-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nd2Dzb0hTjZd8SAf+Dm659YZKAy9+uuEgnmSwo6oxb7GgmLYCYR/V5j4dZ1Neb5Z TI5TX0q62R6p4Y8ZGh593A== 0000950130-97-005266.txt : 19971125 0000950130-97-005266.hdr.sgml : 19971125 ACCESSION NUMBER: 0000950130-97-005266 CONFORMED SUBMISSION TYPE: N-14/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19971124 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERRILL LYNCH MUNICIPAL BOND FUND INC CENTRAL INDEX KEY: 0000225635 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 132896246 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: N-14/A SEC ACT: SEC FILE NUMBER: 333-37349 FILM NUMBER: 97727282 BUSINESS ADDRESS: STREET 1: P O BOX 9011 CITY: PRINCETON STATE: NJ ZIP: 08543 BUSINESS PHONE: 6092822026 FORMER COMPANY: FORMER CONFORMED NAME: ONE LIBERTY MUNICIPAL BOND FUND INC DATE OF NAME CHANGE: 19780622 N-14/A 1 MERRILL LYNCH MUNICIPAL BOND FUND, INC. AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 24, 1997 SECURITIES ACT FILE NO. 333-37349 INVESTMENT COMPANY ACT FILE NO. 811-2688 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM N-14 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- [X] PRE-EFFECTIVE AMENDMENT NO. 1 [_] POST-EFFECTIVE AMENDMENT NO. (CHECK APPROPRIATE BOX OR BOXES) ---------------- MERRILL LYNCH MUNICIPAL BOND FUND, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- (609) 282-2800 (AREA CODE AND TELEPHONE NUMBER) ---------------- 800 SCUDDERS MILL ROAD PLAINSBORO, NEW JERSEY 08536 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES: NUMBER, STREET, CITY, STATE, ZIP CODE) ---------------- ARTHUR ZEIKEL MERRILL LYNCH MUNICIPAL BOND FUND, INC. 800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536 MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 (NAME AND ADDRESS OF AGENT FOR SERVICE) ---------------- COPIES TO: LEONARD B. MACKEY, JR., ESQ. JOHN A. MACKINNON, ESQ. PHILIP L. KIRSTEIN, ESQ. ROGERS & WELLS BROWN & WOOD LLP MERRILL LYNCH ASSET 200 PARK AVENUE ONE WORLD TRADE CENTER MANAGEMENT NEW YORK, NY 10166 NEW YORK, NY 10048-0557 800 SCUDDERS MILL ROAD PLAINSBORO, NJ 08536 ---------------- APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the Registration Statement becomes effective under the Securities Act of 1933. ---------------- Title of Securities to Be Registered: Common Stock, par value $.10 per share No filing fee is required because of reliance on Section 24(f) of the Investment Company Act of 1940. The notice required for such Rule for the Registrant's most recent fiscal year end was filed on August 25, 1997. Pursuant to Rule 429, this Registration Statement relates to shares previously registered on Form N-1A (File No. 2-57354). - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- MERRILL LYNCH MUNICIPAL BOND FUND, INC. CROSS REFERENCE SHEET PURSUANT TO RULE 481(A) UNDER THE SECURITIES ACT OF 1933
FORM N-14 ITEM NO. PROXY STATEMENT AND PROSPECTUS CAPTION ------------------ -------------------------------------- PART A Item 1. Beginning of Registration Statement and Outside Front Cover Registration Statement Cover Page; Proxy Page of Prospectus..... Statement and Prospectus Cover Page Item 2. Beginning and Outside Back Cover Page of Prospectus............. Table of Contents Item 3. Fee Table, Synopsis Information and Risk Summary; Risk Factors and Special Factors................ Considerations Item 4. Information about the Summary; The Reorganization--Agreement and Transaction............ Plan of Reorganization Item 5. Information about the Proxy Statement and Prospectus Cover Page; Registrant............. Summary; Comparison of the State Funds and Limited Maturity Portfolio; Additional Information Item 6. Information about the Company Being Proxy Statement and Prospectus Cover Page; Acquired............... Summary; Comparison of the State Funds and Limited Maturity Portfolio; Additional Information Item 7. Voting Information...... Notice of Special Meeting of Stockholders; Introduction; Summary; Comparison of the State Funds and Limited Maturity Portfolio; Information Concerning the Special Meeting; Additional Information Item 8. Interest of Certain Persons and Experts.... Not Applicable Item 9. Additional Information Required for Reoffering by Persons Deemed to be Underwriters........... Not Applicable PART B Item 10. Cover Page.............. Cover Page Item 11. Table of Contents....... Table of Contents Item 12. Additional Information about the Registrant... General Information Item 13. Additional Information about the Company Being Acquired............... General Information Item 14. Financial Statements.... Financial Statements
PART C Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C to this Registration Statement. [Proxy Card Front] MERRILL LYNCH ARIZONA LIMITED MATURITY MUNICIPAL BOND FUND OF MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST P.O. BOX 9011 PRINCETON, NEW JERSEY 08543-9011 P R O X Y This proxy is solicited on behalf of the Board of Trustees The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Lawrence A. Rogers as proxies, each with the power to appoint his substitute, and hereby authorizes each of them to represent and to vote, as designated on the reverse hereof, all of the shares of beneficial interest of Merrill Lynch Arizona Limited Maturity Municipal Bond Fund of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the "Fund") held of record by the undersigned on October 10, 1997 at a Special Meeting of Stockholders of the Fund to be held on December 9, 1997, or any adjournment thereof. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1. (Continued and to be signed on the reverse side) [Proxy Card Reverse] 1. To consider and act upon a proposal to approve the Agreement and Plan of Reorganization between the Merrill Lynch Multi-State Limited Maturity Municipal Series Trust and Merrill Lynch Municipal Bond Fund, Inc. FOR [_] AGAINST [_] ABSTAIN [_] 2. In the discretion of such proxies, upon such other business as properly may come before the meeting or any adjournment thereof. Please sign exactly as name appears hereon. When shares are held by joint tenants, both should sign. When signing as attorney or as executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized persons. Dated: _________________, 1997 X ---------------------------- Signature X ---------------------------- Signature, if held jointly PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. [Proxy Card Front] MERRILL LYNCH MASSACHUSETTS LIMITED MATURITY MUNICIPAL BOND FUND OF MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST P.O. BOX 9011 PRINCETON, NEW JERSEY 08543-9011 P R O X Y This proxy is solicited on behalf of the Board of Trustees The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Lawrence A. Rogers as proxies, each with the power to appoint his substitute, and hereby authorizes each of them to represent and to vote, as designated on the reverse hereof, all of the shares of beneficial interest of Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the "Fund") held of record by the undersigned on October 10, 1997 at a Special Meeting of Stockholders of the Fund to be held on December 9, 1997, or any adjournment thereof. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1. (Continued and to be signed on the reverse side) [Proxy Card Reverse] 1. To consider and act upon a proposal to approve the Agreement and Plan of Reorganization between the Merrill Lynch Multi-State Limited Maturity Municipal Series Trust and Merrill Lynch Municipal Bond Fund, Inc. FOR [_] AGAINST [_] ABSTAIN [_] 2. In the discretion of such proxies, upon such other business as properly may come before the meeting or any adjournment thereof. Please sign exactly as name appears hereon. When shares are held by joint tenants, both should sign. When signing as attorney or as executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized persons. Dated: _________________, 1997 X ---------------------------- Signature X ---------------------------- Signature, if held jointly PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. [Proxy Card Front] MERRILL LYNCH MICHIGAN LIMITED MATURITY MUNICIPAL BOND FUND OF MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST P.O. BOX 9011 PRINCETON, NEW JERSEY 08543-9011 P R O X Y This proxy is solicited on behalf of the Board of Trustees The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Lawrence A. Rogers as proxies, each with the power to appoint his substitute, and hereby authorizes each of them to represent and to vote, as designated on the reverse hereof, all of the shares of beneficial interest of Merrill Lynch Michigan Limited Maturity Municipal Bond Fund of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the "Fund") held of record by the undersigned on October 10, 1997 at a Special Meeting of Stockholders of the Fund to be held on December 9, 1997, or any adjournment thereof. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1. (Continued and to be signed on the reverse side) [Proxy Card Reverse] 1. To consider and act upon a proposal to approve the Agreement and Plan of Reorganization between the Merrill Lynch Multi-State Limited Maturity Municipal Series Trust and Merrill Lynch Municipal Bond Fund, Inc. FOR [_] AGAINST [_] ABSTAIN [_] 2. In the discretion of such proxies, upon such other business as properly may come before the meeting or any adjournment thereof. Please sign exactly as name appears hereon. When shares are held by joint tenants, both should sign. When signing as attorney or as executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized persons. Dated: _________________, 1997 X ---------------------------- Signature X ---------------------------- Signature, if held jointly PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. [Proxy Card Front] MERRILL LYNCH NEW JERSEY LIMITED MATURITY MUNICIPAL BOND FUND OF MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST P.O. BOX 9011 PRINCETON, NEW JERSEY 08543-9011 P R O X Y This proxy is solicited on behalf of the Board of Trustees The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Lawrence A. Rogers as proxies, each with the power to appoint his substitute, and hereby authorizes each of them to represent and to vote, as designated on the reverse hereof, all of the shares of beneficial interest of Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the "Fund") held of record by the undersigned on October 10, 1997 at a Special Meeting of Stockholders of the Fund to be held on December 9, 1997, or any adjournment thereof. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1. (Continued and to be signed on the reverse side) [Proxy Card Reverse] 1. To consider and act upon a proposal to approve the Agreement and Plan of Reorganization between the Merrill Lynch Multi-State Limited Maturity Municipal Series Trust and Merrill Lynch Municipal Bond Fund, Inc. FOR [_] AGAINST [_] ABSTAIN [_] 2. In the discretion of such proxies, upon such other business as properly may come before the meeting or any adjournment thereof. Please sign exactly as name appears hereon. When shares are held by joint tenants, both should sign. When signing as attorney or as executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized persons. Dated: _________________, 1997 X ---------------------------- Signature X ---------------------------- Signature, if held jointly PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. [Proxy Card Front] MERRILL LYNCH NEW YORK LIMITED MATURITY MUNICIPAL BOND FUND OF MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST P.O. BOX 9011 PRINCETON, NEW JERSEY 08543-9011 P R O X Y This proxy is solicited on behalf of the Board of Trustees The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Lawrence A. Rogers as proxies, each with the power to appoint his substitute, and hereby authorizes each of them to represent and to vote, as designated on the reverse hereof, all of the shares of beneficial interest of Merrill Lynch New York Limited Maturity Municipal Bond Fund of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the "Fund") held of record by the undersigned on October 10, 1997 at a Special Meeting of Stockholders of the Fund to be held on December 9, 1997, or any adjournment thereof. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1. (Continued and to be signed on the reverse side) [Proxy Card Reverse] 1. To consider and act upon a proposal to approve the Agreement and Plan of Reorganization between the Merrill Lynch Multi-State Limited Maturity Municipal Series Trust and Merrill Lynch Municipal Bond Fund, Inc. FOR [_] AGAINST [_] ABSTAIN [_] 2. In the discretion of such proxies, upon such other business as properly may come before the meeting or any adjournment thereof. Please sign exactly as name appears hereon. When shares are held by joint tenants, both should sign. When signing as attorney or as executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized persons. Dated: _________________, 1997 X ---------------------------- Signature X ---------------------------- Signature, if held jointly PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. [Proxy Card Front] MERRILL LYNCH PENNSYLVANIA LIMITED MATURITY MUNICIPAL BOND FUND OF MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST P.O. BOX 9011 PRINCETON, NEW JERSEY 08543-9011 P R O X Y This proxy is solicited on behalf of the Board of Trustees The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Lawrence A. Rogers as proxies, each with the power to appoint his substitute, and hereby authorizes each of them to represent and to vote, as designated on the reverse hereof, all of the shares of beneficial interest of Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the "Fund") held of record by the undersigned on October 10, 1997 at a Special Meeting of Stockholders of the Fund to be held on December 9, 1997, or any adjournment thereof. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1. (Continued and to be signed on the reverse side) [Proxy Card Reverse] 1. To consider and act upon a proposal to approve the Agreement and Plan of Reorganization between the Merrill Lynch Multi-State Limited Maturity Municipal Series Trust and Merrill Lynch Municipal Bond Fund, Inc. FOR [_] AGAINST [_] ABSTAIN [_] 2. In the discretion of such proxies, upon such other business as properly may come before the meeting or any adjournment thereof. Please sign exactly as name appears hereon. When shares are held by joint tenants, both should sign. When signing as attorney or as executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized persons. Dated: _________________, 1997 X ---------------------------- Signature X ---------------------------- Signature, if held jointly PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST P.O. BOX 9011 PRINCETON, NEW JERSEY 08543-9011 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON JANUARY 5, 1998 TO THE STOCKHOLDERS OF MERRILL LYNCH MULTI-STATELIMITED MATURITY MUNICIPAL SERIES TRUST holding shares of Merrill Lynch Arizona Limited Maturity Municipal Bond Fund Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund Merrill Lynch Michigan Limited Maturity Municipal Bond Fund Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund Merrill Lynch New York Limited Maturity Municipal Bond Fund Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the "Meeting") of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the "Trust") will be held at the offices of Merrill Lynch Asset Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey, on Monday, January 5, 1998 at 9:00 a.m., New York time, for the following purposes: (1) To approve or disapprove an Agreement and Plan of Reorganization (the "Agreement and Plan of Reorganization") contemplating the acquisition of substantially all of the assets of, and the assumption of substantially all of the liabilities of, Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund, Merrill Lynch Michigan Limited Maturity Municipal Bond Fund, Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund, Merrill Lynch New York Limited Maturity Municipal Bond Fund and Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund, each a series of the Trust (collectively, the "State Funds") by Limited Maturity Portfolio (the "Limited Maturity Portfolio"), a series of Merrill Lynch Municipal Bond Fund, Inc. (the "Municipal Bond Fund"), in exchange solely for an equal aggregate value of newly-issued shares of Common Stock of Limited Maturity Portfolio (the "Limited Maturity Portfolio Common Stock"), the distribution of such Limited Maturity Portfolio Common Stock to the holders of shares of beneficial interest of the State Funds and the termination of the State Funds as series of the Trust (collectively, the "Reorganization"); and (2) To transact such other business as properly may come before the Meeting or any adjournment thereof. If the proposed Reorganization is approved by the stockholders at the Meeting and effected by the State Funds, any stockholder (1) who files with the applicable State Fund before the taking of the vote on the approval of such Agreement and Plan of Reorganization, written objection to the proposed Reorganization stating that he or she intends to demand payment for his or her shares if the Reorganization takes place and (2) whose shares are not voted in favor of such Agreement and Plan of Reorganization has or may have the right to demand in writing from Limited Maturity Portfolio, within twenty days after the date of mailing to him or her of notice in writing that the Reorganization has become effective, payment for his or her shares and an appraisal of the value thereof. Limited Maturity Portfolio and any such stockholders shall in such cases have the rights and duties and shall follow the procedure set forth in sections 88 to 98, inclusive, of chapter 156B of the General Laws of Massachusetts. See "The Reorganization--Agreement and Plan of Reorganization-- Appraisal Rights" in the Proxy Statement, particularly with respect to the intention of Limited Maturity Portfolio to petition a court to determine whether this right of appraisal has been superseded by a rule of the Securities and Exchange Commission, in the event that any stockholder elects to exercise such right. The Board of Trustees of the Trust has fixed the close of business on November 10, 1997 as the record date for the determination of stockholders entitled to notice of, and to vote at, the Meeting or any adjournment thereof. A complete list of the stockholders of each State Fund entitled to vote at the Meeting will be available and open to the examination of any stockholder of such State Fund for any purpose germane to the Meeting during ordinary business hours from and after December 22, 1997, at the offices of the Trust, 800 Scudders Mill Road, Plainsboro, New Jersey. You are cordially invited to attend the Meeting. Stockholders who do not expect to attend the Meeting in person are requested to complete, date and sign the enclosed form of proxy applicable to their State Fund and return it promptly in the envelope provided for that purpose. The enclosed proxy is being solicited on behalf of the Board of Trustees of the Trust. By Order of the Board of Trustees, LAWRENCE A. ROGERS Secretary Plainsboro, New Jersey Dated: November 24, 1997 MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST MERRILL LYNCH MUNICIPAL BOND FUND, INC. P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 (609) 282-2800 SPECIAL MEETING OF STOCKHOLDERS OF MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST JANUARY 5, 1998 This Joint Proxy Statement and Prospectus (this "Proxy Statement and Prospectus") is furnished in connection with the solicitation of proxies on behalf of the Board of Trustees of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, a Massachusetts business trust (the "Trust"), for use at the Special Meeting of Stockholders (the "Meeting") called to approve or disapprove the proposed reorganization whereby Limited Maturity Portfolio (the "Limited Maturity Portfolio"), a series of Merrill Lynch Municipal Bond Fund, Inc., a Maryland corporation (the "Municipal Bond Fund"), will acquire substantially all of the assets, and will assume substantially all of the liabilities, of Merrill Lynch Arizona Limited Maturity Municipal Bond Fund (the "Arizona Fund"), Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund (the "Massachusetts Fund"), Merrill Lynch Michigan Limited Maturity Municipal Bond Fund (the "Michigan Fund"), Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund (the "New Jersey Fund"), Merrill Lynch New York Limited Maturity Municipal Bond Fund (the "New York Fund") and Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund (the "Pennsylvania Fund"), each a series of the Trust (collectively, the "State Funds"), in exchange solely for an equal aggregate value of newly-issued shares of Common Stock of Limited Maturity Portfolio (the "Limited Maturity Portfolio Common Stock"), with a par value of $.10 per share, the subsequent distribution of Limited Maturity Portfolio Common Stock to the stockholders of the State Funds in exchange for their shares of beneficial interest of the State Funds, each with a par value of $.10 per share, and the termination of the State Funds as series of the Trust (collectively, the "Reorganization"). This Proxy Statement and Prospectus serves as a prospectus of the Municipal Bond Fund under the Securities Act of 1933, as amended (the "Securities Act"), in connection with the issuance of Limited Maturity Portfolio Common Stock in the Reorganization. Holders of Class A shares of each of the State Funds will be entitled to receive Class A shares of Limited Maturity Portfolio Common Stock. Holders of Class B, Class C and Class D shares of each of the State Funds will be entitled to receive Class D shares of Limited Maturity Portfolio Common Stock. The aggregate net asset value of Limited Maturity Portfolio Common Stock to be received by each stockholder of each of the State Funds will equal the aggregate net asset value of the State Fund shares owned by such stockholder as set forth in the Agreement and Plan of Reorganization. Both the Trust and the Municipal Bond Fund are open-end management investment companies with similar, though not identical, investment objectives. Specifically, each State Fund seeks to provide stockholders with as high a level of income exempt from Federal income taxes and personal income taxes imposed by the designated state (and, in certain instances, state intangible personal property taxes, corporate income or local personal income taxes and local personal property taxes) as is consistent with prudent investment management. Limited Maturity Portfolio seeks to provide stockholders with as high a level of income exempt from Federal income taxes as is consistent with prudent investment management. Each State Fund seeks to achieve its objective by investing primarily in a portfolio of intermediate- term investment grade obligations of the designated state or its political subdivisions, agencies or instrumentalities, or certain other jurisdictions, that pay interest exempt, in the opinion of bond counsel to the issuer, from Federal income taxes and personal income taxes of the designated state and, where applicable, state intangible personal property taxes, local personal property taxes and local personal income taxes in the designated state. Limited Maturity Portfolio seeks to achieve its objective by investing primarily in a portfolio of short-term investment grade obligations issued by or on behalf of states, territories and possessions of the United States and the District of Columbia and their political subdivisions, agencies and instrumentalities, the interest on which is exempt from Federal income taxes. There can be no assurance that, after the Reorganization, Limited Maturity Portfolio will achieve its investment objective. The current prospectus relating to Municipal Bond Fund, dated October 7, 1997 (the "Municipal Bond Fund Prospectus") accompanies this Proxy Statement and Prospectus and is incorporated herein by reference. The Annual Report to Stockholders of the Municipal Bond Fund for the fiscal year ended June 30, 1997 also accompanies this Proxy Statement and Prospectus. A statement of additional information relating to Municipal Bond Fund, dated October 7, 1997 (the "Municipal Bond Fund Statement"), a prospectus relating to the Trust, dated November 27, 1996 (the "Limited Maturity Trust Prospectus") and a statement of additional information relating to the Trust, dated November 27, 1996 (the "Limited Maturity Trust Statement"), have been filed with the Securities and Exchange Commission (the "Commission"). Such documents may be obtained, without charge, by writing either Municipal Bond Fund or the Trust at the address above, or by calling 1-800-456-4587, ext. 123. -------------- 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 PROXY STATEMENT AND PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------------- This Proxy Statement and Prospectus sets forth concisely the information about the Municipal Bond Fund that stockholders of the State Funds should know before considering the Reorganization and should be retained for future reference. The Trust has authorized the solicitation of proxies in connection with the Reorganization solely on the basis of this Proxy Statement and Prospectus and the accompanying documents. A statement of additional information relating to the Reorganization (the "Statement of Additional Information"), including pro forma combined financial statements of the Trust and Municipal Bond Fund, is on file with the Commission. It is available from Municipal Bond Fund, without charge, upon oral request by calling the telephone number set forth above or upon written request by writing Municipal Bond Fund at its principal executive offices. The Statement of Additional Information, dated November 24, 1997, is incorporated by reference into this Proxy Statement and Prospectus. The Commission maintains a Web site (http://www.sec.gov) that contains the Statement of Additional Information, the Limited Maturity Trust Prospectus, the Limited Maturity Trust Statement, the Municipal Bond Fund Prospectus, the Municipal Bond Fund Statement, other material incorporated by reference and other information regarding the Municipal Bond Fund and the Trust. The address of the principal executive offices of both the Trust and Municipal Bond Fund is 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and the telephone number is (609) 282-2800. -------------- THE DATE OF THIS PROXY STATEMENT AND PROSPECTUS IS NOVEMBER 24, 1997. TABLE OF CONTENTS
PAGE ----- INTRODUCTION............................................................. 3 THE REORGANIZATION....................................................... 3 SUMMARY.................................................................. 3 RISK FACTORS AND SPECIAL CONSIDERATIONS.................................. 16 Portfolio Management................................................... 16 Maturity............................................................... 16 COMPARISON OF THE STATE FUNDS AND LIMITED MATURITY PORTFOLIO............. 17 Financial Highlights................................................... 17 Investment Objective and Policies...................................... 25 Description of Municipal Bonds......................................... 28 Other Investment Policies.............................................. 28 Information Regarding Options and Futures Transactions................. 29 Investment Restrictions................................................ 31 Portfolio Composition.................................................. 32 Portfolio Transactions................................................. 34 Portfolio Turnover..................................................... 34 Additional Information................................................. 35 Management............................................................. 36 Purchase of Shares..................................................... 37 Redemption of Shares................................................... 37 Voting Rights.......................................................... 37 Stockholder Inquiries.................................................. 38 Dividends and Distributions............................................ 38 Taxation of Limited Maturity Portfolio, State Funds and Their Stockholders.......................................................... 38 State of Organization.................................................. 40 AGREEMENT AND PLAN OF REORGANIZATION..................................... 41 General................................................................ 41 Procedure.............................................................. 42 Terms of the Agreement and Plan of Reorganization...................... 42 Potential Benefits to Stockholders of the State Funds as a Result of the Reorganization.................................................... 43 Tax Consequences of the Reorganization................................. 45 Appraisal Rights....................................................... 46 Capitalization......................................................... 47 INFORMATION CONCERNING THE SPECIAL MEETING............................... 48 Date, Time and Place of Meeting........................................ 48 Solicitation, Revocation and Use of Proxies............................ 48 Record Date and Outstanding Shares..................................... 48 Security Ownership of Certain Beneficial Owners and Management of the State Funds and Limited Maturity Portfolio............................ 49 Voting Rights and Required Vote........................................ 49 ADDITIONAL INFORMATION................................................... 50 LEGAL PROCEEDINGS........................................................ 51 LEGAL OPINIONS........................................................... 51 EXPERTS.................................................................. 51 STOCKHOLDER PROPOSALS.................................................... 51 EXHIBIT I AGREEMENT AND PLAN OF REORGANIZATION........................... I-1 EXHIBIT II RATINGS OF MUNICIPAL BONDS.................................... II-1 EXHIBIT III SECTIONS 86 THROUGH 98 OF CHAPTER 156B OF THE MASSACHUSETTS GENERAL LAWS (THE MASSACHUSETTS BUSINESS CORPORATION LAW)............... III-1
2 INTRODUCTION This Proxy Statement and Prospectus is furnished in connection with the solicitation of proxies on behalf of the Board of Trustees of the Trust with respect to the State Funds for use at the Meeting to be held at the offices of Merrill Lynch Asset Management, L.P. ("MLAM"), 800 Scudders Mill Road, Plainsboro, New Jersey, on January 5, 1998, at 9:00 a.m., New York time. The mailing address for the Trust is P.O. Box 9011, Princeton, New Jersey 08543- 9011. The approximate mailing date of this Proxy Statement and Prospectus is November 28, 1997. Any person giving a proxy may revoke it at any time prior to its exercise by executing a superseding proxy, by giving written notice of the revocation to the Secretary of the Trust at the address indicated above or by voting in person at the Meeting. All properly executed proxies received prior to the Meeting will be voted at the Meeting in accordance with the instructions marked thereon or otherwise as provided therein. Unless instructions to the contrary are marked, proxies will be voted "FOR" the proposal to approve the Agreement and Plan of Reorganization between the Trust on behalf of each of the State Funds and Municipal Bond Fund on behalf of Limited Maturity Portfolio. Approval of the Agreement and Plan of Reorganization will require the affirmative vote of stockholders representing more than 50% of the outstanding shares of beneficial interest of each of the State Funds voting separately as a class. See "Information Concerning the Special Meeting." The Board of Trustees of the Trust knows of no business other than that discussed in the proposal above that will be presented for consideration at the Meeting. If any other matter is properly presented, it is the intention of the persons named in the enclosed proxy to vote in accordance with their best judgment. The class of stockholders solicited and entitled to vote on each proposal is outlined in the chart below:
PROPOSAL TO APPROVE THE AGREEMENT AND PLAN FUND OF REORGANIZATION ------------------------------------------- Arizona Fund* Yes Massachusetts Fund* Yes Michigan Fund* Yes New Jersey Fund* Yes New York Fund* Yes Pennsylvania Fund* Yes
- -------- * All classes of the Fund's shares of beneficial interest may vote on the proposal together as a single class. THE REORGANIZATION SUMMARY The following is a summary of certain information contained elsewhere in this Proxy Statement and Prospectus and is qualified in its entirety by reference to the more complete information contained herein and in the Agreement and Plan of Reorganization, attached hereto as Exhibit I. In this Proxy Statement and Prospectus, the term "Reorganization" refers collectively to (i) the acquisition of substantially all of the assets, and the assumption of substantially all of the liabilities, of each of the State Funds by Limited Maturity Portfolio of the Municipal Bond Fund and the subsequent distribution of Limited Maturity Portfolio Common Stock to the holders of shares of beneficial interest of each of the State Funds and (ii) the subsequent termination of each of the State Funds as series of the Trust. At a meeting of the Board of Trustees of the Trust held on September 26, 1997, the Board of Trustees of the Trust approved a proposal that Limited Maturity Portfolio of the Municipal Bond Fund acquire substantially 3 all of the assets, and assume substantially all of the liabilities, of each of the State Funds in exchange solely for Limited Maturity Portfolio Common Stock to be distributed to the stockholders of each of the State Funds. Based upon their evaluation of all relevant information, the Trustees of the Trust determined that the Reorganization will potentially benefit the holders of shares of beneficial interest of the State Funds. Specifically, after the Reorganization, stockholders of each of the State Funds will remain invested in an open-end fund that has an investment objective and policies similar, but not identical, to those of the State Funds. In addition, it is anticipated that stockholders of the State Funds will be subject to a reduced overall operating expense ratio based on the combined assets of the surviving entity after the Reorganization. See "The Reorganization--Agreement and Plan of Reorganization--Potential Benefits to State Fund Stockholders as a Result of the Reorganization." In deciding to recommend the Reorganization, the Board of Trustees of the Trust took into account the investment objective and policies of the State Funds and of Limited Maturity Portfolio, the expenses incurred both due to the Reorganization and on an ongoing basis by the new and existing stockholders of Limited Maturity Portfolio and the potential benefits, including economies of scale, to the holders of shares of beneficial interest of the State Funds as a result of the Reorganization. The Trustees also considered the effect of the Reorganization on the holders of the shares of beneficial interest of Merrill Lynch California Limited Maturity Municipal Bond Fund and Merrill Lynch Florida Limited Maturity Municipal Bond Fund, the two series of the Trust that are not participating in the Reorganization. The Board of Trustees of the Trust, including all of the Trustees who are not "interested persons," as defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"), of the Trust have determined that the Reorganization is in the best interests of each of the State Funds and of the holders of shares of beneficial interest of the State Funds and that the interests of such stockholders will not be diluted as a result of effecting the Reorganization. If all of the requisite approvals are obtained, it is anticipated that the Reorganization will occur as soon as practicable after such approval, provided that the State Funds and Limited Maturity Portfolio have obtained prior to that time a favorable private letter ruling from the Internal Revenue Service (the "IRS") concerning the tax consequences of the Reorganization as set forth in the Agreement and Plan of Reorganization. Under the Agreement and Plan of Reorganization, however, the Board of Trustees of the Trust or the Board of Directors of Municipal Bond Fund may cause the Reorganization to be postponed or abandoned should either Board determine that it is in the best interests of the stockholders of either the Trust or Municipal Bond Fund, respectively, to do so. The Agreement and Plan of Reorganization may be terminated, and the Reorganization abandoned, whether before or after approval by the stockholders of the State Funds, at any time prior to the Exchange Date (as defined below), (i) by mutual consent of the Board of Trustees of the Trust and the Board of Directors of Municipal Bond Fund; (ii) by the Board of Trustees of the Trust if any condition to the Trust's obligations has not been fulfilled or waived by such Board; or (iii) by the Board of Directors of Municipal Bond Fund if any condition to Municipal Bond Fund's obligations has not been fulfilled or waived by such Board. 4 PRO FORMA FEE TABLE FOR CLASS A AND CLASS B STOCKHOLDERS OF THE STATE FUNDS, LIMITED MATURITY PORTFOLIO AND THE COMBINED ENTITY FOR THE YEAR ENDED JULY 31, 1997 (UNAUDITED)
CLASS A SHARES (a) CLASS B SHARES (b) ------------------------------- ---------------------------------------- ACTUAL ACTUAL ------------------- -------------------------- ALL LIMITED ALL LIMITED STATE MATURITY PRO FORMA STATE MATURITY PRO FORMA FUNDS PORTFOLIO COMBINED FUNDS PORTFOLIO COMBINED ----- --------- --------- ------------ ------------ ------------ STOCKHOLDER TRANSACTION EXPENSES: Maximum Sales Charge Imposed on Purchases (as a percentage of of- fering price).......... 1.00%(c) 1.00%(c) 1.00%(c) None None None Sales Charge Imposed on Dividend Reinvestment.. None None None None None None Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, whichever is lower).... None(d) None(d) None(d) 1.0% during 1.0% during 1.0% during the first the first the first year year, year, decreasing decreasing decreasing to 0.0% to 0.0% to 0.0% after the after the after the first year(e) first year(e) first year(e) Exchange Fee........... None None None None None None
- ---- (a) Class A shares are sold to a limited group of investors including existing Class A stockholders and certain participants in fee-based programs. See "The Reorganization--Comparison of the State Funds and Limited Maturity Portfolio--Purchase of Shares." (b) Class B shares convert to Class D shares automatically approximately ten years after initial purchase and cease being subject to distribution fees and are subject to lower account maintenance fees. See "The Reorganization--Comparison of the State Funds and Limited Maturity Portfolio--Purchase of Shares." (c) Reduced for purchases of $100,000 and over and waived for purchases of Class A shares by certain fee-based programs. Class A purchases of $1,000,000 or more may not be subject to an initial sales charge. See "The Reorganization--Comparison of the State Funds and Limited Maturity Portfolio--Purchase of Shares." (d) Class A shares are not subject to a contingent deferred sales charge ("CDSC"), except that certain purchases of $1,000,000 or more which are not subject to an initial sales charge may instead be subject to a CDSC of 0.20% of amounts redeemed within the first year after purchase. Such CDSC may be waived in connection with certain fee-based programs. (e) The CDSC may be modified in connection with certain fee-based programs. 5 PRO FORMA FEE TABLE FOR CLASS A AND CLASS B STOCKHOLDERS OF THE STATE FUNDS, LIMITED MATURITY PORTFOLIO AND THE COMBINED ENTITY FOR THE YEAR ENDED JULY 31, 1997 (UNAUDITED)--(CONTINUED)
CLASS A SHARES (a) ----------------------------------------------------------------------------------- ACTUAL ------------------------------------------------------------------------- LIMITED ARIZONA MASSACHUSETTS MICHIGAN NEW JERSEY NEW YORK PENNSYLVANIA MATURITY PRO FORMA FUND FUND FUND FUND FUND FUND PORTFOLIO COMBINED ------- ------------- -------- ---------- -------- ------------ --------- --------- ANNUAL FUND OPERATING EXPENSES (AS A PERCENT- AGE OF AVERAGE NET AS- SETS): Investment Advisory Fees(c)................ 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.33% 0.33% 12b-1 fees(d): Account Maintenance Fees................... None None None None None None None None Distribution Fees...... None None None None None None None None Other Expenses.......... 2.86% 2.17% 3.15% 1.30% 0.81% 1.40% 0.08% 0.08% ---- ---- ---- ---- ---- ---- ---- ---- Total Fund Operating Expenses(e)............. 3.21% 2.52% 3.50% 1.65% 1.16% 1.75% 0.41% 0.41% ==== ==== ==== ==== ==== ==== ==== ====
CLASS B SHARES (b) ----------------------------------------------------------------------------------- ACTUAL ------------------------------------------------------------------------- LIMITED PRO FORMA ARIZONA MASSACHUSETTS MICHIGAN NEW JERSEY NEW YORK PENNSYLVANIA MATURITY COMBINED FUND FUND FUND FUND FUND FUND PORTFOLIO (f) ------- ------------- -------- ---------- -------- ------------ --------- --------- Investment Advisory Fees(c)................. 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.33% 0.33% 12b-1 fees(d): Account Maintenance Fees................... 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% Distribution Fees...... 0.20% 0.20% 0.20% 0.20% 0.20% 0.20% 0.20% 0.20% Other Expenses.......... 2.86% 2.14% 3.16% 1.30% 0.82% 1.41% 0.08% 0.08% ---- ---- ---- ---- ---- ---- ---- ---- Total Fund Operating Expenses(e)............. 3.56% 2.84% 3.86% 2.00% 1.52% 2.11% 0.76% 0.76% ==== ==== ==== ==== ==== ==== ==== ====
(a) Class A shares are sold to a limited group of investors including existing Class A stockholders and certain participants in fee-based programs. (b) Class B shares convert to Class D shares automatically approximately ten years after initial purchase and cease being subject to distribution fees and are subject to lower account maintenance fees. (c) See "The Reorganization--Comparison of the State Funds and Limited Maturity Portfolio--Management." (d) See "The Reorganization--Comparison of the State Funds and Limited Maturity Portfolio--Purchase of Shares." (e) Currently, Fund Asset Management, L.P. ("FAM") has voluntarily waived all of the advisory fees due from each of the State Funds and has voluntarily reimbursed each of the State Funds for a portion of other expenses (excluding Rule 12b-1 fees). The Total Fund Operating Expenses in the fee table above have been restated to assume the absence of any such waiver or reimbursement because FAM may discontinue or reduce such waiver of fees and/or assumption of expenses at any time without notice. The actual Total Fund Operating Expenses, net of the waiver, is provided below for the year ended July 31, 1997:
ADVISORY FEES WAIVED AND EXPENSES TOTAL OPERATING EXPENSES AFTER REIMBURSED WAIVER AND REIMBURSEMENT --------------- -------------------------------- CLASS A CLASS B CLASS A CLASS B ------- ------- --------------- --------------- Arizona Fund............... 2.27% 2.26% 0.94% 1.30% Massachusetts Fund......... 1.53% 1.49% 0.99% 1.35% Michigan Fund.............. 2.56% 2.55% 0.94% 1.31% New Jersey Fund............ 0.71% 0.70% 0.94% 1.30% New York Fund.............. 0.46% 0.47% 0.70% 1.05% Pennsylvania Fund.......... 0.76% 0.76% 0.99% 1.35%
(f) Holders of Class B shares of the State Funds will receive Class D shares of Limited Maturity Portfolio in the Reorganization and will be subject to the expenses relating to Class D shares. See "Pro Forma Fee Table for Class C and Class D Stockholders" on page 9. 6 CUMULATIVE EXPENSES PAID ON CLASS A AND CLASS B SHARES FOR THE PERIODS INDICATED: EXAMPLE:
CLASS A SHARES CLASS B SHARES ------------------------------- ------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- ------ ------- ------- -------- An investor would pay the following expenses on a $1,000 investment, including the maximum sales load of $10.00 (Class A shares only) and assuming (1) the Total Fund Operating Expenses set forth above for the relevant portfolio, (2) a 5% annual return throughout the periods and (3) redemption at the end of the period (including any applicable CDSC for Class B shares): Arizona Fund........... $42 $108 $176 $358 $46 $109 $185 $383 Massachusetts Fund..... 35 88 143 293 39 88 150 317 Michigan Fund.......... 45 116 190 384 49 118 199 409 New Jersey Fund........ 27 62 99 204 30 63 108 233 New York Fund.......... 22 46 73 149 25 48 83 181 Pennsylvania Fund...... 28 65 104 214 31 66 113 244 Limited Maturity Portfolio.............. 14 23 33 61 18 24 42 94 Combined Entity+....... 14 23 33 61 18 24 42 94 An investor would pay the following expenses on the same $1,000 investment assuming no redemption at the end of the period: Arizona Fund........... $42 $108 $176 $358 $36 $109 $185 $383 Massachusetts Fund..... 35 88 143 293 29 88 150 317 Michigan Fund.......... 45 116 190 384 39 118 199 409 New Jersey Fund........ 27 62 99 204 20 63 108 233 New York Fund.......... 22 46 73 149 15 48 83 181 Pennsylvania Fund...... 28 65 104 214 21 66 113 244 Limited Maturity Portfolio.............. 14 23 33 61 8 24 42 94 Combined Entity+....... 14 23 33 61 8 24 42 94
- ----- +Assuming the Reorganization had taken place on August 1, 1996 (the first day of the year ended July 31, 1997). 7 PRO FORMA FEE TABLE FOR CLASS C AND CLASS D STOCKHOLDERS OF THE STATE FUNDS, LIMITED MATURITY PORTFOLIO AND THE COMBINED ENTITY FOR THE YEAR ENDED JULY 31, 1997 (UNAUDITED)
CLASS C SHARES* CLASS D SHARES ---------------------------------- ---------------------------- ACTUAL ACTUAL ---------------------- ------------------ ALL LIMITED ALL LIMITED STATE MATURITY PRO FORMA STATE MATURITY PRO FORMA FUNDS PORTFOLIO COMBINED FUNDS PORTFOLIO COMBINED ---------- ---------- ---------- ------- --------- --------- STOCKHOLDER TRANSACTION EXPENSES: Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)........ None None None 1.00%(a) 1.00%(a) 1.00%(a) Sales Charge Imposed on Dividend Reinvestment.. None None None None None None Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, 1.0% for 1.0% for 1.0% for whichever is lower).... one year(c) one year(c) one year(c) None(b) None(b) None(b) Exchange Fee........... None None None None None None
- ---- (a) Reduced for purchases of $100,000 and over. Like Class A purchases, certain Class D purchases of $1,000,000 or more may not be subject to an initial sales charge. See "The Reorganization--Comparison of the State Funds and Limited Maturity Portfolio--Purchase of Shares." (b) Like Class A shares, Class D shares are not subject to a CDSC, except that certain purchases of $1,000,000 or more which are not subject to an initial sales charge may instead be subject to a CDSC of 0.20% of amounts redeemed within the first year after purchase. (c) The CDSC may be waived in connection with certain fee-based programs. * Class C shares of the State Funds, Limited Maturity Portfolio and the Combined Fund are, or will be, available only through the exchange privilege. See "The Reorganization--Comparison of the State Funds and Limited Maturity Portfolio--Additional Information--Stockholder Services." 8 PRO FORMA FEE TABLE FOR CLASS C AND CLASS D STOCKHOLDERS OF THE STATE FUNDS, LIMITED MATURITY PORTFOLIO AND THE COMBINED ENTITY FOR THE YEAR ENDED JULY 31, 1997 (UNAUDITED)--(CONTINUED)
CLASS C SHARES ------------------------------------------------------------------------------------- ACTUAL ------------------------------------------------------------------------- LIMITED ARIZONA MASSACHUSETTS MICHIGAN NEW JERSEY NEW YORK PENNSYLVANIA MATURITY PRO FORMA FUND FUND FUND FUND FUND FUND PORTFOLIO COMBINED(d) ------- ------------- -------- ---------- -------- ------------ --------- ----------- ANNUAL FUND OPERATING EXPENSES (AS A PERCENT- AGE OF AVERAGE NET AS- SETS): Investment Advisory Fees(a)................ 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.33% 0.33% 12b-1 fees(b): Account Maintenance Fees................... 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% Distribution Fees...... 0.20% 0.20% 0.20% 0.20% 0.20% 0.20% 0.20% 0.20% Other Expenses......... 2.65% 1.99% 3.11% 1.10% 0.62% 1.32% 0.08% 0.08% ----- ----- ----- ----- ----- ----- ----- ----- Total Fund Operating Expenses(c)............ 3.35% 2.69% 3.81% 1.80% 1.32% 2.02% 0.76% 0.76% ===== ===== ===== ===== ===== ===== ===== ===== CLASS D SHARES ------------------------------------------------------------------------------------- ACTUAL ------------------------------------------------------------------------- LIMITED ARIZONA MASSACHUSETTS MICHIGAN NEW JERSEY NEW YORK PENNSYLVANIA MATURITY PRO FORMA FUND FUND FUND FUND FUND FUND PORTFOLIO COMBINED ------- ------------- -------- ---------- -------- ------------ --------- ----------- ANNUAL FUND OPERATING EXPENSES (AS A PERCENT- AGE OF AVERAGE NET AS- SETS): Investment Advisory Fees(a)................ 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.33% 0.33% 12b-1 fees(b): Account Maintenance Fees................... 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% Distribution Fees...... None None None None None None None None Other Expenses......... 2.84% 2.17% 3.03% 1.33% 0.81% 1.40% 0.08% 0.08% ----- ----- ----- ----- ----- ----- ----- ----- Total Fund Operating Expenses(c)............ 3.29% 2.62% 3.48% 1.78% 1.26% 1.85% 0.51% 0.51% ===== ===== ===== ===== ===== ===== ===== =====
- ---- (a) See "The Reorganization--Comparison of the State Funds and Limited Maturity Portfolio--Management." (b) See "The Reorganization--Comparison of the State Funds and Limited Maturity Portfolio--Purchase of Shares." (c) Currently, FAM has voluntarily waived all of the advisory fees due from each of the State Funds and has voluntarily reimbursed each of the State Funds for a portion of other expenses (excluding Rule 12b-1 fees). The Total Fund Operating Expenses in the fee table above have been restated to assume the absence of any such waiver or reimbursement because FAM may discontinue or reduce such waiver of fees and/or assumption of expenses at any time without notice. The actual Total Fund Operating Expenses, net of the waiver, is provided below for the year ended July 31, 1997:
ADVISORY FEES WAIVED AND EXPENSES TOTAL OPERATING EXPENSES REIMBURSED AFTER WAIVER AND REIMBURSEMENT ---------------------- -------------------------------- CLASS C CLASS D CLASS C CLASS D ---------- ---------- --------------- --------------- Arizona Fund............ 2.24% 2.25% 1.11% 1.04% Massachusetts Fund...... 1.54% 1.53% 1.15% 1.09% Michigan Fund........... 2.49% 2.44% 1.32% 1.04% New Jersey Fund......... 0.70% 0.74% 1.10% 1.04% New York Fund........... 0.46% 0.46% 0.86% 0.80% Pennsylvania Fund....... 0.74% 0.76% 1.28% 1.09%
(d) Holders of Class C shares of the State Funds will receive Class D shares of Limited Maturity Portfolio in the Reorganization and will be subject to the expenses relating to Class D shares. See "Class D Shares." 9 CUMULATIVE EXPENSES PAID ON CLASS C AND CLASS D SHARES FOR THE PERIODS INDICATED: EXAMPLE:
CLASS C SHARES CLASS D SHARES ------------------------------- ------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- ------ ------- ------- -------- An investor would pay the following expenses on a $1,000 investment, including the maximum sales load of $10.00 (Class D shares only) and assuming (1) the Total Fund Operating Expenses set forth above for the relevant portfolio, (2) a 5% annual return throughout the periods and (3) redemption at the end of the period (including any applicable CDSC for Class C shares): Arizona Fund........... $44 $103 $175 $364 $43 $110 $180 $365 Massachusetts Fund..... 37 84 142 302 36 91 148 302 Michigan Fund.......... 48 116 196 404 45 116 189 382 New Jersey Fund........ 28 57 97 212 28 65 105 217 New York Fund.......... 23 42 72 159 23 50 78 161 Pennsylvania Fund...... 31 63 109 235 29 68 109 225 Limited Maturity Portfolio.............. 18 24 42 94 15 26 38 73 Combined Entity+....... 18 24 42 94 15 26 38 73 An investor would pay the following expenses on the same $1,000 investment assuming no redemption at the end of the period: Arizona Fund........... $34 $103 $175 $364 $43 $110 $180 $365 Massachusetts Fund..... 27 84 142 302 36 91 148 302 Michigan Fund.......... 38 116 196 404 45 116 189 382 New Jersey Fund........ 18 57 97 212 28 65 105 217 New York Fund.......... 13 42 72 159 23 50 78 161 Pennsylvania Fund...... 21 63 109 235 29 68 109 225 Limited Maturity Portfolio.............. 8 24 42 94 15 26 38 73 Combined Entity+....... 8 24 42 94 15 26 38 73
- ----- + Assuming the Reorganization had taken place on August 1, 1996 (the first day of the year ended July 31, 1997). 10 The foregoing Fee Tables are intended to assist investors in understanding the costs and expenses that a stockholder of each of the State Funds and of Limited Maturity Portfolio will bear directly or indirectly without giving effect to the Reorganization as compared to the costs and expenses that would be borne by such investors taking into account the Reorganization. The Examples set forth above assume reinvestment of all dividends and distributions and utilize a 5% annual rate of return as mandated by Commission regulations. THE EXAMPLES 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 EXAMPLES. See "The Reorganization--Summary," "--Agreement and Plan of Reorganization-- Potential Benefits to Stockholders of the State Funds as a Result of the Reorganization," "--Comparison of the State Funds and Limited Maturity Portfolio--Management," "--Purchase of Shares" and "--Redemption of Shares." BUSINESS OF THE TRUST The Trust was organized under the laws of the Commonwealth of Massachusetts on February 14, 1991 and commenced operations on November 26, 1993. The Trust is a non-diversified open-end management investment company. As of July 31, 1997, the State Funds had net assets as follows: Arizona Fund....... $ 3,357,395 Massachusetts Fund.............. $ 5,135,751 Michigan Fund...... $ 4,251,345 New Jersey Fund.... $ 6,322,601 New York Fund...... $14,565,335 Pennsylvania Fund.. $ 7,738,657
BUSINESS OF MUNICIPAL BOND FUND Municipal Bond Fund was incorporated under the laws of the State of Maryland on September 30, 1976 and commenced operations on October 21, 1977. Limited Maturity Portfolio commenced operations on November 2, 1979. Municipal Bond Fund is a diversified, open-end management investment company. As of July 31, 1997, the three portfolios of Municipal Bond Fund had aggregate net assets of $4,031,606,977; Limited Maturity Portfolio had net assets of $413,877,781. COMPARISON OF THE STATE FUNDS AND LIMITED MATURITY PORTFOLIO Investment Objectives. Each State Fund seeks to provide stockholders with as high a level of income exempt from Federal income taxes and personal income taxes imposed by the designated state (and, in certain instances, state intangible personal property taxes, local personal property taxes and corporate income or local personal income taxes) as is consistent with prudent investment management. Limited Maturity Portfolio seeks to provide stockholders with as high a level of income exempt from Federal income taxes as is consistent with its investment policies and prudent investment management. Investment Policies. Each State Fund seeks to achieve its objective through a policy of investing primarily in a portfolio of intermediate term investment grade obligations of the designated state or its political subdivisions, agencies or instrumentalities, or certain other jurisdictions, that pay interest exempt, in the opinion of bond counsel to the issuer, from Federal income taxes and personal 11 income taxes of the designated state and, where applicable, state intangible personal property taxes, and corporate income or local personal income taxes in the designated state. Limited Maturity Portfolio seeks to achieve its objective by investing in a portfolio primarily of short-term investment grade obligations issued by or on behalf of states, territories and possessions of the United States and the District of Columbia and their political subdivisions, agencies and instrumentalities, the interest on which is exempt from Federal income taxes. Advisory Fees. The investment adviser for both the Trust and Municipal Bond Fund is Fund Asset Management, L.P. ("FAM"). FAM is responsible for the management of the investment portfolio of each of the State Funds and of Limited Maturity Portfolio and for providing administrative services to each of the State Funds and to Limited Maturity Portfolio. The portfolio managers for the State Funds are Edward S. Andrews, Peter J. Hayes and Helen M. Sheehan. Peter J. Hayes is the portfolio manager for Limited Maturity Portfolio. Pursuant to separate management agreements between the Trust and FAM on behalf of each of the State Funds, each State Fund pays FAM a monthly fee based upon the average daily net assets of that State Fund at the annual rate of 0.35% of the average daily net assets of that State Fund. Municipal Bond Fund's investment advisory agreement with FAM provides that as compensation for FAM's services to Limited Maturity Portfolio, FAM receives at the end of each month a fee determined based on the annual rates set forth in the table below. These rates are applied to the average daily net assets of each of the three portfolios of Municipal Bond Fund to the extent that the aggregate of the average daily net assets of the three combined portfolios of Municipal Bond Fund exceeds $250 million, $400 million, $550 million and $1.5 billion, respectively (each such amount being a breakpoint level). The portion of the assets of a portfolio to which the rate at each breakpoint level applies will be determined on a "uniform percentage" basis. The uniform percentage applicable to a breakpoint level is determined by dividing the amount of the aggregate of the average daily net assets of the three combined portfolios of the Municipal Bond Fund that falls within that breakpoint level by the aggregate of the average daily net assets of the three combined portfolios. The amount of the fee for a portfolio at each breakpoint level is determined by multiplying the average daily net assets of that portfolio by the uniform percentage applicable to that breakpoint level and multiplying the product by the advisory fee rate.
ADVISORY FEE RATE OF AGGREGATE OF AVERAGE DAILY NET LIMITED MATURITY ASSETS OF THE THREE COMBINED PORTFOLIOS PORTFOLIO --------------------------------------- ---------------- Not exceeding $250 million................ 0.40 % In excess of $250 million but not exceed- ing $400 million......................... 0.375 In excess of $400 million but not exceed- ing $550 million......................... 0.35 In excess of $550 million but not exceed- ing $1.5 billion......................... 0.325 In excess of $1.5 billion................. 0.325
12 See "The Reorganization--Summary--Pro Forma Fee Tables" and "--Comparison of the State Funds and Limited Maturity Portfolio--Management." As of October 31, 1997, the three portfolios of Municipal Bond Fund had aggregate net assets of $3,934,278,239; Limited Maturity Portfolio had net assets of $398,404,439. At this asset level the advisory fee rate of Limited Maturity Portfolio would be 0.33%. Class Structure. Like each of the State Funds, Limited Maturity Portfolio offers four classes of shares under the Merrill Lynch Select PricingSM System. The Class A, Class B, Class C and Class D shares issued by Limited Maturity Portfolio are identical in all respects to the Class A, Class B, Class C and Class D shares issued by the State Funds except that they represent ownership interests in a different investment portfolio. See "The Reorganization-- Comparison of the State Funds and Limited Maturity Portfolio--Purchase of Shares." Overall Expense Ratio. The overall operating expense ratio for the year ended July 31, 1997 for Class A shares was 0.41% for Limited Maturity Portfolio and for each of the State Funds was as set forth below:
BEFORE GIVING EFFECT TO ANY WAIVER OF AFTER GIVING EFFECT TO ADVISORY FEES OR WAIVER OF ADVISORY FEES REIMBURSEMENT OF AND REIMBURSEMENT OF EXPENSES EXPENSES -------------------- ----------------------- Arizona Fund............ 3.21% .94% Massachusetts Fund...... 2.52% .99% Michigan Fund........... 3.50% .94% New Jersey Fund......... 1.65% .94% New York Fund........... 1.16% .70% Pennsylvania Fund....... 1.75% .99%
If the Reorganization had taken place on August 1, 1996 (the first day of the year ended July 31, 1997), the overall operating expense ratio for Class A shares for the combined entity on a pro forma basis would have been 0.41%. The above ratios would differ for Class B, Class C and Class D shares as a result of class specific distribution and account maintenance expenditures. See "The Reorganization-- Summary--Pro Forma Fee Tables." Purchase of Shares. Shares of Limited Maturity Portfolio are offered continuously for sale to the public in substantially the same manner as the shares of each of the State Funds. See "The Reorganization--Comparison of the State Funds and Limited Maturity Portfolio--Purchase of Shares." Redemption of Shares. The redemption procedures for shares of Limited Maturity Portfolio are the same as the redemption procedures for shares of each of the State Funds. See "The Reorganization--Comparison of the State Funds and Limited Maturity Portfolio--Redemption of Shares." Dividends and Distributions. The policies of each State Fund with respect to dividends and distributions are identical to those of 13 Limited Maturity Portfolio. See "The Reorganization--Comparison of the State Funds and Limited Maturity Portfolio--Dividends and Distributions." Net Asset Value. The State Funds and Limited Maturity Portfolio each determines the net asset value of each class of its shares once daily 15 minutes after the close of business on the New York Stock Exchange (the "NYSE") (generally, 4:00 p.m., New York time), on each day during which the NYSE is open for trading. The State Funds and Limited Maturity Portfolio each compute net asset value per share in the same manner. See "The Reorganization-- Comparison of the State Funds and Limited Maturity Portfolio--Additional Information--Net Asset Value." Voting Rights. The corresponding voting rights of the holders of shares of beneficial interest of the Trust and shares of Common Stock of Municipal Bond Fund are substantially the same. See "The Reorganization--Comparison of the State Funds and Limited Maturity Portfolio-- Capital Stock." Stockholder Services. Stockholder services, including exchange privileges, available to the State Funds and Limited Maturity Portfolio are substantially the same. See "The Reorganization--Comparison of the State Funds and Limited Maturity Portfolio--Additional Information--Stockholder Services." An automatic dividend reinvestment plan is available both to the holders of shares of beneficial interest of the Trust and the holders of shares of Common Stock of Municipal Bond Fund. The plans are identical. See "The Reorganization--Comparison of the State Funds and Limited Maturity Portfolio--Automatic Dividend Reinvestment Plan." Other stockholder services, including the provision of annual and semi-annual reports, are the same for the Trust and Municipal Bond Fund. See "The Reorganization--Comparison of the State Funds and Limited Maturity Portfolio--Additional Information--Stockholder Services." State of Organization. The Trust is organized as a business trust under the laws of the Commonwealth of Massachusetts and the Municipal Bond Fund is organized as a corporation under the laws of the State of Maryland. See "The Reorganization--Comparison of the State Funds and Limited Maturity Portfolio--State of Organization" for a summary of certain differences between the Trust's Declaration of Trust, By-laws and Massachusetts law and the Municipal Bond Fund's Articles of Incorporation, By-laws and Maryland law. TAX CONSIDERATIONS The State Funds and Limited Maturity Portfolio have jointly requested a private letter ruling from the IRS with respect to the Reorganization to the effect that, among other things, neither the State Funds nor Limited Maturity Portfolio will recognize gain or loss on the transaction and stockholders of the State Funds will not recognize gain or loss on the exchange of their shares of beneficial interest for shares of Limited Maturity Portfolio Common Stock. The consummation of the Reorganization is subject to the receipt of 14 such ruling. The Reorganization will not affect the status of Limited Maturity Portfolio as a regulated investment company ("RIC") under the Internal Revenue Code of 1986, as amended ("Code"). Each State Fund will liquidate pursuant to the Reorganization and will terminate as a series of the Trust. After the Reorganization, the distributions received from Limited Maturity Portfolio will be exempt from Federal income tax but generally will not be exempt to any significant degree from personal income tax at the state level. Currently, the portion of a State Fund's exempt interest dividends paid from interest received by the State Fund from municipal bonds of the designated state is also exempt from personal income tax in the designated state and, where applicable, corporate income or local personal income taxes. Currently, shares of a State Fund may also be exempt from state intangible personal property tax in the designated state. 15 RISK FACTORS AND SPECIAL CONSIDERATIONS Since the State Funds and Limited Maturity Portfolio invest primarily in a portfolio of Municipal Bonds, any risks inherent in such investments are equally applicable to the State Funds and Limited Maturity Portfolio and will be similarly pertinent to the combined fund after the Reorganization. It is expected that the Reorganization itself will not adversely affect the rights of holders of shares of beneficial interest of the State Funds or shares of Limited Maturity Portfolio Common Stock or create additional risks. PORTFOLIO MANAGEMENT Each State Fund ordinarily will invest at least 65% (80% in the case of the New Jersey Fund) of its total assets in its respective State Municipal Bonds and, therefore, is more susceptible to factors adversely affecting issuers of Municipal Bonds in such state than is a tax-exempt mutual fund that is not concentrated in issuers of a particular state's Municipal Bonds to this degree, such as Limited Maturity Portfolio. Limited Maturity Portfolio currently contemplates that it will not invest more than 25% of its total assets (taken at market value) in Municipal Bonds of issuers that are located in the same state. Certain special considerations and risk factors specific to each State Fund are described in the Limited Maturity Trust Prospectus. FAM does not believe that the current economic conditions described in the Limited Maturity Trust Prospectus will have a significant adverse effect on the ability of any State Fund to invest in investment grade State Municipal Bonds. MATURITY Limited Maturity Portfolio may not invest in Municipal Bonds with a remaining term exceeding four years. The State Funds invest primarily in Municipal Bonds with remaining maturities of between one and ten years. Because the State Funds hold Municipal Bonds with maturities which exceed the permitted maturity for investments by Limited Maturity Portfolio, prior to the Reorganization, the State Funds will dispose of all portfolio securities that have maturities greater than four years. FAM believes that such disposition will not affect the receipt of a favorable private letter ruling from the IRS with respect to the tax-free status of the Reorganization. TAX CONSIDERATIONS The distributions to stockholders of Limited Maturity Portfolio are, and after the Reorganization will be, exempt from Federal income tax but not, to any significant degree, from personal income tax at the state level. The distributions to stockholders of the State Funds, however, are currently exempt from Federal income taxes and personal income taxes imposed by the designated state (and, in certain instances, corporate income or local personal income taxes) and may also provide exemption of State Fund shares from state intangible personal income taxes. See "Comparison of the State Funds and Limited Maturity Portfolio--Taxation of Limited Maturity Portfolio, State Funds and Their Stockholders" and "Agreement and Plan of Reorganization--Tax Consequences of the Reorganization." Stockholders should consult their tax advisers regarding the effect of the Reorganization on their investment. 16 COMPARISON OF THE STATE FUNDS AND LIMITED MATURITY PORTFOLIO FINANCIAL HIGHLIGHTS Limited Maturity Portfolio The financial information in the table below has been audited in conjunction with the annual audits of the financial statements of the Municipal Bond Fund by Deloitte & Touche llp, independent auditors. The following per share data and ratios have been derived from information provided in the financial statements of the Municipal Bond Fund.
LIMITED MATURITY PORTFOLIO -------------------------------------------------------------------------------------------------- CLASS A -------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED JUNE 30, -------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PER- FORMANCE: Net asset value, begin- ning of year............ $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.91 $ 9.75 $ 9.71 $ 9.73 $ 9.75 $ 9.83 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Investment income--net.. .39 .38 .38 .37 .41 .50 .57 .60 .58 .53 Realized and unrealized gain (loss) on invest- ments--net.............. .04 (.01) .05 (.14) .10 .16 .04 (.02) (.02) (.07) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total from investment operations.............. .43 .37 .43 .23 .51 .66 .61 .58 .56 .46 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Less dividends and dis- tributions: Investment income-- net.................... (.39) (.38) (.38) (.37) (.41) (.50) (.57) (.60) (.58) (.53) Realized gain on in- vestments--net......... (.02) -- -- -- -- -- -- -- -- (.01) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total dividends and dis- tributions: (.41) (.38) (.38) (.37) (.41) (.50) (.57) (.60) (.58) (.54) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net asset value, end of year.................... $ 9.93 $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.91 $ 9.75 $ 9.71 $ 9.73 $ 9.75 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== TOTAL INVESTMENT RE- TURN:* Based on net asset value per share............... 4.40% 3.75% 4.53% 2.30% 5.28% 6.93% 6.45% 6.16% 5.96% 4.83% ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== RATIOS TO AVERAGE NET ASSETS: Expenses................ .39% .44% .41% .40% .41% .40% .40% .40% .41% .40% ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Investment income--net.. 3.93% 3.83% 3.86% 3.68% 4.13% 5.02% 5.88% 6.21% 6.00% 5.42% ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== SUPPLEMENTAL DATA: Net assets, end of year (in thousands).......... $343,641 $417,097 $536,474 $790,142 $846,736 $613,407 $350,549 $352,005 $385,794 $567,158 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Portfolio turnover...... 61.90% 88.32% 37.33% 45.67% 65.43% 96.32% 93.06% 106.44% 228.78% 146.01% ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
- ---- * Total investment returns exclude the effect of sales loads. 17
LIMITED MATURITY PORTFOLIO ------------------------------------------------------------------------------------------------------ CLASS B CLASS C CLASS D ---------------------------------------------- ------------------------- -------------------------- FOR THE FOR THE FOR THE PERIOD PERIOD PERIOD NOV. 2, FOR THE YEAR OCT. 21, FOR THE YEAR OCT. 21, FOR THE YEAR ENDED JUNE 30, 1992+ TO ENDED JUNE 30, 1994+ TO ENDED JUNE 30, 1994+ TO ------------------------------------ JUNE 30, --------------- JUNE 30, ---------------- JUNE 30, 1997 1996 1995 1994 1993 1997 1996 1995 1997 1996 1995 ------- ------- -------- -------- -------- ------- ------- -------- ------- ------- -------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PER- FORMANCE: Net asset value, begin- ning of period......... $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.93 $ 9.88 $ 9.92 $ 9.83 $ 9.91 $ 9.93 $ 9.83 ------- ------- -------- -------- ------- ------ ------- ------ ------- ------- ------- Investment income--net.. .36 .35 .35 .33 .24 .35 .34 .25 .38 .37 .26 Realized and unrealized gain (loss) on investments--net....... .05 (.01) .05 (.14) .08 .05 (.04) .09 .05 (.02) .10 ------- ------- -------- -------- ------- ------ ------- ------ ------- ------- ------- Total from investment operations............. .41 .34 .40 .19 .32 .40 .30 .34 .43 .35 .36 ------- ------- -------- -------- ------- ------ ------- ------ ------- ------- ------- Less dividends and dis- tributions: Investment income-- net................... (.36) (.35) (.35) (.33) (.24) (.35) (.34) (.25) (.38) (.37) (.26) Realized gain on in- vestment--net......... (.02) -- -- -- -- (.02) -- -- (.02) -- -- ------- ------- -------- -------- ------- ------ ------- ------ ------- ------- ------- Total dividends and dis- tributions............. (.38) (.35) (.35) (.33) (.24) (.37) (.34) (.25) (.40) (.37) (.26) ------- ------- -------- -------- ------- ------ ------- ------ ------- ------- ------- Net asset value, end of period................. $ 9.94 $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.91 $ 9.88 $ 9.92 $ 9.94 $ 9.91 $ 9.93 ======= ======= ======== ======== ======= ====== ======= ====== ======= ======= ======= TOTAL INVESTMENT RE- TURN:** Based on net asset value per share.............. 4.13% 3.37% 4.14% 1.98% 3.26%# 4.11% 2.97% 3.52%# 4.40% 3.55% 3.73%# ======= ======= ======== ======== ======= ====== ======= ====== ======= ======= ======= RATIOS TO AVERAGE NET ASSETS: Expenses................ .75% .80% .78% .76% .76%* .75% .80% .70%* .48% .54% .53%* ======= ======= ======== ======== ======= ====== ======= ====== ======= ======= ======= Investment income--net.. 3.58% 3.46% 3.50% 3.33% 3.60%* 3.57% 3.41% 3.61%* 3.84% 3.71% 3.78%* ======= ======= ======== ======== ======= ====== ======= ====== ======= ======= ======= SUPPLEMENTAL DATA: Net assets, end of pe- riod (in thousands).... $54,275 $71,075 $129,581 $145,534 $95,179 $ 108 $ 94 $3,965 $20,383 $15,886 $11,258 ======= ======= ======== ======== ======= ====== ======= ====== ======= ======= ======= Portfolio turnover...... 61.90% 88.32% 37.33% 45.67% 65.43% 61.90% 88.32% 37.33% 61.90% 88.32% 37.33% ======= ======= ======== ======== ======= ====== ======= ====== ======= ======= =======
- ------ * Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of operations. # Aggregate total investment return. 18 The State Funds 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 year ended July 31, 1997 and the independent auditors' report thereon are included in the Trust's Annual Report to Stockholders for the fiscal year ended July 31, 1997. The following per share data and ratios have been derived from information provided in such audited financial statements.
ARIZONA FUND ---------------------------------------------------------------------------------------------- CLASS A CLASS B CLASS C -------------------------------- -------------------------------- -------------------------- FOR THE FOR THE FOR THE PERIOD PERIOD PERIOD FOR THE YEAR ENDED NOV. 26, FOR THE YEAR ENDED NOV. 26, FOR THE YEAR OCT. 21, JULY 31, 1993+ TO JULY 31, 1993+ TO ENDED JULY 31, 1994+ TO ---------------------- JULY 31, ---------------------- JULY 31, ---------------- JULY 31, 1997 1996 1995 1994 1997 1996 1995 1994 1997 1996 1995 ------ ------ ------ -------- ------ ------ ------ -------- ------- ------- -------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.......... $10.08 $10.17 $ 9.97 $10.00 $10.08 $10.16 $ 9.97 $10.00 $ 10.08 $ 10.17 $ 9.89 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------ Investment income-net...... .37 .41 .43 .23 .33 .37 .39 .20 .35 .37 .29 Realized and unrealized gain (loss) on investments- net............. .09 (.09) .20 (.03) .09 (.08) .19 (.03) .10 (.09) .28 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------ Total from investment operations...... .46 .32 .63 .20 .42 .29 .58 .17 .45 .28 .57 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------ Less dividends from investment income-net...... (.37) (.41) (.43) (.23) (.33) (.37) (.39) (.20) (.35) (.37) (.29) ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------ Net asset value, end of period... $10.17 $10.08 $10.17 $ 9.97 $10.17 $10.08 $10.16 $ 9.97 $ 10.18 $ 10.08 $10.17 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== TOTAL INVESTMENT RETURN: ** Based on net asset value per share........... 4.62% 3.16% 6.47% 2.02%# 4.25% 2.88% 5.99% 1.78%# 4.55% 2.78% 5.90%# ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursements.. .94% .74% .35% .02%* 1.30% 1.09% .72% .38%* 1.11% 1.03% 1.05%* ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== Expenses........ 3.21% 2.27% 2.05% 1.82%* 3.56% 2.61% 2.44% 2.18%* 3.35% 2.80% 2.79%* ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== Investment income-net...... 3.64% 4.01% 4.31% 3.37%* 3.28% 3.65% 3.95% 3.02%* 3.48% 3.86% 3.80%* ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== SUPPLEMENTAL DATA: Net assets, end of period (in thousands)...... $709 $813 $1,054 $2,103 $2,135 $2,885 $5,191 $5,575 $36 $135 $1 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== Portfolio turnover........ 38.21% 43.53% 182.58% 142.37% 38.21% 43.53% 182.58% 142.37% 38.21% 43.53% 182.58% ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== ARIZONA FUND --------------------------- CLASS D -------------------------- FOR THE PERIOD FOR THE YEAR OCT. 21, ENDED JULY 31, 1994+ TO ---------------- JULY 31, 1997 1996 1995 ------- ------- -------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.......... $ 10.08 $ 10.17 $ 9.89 ------- ------- ------ Investment income-net...... .36 .40 .33 Realized and unrealized gain (loss) on investments- net............. .10 (.09) .28 ------- ------- ------ Total from investment operations...... .46 .31 .61 ------- ------- ------ Less dividends from investment income-net...... (.36) (.40) (.33) ------- ------- ------ Net asset value, end of period... $ 10.18 $ 10.08 $10.17 ======= ======= ====== TOTAL INVESTMENT RETURN: ** Based on net asset value per share........... 4.62% 3.05% 6.34%# ======= ======= ====== RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursements.. 1.04% .90% .55%* ======= ======= ====== Expenses........ 3.29% 2.42% 2.39%* ======= ======= ====== Investment income-net...... 3.56% 3.88% 4.31%* ======= ======= ====== SUPPLEMENTAL DATA: Net assets, end of period (in thousands)...... $477 $619 $19 ======= ======= ====== Portfolio turnover........ 38.21% 43.53% 182.58% ======= ======= ======
- ---- * Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of operations. # Aggregate total investment return. 19
MASSACHUSETTS FUND ---------------------------------------------------------------------------------------------- CLASS A CLASS B CLASS C --------------------------------- --------------------------------- ------------------------ FOR THE FOR THE FOR THE PERIOD PERIOD FOR THE YEAR PERIOD FOR THE YEAR ENDED NOV. 26, FOR THE YEAR ENDED NOV. 26, ENDED OCT. 21, JULY 31, 1993+ TO JULY 31, 1993+ TO JULY 31, 1994+ TO ----------------------- JULY 31, ----------------------- JULY 31, -------------- JULY 31, 1997 1996 1995 1994 1997 1996 1995 1994 1997 1996 1995 ------ ------ ------ -------- ------ ------ ------ -------- ------ ------ -------- INCREASE (DE- CREASE) IN NET ASSET VALUE: PER SHARE OPER- ATING PERFOR- MANCE: Net asset value, beginning of period......... $ 9.96 $ 9.96 $ 9.95 $10.00 $ 9.96 $ 9.96 $ 9.95 $10.00 $ 9.95 $ 9.96 $ 9.82 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Investment income-net..... .39 .40 .44 .25 .36 .37 .40 .22 .38 .39 .33 Realized and unrealized gain (loss) on investments- net............ .08 -- ++ .02 (.05) .08 -- ++ .02 (.05) .08 (.01) .15 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total from in- vestment opera- tions.......... .47 .40 .46 .20 .44 .37 .42 .17 .46 .38 .48 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Less dividends and distribu- tions: Investment income-net..... (.39) (.40) (.44) (.25) (.36) (.37) (.40) (.22) (.38) (.39) (.33) Realized gain on investments- net............ -- -- (.01) -- -- -- (.01) -- -- -- (.01) ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total dividends and distribu- tions.......... (.39) (.40) (.45) (.25) (.36) (.37) (.41) (.22) (.38) (.39) (.34) ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== Net asset value, end of period.. $10.04 $ 9.96 $ 9.96 $ 9.95 $10.04 $ 9.96 $ 9.96 $ 9.95 $10.03 $ 9.95 $ 9.96 ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== TOTAL INVESTMENT RETURN:** Based on net as- set value per share.......... 4.86% 4.08% 4.79% 2.01%# 4.49% 3.70% 4.41% 1.77%# 4.70% 3.81% 5.00%# ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== RATIOS TO AVER- AGE NET ASSETS: Expenses, net of reimbursement.. .99% .77% .37% .03%* 1.35% 1.16% .74% .38%* 1.15% .94% .67%* ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== Expenses........ 2.52% 2.15% 1.71% 1.17%* 2.84% 2.61% 2.08% 1.54%* 2.69% 2.37% 2.23%* ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== Investment in- come-net....... 3.95% 4.04% 4.45% 3.69%* 3.58% 3.66% 4.08% 3.28%* 3.80% 3.88% 4.32%* ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== SUPPLEMENTAL DA- TA: Net assets, end of period (in thousands)..... $1,356 $1,719 $4,453 $8,097 $2,807 $4,577 $4,800 $8,046 $ 275 $ 210 $ 413 ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== Portfolio turn- over........... 22.93% 22.71% 89.96% 57.80% 22.93% 22.71% 89.96% 57.80% 22.93% 22.71% 89.96% ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== MASSACHUSETTS FUND -------------------------- CLASS D ------------------------- FOR THE FOR THE YEAR PERIOD ENDED OCT. 21, JULY 31, 1994+ TO -------------- JULY 31, 1997 1996 1995 ------ ------ -------- INCREASE (DE- CREASE) IN NET ASSET VALUE: PER SHARE OPER- ATING PERFOR- MANCE: Net asset value, beginning of period......... $ 9.96 $ 9.96 $ 9.82 ------ ------ ------ Investment income-net..... .38 .39 .34 Realized and unrealized gain (loss) on investments- net............ .08 -- ++ .15 ------ ------ ------ Total from in- vestment opera- tions.......... .46 .39 .49 ------ ------ ------ Less dividends and distribu- tions: Investment income-net..... (.38) (.39) (.34) Realized gain on investments- net............ -- -- (.01) ------ ------ ------ Total dividends and distribu- tions.......... (.38) (.39) (.35) ====== ====== ====== Net asset value, end of period.. $10.04 $ 9.96 $ 9.96 ====== ====== ====== TOTAL INVESTMENT RETURN:** Based on net as- set value per share.......... 4.76% 3.97% 5.09%# ====== ====== ====== RATIOS TO AVER- AGE NET ASSETS: Expenses, net of reimbursement.. 1.09% .93% .70%* ====== ====== ====== Expenses........ 2.62% 2.42% 2.31%* ====== ====== ====== Investment in- come-net....... 3.85% 3.89% 4.21%* ====== ====== ====== SUPPLEMENTAL DA- TA: Net assets, end of period (in thousands)..... $ 698 $ 890 $ 253 ====== ====== ====== Portfolio turn- over........... 22.93% 22.71% 89.96% ====== ====== ======
- ------ * Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of operations. # Aggregate total investment return. ++ Amount is less than $.01 per share. 20
MICHIGAN FUND ------------------------------------------------------------------------------------------------ CLASS A CLASS B CLASS C --------------------------------- --------------------------------- -------------------------- FOR THE FOR THE FOR THE PERIOD PERIOD PERIOD FOR THE YEAR ENDED NOV. 26, FOR THE YEAR ENDED NOV. 26, FOR THE YEAR OCT. 21, JULY 31, 1993+ TO JULY 31, 1993+ TO ENDED JULY 31, 1994+ TO ----------------------- JULY 31, ----------------------- JULY 31, ----------------- JULY 31, 1997 1996 1995 1994 1997 1996 1995 1994 1997 1996 1995 ------ ------ ------ -------- ------ ------ ------ -------- ------- ------- -------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.......... $ 9.94 $ 9.98 $ 9.92 $10.00 $ 9.94 $ 9.98 $ 9.92 $10.00 $ 9.94 $ 9.98 $9.76 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ----- Investment income--net.... .39 .41 .44 .24 .36 .37 .40 .22 .36 .36 .30 Realized and unrealized gain (loss) on investments-- net............ .15 (.04) .06 (.08) .15 (.04) .06 (.08) .15 (.04) .22 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ----- Total from investment operations...... .54 .37 .50 .16 .51 .33 .46 .14 .51 .32 .52 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ----- Less dividends and distributions: Investment income--net.... (.39) (.41) (.44) (.24) (.36) (.37) (.40) (.22) (.36) (.36) (.30) In excess of realized gain on investments-- net............ -- ++ -- -- -- -- ++ -- -- -- -- ++ -- -- ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ----- Total dividends and distributions... (.39) (.41) (.44) (.24) (.36) (.37) (.40) (.22) (.36) (.36) (.30) ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ----- Net asset value, end of period... $10.09 $ 9.94 $ 9.98 $ 9.92 $10.09 $ 9.94 $ 9.98 $ 9.92 $ 10.09 $ 9.94 $9.98 ====== ====== ====== ====== ====== ====== ====== ====== ======= ====== ===== TOTAL INVESTMENT RETURN:** Based on net asset value per share........... 5.61% 3.71% 5.16% 1.66%# 5.22% 3.32% 4.78% 1.42%# 5.22% 3.20% 5.40%# ====== ====== ====== ====== ====== ====== ====== ====== ======= ====== ===== RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursements.. .94% .74% .27% .02%* 1.31% 1.10% .65% .38%* 1.32% 1.24% .96%* ====== ====== ====== ====== ====== ====== ====== ====== ======= ====== ===== Expenses......... 3.50% 2.78% 2.18% 2.01%* 3.86% 3.14% 2.56% 2.38%* 3.81% 3.31% 2.90%* ====== ====== ====== ====== ====== ====== ====== ====== ======= ====== ===== Investment income--net..... 3.93% 4.06% 4.42% 3.59%* 3.56% 3.70% 4.09% 3.21%* 3.56% 3.57% 3.80%* ====== ====== ====== ====== ====== ====== ====== ====== ======= ====== ===== SUPPLEMENTAL DATA: Net assets, end of period (in thousands)...... $1,368 $1,641 $2,302 $3,435 $1,411 $1,842 $2,494 $2,411 $ 1 $ 1 $ 1 ====== ====== ====== ====== ====== ====== ====== ====== ======= ====== ===== Portfolio turnover........ 13.24% 32.92% 93.08% 204.15% 13.24% 32.92% 93.08% 204.15% 13.24% 32.92% 93.08% ====== ====== ====== ====== ====== ====== ====== ====== ======= ====== ===== MICHIGAN FUND -------------------------- CLASS D -------------------------- FOR THE PERIOD FOR THE YEAR OCT. 21, ENDED JULY 31, 1994+ TO ----------------- JULY 31, 1997 1996 1995 ------- ------- -------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.......... $ 9.94 $ 9.97 $9.76 ------- ------ ----- Investment income--net.... .38 .40 .34 Realized and unrealized gain (loss) on investments-- net............ .14 (.03) .21 ------- ------ ----- Total from investment operations...... .52 .37 .55 ------- ------ ----- Less dividends and distributions: Investment income--net.... (.38) (.40) (.34) In excess of realized gain on investments-- net............ -- ++ -- -- ------- ------ ----- Total dividends and distributions... (.38) (.40) (.34) ------- ------ ----- Net asset value, end of period... $ 10.08 $ 9.94 $9.97 ======= ====== ===== TOTAL INVESTMENT RETURN:** Based on net asset value per share........... 5.40% 3.71% 5.72%# ======= ====== ===== RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursements.. 1.04% .87% .44%* ======= ====== ===== Expenses......... 3.48% 3.06% 2.38%* ======= ====== ===== Investment income--net..... 3.83% 3.94% 4.47%* ======= ====== ===== SUPPLEMENTAL DATA: Net assets, end of period (in thousands)...... $ 1,471 $ 541 $ 254 ======= ====== ===== Portfolio turnover........ 13.24% 32.92% 93.08% ======= ====== =====
- ------ * Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of operations. ++ Amount is less than $.01 per share. # Aggregate total investment return. 21
NEW JERSEY FUND ---------------------------------------------------------------------------------------------- CLASS A CLASS B CLASS C -------------------------------- -------------------------------- -------------------------- FOR THE FOR THE FOR THE PERIOD PERIOD PERIOD FOR THE YEAR ENDED NOV. 26, FOR THE YEAR ENDED NOV. 26, FOR THE YEAR OCT. 21, JULY 31, 1993+ TO JULY 31, 1993+ TO ENDED JULY 31, 1994+ TO ---------------------- JULY 31, ---------------------- JULY 31, ---------------- JULY 31, 1997 1996 1995 1994 1997 1996 1995 1994 1997 1996 1995 ------ ------ ------ -------- ------ ------ ------ -------- ------- ------- -------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.......... $10.11 $10.15 $ 9.94 $10.00 $10.11 $10.16 $ 9.95 $10.00 $ 9.16 $ 9.20 $ 9.86 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------ Investment income--net.... .38 .41 .42 .23 .35 .37 .38 .20 .33 .34 .26 Realized and unrealized gain (loss) on investments-- net............ .03 (.04) .21 (.06) .04 (.05) .21 (.05) .03 (.04) (.66) ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------ Total from investment operations...... .41 .37 .63 .17 .39 .32 .59 .15 .36 .30 (.40) ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------ Less dividends from investment income--net..... (.38) (.41) (.42) (.23) (.35) (.37) (.38) (.20) (.33) (.34) (.26) ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------ Net asset value, end of period... $10.14 $10.11 $10.15 $ 9.94 $10.15 $10.11 $10.16 $ 9.95 $ 9.19 $ 9.16 $ 9.20 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== TOTAL INVESTMENT RETURN:** Based on net asset value per share........... 4.19% 3.68% 6.45% 1.73%# 3.92% 3.21% 6.07% 1.59%# 4.06% 3.24% (4.01%)# ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursements.. .94% .76% .34% .03%* 1.30% 1.10% .73% .38%* 1.10% 1.00% .55%* ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== Expenses......... 1.65% 1.78% 1.69% 1.14%* 2.00% 2.12% 2.15% 1.52%* 1.80% 2.04% 2.22%* ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== Investment income--net..... 3.82% 4.02% 4.10% 3.45%* 3.46% 3.67% 3.80% 3.04%* 3.66% 3.82% 4.06%* ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== SUPPLEMENTAL DATA: Net assets, end of period (in thousands)...... $1,735 $2,663 $2,401 $5,933 $4,109 $5,152 $7,593 $7,885 $ 241 $ 272 $ 1 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== Portfolio turnover........ 32.89% 6.57% 131.56% 205.04% 32.89% 6.57% 131.56% 205.04% 32.89% 6.57% 131.56% ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== NEW JERSEY FUND -------------------------- CLASS D -------------------------- FOR THE PERIOD FOR THE YEAR OCT. 21, ENDED JULY 31, 1994+ TO ---------------- JULY 31, 1997 1996 1995 ------- ------- -------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.......... $ 10.11 $ 10.16 $ 9.85 ------- ------- ------ Investment income--net.... .37 .40 .32 Realized and unrealized gain (loss) on investments-- net............ .04 (.05) .31 ------- ------- ------ Total from investment operations...... .41 .35 .63 ------- ------- ------ Less dividends from investment income--net..... (.37) (.40) (.32) ------- ------- ------ Net asset value, end of period... $ 10.15 $ 10.11 $10.16 ======= ======= ====== TOTAL INVESTMENT RETURN:** Based on net asset value per share........... 4.18% 3.48% 6.51%# ======= ======= ====== RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursements.. 1.04% .84% .62%* ======= ======= ====== Expenses......... 1.78% 1.86% 2.07%* ======= ======= ====== Investment income--net..... 3.75% 3.93% 4.17%* ======= ======= ====== SUPPLEMENTAL DATA: Net assets, end of period (in thousands)...... $ 238 $ 540 $ 437 ======= ======= ====== Portfolio turnover........ 32.89% 6.57% 131.56% ======= ======= ======
- ------ * Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of operations. # Aggregate total investment return. 22
NEW YORK FUND ----------------------------------------------------------------------------------------------- CLASS A CLASS B CLASS C -------------------------------- --------------------------------- -------------------------- FOR THE FOR THE FOR THE PERIOD PERIOD PERIOD FOR THE YEAR ENDED NOV. 26, FOR THE YEAR ENDED NOV. 26, FOR THE YEAR OCT. 21, JULY 31, 1993+ TO JULY 31, 1993+ TO ENDED JULY 31, 1994+ TO ---------------------- JULY 31, ----------------------- JULY 31, ---------------- JULY 31, 1997 1996 1995 1994 1997 1996 1995 1994 1997 1996 1995 ------ ------ ------ -------- ------ ------- ------ -------- ------- ------- -------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period......... $10.06 $10.05 $ 9.91 $10.00 $10.06 $ 10.05 $ 9.91 $10.00 $ 10.06 $ 10.05 $ 9.78 ------ ------ ------ ------ ------ ------- ------ ------ ------- ------- ------ Investment income-net..... .43 .43 .44 .25 .39 .40 .41 .22 .41 .42 .30 Realized and unrealized gain (loss) on investments- net............ .17 .01 .14 (.09) .17 .01 .14 (.09) .17 .01 .27 ------ ------ ------ ------ ------ ------- ------ ------ ------- ------- ------ Total from investment operations..... .60 .44 .58 .16 .56 .41 .55 .13 .58 .43 .57 ------ ------ ------ ------ ------ ------- ------ ------ ------- ------- ------ Less dividends from investment income-net..... (.43) (.43) (.44) (.25) (.39) (.40) (.41) (.22) (.41) (.42) (.30) ------ ------ ------ ------ ------ ------- ------ ------ ------- ------- ------ Net asset value, end of period.. $10.23 $10.06 $10.05 $ 9.91 $10.23 $ 10.06 $10.05 $ 9.91 $ 10.23 $ 10.06 $10.05 ====== ====== ====== ====== ====== ======= ====== ====== ======= ======= ====== TOTAL INVESTMENT RETURN:** Based on net asset value per share.......... 6.09% 4.46% 6.03% 1.61%# 5.71% 4.08% 5.66% 1.37%# 5.91% 4.28% 5.97%# ====== ====== ====== ====== ====== ======= ====== ====== ======= ======= ====== RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursements.. .70% .50% .33% .03%* 1.05% .87% .69% .38%* .86% .71% .63%* ====== ====== ====== ====== ====== ======= ====== ====== ======= ======= ====== Expenses........ 1.16% 1.38% 1.30% 1.24%* 1.52% 1.75% 1.65% 1.60%* 1.32% 1.59% 1.63%* ====== ====== ====== ====== ====== ======= ====== ====== ======= ======= ====== Investment income-net..... 4.24% 4.28% 4.49% 3.68%* 3.88% 3.91% 4.11% 3.31%* 4.05% 4.06% 4.21%* ====== ====== ====== ====== ====== ======= ====== ====== ======= ======= ====== SUPPLEMENTAL DATA: Net assets, end of period (in thousands)..... $2,605 $3,723 $4,811 $5,290 $8,209 $10,071 $8,822 $9,743 $ 68 $ 214 $ 38 ====== ====== ====== ====== ====== ======= ====== ====== ======= ======= ====== Portfolio turnover....... 36.53% 51.47% 139.16% 152.73% 36.53% 51.47% 139.16% 152.73% 36.53% 51.47% 139.16% ====== ====== ====== ====== ====== ======= ====== ====== ======= ======= ====== NEW YORK FUND -------------------------- CLASS D -------------------------- FOR THE PERIOD FOR THE YEAR OCT. 21, ENDED JULY 31, 1994+ TO ---------------- JULY 31, 1997 1996 1995 ------- ------- -------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period......... $ 10.06 $ 10.05 $ 9.78 ------- ------- ------ Investment income-net..... .42 .42 .34 Realized and unrealized gain (loss) on investments- net............ .17 .01 .27 ------- ------- ------ Total from investment operations..... .59 .43 .61 ------- ------- ------ Less dividends from investment income-net..... (.42) (.42) (.34) ------- ------- ------ Net asset value, end of period.. $ 10.23 $ 10.06 $10.05 ======= ======= ====== TOTAL INVESTMENT RETURN:** Based on net asset value per share.......... 5.98% 4.35% 6.37%# ======= ======= ====== RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursements.. .80% .62% .48%* ======= ======= ====== Expenses........ 1.26% 1.49% 1.48%* ======= ======= ====== Investment income-net..... 4.14% 4.16% 4.47%* ======= ======= ====== SUPPLEMENTAL DATA: Net assets, end of period (in thousands)..... $ 3,683 $ 3,912 $2,306 ======= ======= ====== Portfolio turnover....... 36.53% 51.47% 139.16% ======= ======= ======
- ------ * Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of operations. # Aggregate total investment return. 23
PENNSYLVANIA FUND ---------------------------------------------------------------------------------------------- CLASS A CLASS B CLASS C -------------------------------- -------------------------------- -------------------------- FOR THE FOR THE FOR THE PERIOD PERIOD PERIOD FOR THE YEAR ENDED NOV. 26, FOR THE YEAR ENDED NOV. 26, FOR THE YEAR OCT. 21, JULY 31, 1993+ TO JULY 31, 1993+ TO ENDED JULY 31, 1994+ TO ---------------------- JULY 31, ---------------------- JULY 31, ---------------- JULY 31, 1997 1996 1995 1994 1997 1996 1995 1994 1997 1996 1995 ------ ------ ------ -------- ------ ------ ------ -------- ------- ------- -------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.......... $10.11 $10.10 $ 9.95 $10.00 $10.11 $10.10 $ 9.95 $10.00 $ 10.15 $ 10.10 $ 9.84 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------ Investment income--net.... .38 .41 .42 .23 .34 .37 .39 .21 .35 .38 .29 Realized and unrealized gain (loss) on investments-- net............ .12 .01 .15 (.05) .12 .01 .15 (.05) .12 .05 .26 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------ Total from investment operations...... .50 .42 .57 .18 .46 .38 .54 .16 .47 .43 .55 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------ Less dividends from investment income--net..... (.38) (.41) (.42) (.23) (.34) (.37) (.39) (.21) (.35) (.38) (.29) ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- ------ Net asset value, end of period... $10.23 $10.11 $10.10 $ 9.95 $10.23 $10.11 $10.10 $ 9.95 $ 10.27 $ 10.15 $10.10 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== TOTAL INVESTMENT RETURN:** Based on net asset value per share........... 5.04% 4.18% 5.89% 1.85%# 4.66% 3.80% 5.51% 1.61%# 4.68% 4.28% 5.68%# ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursements.. .99% .80% .38% .02%* 1.35% 1.15% .73% .38%* 1.28% .97% 1.05%* ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== Expenses......... 1.75% 1.63% 1.90% 1.48%* 2.11% 1.99% 2.25% 1.83%* 2.02% 1.83% 2.55%* ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== Investment income--net..... 3.74% 4.01% 4.25% 3.46%* 3.38% 3.65% 3.87% 3.05%* 3.46% 3.84% 3.77%* ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== SUPPLEMENTAL DATA: Net assets, end of period (in thousands)...... $ 736 $ 833 $ 943 $ 990 $5,134 $6,264 $7,414 $9,532 $ 8 $ 1 $ 1 ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== Portfolio turnover........ 20.88% 30.90% 141.52% 237.47% 20.88% 30.90% 141.52% 237.47% 20.88% 30.90% 141.52% ====== ====== ====== ====== ====== ====== ====== ====== ======= ======= ====== PENNSYLVANIA FUND -------------------------- CLASS D -------------------------- FOR THE PERIOD FOR THE YEAR OCT. 21, ENDED JULY 31, 1994+ TO ---------------- JULY 31, 1997 1996 1995 ------- ------- -------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.......... $ 10.11 $ 10.10 $ 9.84 ------- ------- ------ Investment income--net.... .37 .40 .33 Realized and unrealized gain (loss) on investments-- net............ .13 .01 .26 ------- ------- ------ Total from investment operations...... .50 .41 .59 ------- ------- ------ Less dividends from investment income--net..... (.37) (.40) (.33) ------- ------- ------ Net asset value, end of period... $ 10.24 $ 10.11 $10.10 ======= ======= ====== TOTAL INVESTMENT RETURN:** Based on net asset value per share........... 5.04% 4.07% 6.10%# ======= ======= ====== RATIOS TO AVERAGE NET ASSETS: Expenses, net of reimbursements.. 1.09% .96% .57%* ======= ======= ====== Expenses......... 1.85% 1.71% 2.08%* ======= ======= ====== Investment income--net..... 3.64% 3.84% 4.30%* ======= ======= ====== SUPPLEMENTAL DATA: Net assets, end of period (in thousands)...... $ 1,861 $ 1,807 $ 382 ======= ======= ====== Portfolio turnover........ 20.88% 30.90% 141.52% ======= ======= ======
- ------ * Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of operations. # Aggregate total investment return. 24 Set forth below for each State Fund and for Limited Maturity Portfolio is the 30-day yield as of July 31, 1997, the tax-equivalent yield, which treats income as exempt from Federal income taxes, and the maximum tax-equivalent yield, which treats income as exempt from all Federal income and applicable state taxes (and New York City taxes, in the case of the New York Fund). All yields are calculated utilizing formulas specified by the Commission.
30 DAY FEDERAL EXEMPT MAXIMUM YIELD AS OF TAX-EQUIVALENT TAX-EQUIVALENT FUND NAME CLASS 7/31/97 YIELD * YIELD** - --------- ------- ----------- -------------- -------------- Arizona Fund................. Class A 3.37% 4.68% 4.94% Class B 3.04% 4.22% 4.45% Class C 3.22% 4.47% 4.72% Class D 3.27% 4.54% 4.79% Massachusetts Fund........... Class A 3.59% 4.99% 5.67% Class B 3.26% 4.53% 5.15% Class C 3.47% 4.82% 5.48% Class D 3.49% 4.85% 5.51% Michigan Fund................ Class A 3.62% 5.03% 5.26% Class B 3.28% 4.56% 4.77% Class C 3.12% 4.33% 4.53% Class D 3.52% 4.89% 5.11% New Jersey Fund.............. Class A 3.32% 4.61% 4.92% Class B 2.99% 4.15% 4.44% Class C 3.20% 4.44% 4.75% Class D 3.22% 4.47% 4.78% New York Fund................ Class A 3.86% 5.36% 6.04% Class B 3.54% 4.92% 5.54% Class C 3.72% 5.17% 5.82% Class D 3.77% 5.24% 5.90% Pennsylvania Fund............ Class A 3.41% 4.74% 4.89% Class B 3.08% 4.28% 4.40% Class C 3.15% 4.38% 4.50% Class D 3.31% 4.60% 4.73% Limited Maturity Portfolio... Class A 3.78% 5.25% 5.25% Class B 3.46% 4.81% 4.81% Class C 3.45% 4.79% 4.79% Class D 3.68% 5.11% 5.11%
- -------- * Figures are based on Federal tax rate of 28%. ** With respect to the State Funds, the figures represent the maximum tax- equivalent yield for an individual who is a resident of the designated state. INVESTMENT OBJECTIVE AND POLICIES The structure, organization and investment policies of the State Funds and Limited Maturity Portfolio are similar, but not identical. The State Funds and Limited Maturity Portfolio are sometimes referred to herein collectively as the "Funds" and individually as a "Fund." Certain of the significant differences are discussed below. The investment objective of each State Fund is to provide stockholders with as high a level of income exempt from Federal income taxes, the designated state's personal income taxes and, where applicable, state 25 intangible personal property tax, and corporate income or local personal income taxes as is consistent with prudent investment management. The investment objective of Limited Maturity Portfolio is to provide stockholders with as high a level of income exempt from Federal income taxes as is consistent with its investment policies and prudent investment management. There can be no assurance that after the Reorganization, Limited Maturity Portfolio will achieve its investment objective. Each State Fund seeks to achieve its objective by 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. Limited Maturity Portfolio seeks to achieve its objective by investing in a diversified portfolio consisting primarily of short-term investment grade obligations issued by or on behalf of states, territories and possessions of the United States and the District of Columbia and their political subdivisions, agencies and instrumentalities, the interest from which is exempt from Federal income taxes (such obligations are herein referred to as "Municipal Bonds"). The investment objective of each of the State Funds and of Limited Maturity Portfolio is a fundamental policy that may not be changed without a vote of a majority of that Fund's outstanding voting securities. At times, the State Funds and Limited Maturity Portfolio may seek to hedge their portfolios through the use of futures contracts and options transactions thereon to reduce volatility in the net asset value of their shares. Each State 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/1/; the New Jersey Fund will maintain at least 80% of its total assets invested in New Jersey State Municipal Bonds. Limited Maturity Portfolio invests in a portfolio consisting primarily of short-term investment grade Municipal Bonds. Municipal Bonds in Limited Maturity Portfolio will be either Municipal Bonds with remaining maturities of less than four years or short-term municipal notes, which typically are issued with a maturity of not more than one year. Municipal notes include tax anticipation notes, bond anticipation notes and revenue anticipation notes. Interest rates on short-term Municipal Bonds may fluctuate more widely from time to time than interest rates on long-term Municipal Bonds. However, because of the shorter maturities, the market value of the Municipal Bonds held by Limited Maturity Portfolio can be expected to fluctuate less as a result of changes in interest rates. Each State 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 State 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 State Fund's portfolio will not exceed five years. For purposes of these investment policies, a bond will be treated as having a maturity earlier than its stated maturity date if such bond has technical features which, in the judgment of FAM, 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 State Fund can be expected to fluctuate less as a result of changes in interest rates. The investment grade Municipal Bonds in which the State Funds and Limited Maturity Portfolio invest are those Municipal Bonds rated at the date of purchase within the four highest ratings as determined by either Moody's Investors Service, Inc. ("Moody's") (currently "Aaa", "Aa", "A" and "Baa"), Standard & Poor's Ratings Services ("S&P") (currently AAA, AA, A and BBB) or Fitch Investors Service, Inc. ("Fitch") (currently AAA, AA, A and BBB) or, if unrated, are considered to be of comparable quality by FAM. See Exhibit II-- "Ratings of Municipal Bonds." - -------- /1/ State Municipal Bonds are obligations that pay interest exempt from Federal income taxes, state personal income taxes in the designated state and, where applicable, corporate income or local personal income taxes and/or state intangible personal property taxes. 26 Limited Maturity Portfolio may invest in variable rate demand notes ("VRDNs") which are tax-exempt obligations containing a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest upon a short notice period not to exceed seven days. The interest rates are adjustable at intervals ranging from daily to up to six months based on some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market value of the VRDN at approximately the par value of the VRDN upon the adjustment date. The adjustments are typically based upon the prime rate of a bank or some other appropriate interest rate adjustment index. Limited Maturity Portfolio may also invest in VRDNs in the form of participation interests ("Participating VRDNs") in variable rate tax-exempt obligations held by a financial institution, typically a commercial bank ("institution"). Participating VRDNs provide Limited Maturity Portfolio 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 VRDNs from the institution upon a specified number of days' notice, not to exceed seven days. In addition, the Participating VRDN is backed by an irrevocable letter of credit or guaranty of the institution. Limited Maturity Portfolio has an undivided interest in the underlying obligation and thus participates on the same basis as the institution in such obligation except that the institution typically retains fees out of the interest paid on the obligation for servicing the obligation, providing the letter of credit and issuing the repurchase commitment. Limited Maturity Portfolio has been advised by its counsel that the interest received on Participating VRDNs will be treated as interest from tax-exempt obligations as long as Limited Maturity Portfolio does not invest more than a limited amount (not more than 20%) of its total assets in such investments and certain other conditions are met. It is contemplated that Limited Maturity Portfolio will not invest more than a limited amount of its total assets in Participating VRDNs. The State Funds may also invest in VRDNs and Participating VRDNs. See the Municipal Bond Fund Prospectus for information about investment in such securities. Each State 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 State Fund will rely on FAM's judgment, analysis and experience in evaluating the creditworthiness of the issuer of such securities. FAM 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 Limited Maturity Trust Statement for a more detailed discussion of the pertinent risk factors involved in investing in "high yield" or "junk" bonds and Exhibit II--"Ratings of Municipal Bonds" for additional information regarding ratings of debt securities. None of the State Funds intends to purchase debt securities that are in default or which FAM believes will be in default. On a temporary basis, each Fund may invest in short-term tax-exempt or taxable securities (Limited Maturity Portfolio may only invest in taxable securities), short-term U.S. Government securities, repurchase agreements or cash. Such securities or cash will not exceed 20% of each Fund's net assets except during interim periods pending investment of the net proceeds from public offerings of the Fund's securities and temporary defensive periods when, in the opinion of FAM, prevailing market or economic conditions warrant. Each State Fund is classified as non-diversified within the meaning of the Investment Company Act, which means that it is not limited by such Act in the proportion of its total assets that it may invest in securities of a single issuer. However, each State Fund's investments are limited so as to qualify the State Fund for the special tax treatment afforded RICs under the Code. See "The Reorganization--Agreement and Plan of Reorganization--Tax Consequences of the Reorganization." To qualify, among other requirements, each State Fund limits its 27 investments so that, at the close of each quarter of the taxable year, (i) not more than 25% of the market value of the State Fund's total assets are invested in the securities (other than U.S. Government 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 are invested in the securities (other than U.S. Government securities) of a single issuer. Limited Maturity Portfolio is classified as diversified. A fund which elects to be classified as "diversified" under the Investment Company Act must satisfy the foregoing 5% requirement with respect to 75% of its total assets. To the extent that a State Fund assumes large positions in the securities of a small number of issuers, that Fund's yield may fluctuate to a greater extent than that of a diversified fund as a result of changes in the financial condition or in the market's assessment of the issuers. DESCRIPTION OF MUNICIPAL BONDS Municipal Bonds include debt obligations issued to obtain funds for various public purposes, including construction of a wide range of public facilities, refunding of outstanding obligations and obtaining funds for general operating expenses and loans to other public institutions and facilities. In addition, certain types of industrial development bonds are issued by or on behalf of public authorities to finance various privately operated facilities, including pollution control facilities. For purposes of this Proxy Statement and Prospectus, such obligations are Municipal Bonds if the interest paid thereon is exempt from Federal income tax, even though such bonds may be "private activity bonds" as discussed below. The two principal classifications of Municipal Bonds are "general obligation" bonds and "revenue" or "special obligation" bonds. General obligation bonds are secured by the issuer's pledge of faith, credit and taxing power for the payment of principal and interest. Revenue or special obligation bonds are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds from a special excise tax or other specific revenue source such as from the user of the facility being financed. Industrial development bonds are in most cases revenue bonds and generally do not constitute the pledge of the credit or taxing power of the issuer of such bonds. The payment of the principal and interest on such industrial development 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. Municipal Bonds also may include "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. Each Fund may purchase Municipal Bonds classified as "private activity bonds" (in general, bonds that benefit non-governmental entities). Interest received on certain tax-exempt securities that are classified as "private activity bonds" may subject certain investors in a Fund to an alternative minimum tax. There is no limitation on the percentage of each Fund's assets that may be invested in Municipal Bonds that may subject certain investors to an alternative minimum tax. See the discussion under "Taxes" in the Municipal Bond Fund Prospectus and the Limited Maturity Trust Prospectus. 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. OTHER INVESTMENT POLICIES The State Funds and Limited Maturity Portfolio have each adopted certain other policies as set forth below: Borrowings. Notwithstanding a less restrictive fundamental policy permitting borrowings of up to 33 1/3% of total assets, as a matter of operating policy, the Municipal Bond Fund does not intend to have Limited Maturity Portfolio (or any other portfolio) borrow amounts in excess of 10% of the total assets of Limited Maturity Portfolio, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes such as the redemption of shares of Limited Maturity Portfolio. No State Fund may borrow 28 amounts in excess of 20% of its total assets, taken at market value (excluding the amount borrowed), and then only from banks as a temporary measure for extraordinary or emergency purposes such as to meet redemption requests. Neither the State Funds nor Limited Maturity Portfolio will purchase securities while borrowings are outstanding. When-Issued Securities and Delayed Delivery Transactions. The State Funds and Limited Maturity Portfolio may purchase or sell Municipal Bonds on a delayed delivery basis or on a when-issued basis at fixed purchase or sale terms. These transactions arise when securities are purchased or sold with payment and delivery taking place in the future. The value of the obligation on the delivery date may be more or less than its purchase price. A separate account will be established with the respective Fund's custodian consisting of cash, cash equivalents or liquid securities having a market value at all times at least equal to the amount of the commitment. Indexed and Inverse Floating Obligations. The State Funds and Limited Maturity Portfolio may utilize indexed and inverse floating obligations in connection with their investment strategies. See the Municipal Bond Fund Prospectus and Limited Maturity Trust Prospectus for a detailed discussion of these policies. Limited Maturity Portfolio may not invest in such illiquid obligations if such investments, together with other illiquid investments, would exceed 10% of its total assets; for each of the State Funds, this limitation is 15%. Call Rights. Each State 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 State 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 the 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. A State 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. Forward Commitments. Limited Maturity Portfolio may purchase Municipal Bonds on a forward commitment basis at fixed purchase terms. The purchase will be recorded on the date Limited Maturity Portfolio enters into the commitment and the value of the security will hereafter be reflected in the calculation of Limited Maturity Portfolio's net asset value. The value of the security on the delivery date may be more or less than its purchase price. A separate account of Limited Maturity Portfolio will be established with its custodian consisting of cash or liquid Municipal Bonds having a market value at all times at least equal to the amount of the forward commitment. INFORMATION REGARDING OPTIONS AND FUTURES TRANSACTIONS Financial Futures Contracts and Options Thereon. The State Funds and Limited Maturity Portfolio are authorized to purchase and sell certain financial futures contracts ("financial futures contracts") and options thereon. 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. 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 or options. 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. The purchase or sale of a financial futures contract or option thereon 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 29 the broker effecting the transaction equal to approximately 5% of the contract amount must be deposited with the broker. This amount is known as initial margin. Subsequent payments to and from the broker, called variation margin, are made on a daily basis as the price of the financial futures contract or option thereon fluctuates making the long and short positions in the financial futures contract or option thereon more or less valuable. Each Fund may purchase and sell financial futures contracts based on The Bond Buyer Municipal Bond Index, a price-weighted measure of the market value of 40 large tax-exempt issues, and purchase and sell put and call options on such financial futures contracts for the purpose of hedging Municipal Bonds that the Fund holds or anticipates purchasing against adverse changes in interest rates. Each State Fund also 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 Limited Maturity Trust Statement. 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, GNMA Certificates and three-month U.S. Treasury bills. Subject to policies adopted by the Trustees of the Trust, the State 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 FAM 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. Risk Factors in Financial Futures Contracts and Options Thereon. Utilization of financial futures contracts and options thereon involves the risk of imperfect correlation in movements in the price of financial futures contracts and options thereon and movements in the price of the security that 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, geographic compositions or other characteristics 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 contracts 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's being deemed a "commodity pool," as defined under such regulations, provided that the Fund adheres to certain restrictions. In particular, the Fund may 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, after taking into account unrealized profits and unrealized losses on any such contracts and options. 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., commercial paper and daily tender adjustable notes) or other 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, thereby ensuring that the use of such financial futures contract is unleveraged. Although certain risks are involved in financial futures contracts and options thereon, FAM believes that, because each Fund will engage in transactions involving financial futures contracts and options thereon only for 30 hedging purposes, the options and futures portfolio strategies of a Fund will not subject the Fund to certain risks frequently associated with speculation in financial futures contracts and options thereon. A Fund may be restricted in engaging in transactions involving financial futures contracts and options thereon due to the Federal tax requirement that less than 30% of its gross income in each taxable year be derived from the sale or other disposition of securities held for less than three months. Under recently enacted legislation, this requirement will no longer apply to Limited Maturity Portfolio after its fiscal year ending June 30, 1998 or to the State Funds after their fiscal years ending July 31, 1998. The volume of trading in the exchange markets with respect to Municipal Bond options may be limited, and it is impossible to predict the amount of trading interest that may exist in such options. In addition, there can be no assurance that viable exchange markets will continue to be available. Each Fund intends to enter into financial futures contracts and options thereon, on an exchange or in the over-the-counter market, only if there appears to be a liquid secondary market for such financial futures contracts or options. There can be no assurance, however, that a liquid secondary market will exist at any specific time. Thus, it may not be possible to close a financial futures contract position or the related option. The inability to close financial futures contract positions or the related options also could have an adverse impact on a Fund's ability to hedge effectively its portfolio. There is also the risk of loss by a Fund of margin deposits or collateral in the event of bankruptcy of a broker with which the Fund has an open position in a financial futures contract or the related option. The liquidity of a secondary market in a financial futures contract or option thereon may be adversely affected by "daily price fluctuation limits" established by commodity exchanges which limit the amount of fluctuation in a financial futures contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open futures positions. Prices in the past have reached or exceeded the daily limit on a number of consecutive trading days. The successful use of financial futures contracts and options thereon also depends on the ability of FAM to forecast correctly the direction and extent of interest rate movements within a given time frame. To the extent these rates remain stable during the period in which a financial futures contract or related option is held by a Fund or moves in a direction opposite to that anticipated, the 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. Furthermore, each State 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. INVESTMENT RESTRICTIONS Other than as noted above under "The Reorganization--Comparison of the State Funds and Limited Maturity Portfolio--Investment Objectives and Policies" and "--Other Investment Policies," each of the State Funds and Limited Maturity Portfolio have identical investment restrictions. See "Investment Restrictions" in the Municipal Bond Fund Statement and "Investment Restrictions" in the Limited Maturity Trust Statement. 31 PORTFOLIO COMPOSITION The following table sets forth certain information with respect to the composition of the investment portfolio of Limited Maturity Portfolio and of each of the State Funds as of July 31, 1997. Limited Maturity Portfolio
VALUE S&P* MOODY'S* NUMBER OF ISSUES (IN THOUSANDS) PERCENT ---- ---------- ---------------- -------------- ------- AAA "Aaa" 27 $154,821 41.6% AA "Aa" 22 116,609 31.3 A "A" 8 49,198 13.2 BBB "Baa" 2 17,742 4.8 NR NR 0 0 0 SP1 VMIG1/MIG1 6 33,664 9.1 --- -------- ----- 65 $372,034 100.0% === ======== =====
State Funds Arizona Fund
VALUE S&P* MOODY'S* NUMBER OF ISSUES (IN THOUSANDS) PERCENT ---- -------- ---------------- -------------- ------- AAA "Aaa" 5 $1,251 54.2% AA "Aa" 4 892 38.7 A "A" 1 163 7.1 BBB "Baa" 0 0 0 NR NR 0 0 0 --- ------ ----- 10 $2,306 100.0% === ====== =====
Massachusetts Fund
VALUE S&P* MOODY'S* NUMBER OF ISSUES (IN THOUSANDS) PERCENT ---- -------- ---------------- -------------- ------- AAA "Aaa" 9 $2,117 44.4% AA "Aa" 3 646 13.5 A "A" 5 2,010 42.1 BBB "Baa" 0 0 0 NR NR 0 0 0 --- ------ ----- 17 $4,773 100.0% === ====== =====
Michigan Fund
VALUE S&P* MOODY'S* NUMBER OF ISSUES (IN THOUSANDS) PERCENT ---- -------- ---------------- -------------- ------- AAA "Aaa" 13 $2,644 64.3% AA "Aa" 6 1,471 35.7 A "A" 0 0 0 BBB "Baa" 0 0 0 NR NR 0 0 0 --- ------ ----- 19 $4,115 100.0% === ====== =====
(footnote on next page) 32 New Jersey Fund
VALUE S&P* MOODY'S* NUMBER OF ISSUES (IN THOUSANDS) PERCENT ---- -------- ---------------- -------------- ------- AAA "Aaa" 9 $3,838 89.8% AA "Aa" 1 436 10.2 A "A" 0 0 0 BBB "Baa" 0 0 0 NR NR 0 0 0 --- ------ ----- 10 $4,274 100.0% === ====== =====
New York Fund
VALUE S&P* MOODY'S* NUMBER OF ISSUES (IN THOUSANDS) PERCENT ---- -------- ---------------- -------------- ------- AAA "Aaa" 8 $ 5,570 42.4% AA "Aa" 6 3,748 28.5 A "A" 4 2,730 20.8 BBB "Baa" 2 1,092 8.3 NR NR 0 0 0 --- ------- ----- 20 $13,140 100.0% === ======= =====
Pennsylvania Fund
VALUE S&P* MOODY'S* NUMBER OF ISSUES (IN THOUSANDS) PERCENT ---- -------- ---------------- -------------- ------- AAA "Aaa" 5 $2,583 42.5% AA "Aa" 3 1,709 28.1 A "A" 2 1,791 29.4 BBB "Baa" 0 0 0 NR NR 0 0 0 --- ------ ----- 10 $6,083 100.0% === ====== =====
- -------- * Ratings: Using the higher of S&P's or Moody's rating on the Fund's municipal obligations. S&P's rating categories may be modified further by a plus (+) or minus (-) in AA, A, BBB, BB, B and C ratings. Moody's rating categories may be modified further by a 1, 2 or 3 in "Aa," "A," "Baa," "Ba" and "B" ratings. See Exhibit II--"Ratings of Municipal Bonds." 33 PORTFOLIO TRANSACTIONS The procedures for engaging in portfolio transactions are the same for each State Fund and Limited Maturity Portfolio. Subject to policies established by the Board of Trustees of the Trust and the Board of Directors of Municipal Bond Fund. FAM is primarily responsible for the execution of the portfolio transactions for the State Funds and Limited Maturity Portfolio. In executing such transactions, FAM seeks to obtain the best results for each entity, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution and operational facilities of the firm involved and the firm's risk in positioning a block of securities. While FAM generally seeks reasonably competitive commission rates, the State Funds and Limited Maturity Portfolio do not necessarily pay the lowest commission or spread available. Neither any State Fund nor Limited Maturity Portfolio has any obligation to deal with any broker or dealer in the execution of transactions in portfolio securities. Subject to obtaining the best price and execution, securities firms that provide supplemental investment research to FAM, including Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), may receive orders for transactions by a Fund. Information so received will be in addition to, and not in lieu of, the services required to be performed by FAM under its investment advisory agreements with the Trust and the Municipal Bond Fund, and the expenses of FAM will not necessarily be reduced as a result of the receipt of such supplemental information. The securities in which each State Fund and Limited Maturity Portfolio primarily invest are traded in the over-the-counter markets, and the State Funds and Limited Maturity Portfolio normally deal directly with the dealers who make markets in the securities involved, except in those circumstances where better prices and execution are available elsewhere. Under the Investment Company Act, except as permitted by exemptive order, persons affiliated with a State Fund or Limited Maturity Portfolio are prohibited from dealing with that fund as principals in the purchase and sale of securities. Since transactions in the over-the-counter markets usually involve transactions with dealers acting as principals for their own account, a State Fund or Limited Maturity Portfolio will not deal with affiliated persons, including Merrill Lynch and its affiliates, in connection with such transactions, except that pursuant to an exemptive order obtained by FAM, a State Fund or Limited Maturity Portfolio may engage in principal transactions with Merrill Lynch in high quality, short-term, tax-exempt securities. In addition, the Funds may not purchase securities, including Municipal Bonds, during the existence of an 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 Board that either comply with rules adopted by the Commission or interpretations of the Commission staff. An affiliated person of a State Fund or Limited Maturity Portfolio may serve as its broker in over-the-counter transactions conducted on an agency basis. The Board of Trustees of the Trust and the Board of Directors of the Municipal Bond Fund have considered the possibility of recapturing for the benefit of the Trust or the Municipal Bond Fund brokerage commissions, dealer spreads and other expenses of possible portfolio transactions, such as underwriting commissions, by conducting portfolio transactions through affiliated entities, including Merrill Lynch. For example, brokerage commissions received by Merrill Lynch could be offset against the investment advisory fees paid by the State Funds or Limited Maturity Portfolio to FAM. After considering all factors deemed relevant, the respective Trustees and Directors made a determination not to seek such recapture. The Boards will reconsider this matter from time to time. PORTFOLIO TURNOVER Generally, neither the State Funds nor Limited Maturity Portfolio purchases securities for short-term trading profits. However, any State Fund or Limited Maturity Portfolio may dispose of securities without regard to the time that they have been held when such action, for defensive or other reasons, appears advisable to FAM. However, the Funds monitor their trading so as to comply with the Federal tax requirement that less than 30% of gross income be derived from the sale or other disposition of securities held for less than three months. Under recently enacted legislation, this requirement will no longer apply to Limited Maturity Portfolio after its fiscal year ending June 30, 1998 or to the State Funds after their fiscal years ending July 31, 1998. As a result of the 34 investment policies of the State Funds and of Limited Maturity Portfolio, their portfolio turnover rates may be higher than that of other investment companies; however, it is extremely difficult to predict portfolio turnover rates with any degree of accuracy. (The portfolio turnover rate 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 a 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.) The portfolio turnover rate of Limited Maturity Portfolio for the fiscal years ended June 30, 1997 and 1996 was 61.90% and 88.32%, respectively. For the fiscal years ended July 31, 1997 and 1996, the portfolio turnover rates for each of the State Funds were as follows:
FISCAL YEAR ENDED JULY 31, ---------------- FUND 1997 1996 ---- ------- ------- Arizona Fund............................................ 38.21% 43.53% Massachusetts Fund...................................... 22.93 22.71 Michigan Fund........................................... 13.24 32.92 New Jersey Fund......................................... 32.89 6.57 New York Fund........................................... 36.53 51.47 Pennsylvania Fund....................................... 20.88 30.90
ADDITIONAL INFORMATION Net Asset Value. The net asset value per share for each of the State Funds and for Limited Maturity Portfolio is determined as of 15 minutes after the close of business on the NYSE (generally, 4:00 p.m., New York time) on each day during which the NYSE is open for trading. For purposes of determining the net asset value of a share of beneficial interest of the State Funds or a share of Common Stock of Limited Maturity Portfolio, the value of the securities held plus any cash or other assets (including interest and dividends accrued but not yet received) minus all liabilities (including accrued expenses) is divided by the total number of shares outstanding at such time rounded to the nearest cent. Expenses, including the fees payable to FAM, and any account maintenance and/or distribution fees are accrued daily. Stockholder Services. Limited Maturity Portfolio offers a number of stockholder services and investment plans designed to facilitate investment in its shares. In addition, U.S. stockholders of each class of shares of Limited Maturity Portfolio have an exchange privilege with certain other MLAM-advised mutual funds. Stockholder services, including exchange privileges, available to stockholders of the State Funds and Limited Maturity Portfolio are substantially the same. For a description of these services, see "Stockholder Services" in the Municipal Bond Fund Prospectus. Custodian. The Bank of New York, 90 Washington Street, 12th Floor, New York, New York 10286, acts as custodian of the cash and securities of the State Funds and Limited Maturity Portfolio. Transfer Agent, Dividend Disbursing Agent and Registrar. Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484, serves as the transfer agent, dividend disbursing agent and registrar with respect to each State Fund and Limited Maturity Portfolio (the "Transfer Agent"), at the same rate, pursuant to separate registrar, transfer agency and service agreements with the Trust on behalf of each of the State Funds and with the Municipal Bond Fund on behalf of Limited Maturity Portfolio. Capital Stock. The Board of Trustees of the Trust is authorized to create an unlimited number of series and, with respect to each series, to issue an unlimited number of full and fractional shares of beneficial interest of $0.10 par value of different classes. Each of the State Funds constitutes a series of the Trust. The shares of each series are divided into four classes designated Class A, Class B, Class C and Class D shares. 35 The Municipal Bond Fund has an authorized capital of 3,850,000,000 shares of common stock, divided into three series, each of which is divided into four classes, having a par value of $0.10 per share. The shares of each series are divided into four classes, designated Class A, Class B, Class C and Class D as follows:
LIMITED INSURED NATIONAL MATURITY CLASS PORTFOLIO PORTFOLIO PORTFOLIO ----- ----------- ----------- ----------- A..................................... 500,000,000 375,000,000 150,000,000 B..................................... 375,000,000 375,000,000 150,000,000 C..................................... 375,000,000 375,000,000 150,000,000 D..................................... 500,000,000 375,000,000 150,000,000
The rights, preferences and expenses attributable to the Class A, Class B, Class C and Class D shares of the State Funds are substantially the same as those of the Class A, Class B, Class C and Class D shares of Limited Maturity Portfolio. MANAGEMENT Directors. The Board of Directors of the Municipal Bond Fund currently consists of six persons, five of whom are not "interested persons," as defined in the Investment Company Act. The Directors are responsible for the overall supervision of the operations of the Municipal Bond Fund and perform the various duties imposed on the directors of investment companies by the Investment Company Act and under applicable Maryland law. Arthur Zeikel is a Director of Municipal Bond Fund and a Trustee of the Trust. There is otherwise no overlap between the Boards. The Directors of the Municipal Bond Fund are: ARTHUR ZEIKEL*--President of FAM and its affiliate, MLAM; President and Director of Princeton Services, Inc. ("Princeton Services"); and Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co."). RONALD W. FORBES--Professor of Finance, School of Business, State University of New York at Albany. CYNTHIA A. MONTGOMERY--Professor of Competition and Strategy, Harvard Business School. CHARLES C. REILLY--Self-employed financial consultant; former President and Chief Investment Officer of Verus Capital, Inc.; former Senior Vice President of Arnhold and S. Bleichroeder, Inc. KEVIN A. RYAN--Professor of Education, Boston University; Founder and current Director of The Boston University Center for Advancement of Ethics and Character. RICHARD R. WEST--Dean Emeritus, New York University Leonard N. Stern School of Business Administration. - -------- * Interested person, as defined in the Investment Company Act, of the Municipal Bond Fund. Management and Advisory Arrangements. Pursuant to separate management agreements between the Trust and FAM on behalf of each State Fund, each State Fund pays FAM a monthly fee at the annual rate of 0.35% of the average daily net assets of that State Fund. The Municipal Bond Fund's investment advisory agreement with FAM provides that as compensation for FAM's services to Limited Maturity Portfolio, FAM receives at the end of each month a fee determined based on the annual rates set forth in the table below. These fee rates are applied to the average daily net assets of each of the three portfolios of the Municipal Bond Fund to the extent that the aggregate of the average daily net assets of the three combined portfolios of the Municipal Bond Fund exceeds $250 million, $400 million, $550 million and $1.5 billion, respectively (each such amount being a breakpoint level). The portion of the assets of a portfolio to which the rate at each breakpoint level applies will be 36 determined on a "uniform percentage" basis. The uniform percentage applicable to a breakpoint level is determined by dividing the amount of the aggregate of the average daily net assets of the three combined portfolios of the Municipal Bond Fund that falls within that breakpoint level by the aggregate of the average daily net assets of the three combined portfolios. The amount of the fee for a portfolio at each breakpoint level is determined by multiplying the average daily net assets of that portfolio by the uniform percentage applicable to that breakpoint level and multiplying that product by the advisory fee rate.
RATE OF ADVISORY FEE -------------------- AGGREGATE OF AVERAGE DAILY NET ASSETS OF THE THREE COMBINED PORTFOLIOS OF THE MUNICIPAL BOND LIMITED FUND MATURITY PORTFOLIO ----------------------------------------------- -------------------- Not exceeding $250 million......................... 0.40 % In excess of $250 million but not exceeding $400 million........................................... 0.375 In excess of $400 million but not exceeding $550 million........................................... 0.35 In excess of $550 million but not exceeding $1.5 billion........................................... 0.325 In excess of $1.5 billion.......................... 0.325
At July 31, 1997, the average daily net assets of the three portfolios of Municipal Bond Fund aggregated approximately $3.9 billion. At that date, the average daily net assets of Limited Maturity Portfolio were $415.5 million and the advisory fee rate of Limited Maturity Portfolio was 0.33%. For the fiscal year ended June 30, 1997, FAM received $1,552,369 from Limited Maturity Portfolio in advisory fees. As of October 31, 1997, the three portfolios of Municipal Bond Fund had aggregate net assets of $3,934,278,239; Limited Maturity Portfolio had net assets of $398,404,439. At this asset level, the advisory fee rate of Limited Maturity Portfolio would be 0.33%. PURCHASE OF SHARES The class structure and purchase and distribution procedures for shares of the State Funds is substantially the same as those of Limited Maturity Portfolio. For a complete discussion of the four classes of shares and the purchase and distribution procedures related thereto, see "Merrill Lynch Select Pricing SM System" and "Purchase of Shares" in either the Municipal Bond Fund Prospectus or the Limited Maturity Trust Prospectus. REDEMPTION OF SHARES The procedure for redeeming shares of Limited Maturity Portfolio is substantially the same as the procedure for redeeming shares of the State Funds. For purposes of computing any CDSC that may be payable upon disposition of Limited Maturity Portfolio Common Stock acquired by State Fund stockholders in the Reorganization, the holding period of State Fund shares outstanding on the date the Reorganization takes place will be tacked onto the holding period of Limited Maturity Portfolio Common Stock acquired in the Reorganization. Only Class A and Class D shares of Limited Maturity Portfolio Common Stock will be issued in the Reorganization. Class A and Class D shares are not subject to a CDSC except that certain purchases of $1,000,000 or more which are not subject to an initial sales charge may instead be subject to a CDSC of 0.20% of amounts redeemed within the first year after purchase. Such CDSC may be waived in connection with certain fee-based programs and will be waived with respect to Class A or Class D shares of Limited Maturity Portfolio Common Stock issued in the Reorganization. VOTING RIGHTS Stockholders of Limited Maturity Portfolio are entitled to one vote for each share held and fractional votes for fractional shares held and will vote on the election of Directors and any other matter submitted to a stockholder vote. The Municipal Bond Fund does not intend to hold meetings of stockholders in any year in which the Investment Company Act does not require stockholders to act upon any of the following matters: (i) election of Directors; (ii) approval of an investment advisory agreement; (iii) approval of distribution arrangements; and (iv) ratification of selection of independent accountants. Voting rights for Directors are not cumulative. Limited Maturity Portfolio Common Stock to be issued to the State Funds in the Reorganization and thereafter distributed to the State Fund stockholders will be fully paid and non-assessable, will have no 37 preemptive rights, and will have the conversion rights described in this Prospectus and Proxy Statement and in the Municipal Bond Fund Prospectus. Each share of Limited Maturity Portfolio Common Stock is entitled to participate equally in dividends and distributions declared with respect to Limited Maturity Portfolio and in the net assets of Limited Maturity Portfolio on liquidation or dissolution after satisfaction of outstanding liabilities, except that Class B, Class C and Class D shares bear certain additional expenses. Rights attributable to shares of the State Funds are substantially the same as those described above. STOCKHOLDER INQUIRIES Stockholder inquiries with respect to the State Funds and Limited Maturity Portfolio may be addressed by telephone at (609) 282-2800 or at the address set forth on the cover page of this Proxy Statement and Prospectus. DIVIDENDS AND DISTRIBUTIONS The Trust's current policy with respect to dividends and distributions is substantially the same as Municipal Bond Fund's policy. It is the intention of the State Funds and of Limited Maturity Portfolio to distribute all of their net investment income, if any. In addition, each of the State Funds and Limited Maturity Portfolio declares and distributes all net realized capital gains, if any, to stockholders at least annually. Capital gains distributions will be automatically reinvested in shares unless the stockholder elects to receive such distributions in cash. See "Automatic Dividend Reinvestment Plan" below for information as to electing either dividend reinvestment or cash payments. Any portions of dividends and distributions which are taxable to stockholders are subject to income tax whether they are reinvested in shares of such fund or received in cash. TAXATION OF LIMITED MATURITY PORTFOLIO, STATE FUNDS AND THEIR STOCKHOLDERS The tax consequences associated with investment in shares of Limited Maturity Portfolio Common Stock are substantially similar to the tax consequences associated with investment in shares of the State Funds. Limited Maturity Portfolio and the State Funds have elected and qualified for the special tax treatment afforded RICs under the Code. Consequently, the Funds (but not their stockholders) are not subject to Federal income tax on the part of their net ordinary income and net realized capital gains which they distribute to their Class A, Class B, Class C and Class D stockholders (together, the "Stockholders"). The Funds have distributed substantially all of such income in taxable years prior to the Reorganization and Limited Maturity Portfolio intends to distribute substantially all of such income in taxable years following the Reorganization. Each Fund has qualified, and Limited Maturity Portfolio intends to continue to qualify, 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 of the Code (relating generally to obligations of a state or local governmental unit), the Fund is qualified to pay exempt-interest dividends to its Stockholders. Exempt-interest dividends are dividends or any part thereof paid by a Fund which are attributable to interest on tax-exempt obligations and designated as exempt-interest dividends in a written notice mailed to Stockholders within 60 days after the close of its taxable year. To the extent that the dividends distributed to a Fund's Stockholders 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 Stockholder's gross income for Federal income tax purposes. Exempt- interest dividends are included, however, in determining the portion, if any, of a person's social security benefits and railroad retirement benefits subject to Federal income taxes. Interest on indebtedness incurred or continued to purchase or carry shares of a RIC paying exempt-interest dividends such as the Limited Maturity Portfolio, will not be deductible by the investor for purposes of Federal income taxes or state personal income taxes, where applicable, to the extent attributable to exempt-interest dividends. Stockholders are advised to consult their tax advisers with respect to whether exempt-interest dividends retain the exclusion under Code Section 103(a) if a Stockholder 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 the Limited Maturity Portfolio. 38 For investors in each of the State Funds, the portion of a Fund's exempt- interest dividends paid from interest received by the Fund from the municipal bonds of the designated state is also exempt from personal income tax in the designated state and, where applicable, corporate income or local personal income taxes. Currently, shares of a State Fund may also be exempt from state intangible personal property tax in the designated state. Stockholders subject to income taxation by states other than the designated state realize a lower after tax rate of return than Stockholders resident in the designated state since the dividends distributed by the particular State Fund generally are not exempt, to any significant degree, from income taxation by such other states. Stockholders of the State Funds should be aware that after the Reorganization, the distributions they receive from Limited Maturity Portfolio will be exempt from Federal income tax but generally will not be exempt to any significant degree from personal income tax at the state level. To the extent that a Fund's distributions are derived from interest on taxable securities 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 and state 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 a Stockholder has owned Fund shares, and for state income tax purposes, generally are treated as capital gains which are taxed at ordinary income tax rates. Recent legislation creates additional categories of capital gains taxable at different rates. Not later than 60 days after the close of its taxable year, each Fund will provide its shareholders with a written notice designating the amounts of any exempt-interest dividends, ordinary income dividends or capital gain dividends, as well as the amount of capital gain dividends in the different categories of capital gain referred to above. Distributions by a Fund, whether from exempt-interest income, ordinary income or capital gains, are not eligible for the dividends received deduction allowed to corporations under the Code. 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 Stockholders of Limited Maturity Portfolio, to an alternative minimum tax. The Funds report to Stockholders within 60 days after the Fund's taxable year-end the portion of the Fund's dividends declared during the year which constitutes an item of tax preference for alternative minimum tax purposes. The Code further provides that corporations are subject to an alternative minimum tax based, in part on certain differences between taxable income as adjusted for other tax preferences and the corporation's "adjusted current earnings," which more closely reflect a corporation's economic income. Because an exempt-interest dividend paid by a Fund will be included in adjusted current earnings, a corporate stockholder may be required to pay alternative minimum tax on exempt-interest dividends paid by a Fund. Under certain provisions of the Code, some Stockholders may be subject to a 31% withholding tax on certain ordinary income dividends and on capital gain dividends and redemption payments ("backup withholding"). Generally, Stockholders subject to backup withholding will be those for whom no taxpayer identification number is on file with a Fund or who, to the Fund'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 Stockholder is not otherwise subject to backup withholding. Ordinary income dividends paid to Stockholders who are nonresident aliens or foreign entities are 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. A loss realized on a sale or exchange of shares of a Fund is disallowed if other Fund shares are acquired (whether under the Automatic Dividend Reinvestment Plan or otherwise) within a 61-day period beginning 30 39 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. The Code provides that every Stockholder 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. STATE OF ORGANIZATION The Trust is a Massachusetts business trust and is governed by its Declaration of Trust, By-laws and applicable Massachusetts law. The Municipal Bond Fund is a Maryland corporation and is governed by its Articles of Incorporation, By-laws and Maryland corporation law. Certain differences between the two forms of organization are summarized below. Stockholders of the State Funds entitled to vote at the Meeting may obtain a copy of the Trust's Declaration of Trust and By-laws or Municipal Bond Fund's Articles of Incorporation and By-laws, without charge, on written request to the Trust or Municipal Bond Fund, as the case may be. Shares of Capital Stock. The Declaration of Trust permits the Trustees to issue an unlimited number of shares and to divide such shares into an unlimited number of series or classes, all without stockholder approval. The Trust currently has eight series (including the State Funds) each of which is divided into four classes. The authorized capital stock of the Municipal Bond Fund consists of 3,850,000,000 shares of Common Stock, divided into three series (of which the Limited Maturity Portfolio is one), each of which is divided into four classes. The Directors of the Municipal Bond Fund may, without stockholder approval, increase the number of shares authorized and may classify and reclassify the shares of the Municipal Bond Fund into additional series or classes at a future date. Voting Requirements. The By-laws of the Municipal Bond Fund and the Maryland General Corporation Law (the "Maryland Code") provide that a special meeting of stockholders must be called upon the written request of stockholders representing 25% of the votes entitled to be cast at the meeting. The Declaration of Trust provides that special meetings of stockholders must be called upon the written request of holders of at least 10% of the outstanding shares of any series of the Trust. No amendments may be made to the Declaration of Trust, 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 the holders of not less than a majority of the Trust's outstanding shares or of the affected series or class, as applicable. Under the Articles of Incorporation of the Municipal Bond Fund and the Maryland Code, the Articles of Incorporation of the Municipal Bond Fund may be amended upon adoption of a resolution to that effect by the Directors of the Municipal Bond Fund and approval of such resolution by the holders of a majority of the outstanding shares of the Municipal Bond Fund. Stockholder Meetings. Like the Trust, the Municipal Bond Fund will not be required to hold annual meetings of its stockholders. The initial Board of Trustees of the Trust and the initial Board of Directors of the Municipal Bond Fund were elected by the sole stockholder of the Trust and the Municipal Bond Fund, respectively, at the time of its organization and have served and will continue to serve as Trustees or Directors until they resign, die or are removed. The Trustees of the Trust may be removed for cause by a written instrument signed by at least two-thirds of the remaining Trustees or by vote of stockholders of the Trust holding not less than two-thirds of the shares then outstanding, cast in person or by proxy at any meeting called for the purpose. The By-laws of the Municipal Bond Fund permit removal of a Director by the holders of a majority of the outstanding shares of the Municipal Bond Fund. Stockholder Liability. Under Massachusetts law, stockholders of the Trust may, under certain circumstances, be held personally liable as partners for the Trust's obligations. However, the risk of a stockholder incurring financial loss on account of stockholder liability is limited to circumstances in which both inadequate insurance existed and the Trust itself was unable to meet its obligations. As a Maryland corporation, the stockholders of the Municipal Bond Fund have no personal liability to the Municipal Bond Fund or its creditors 40 with respect to their stock, except that a stockholder may be liable to the extent that (1) the subscription price or other agreed consideration for the stock has not been paid; or (2) liability is imposed under any other provision of Maryland law. Liability of Directors and Trustees. Maryland law provides that in addition to any other liabilities imposed by law, a Director may be liable to the Municipal Bond Fund for voting or assenting to the declaration of any dividend or other distribution of assets to Municipal Bond Fund stockholders that is contrary to Maryland law if it is established that the Director did not act in good faith, in a manner he or she reasonably believed to be in the best interest of the Municipal Bond Fund, and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In the event of any litigation against the Directors or officers of the Municipal Bond Fund, Maryland law permits, and the Municipal Bond Fund's By-laws require, the Municipal Bond Fund to indemnify a Director or officer for certain expenses and to advance money for such expenses only if he or she demonstrates that he or she acted in good faith and reasonably believed that his or her conduct was in, or not opposed to, the best interest of the Municipal Bond Fund and, with respect to a criminal proceeding, he or she had no reasonable cause to believe such conduct was unlawful. Under the Declaration of Trust, the Trustees would be personally liable only for willful misfeasance, bad faith, gross negligence or reckless disregard of their duties. Under the Declaration of Trust, Trustees, officers, agents and employees will be indemnified 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 them in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which they may be involved or with which they may be threatened, while in office or thereafter, by reason of their being or having been such a Trustee, officer, employee or agent, except with respect to any matter as to which they have been adjudicated to have acted in bad faith or with willful misfeasance, gross negligence or reckless disregard of their duties, provided, however, that as to any matter disposed of by a compromise payment, pursuant to a consent decree or otherwise, no indemnification either for that payment or for any other expenses may be provided unless the Trust has 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 the person seeking indemnification. The Trustees may make advance payments in connection with indemnification, provided that the indemnified person has given a written undertaking to reimburse the Trust in the event it is subsequently determined that he or she is not entitled to such indemnification. The foregoing is only a summary of certain of the differences between the Municipal Bond Fund's Articles of Incorporation and By-laws and Maryland law and the Trust's Declaration of Trust and By-laws and Massachusetts law. It is not a complete list of differences. Stockholders should refer to the provisions of such Articles of Incorporation, By-laws, Maryland law, and the Declaration of Trust, By-laws and Massachusetts law directly for a more thorough comparison. AGREEMENT AND PLAN OF REORGANIZATION GENERAL Under the Agreement and Plan of Reorganization (attached hereto as Exhibit I), Limited Maturity Portfolio will acquire substantially all of the assets, and will assume substantially all of the liabilities, of the State Funds, in exchange solely for an equal aggregate value of Limited Maturity Portfolio Common Stock. Upon receipt by the Trust of such shares of Common Stock, the Trust will distribute the shares to the stockholders of the State Funds in exchange for their shares of beneficial interest of the State Funds, as described below. Generally, the assets transferred by each State Fund to Limited Maturity Portfolio will equal all investments of such State Fund held in its portfolio as of the Valuation Time (as defined in the Agreement and Plan of Reorganization) and all other assets of such State Fund as of such time, except for any cash or cash equivalents reserved by such State Fund to discharge its unpaid or contingent liabilities existing at the Valuation Time. Any unexpended portion of the foregoing funds retained by each State Fund will be disbursed by such State Fund pro 41 rata to its stockholders of record as of the date of the Reorganization upon consummation of the Reorganization as a final liquidating dividend. The Trust will distribute Limited Maturity Portfolio Common Stock received by it pro rata to the stockholders of each State Fund in exchange for such stockholders' proportional interests in such State Fund. Stockholders of each State Fund who hold Class A shares as of the Valuation Time will receive Class A shares of Limited Maturity Portfolio Common Stock and stockholders of each State Fund who hold Class B, Class C or Class D shares as of the Valuation Time will receive Class D shares of Limited Maturity Portfolio Common Stock; such shares of Limited Maturity Portfolio Common Stock will have the same aggregate net asset value as each such stockholder's interest in such State Fund as of the Valuation Time. (See "Terms of the Agreement and Plan of Reorganization--Valuation of Assets and Liabilities" below in this section for information concerning the calculation of net asset value.) The distribution will be accomplished by opening new accounts on the books of Limited Maturity Portfolio in the names of all stockholders of each State Fund, including stockholders holding such State Fund shares in certificate form, and transferring to each stockholder's account Limited Maturity Portfolio Common Stock representing such stockholder's interest previously credited to the account of such State Fund. Stockholders holding State Fund shares in certificate form may receive certificates representing Limited Maturity Portfolio Common Stock credited to their account in respect of such State Fund shares by sending the certificates to the Transfer Agent accompanied by a written request for such exchange. Since Limited Maturity Portfolio Common Stock would be issued at net asset value in exchange for the net assets of each State Fund having a value equal to the aggregate net asset value of those shares of such State Fund, the net asset value per share of Limited Maturity Portfolio should remain virtually unchanged solely as a result of the Reorganization. Thus, the Reorganization should result in virtually no dilution of net asset value of Limited Maturity Portfolio immediately following consummation of the Reorganization. However, as a result of the Reorganization, a stockholder of each State Fund likely would hold a reduced percentage of ownership in Limited Maturity Portfolio than he or she did in such State Fund prior to the Reorganization. PROCEDURE On September 26, 1997, the Board of Trustees of the Trust, including all of the Trustees who are not "interested persons," as defined in the Investment Company Act, of the Trust, approved the Agreement and Plan of Reorganization and the submission of such Agreement and Plan of Reorganization to the State Funds' stockholders for approval. The Board of Directors of the Municipal Bond Fund, including all of the Directors present at the meeting who are not "interested persons," approved the Agreement and Plan of Reorganization on September 18, 1997. If the stockholders of each State Fund approve the Reorganization at the Meeting and certain conditions are met or waived, the Reorganization will take place as early as possible in calendar year 1998. THE BOARD OF TRUSTEES OF THE TRUST RECOMMENDS THAT THE STOCKHOLDERS OF THE STATE FUNDS APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION. TERMS OF THE AGREEMENT AND PLAN OF REORGANIZATION The following is a summary of the significant terms of the Agreement and Plan of Reorganization. This summary is qualified in its entirety by reference to the Agreement and Plan of Reorganization, attached hereto as Exhibit I. Valuation of Assets and Liabilities. The respective assets of the State Funds and Limited Maturity Portfolio will be valued as of the Valuation Time. The assets in each State Fund and in Limited Maturity Portfolio will be valued according to the procedures set forth under "Additional Information-- Determination of Net Asset Value" in the Municipal Bond Fund Prospectus. Purchase orders for any State Fund shares that have not been confirmed as of the Valuation Time will be treated as assets of such State Fund for purposes of the Reorganization; redemption requests that have not settled as of the Valuation Time will be treated as liabilities for purposes of the Reorganization. 42 Distribution of Limited Maturity Portfolio Common Stock. On the next full business day following the Valuation Time (the "Exchange Date"), the Municipal Bond Fund will issue to the Trust a number of shares of Limited Maturity Portfolio Common Stock the aggregate net asset value of which will equal the aggregate net asset value of shares of each of the State Funds as of the Valuation Time. Each holder of shares of beneficial interest of each State Fund will receive, in exchange for his or her proportionate interest in such State Fund, Limited Maturity Portfolio Common Stock having the same aggregate net asset value as the shares of such State Fund held by such stockholder as of the Valuation Time. Holders of Class A shares of the State Funds will receive Class A shares of Limited Maturity Portfolio Common Stock; holders of Class B, Class C or Class D shares of the State Funds will receive Class D shares of Limited Maturity Portfolio Common Stock. Expenses. The Agreement and Plan of Reorganization provides for the allocation of the expenses of the Reorganization between the State Funds and the Limited Maturity Portfolio. FAM has informed the Funds that it intends to pay all expenses relating to the Reorganization. Required Approvals. Under the Trust's Declaration of Trust (as amended to date) and relevant Massachusetts law, stockholder approval of the Agreement and Plan of Reorganization requires the affirmative vote of stockholders of each State Fund voting separately and representing a majority of the outstanding shares of each State Fund entitled to be voted thereon. Amendments and Conditions. The Agreement and Plan of Reorganization may be amended at any time prior to the Exchange Date with respect to any of the terms therein. The obligations of the Trust and Municipal Bond Fund pursuant to the Agreement and Plan of Reorganization are subject to various conditions, including a registration statement on Form N-14 being declared effective by the Commission, approval of the Reorganization by the stockholders of the State Funds, a favorable IRS ruling being received as to tax matters, an opinion of counsel as to securities matters being received and the continuing accuracy of various representations and warranties of the Trust and Municipal Bond Fund being confirmed by the respective parties. Postponement, Termination. Under the Agreement and Plan of Reorganization, the Board of Trustees of the Trust and the Board of Directors of the Municipal Bond Fund, respectively, may cause the Reorganization to be postponed or abandoned should either Board determine that it is in the best interests of the stockholders of any State Fund or Limited Maturity Portfolio, respectively, to do so. The Agreement and Plan of Reorganization may be terminated, and the Reorganization abandoned, at any time, whether before or after adoption thereof by the stockholders of the State Funds, prior to the Exchange Date, or the Exchange Date may be postponed: (i) by mutual consent of the Board of Trustees of the Trust and the Board of Directors of the Municipal Bond Fund; (ii) the Board of Trustees of the Trust if any condition to the Trust's obligations has not been fulfilled or waived by such Board; or (iii) by the Board of Directors of the Municipal Bond Fund if any condition to the Municipal Bond Fund's obligations has not been fulfilled or waived by such Board. POTENTIAL BENEFITS TO STOCKHOLDERS OF THE STATE FUNDS AS A RESULT OF THE REORGANIZATION The Board of Trustees of the Trust has identified certain potential benefits to stockholders of the State Funds that are likely to result from the Reorganization. First, following the Reorganization, State Fund stockholders will remain invested in an open-end fund that has an investment objective similar to that of the State Funds, although not identical. In addition, State Fund stockholders are likely to experience certain additional benefits, including lower expenses per share, economies of scale and greater flexibility in portfolio management. Specifically, after the Reorganization, on a pro forma combined basis, Limited Maturity Portfolio would pay an advisory fee to FAM at a lower annual rate than that currently due from the State Funds. If the aggregate assets of the three portfolios decreases, however, the advisory fee rate of the Limited Maturity Portfolio could increase to a level that is higher than the advisory fee rate currently applicable to the State Funds. Also, the total operating expenses of Limited Maturity Portfolio after the Reorganization, as a percentage of net assets, would be less than the current operating expenses for each of the State Funds. However, since inception, FAM has voluntarily waived the advisory fees payable by each of the State Funds and has reimbursed each State Fund for 43 a portion of its expenses (excluding 12b-1 plan fees). There can be no assurance that FAM will not discontinue or modify this waiver of fees or reimbursement of expenses at any time. In addition, certain fixed costs, such as costs of printing stockholder reports and proxy statements, legal expenses, audit fees, registration fees, mailing costs and other expenses, would be spread across a larger asset base, thereby lowering the expense ratio borne by stockholders of the State Funds. To illustrate the potential economies of scale, the table below shows, for the year ended July 31, 1997, the total operating expense ratio for the Class A shares of each of the State Funds, of Limited Maturity Portfolio and of Limited Maturity Portfolio on a pro forma basis as if the Reorganization had taken place on August 1, 1996 (the first day of the year ended July 31, 1997).
PRO FORMA ----------------------- TOTAL BASED ON TOTAL OPERATING NET ASSETS OPERATING BASED ON EXPENSE AS OF EXPENSE NET RATIO(%)(a)(b) 7/31/97($) RATIO(%)(c) ASSETS($) -------------- ----------- ----------- ----------- Arizona Fund............ 3.21 3,357,395 -- -- Massachusetts Fund...... 2.52 5,135,751 -- -- Michigan Fund........... 3.50 4,251,345 -- -- New Jersey Fund......... 1.65 6,322,601 -- -- New York Fund........... 1.16 14,565,335 -- -- Pennsylvania Fund....... 1.75 7,738,657 -- -- Limited Maturity Portfolio.............. 0.41 413,877,781 0.41 455,248,865
- -------- (a) FAM has in the past voluntarily waived all of the advisory fees due from each of the State Funds and voluntarily reimbursed each State Fund for a portion of its other expenses (excluding Rule 12b-1 plan fees). The Total Operating Expense Ratio does not give effect to any such waiver or reimbursement because FAM may discontinue or reduce such waiver of fees and/or assumption of expenses at any time without notice. The actual Total Operating Expense Ratio for the year ended July 31, 1997, net of the waiver of fees and/or assumption of expenses, would be:
TOTAL OPERATING EXPENSE RATIO AFTER WAIVER AND REIMBURSEMENT(%) --------------------------------- Arizona Fund............................... .94 Massachusetts Fund......................... .99 Michigan Fund.............................. .94 New Jersey Fund............................ .94 New York Fund.............................. .70 Pennsylvania Fund.......................... .99
(b) Class A share ratios are shown because Class A shares are not subject to class specific distribution and account maintenance fees. (c) Assumes Reorganization had taken place on August 1, 1996 (the first day of the year ended July 31, 1997). The following table sets forth the approximate average net assets of each of the State Funds and of Limited Maturity Portfolio for each entity's last three fiscal years.
NET ASSETS($) -------------------------------------------------------------------- ARIZONA MASSACHUSETTS MICHIGAN NEW JERSEY NEW YORK PENNSYLVANIA PERIOD FUND FUND FUND FUND FUND FUND ------ --------- ------------- --------- ---------- ---------- ------------ Year ended 7/31/97...... 3,791,000 6,323,000 4,279,000 7,284,000 16,470,000 8,502,000 Year ended 7/31/96...... 6,131,000 8,782,000 4,689,000 9,649,000 16,570,000 8,627,000 Year ended 7/31/95...... 7,562,000 11,856,000 5,508,000 11,323,000 14,904,000 9,829,000
PERIOD LIMITED MATURITY PORTFOLIO($) ------ ----------------------------- Year ended 6/30/97................................ 467,286,826 Year ended 6/30/96................................ 575,561,212 Year ended 6/30/95................................ 822,018,788
44 The preceding table illustrates that (i) the net assets of each of the State Funds (other than the New York Fund which experienced an increase in 1996 over 1995) and of Limited Maturity Portfolio have generally been decreasing over the past several years and (ii) in all cases (other than the New York Fund), average net assets for the most recent fiscal year, are below the net asset levels achieved for the 1995 fiscal year. FAM anticipates that if this decrease in net assets were to continue, the State Funds and Limited Maturity Portfolio might experience increasingly higher operating expense ratios. Conversely, FAM anticipates that the State Funds and Limited Maturity Portfolio as a combined entity might experience certain economies of scale, which might in turn result in a reduction in the entity's overall operating expense ratio. The State Funds alone might experience the opposite result, that is, a higher operating expense ratio due to continuing reductions in already relatively small asset bases. Although there can be no assurance that the foregoing would in fact occur, FAM believes that the economies of scale that may be realized as a result of the Reorganization would be beneficial to stockholders of each of the State Funds. The Board of Trustees of the Trust also considered the difference in the risks associated with certain of the investment strategies used by Limited Maturity Portfolio that are not used by the State Funds. Based on the foregoing, the Board concluded that the Reorganization presents no significant risks or costs (including legal, accounting and administrative costs) that would outweigh the benefits discussed above. In approving the Reorganization, the Board of Trustees of the Trust determined that the interests of existing stockholders of the State Funds would not be diluted as a result of the Reorganization. TAX CONSEQUENCES OF THE REORGANIZATION General. The Reorganization has been structured with the intention that it qualify for Federal income tax purposes as a tax-free reorganization under Section 368(a)(1)(C) of the Code. The State Funds and Limited Maturity Portfolio have elected and qualified for the special tax treatment afforded "regulated investment companies" under the Code, and the Limited Maturity Portfolio intends to continue to so qualify after the Reorganization. The State Funds and Limited Maturity Portfolio have jointly requested a private letter ruling from the IRS to the effect that for Federal income tax purposes: (i) the Reorganization, as described, will constitute a reorganization within the meaning of Section 368(a)(1)(C) of the Code, and each State Fund and Limited Maturity Portfolio will be deemed a "party" to the Reorganization within the meaning of Section 368(b) of the Code; (ii) in accordance with Section 361(a) of the Code, no gain or loss will be recognized to any State Fund as a result of the asset transfer or on the distribution of Limited Maturity Portfolio Common Stock to stockholders of each State Fund under Section 361(c)(1) of the Code; (iii) under Section 1032 of the Code, no gain or loss will be recognized to Limited Maturity Portfolio as a result of receipt of assets of the State Funds in exchange for shares of Limited Maturity Portfolio; (iv) in accordance with Section 354(a)(1) of the Code, no gain or loss will be recognized to the stockholders of any State Fund on the receipt of Limited Maturity Portfolio Common Stock in exchange for their shares of such State Fund; (v) in accordance with Section 362(b) of the Code, the tax basis of the assets of each State Fund in the hands of Limited Maturity Portfolio will be the same as the tax basis of such assets in the hands of such State Fund immediately prior to the consummation of the Reorganization; (vi) in accordance with Section 358 of the Code, immediately after the Reorganization, the tax basis of Limited Maturity Portfolio Common Stock received by the stockholders of each State Fund in the Reorganization will be equal, in the aggregate, to the tax basis of the shares of each State Fund surrendered in exchange; (vii) in accordance with Section 1223 of the Code, a stockholder's holding period for Limited Maturity Portfolio Common Stock will be determined by including the period for which such stockholder held the shares of the State Fund exchanged therefor, provided that such State Fund shares were held as a capital asset; (viii) in accordance with Section 1223 of the Code, Limited Maturity Portfolio's holding period with respect to the assets transferred by each State Fund will include the period for which the assets were held by such State Fund; and (ix) the taxable year of each State Fund will end on the effective date of the Reorganization, and pursuant to Section 381(a) of the Code and regulations thereunder, Limited Maturity Portfolio will succeed to and take into account certain tax attributes of such State Fund, such as earnings and profits, capital loss carryovers and method of accounting. 45 Stockholders of the State Funds should be aware that after the Reorganization, the distributions they receive from Limited Maturity Portfolio will be exempt from Federal income tax but generally will not be exempt to any significant degree from personal income tax at the state level. Stockholders should consult their tax advisers regarding the effect of the Reorganization in light of their individual circumstances. As the foregoing relates only to Federal income tax consequences, stockholders also should consult their tax advisers as to the foreign, state and local tax consequences of the Reorganization. Status as a Regulated Investment Company. The Reorganization will not affect the status of Limited Maturity Portfolio as a RIC under the Code. Each State Fund will terminate as a series of the Trust pursuant to the Reorganization. APPRAISAL RIGHTS A stockholder of any of the State Funds who does not vote in favor of the Reorganization may have the right under Massachusetts law to object to the Reorganization and demand payment for his or her shares from the applicable State Fund and an appraisal thereof upon compliance with the procedures specified in Sections 86 through 98 of the Massachusetts Business Corporation Law (the "Massachusetts Business Corporation Law"), which are set forth in Exhibit III hereto. A vote against the Reorganization or the execution of a proxy directing such a vote will not satisfy the requirements of those provisions. A failure to vote against the Reorganization will not constitute a waiver of such rights. The State Funds take the position that, if available, this statutory right of appraisal may be exercised only by stockholders of record. Section 92 of the Massachusetts Business Corporation Law provides that for purposes of payment to any stockholder who elects to exercise his or her statutory right of appraisal, the value of shares of such stockholder is to be determined as of the day preceding the date of the stockholders' vote approving the Agreement and Plan of Reorganization. However, the Commission's Division of Investment Management has taken the position that such valuation procedures would constitute violation of Rule 22c-1 under the Investment Company Act (the "forward pricing" rule which in substance prohibits a registered investment company from redeeming its shares except at a price based on the net asset value of such shares next computed after such shares have been tendered for redemption) and that Rule 22c-1 supersedes contrary provisions of state statutes. Under the terms of the Agreement and Plan of Reorganization, Limited Maturity Portfolio will assume the obligations of each of the State Funds, if any, with respect to statutory rights of appraisal. In the event that any stockholder elects to exercise his or her statutory right of appraisal under Massachusetts law, it is the present intention of Limited Maturity Portfolio to petition a court of competent jurisdiction to determine whether such right of appraisal has been superseded by the provisions of Rule 22c-1. In such event a dissenting stockholder may not receive any payment until disposition of any such court proceeding. For federal income tax purposes, dissenting stockholders obtaining payment for their shares will recognize gain or loss measured by the difference between any such payment and the tax basis for their shares. Stockholders are advised to consult their personal tax advisers as to the tax consequences of dissenting. Stockholders of the State Funds will, of course, continue to be able to redeem their shares of the applicable State Fund at the current net asset value until the close of business on the day five business days prior to the effective date of the Reorganization. Redemption requests received by the State Funds thereafter will be treated as requests for the redemption of shares of Limited Maturity Portfolio Common Stock received by the stockholder in the Reorganization. 46 CAPITALIZATION The following table sets forth as of July 31, 1997 (i) the capitalization of each State Fund, (ii) the capitalization of Limited Maturity Portfolio and (iii) the pro forma capitalization of Limited Maturity Portfolio as adjusted to give effect to the Reorganization. PRO FORMA CAPITALIZATION OF THE STATE FUNDS, LIMITED MATURITY PORTFOLIO AND THE COMBINED FUND* AS OF JULY 31, 1997
ARIZONA FUND --------------------------------------------- CLASS A CLASS B CLASS C CLASS D ------------ ----------- -------- ----------- Total Net Assets................. $ 709,319 $ 2,135,376 $ 36,084 $ 476,616 Shares Outstanding............... 69,741 209,967 3,545 46,841 Net Asset Value Per Share........ $ 10.17 $ 10.17 $ 10.18 $ 10.18 MASSACHUSETTS FUND --------------------------------------------- CLASS A CLASS B CLASS C CLASS D ------------ ----------- -------- ----------- Total Net Assets................. $ 1,355,818 $ 2,806,894 $274,926 $ 698,113 Shares Outstanding............... 135,068 279,567 27,406 69,563 Net Asset Value Per Share........ $ 10.04 $ 10.04 $ 10.03 $ 10.04 MICHIGAN FUND --------------------------------------------- CLASS A CLASS B CLASS C CLASS D ------------ ----------- -------- ----------- Total Net Assets................. $ 1,368,162 $ 1,410,732 $ 1,231 $ 1,471,220 Shares Outstanding............... 135,574 139,786 122 145,888 Net Asset Value Per Share........ $ 10.09 $ 10.09 $ 10.09 $ 10.08 NEW JERSEY FUND --------------------------------------------- CLASS A CLASS B CLASS C CLASS D ------------ ----------- -------- ----------- Total Net Assets................. $ 1,734,544 $ 4,108,454 $241,191 $ 238,412 Shares Outstanding............... 170,998 404,782 26,241 23,497 Net Asset Value Per Share........ $ 10.14 $ 10.15 $ 9.19 $ 10.15 NEW YORK FUND --------------------------------------------- CLASS A CLASS B CLASS C CLASS D ------------ ----------- -------- ----------- Total Net Assets................. $ 2,605,219 $ 8,209,327 $ 67,418 $ 3,683,371 Shares Outstanding............... 254,768 802,714 6,593 360,094 Net Asset Value Per Share........ $ 10.23 $ 10.23 $ 10.23 $ 10.23 PENNSYLVANIA FUND --------------------------------------------- CLASS A CLASS B CLASS C CLASS D ------------ ----------- -------- ----------- Total Net Assets................. $ 735,726 $ 5,134,207 $ 7,869 $ 1,860,855 Shares Outstanding............... 71,902 501,850 766 181,770 Net Asset Value Per Share........ $ 10.23 $ 10.23 $ 10.27 $ 10.24 LIMITED MATURITY PORTFOLIO --------------------------------------------- CLASS A CLASS B CLASS C CLASS D ------------ ----------- -------- ----------- Total Net Assets................. $340,141,818 $53,107,866 $128,373 $20,499,724 Shares Outstanding............... 34,147,124 5,330,319 12,913 2,056,678 Net Asset Value Per Share........ $ 9.96 $ 9.96 $ 9.94 $ 9.97
47
COMBINED FUND* --------------------------------------------- ADJUSTED** CLASS A CLASS B CLASS C CLASS D ---------- ------------ ----------- -------- ----------- Total Net Assets................. $348,647,168 $53,107,866 $128,373 $53,349,184 Shares Outstanding............... 35,000,983 5,330,319 12,913 5,352,369 Net Asset Value Per Share........ $ 9.96 $ 9.96 $ 9.94 $ 9.97
- -------- * Combined Fund refers to Limited Maturity Portfolio after giving effect to the Reorganization. ** Total Net Assets and Net Asset Value Per Share include the aggregate value of each State Fund's net assets which would have been transferred to Limited Maturity Portfolio had the Reorganization been consummated on July 31, 1997. Data does not take into account expenses incurred in connection with the Reorganization or the actual number of shares that would have been issued. No assurance can be given as to how many shares of Limited Maturity Portfolio the stockholders of the State Funds will receive on the date the Reorganization takes place, and the foregoing should not be relied upon to reflect the number of shares of Limited Maturity Portfolio that actually will be received on or after such date. INFORMATION CONCERNING THE SPECIAL MEETING DATE, TIME AND PLACE OF MEETING The Meeting will be held on January 5, 1998 at the offices of MLAM, 800 Scudders Mill Road, Plainsboro, New Jersey, at 9:00 a.m., New York time. SOLICITATION, REVOCATION AND USE OF PROXIES A stockholder executing and returning a proxy has the power to revoke it at any time prior to its exercise by executing a superseding proxy or by submitting a notice of revocation to the Secretary of the Trust. Although mere attendance at the Meeting will not revoke a proxy, a stockholder present at the Meeting may withdraw his proxy and vote in person. All shares represented by properly executed proxies, unless such proxies previously have been revoked, will be voted at the Meeting in accordance with the directions on the proxies; if no direction is indicated, the shares will be voted "FOR" the approval of the Agreement and Plan of Reorganization. It is not anticipated that any matters other than the adoption of the Agreement and Plan of Reorganization will be brought before the Meeting. If, however, any other business properly is brought before the Meeting, proxies will be voted in accordance with the judgment of the persons designated on such proxies. RECORD DATE AND OUTSTANDING SHARES The Board of Trustees of the Trust has fixed the close of business on November 10, 1997 as the record date (the "Record Date") for the determination of stockholders entitled to notice of, and to vote at, the Meeting or any adjournment thereof. Stockholders on the Record Date will be entitled to one vote for each share held, with no shares having cumulative voting rights. As of the Record Date, for each State Fund there were issued and outstanding the number of shares of beneficial interest, par value $.10 per share, listed below:
SHARES OUTSTANDING ON THE RECORD DATE ------------------ Arizona Fund........................................... 344,230 Massachusetts Fund..................................... 431,791 Michigan Fund.......................................... 404,691 New Jersey Fund........................................ 609,963 New York Fund.......................................... 1,562,395 Pennsylvania Fund...................................... 706,519
48 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF THE STATE FUNDS AND LIMITED MATURITY PORTFOLIO To the knowledge of the management of the Trust, no person owned beneficially 5% or more of the outstanding shares of any State Fund or of any class of shares of any State Fund at the Record Date. To the knowledge of the Municipal Bond Fund, at the date hereof, no person or entity owns beneficially 5% or more of any class of shares of Limited Maturity Portfolio or of all classes of Limited Maturity Portfolio in the aggregate. On the Record Date, the Trustees and officers of the Trust as a group (12 persons) owned an aggregate of less than 1% of the outstanding shares of any State Fund. On the Record Date, Mr. Zeikel, a Trustee and officer of the Trust, and the other officers of the Trust owned an aggregate of less than 1% of the outstanding shares of Common Stock of ML & Co. On the Record Date, the Directors and officers of the Municipal Bond Fund as a group (12 persons) owned an aggregate of less than 1% of the outstanding shares of Limited Maturity Portfolio Common Stock. On the Record Date, Mr. Zeikel, a Director and officer of the Municipal Bond Fund, and the other officers of Municipal Bond Fund owned an aggregate of less than 1% of the outstanding shares of Common Stock of ML & Co. VOTING RIGHTS AND REQUIRED VOTE For purposes of this Proxy Statement and Prospectus, each share of each class of each State Fund is entitled to one vote. Approval of the Agreement and Plan of Reorganization requires the affirmative vote of stockholders representing more than 50% of the outstanding shares of each State Fund. See Exhibit III--"Sections 86 through 98 of Chapter 156B of the Massachusetts General Laws (the Massachusetts Business Corporation Law)" for a discussion of dissenters' rights under Massachusetts law. If, by the time scheduled for the Meeting, sufficient votes in favor of the Agreement and Plan of Reorganization are not received from the stockholders of the applicable State Fund, the persons named as proxies may propose one or more adjournments of the Meeting to permit further solicitation of proxies from stockholders. Any such adjournment will require the affirmative vote of a majority of the shares of the applicable State Fund present in person or by proxy and entitled to vote at the session of the Meeting to be adjourned. The persons named as proxies will vote in favor of any such adjournment if they determine that adjournment and additional solicitation are reasonable and in the interests of the applicable State Fund's stockholders. 49 ADDITIONAL INFORMATION The expenses of preparation, printing and mailing of the enclosed form of proxy, the accompanying Notice and this Proxy Statement and Prospectus will be borne by the State Funds and Limited Maturity Portfolio pro rata according to the aggregate net assets of the State Fund or Limited Maturity Portfolio on the date of the Reorganization. Such expenses are currently estimated to be $255,000. FAM has informed the Funds that it intends to pay all expenses relating to the Reorganization. The State Funds will reimburse banks, brokers and others for their reasonable expenses in forwarding proxy solicitation materials to the beneficial owners of shares of the State Funds and certain persons that the State Funds may employ for their reasonable expenses in assisting in the solicitation of proxies from such beneficial owners of shares of the State Funds. In order to obtain the necessary vote at the Meeting, supplementary solicitation may be made by mail, telephone, telegraph or personal interview by officers of the Trust. It is expected that the cost of such supplementary solicitation, if any, will be nominal. The Funds have retained Tritech Services, an affiliate of ML & Co., with offices at 4 Corporate Place, Piscataway, New Jersey, to aid in the solicitation of proxies from holders of shares held in nominee or "street" name at a cost to be borne by FAM of approximately $12,000, plus out-of-pocket expenses. Broker-dealer firms, including Merrill Lynch, holding State Fund shares in "street name" for the benefit of their customers and clients will request the instructions of such customers and clients on how to vote their shares on each proposal before the Meeting. Broker-dealer firms, including Merrill Lynch, will not be permitted to grant voting authority without instructions with respect to the approval of the Agreement and Plan of Reorganization. The Trust will include shares held of record by broker-dealers as to which such authority has been granted in its tabulation of the total number of shares present for purposes of determining whether the necessary quorum of stockholders of each State Fund exists. Properly executed proxies that are returned, but that are marked "abstain" or on which a broker-dealer has declined to vote on any proposal ("broker non-votes") will be counted as present for the purposes of determining a quorum. Since approval of the Agreement and Plan of Reorganization requires the affirmative vote of stockholders of each State Fund voting separately and representing a majority of the outstanding shares of each State Fund, abstentions and broker non-votes will have the same effect as a vote against the Agreement and Plan of Reorganization. This Proxy Statement and Prospectus does not contain all of the information set forth in the registration statements and the exhibits relating thereto that the Municipal Bond Fund has filed with the Commission under the Securities Act and the Investment Company Act, to which reference is hereby made. The Trust and the Municipal Bond Fund both file reports and other information with the Commission. Reports, proxy statements, registration statements and other information filed by the Trust and the Municipal Bond Fund can be inspected and copied at the public reference facilities of the Commission in Washington, D.C. and at the New York Regional Office of the Commission at Seven World Trade Center, New York, New York 10048. Copies of such materials also can be obtained by mail from the Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and Exchange Commission, Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site (http://www.sec.gov) that contains the Statement of Additional Information, the Limited Maturity Trust Prospectus, the Limited Maturity Trust Statement, the Municipal Bond Fund Prospectus, the Municipal Bond Fund Statement, other material incorporated by reference and other information regarding the Funds. 50 LEGAL PROCEEDINGS There are no material legal proceedings to which the Trust or the Municipal Bond Fund is a party. LEGAL OPINIONS Certain legal matters in connection with the Reorganization will be passed upon for the Trust by Brown & Wood LLP, One World Trade Center, New York, New York, and for the Municipal Bond Fund by Rogers & Wells, 200 Park Avenue, New York, New York. Brown & Wood LLP will rely as to matters of Massachusetts law on the opinion of Bingham Dana LLP. Rogers & Wells will rely as to matters of Maryland law on the opinion of Wilmer, Cutler & Pickering. EXPERTS The financial highlights of each of the State Funds and of Limited Maturity Portfolio included in this Proxy Statement and Prospectus have been so included in reliance on the reports of Deloitte & Touche LLP, independent auditors, given on their authority as experts in auditing and accounting. The principal business address of Deloitte & Touche LLP is 117 Campus Drive, Princeton, New Jersey 08540. STOCKHOLDER PROPOSALS A stockholder proposal intended to be presented at any subsequent meeting of stockholders of the Trust must be received by the Trust a reasonable time before the Board of Trustees solicitation relating to such meeting is to be made in order to be considered in the Trust's proxy statement and form of proxy relating to that meeting. By Order of the Board of Trustees, Lawrence A. Rogers Secretary 51 EXHIBIT I AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as of the 24th day of November, 1997, by and between Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, a Massachusetts business trust (the "Limited Maturity Trust"), and Merrill Lynch Municipal Bond Fund, Inc., a Maryland corporation (the "Municipal Bond Fund"). PLAN OF REORGANIZATION The reorganization will comprise the acquisition by Limited Maturity Portfolio (the "Limited Maturity Portfolio"), a series of the Municipal Bond Fund, of substantially all of the assets, and the assumption of substantially all of the liabilities, of Merrill Lynch Arizona Limited Maturity Municipal Bond Fund (the "Arizona Fund"), Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund (the "Massachusetts Fund"), Merrill Lynch Michigan Limited Maturity Municipal Bond Fund (the "Michigan Fund"), Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund (the "New Jersey Fund"), Merrill Lynch New York Limited Maturity Municipal Bond Fund (the "New York Fund") and Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund (the "Pennsylvania Fund"), each a series of the Limited Maturity Trust (collectively, the "State Funds"), in exchange solely for an equal aggregate value of newly issued shares of Limited Maturity Portfolio's common stock, with a par value of $.10 per share (the "Limited Maturity Portfolio Common Stock"), and the subsequent distribution of Corresponding Shares (defined below) of Limited Maturity Portfolio to the stockholders of the State Funds in exchange for their shares of beneficial interest of the State Funds, each with a par value of $.10 per share, all upon and subject to the terms hereinafter set forth (the "Reorganization"). In the course of the Reorganization, shares of Limited Maturity Portfolio will be distributed to the stockholders of the State Funds as follows: each holder of Class A shares of each of the State Funds will be entitled to receive Class A shares of Limited Maturity Portfolio Common Stock. Holders of Class B, Class C and Class D shares of each of the State Funds will be entitled to receive Class D shares of Limited Maturity Portfolio Common Stock. (The exchanged shares discussed above shall be referred to as "Corresponding Shares"). The aggregate net asset value of Limited Maturity Portfolio to be received by each stockholder of each of the State Funds will equal the aggregate net asset value of the State Fund shares owned by such stockholder on the Exchange Date (as defined in Section 7 of this Agreement). In consideration therefor, on the Exchange Date, Limited Maturity Portfolio shall acquire substantially all of the assets of each of the State Funds and assume substantially all of the obligations and liabilities then existing, whether absolute, accrued, contingent or otherwise of each of the State Funds. It is intended that the Reorganization described in this Plan shall be a reorganization within the meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the "Code"), and any successor provision. As promptly as practicable after the consummation of the Reorganization, the Trustees of the Limited Maturity Trust shall take such action necessary to terminate the designation of the series of the Limited Maturity Trust representing each State Fund in accordance with the laws of the Commonwealth of Massachusetts. AGREEMENT In order to consummate the Reorganization and in consideration of the premises and the covenants and agreements hereinafter set forth, and intending to be legally bound, the Limited Maturity Trust and the Municipal Bond Fund hereby agree as follows: 1. Representations and Warranties of the Limited Maturity Trust. The Limited Maturity Trust represents and warrants to, and agrees with, the Municipal Bond Fund that: I-1 (a) The Limited Maturity Trust is a trust with transferable shares duly organized, validly existing and in good standing in conformity with the laws of the Commonwealth of Massachusetts, and has the power to own all of its assets and to carry out this Agreement. The Limited Maturity Trust has all necessary Federal, state and local authorizations to carry on its business as it is now being conducted and to carry out this Agreement. (b) The Limited Maturity Trust is duly registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a non-diversified, open-end management investment company (File No. 811-6282), and such registration has not been revoked or rescinded and is in full force and effect. The Limited Maturity Trust has elected and qualified each State Fund for the special tax treatment afforded regulated investment companies ("RICs") under Sections 851-855 of the Code at all times since inception and intends to continue to so qualify for the taxable year in which the Exchange Date occurs. (c) As used in this Agreement, the term "Investments" shall mean (i) the investments of each of the State Funds shown on the schedule of its investments as of the Valuation Time (as defined in Section 3(c) of this Agreement) furnished to the Municipal Bond Fund, with such additions thereto and deletions therefrom as may have arisen in the course of each State Fund's business up to the Valuation Time; and (ii) all other assets owned by each State Fund or liabilities incurred as of the Valuation Time, except that each State Fund shall retain cash, bank deposits or cash equivalent securities in an estimated amount necessary to (1) discharge its unpaid liabilities on its books at the Valuation Time (including, but not limited to, its income dividend and capital gains distributions, if any, payable for the period prior to the Valuation Time), and (2) pay such contingent and other liabilities as the Trustees of the Limited Maturity Trust reasonably shall deem to exist against such State Fund, if any, at the Valuation Time, for which contingent and other appropriate liability reserves shall be established on such State Fund's books. Each State Fund also shall retain any and all rights which it may have over and against any other person which may have accrued up to the Valuation Time. Any unexpended portion of the foregoing funds retained by each State Fund shall be disbursed by such State Fund pro rata to its stockholders upon consummation of the Reorganization as a final liquidating dividend. (d) The Limited Maturity Trust has full power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement has been duly authorized by all necessary action of its Board of Trustees, and this Agreement constitutes a valid and binding contract enforceable in accordance with its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors' rights generally and court decisions with respect thereto. (e) The Municipal Bond Fund has been furnished with a statement of assets and liabilities and a schedule of investments of each State Fund, each as of July 31, 1997, said financial statements having been examined by Deloitte & Touche llp, independent public accountants. An unaudited statement of assets and liabilities of each State Fund and an unaudited schedule of investments of each State Fund, each as of the Valuation Time, will be furnished to the Municipal Bond Fund at or prior to the Exchange Date for the purpose of determining the number of shares of Limited Maturity Portfolio to be issued pursuant to Section 4 of this Agreement; and each will fairly present the financial position of the applicable State Fund as of the Valuation Time in conformity with generally accepted accounting principles applied on a consistent basis. (f) The Municipal Bond Fund has been furnished with the Limited Maturity Trust's Annual Report to Stockholders for the year ended July 31, 1997 and any subsequent Semi-Annual Report to Stockholders which may be available, and the financial statements appearing in such reports fairly present the financial position of the Limited Maturity Trust and of each State Fund as of the respective dates indicated, in conformity with generally accepted accounting principles applied on a consistent basis. (g) The Municipal Bond Fund has been furnished with the prospectus and statement of additional information of the Limited Maturity Trust with respect to the State Funds, dated November 27, 1996, and said prospectus and statement of additional information do not contain any untrue statement of a material I-2 fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (h) There are no material legal, administrative or other proceedings pending or, to the knowledge of the Limited Maturity Trust, threatened against it or any State Fund which assert liability on the part of the Limited Maturity Trust or any State Fund or which materially affect their financial condition or their ability to consummate the Reorganization. Neither the Limited Maturity Trust nor any State Fund is charged with or, to the best of the knowledge of the Limited Maturity Trust, threatened with any violation or investigation of any possible violation of any provisions of any Federal, state or local law or regulation or administrative ruling relating to any aspect of its business. (i) There are no material contracts outstanding to which the Limited Maturity Trust is a party that have not been disclosed in the N-14 Registration Statement (as defined in subsection (o) below) or will not otherwise be disclosed to the Municipal Bond Fund prior to the Valuation Time. (j) The Limited Maturity Trust is not a party to or obligated under any provision of its Declaration of Trust, as amended, or its by-laws, as amended, or any contract or other commitment or obligation, and is not subject to any order or decree which would be violated by its execution of or performance under this Agreement. (k) No State Fund has any known liabilities of a material amount, contingent or otherwise, other than those shown on its statements of assets and liabilities referred to above, those incurred in the ordinary course of its business as a series of an investment company since July 31, 1997, and those incurred in connection with the Reorganization. As of the Valuation Time, the Limited Maturity Trust will advise the Municipal Bond Fund in writing of all known liabilities, contingent or otherwise, whether or not incurred in the ordinary course of business, existing or accrued as of such time with respect to each State Fund. (l) The Limited Maturity Trust has filed, or has obtained extensions to file, all Federal, state and local tax returns which are required to be filed by it, and has paid or has obtained extensions to pay, all Federal, state and local taxes shown on said returns to be due and owing and all assessments received by it, up to and including the taxable year in which the Exchange Date occurs. All tax liabilities of the Limited Maturity Trust and of each State Fund have been adequately provided for on its books, and no tax deficiency or liability of the Limited Maturity Trust or any State Fund has been asserted and no question with respect thereto has been raised by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid, up to and including the taxable year in which the Exchange Date occurs. (m) At both the Valuation Time and the Exchange Date, the Limited Maturity Trust will have full right, power and authority to sell, assign, transfer and deliver the Investments. At the Exchange Date, subject only to the delivery of the Investments as contemplated by this Agreement, the Limited Maturity Trust will have good and marketable title to all of the Investments, and the Municipal Bond Fund will acquire all of the Investments free and clear of any encumbrances, liens or security interests and without any restrictions upon the transfer thereof (except those imposed by the Federal or state securities laws and those imperfections of title or encumbrances as do not materially detract from the value or use of the Investments or materially affect title thereto). (n) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by the Limited Maturity Trust of the Reorganization, except such as may be required under the Securities Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act or state securities laws (which term as used herein shall include the laws of the District of Columbia and Puerto Rico). (o) The registration statement filed by the Municipal Bond Fund on Form N-14 relating to the shares of Limited Maturity Portfolio to be issued pursuant to this Agreement which includes the proxy statement of the Limited Maturity Trust with respect to the State Funds and the prospectus of the Municipal Bond Fund with respect to the transaction contemplated herein, and any supplement or amendment thereto or to the documents therein (as amended, the "N-14 Registration Statement"), on the effective date of the N-14 Registration Statement, at the time of the stockholders' meeting referred to in Section 6(a) of this Agreement I-3 and on the Exchange Date, insofar as it relates to the State Funds (i) complied or will comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder, and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and the prospectus included therein did not or will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subsection shall apply only to statements in or omissions from the N-14 Registration Statement made in reliance upon and in conformity with information furnished by the Limited Maturity Trust with respect to the State Funds for use in the N-14 Registration Statement as provided in Section 7 of this Agreement. (p) The Limited Maturity Trust is authorized to create an unlimited number of series and, with respect to each series, to issue an unlimited number of shares of beneficial interest, par value $.10 per share, of different classes, each outstanding share of which is fully paid, and nonassessable and has full voting rights. (q) The books and records of the Limited Maturity Trust with respect to the State Funds made available to the Municipal Bond Fund and/or its counsel are substantially true and correct and contain no material misstatements or omissions with respect to the operations of the State Funds. (r) The Limited Maturity Trust will not sell or otherwise dispose of any of the shares of Limited Maturity Portfolio to be received in the Reorganization, except in distribution to the stockholders of the State Funds. (s) At or prior to the Exchange Date, the Limited Maturity Trust will have obtained any and all regulatory, Trustee and stockholder approvals with respect to each State Fund, necessary to effect the Reorganization as set forth herein. 2. Representations and Warranties of the Municipal Bond Fund. The Municipal Bond Fund represents and warrants to, and agrees with, the Limited Maturity Trust that: (a) The Municipal Bond Fund is a corporation duly organized, validly existing and in good standing in conformity with the laws of the State of Maryland, and has the power to own all of its assets and to carry out this Agreement. The Municipal Bond Fund has all necessary Federal, state and local authorizations to carry on its business as it is now being conducted and to carry out this Agreement. (b) The Municipal Bond Fund is duly registered under the 1940 Act as a diversified, open-end management investment company (File No. 811-2688), and such registration has not been revoked or rescinded and is in full force and effect. The Municipal Bond Fund has elected and qualified Limited Maturity Portfolio for the special tax treatment afforded RICs under Sections 851-855 of the Code at all times since inception, and intends to continue to qualify the Limited Maturity Portfolio both until consummation of the Reorganization and thereafter. (c) The Municipal Bond Fund has full power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement has been duly authorized by all necessary action of its Board of Directors and this Agreement constitutes a valid and binding contract enforceable in accordance with its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors' rights generally and court decisions with respect thereto. (d) The Limited Maturity Trust has been furnished with a statement of assets and liabilities and a schedule of investments of Limited Maturity Portfolio, each as of June 30, 1997, said financial statements having been examined by Deloitte & Touche llp, independent public accountants. An unaudited statement of assets and liabilities of Limited Maturity Portfolio and an unaudited schedule of investments of Limited Maturity Portfolio, each as of the Valuation Time, will be furnished to the Limited Maturity Trust at or prior to the Exchange Date for the purpose of determining the number of shares of Limited Maturity Portfolio to be issued pursuant to Section 4 of this Agreement; and each will fairly present the financial I-4 position of Limited Maturity Portfolio as of the Valuation Time in conformity with generally accepted accounting principles applied on a consistent basis. (e) The Limited Maturity Trust has been furnished with the Municipal Bond Fund's Annual Report to Stockholders for the year ended June 30, 1997 and any subsequent Semi-Annual Reports to Stockholders which may be available, and the financial statements appearing therein fairly present the financial position of the Municipal Bond Fund and Limited Maturity Portfolio as of the respective dates indicated, in conformity with generally accepted accounting principles applied on a consistent basis. (f) The Limited Maturity Trust has been furnished with the prospectus and statement of additional information of the Municipal Bond Fund with respect to Limited Maturity Portfolio, dated October 7, 1997 and said prospectus and statement of additional information do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (g) There are no material legal, administrative or other proceedings pending or, to the knowledge of the Municipal Bond Fund, threatened against it or Limited Maturity Portfolio which assert liability on the part of the Municipal Bond Fund or Limited Maturity Portfolio or which materially affect their financial condition or their ability to consummate the Reorganization. Neither the Municipal Bond Fund nor Limited Maturity Portfolio is charged with or, to the best of the knowledge of the Municipal Bond Fund, threatened with any violation or investigation of any possible violation of any provisions of any Federal, state or local law or regulation or administrative ruling relating to any aspect of its business. (h) There are no material contracts outstanding to which the Municipal Bond Fund is a party that have not been disclosed in the N-14 Registration Statement or will not otherwise be disclosed to the Limited Maturity Trust prior to the Valuation Time. (i) The Municipal Bond Fund is not a party to or obligated under any provision of its Articles of Incorporation, as amended, or its by-laws, as amended, or any contract or other commitment or obligation, and is not subject to any order or decree which would be violated by its execution of or performance under this Agreement. (j) Limited Maturity Portfolio has no known liabilities of a material amount, contingent or otherwise, other than those shown on Limited Maturity Portfolio's statements of assets and liabilities referred to above, those incurred in the ordinary course of its business as a series of an investment company since June 30, 1997 and those incurred in connection with the Reorganization. As of the Valuation Time, the Municipal Bond Fund will advise the Limited Maturity Trust in writing of all known liabilities, contingent or otherwise, whether or not incurred in the ordinary course of business, existing or accrued as of such time with respect to Limited Maturity Portfolio. (k) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by the Municipal Bond Fund of the Reorganization, except such as may be required under the 1933 Act, the 1934 Act, the 1940 Act or state securities laws. (l) The N-14 Registration Statement, on its effective date, at the time of the stockholders' meeting referred to in Section 6(a) of this Agreement and at the Exchange Date, insofar as it relates to Limited Maturity Portfolio (i) complied or will comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and the prospectus included therein did not or will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subsection only shall apply to statements in or omissions from the N-14 Registration Statement made in reliance upon and in conformity with information furnished by the Municipal Bond Fund with respect to Limited Maturity Portfolio for use in the N-14 Registration Statement as provided in Section 7 of this Agreement. I-5 (m) The Municipal Bond Fund is authorized to issue 3,850,000,000 shares of common stock, par value $.10 per share, divided into three series, including Limited Maturity Portfolio, each of which is divided into four classes, designated Class A, Class B, Class C and Class D Common Stock. Class A, Class B, Class C and Class D of Limited Maturity Portfolio each consist of 150,000,000 shares, each outstanding share of which is fully paid and nonassessable and has full voting rights. (n) Limited Maturity Portfolio shares to be issued to the Limited Maturity Trust for distribution to the stockholders of the State Funds pursuant to this Agreement will have been duly authorized and, when issued and delivered pursuant to this Agreement, will be legally and validly issued and will be fully paid and nonassessable and will have full voting rights, and no stockholder of the Municipal Bond Fund will have any preemptive right of subscription or purchase in respect thereof. (o) At or prior to the Exchange Date, Limited Maturity Portfolio shares to be transferred to the Limited Maturity Trust for distribution to the stockholders of the State Funds on the Exchange Date will be duly qualified for offering to the public in all states of the United States in which the sale of shares of Limited Maturity Portfolio presently are qualified, and there are a sufficient number of such shares registered under the 1933 Act and with each pertinent state securities commission to permit the transfers contemplated by this Agreement to be consummated. (p) At or prior to the Exchange Date, the Municipal Bond Fund will have obtained any and all regulatory, Director and stockholder approvals with respect to Limited Maturity Portfolio, necessary to issue the shares of Limited Maturity Portfolio to the Limited Maturity Trust for distribution to the stockholders of the State Funds. 3. The Reorganization. (a) Subject to receiving the requisite approval of the stockholders of each of the State Funds, and to the other terms and conditions contained herein, the Limited Maturity Trust agrees to convey, transfer and deliver to the Municipal Bond Fund for the benefit of Limited Maturity Portfolio, and the Municipal Bond Fund agrees to acquire from the Limited Maturity Trust for the benefit of Limited Maturity Portfolio, on the Exchange Date all of the Investments (including interest accrued as of the Valuation Time on debt instruments), and cause Limited Maturity Portfolio to assume substantially all of the liabilities of each of the State Funds, in exchange solely for that number of shares of Limited Maturity Portfolio provided in Section 4 of this Agreement. Pursuant to this Agreement, as soon as practicable the Limited Maturity Trust will distribute all shares of Limited Maturity Portfolio received by it to the stockholders of each of the State Funds in exchange for their corresponding State Fund shares. Such distribution shall be accomplished by the opening of stockholder accounts on the stock ledger records of Limited Maturity Portfolio in the amounts due the stockholders of each of the State Funds based on their respective holdings in such State Fund as of the Valuation Time. (b) The Limited Maturity Trust will pay or cause to be paid to the Municipal Bond Fund for the benefit of Limited Maturity Portfolio any interest it receives on or after the Exchange Date with respect to the Investments transferred to the Municipal Bond Fund for the benefit of Limited Maturity Portfolio hereunder. (c) The Valuation Time shall be 4:00 p.m., New York time, on February 13, 1998, or such earlier or later day and time as may be mutually agreed upon in writing (the "Valuation Time"). (d) Limited Maturity Portfolio will acquire substantially all of the assets of, and assume substantially all of the known liabilities of, each of the State Funds, except that recourse for such liabilities will be limited to the net assets of each of the State Funds acquired by Limited Maturity Portfolio. The known liabilities of each of the State Funds as of the Valuation Time shall be confirmed in writing to the Municipal Bond Fund by the Limited Maturity Trust pursuant to Section 1(k) of this Agreement. (e) The existence of each of the State Funds will terminate following the distribution referred to in subparagraph (a) above and a majority of the Trustees shall execute and lodge among the records of the Trust an instrument in writing setting forth the fact of such termination and cause a copy thereof to be filed in the Office of the Secretary of State of The Commonwealth of Massachusetts. I-6 4. Issuance and Valuation of Shares of the Limited Maturity Portfolio in the Reorganization. Full shares of Limited Maturity Portfolio, and to the extent necessary, any fractional shares of Limited Maturity Portfolio, of an aggregate net asset value equal to the net asset value of the assets of each of the State Funds acquired, determined as hereinafter provided, reduced by the amount of liabilities of each State Fund assumed by Limited Maturity Portfolio, shall be issued by the Municipal Bond Fund in exchange for such assets of each of the State Funds. The net asset value of each of the State Funds and Limited Maturity Portfolio shall be determined in accordance with the procedures described in the Municipal Bond Fund Prospectus with respect to Limited Maturity Portfolio as of the Valuation Time. Such valuation and determination shall be made by the Municipal Bond Fund in cooperation with the Limited Maturity Trust. The Municipal Bond Fund shall issue Class A shares and Class D shares of Limited Maturity Portfolio to the Limited Maturity Trust in certificates or share deposit receipts registered in the name of the Limited Maturity Trust. The Limited Maturity Trust shall redeliver such certificates to Merrill Lynch Financial Data Services, Inc. and shall distribute the Class A and Class D shares of Limited Maturity Portfolio so received to the stockholders of the State Funds as follows: holders of Class A shares of each of the State Funds will receive Class A shares of Limited Maturity Portfolio and holders of Class B, Class C and Class D shares of each of the State Funds will receive Class D shares of Limited Maturity Portfolio. 5. Payment of Expenses. (a) With respect to expenses incurred in connection with the Reorganization, (i) the Municipal Bond Fund shall cause Limited Maturity Portfolio to pay all expenses incurred which are attributable solely to Limited Maturity Portfolio and the conduct of its business, (ii) the Limited Maturity Trust shall cause each State Fund to pay all expenses incurred which are attributable solely to each such State Fund and the conduct of its business, and (iii) the Municipal Bond Fund and the Limited Maturity Trust shall cause Limited Maturity Portfolio and the State Funds, respectively, to pay, subsequent to the Exchange Date and pro rata according to net assets of Limited Maturity Portfolio and each of the State Funds on the Exchange Date, all expenses incurred in connection with the Reorganization, including, but not limited to, all costs related to the preparation and distribution of the N-14 Registration Statement. Such fees and expenses shall include legal and accounting fees, printing costs, filing fees, portfolio transfer taxes (if any), and any similar expenses incurred in connection with the Reorganization. The Limited Maturity Trust shall pay all expenses associated with the termination of each of the State Funds under Massachusetts law. (b) If for any reason the Reorganization is not consummated, no party shall be liable to any other party for any damages resulting therefrom, including, without limitation, consequential damages. 6. Covenants of the Limited Maturity Trust and the Municipal Bond Fund. (a) The Limited Maturity Trust agrees to call special meetings of stockholders of each of the State Funds as soon as is practicable after the effective date of the N-14 Registration Statement for the purpose of considering the Reorganization as described in this Agreement, and it shall be a condition to the obligations of each of the parties hereto that the holders of a majority of the shares of each of the State Funds issued and outstanding and entitled to vote thereon, shall have approved this Agreement at such a meeting at or prior to the Valuation Time. (b) The Limited Maturity Trust and the Municipal Bond Fund each covenants to operate the business of the State Funds and Limited Maturity Portfolio, respectively, as presently conducted between the date hereof and the Exchange Date. (c) The Limited Maturity Trust agrees that following the consummation of the Reorganization, (i) it will terminate each State Fund in accordance with the laws of the Commonwealth of Massachusetts and any other applicable law, (ii) it will not make any distributions of any shares of Limited Maturity Portfolio other than to the stockholders of the State Funds and without first paying or adequately providing for the payment of all of the State Funds' liabilities not assumed by Limited Maturity Portfolio, if any, and (iii) on and after the Exchange Date it shall not conduct any business with respect to each of the State Funds except in connection with such State Fund's termination. I-7 (d) The Municipal Bond Fund will file the N-14 Registration Statement with the Securities and Exchange Commission (the "Commission") and will use its best efforts to provide that the N-14 Registration Statement becomes effective as promptly as practicable. The Limited Maturity Trust and the Municipal Bond Fund agree to cooperate fully with each other, and each will furnish to the other the information relating to the State Funds and Limited Maturity Portfolio, respectively, to be set forth in the N-14 Registration Statement as required by the 1933 Act, the 1934 Act, the 1940 Act, and the rules and regulations thereunder and the applicable state securities laws, if any. (e) The Limited Maturity Trust and the Municipal Bond Fund each agrees that by the Exchange Date all of the Federal and other tax returns and reports required to be filed on or before such date by the State Funds and Limited Maturity Portfolio, respectively, shall have been filed and all taxes shown as due on said returns either have been paid or adequate liability reserves have been provided for the payment of such taxes. In connection with this covenant, the Funds agree to cooperate with each other in filing any tax return, amended return or claim for refund, determining a liability for taxes or a right to a refund of taxes or participating in or conducting any audit or other proceeding in respect of taxes. The Municipal Bond Fund agrees to retain for a period of ten (10) years following the Exchange Date all returns, schedules and work papers and all material records or other documents relating to tax matters of each State Fund for its taxable period first ending after the Exchange Date and for all prior taxable periods. Any information obtained under this subsection shall be kept confidential except as otherwise may be necessary in connection with the filing of returns or claims for refund or in conducting an audit or other proceeding. After the Exchange Date, the Limited Maturity Trust shall prepare, or cause its agents to prepare, any Federal, state or local tax returns, including any Forms 1099, required to be filed by or with respect to each State Fund with respect to such State Fund's final taxable year ending with its termination and for any prior periods or taxable years and further shall cause such tax returns and Forms 1099 to be duly filed with the appropriate taxing authorities. Notwithstanding the aforementioned provisions of this subsection, any expenses incurred by the Limited Maturity Trust (other than for payment of taxes) in connection with the preparation and filing of said tax returns and Forms 1099 for any State Fund after the Exchange Date shall be borne by such State Fund to the extent such expenses have been accrued by such State Fund in the ordinary course without regard to the Reorganization; any excess expenses shall be borne by Fund Asset Management, L.P. ("FAM") at the time such tax returns and Forms 1099 are prepared. (f) The Limited Maturity Trust agrees to mail to stockholders of record of each State Fund entitled to vote at the special meeting of stockholders at which action is to be considered regarding this Agreement, in sufficient time to comply with requirements as to notice thereof, a combined Proxy Statement and Prospectus which complies in all material respects with the applicable provisions of Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act, and the rules and regulations, respectively, thereunder. (g) Following the consummation of the Reorganization, Limited Maturity Portfolio expects to stay in existence and continue its business as a series of an open-end management investment company registered under the 1940 Act. 7. Exchange Date. (a) Delivery of the assets of the State Funds to be transferred, together with any other Investments, and the shares of Limited Maturity Portfolio to be issued, shall be made at the offices of Brown & Wood LLP, One World Trade Center, New York, New York 10048, at 10:00 a.m. on the next full business day following the Valuation Time, or at such other place, time and date agreed to by the Limited Maturity Trust and the Municipal Bond Fund, the date and time upon which such delivery is to take place being referred to herein as the "Exchange Date." To the extent that any Investments, for any reason, are not transferable on the Exchange Date, the Limited Maturity Trust shall cause such Investments to be transferred to the Municipal Bond Fund's account with The Bank of New York at the earliest practicable date thereafter. (b) The Limited Maturity Trust will deliver to the Municipal Bond Fund on the Exchange Date confirmations or other adequate evidence as to the tax basis of each of the Investments delivered to the Municipal Bond Fund hereunder, certified by Deloitte & Touche llp. I-8 (c) As soon as practicable after the close of business on the Exchange Date, Limited Maturity Trust shall deliver to Municipal Bond Fund a list of the names and addresses of all of the stockholders of record of each State Fund on the Exchange Date and the number of shares of such State Fund owned by each such stockholder, certified to the best of their knowledge and belief by the transfer agent for Limited Maturity Trust or by its President. 8. The Limited Maturity Trust Conditions. The obligations of the Limited Maturity Trust hereunder shall be subject to the following conditions: (a) That this Agreement shall have been adopted, and the Reorganization shall have been approved, by the affirmative vote of the holders of a majority of the shares of each of the State Funds, issued and outstanding and entitled to vote thereon, voting separately as a class, and by the Board of Directors of the Municipal Bond Fund; and that the Municipal Bond Fund shall have delivered to the Limited Maturity Trust a copy of the resolution approving this Agreement adopted by the Municipal Bond Fund's Board of Directors, certified by the Secretary of the Municipal Bond Fund. (b) That the Municipal Bond Fund shall have furnished to the Limited Maturity Trust a statement of Limited Maturity Portfolio's assets and liabilities, with values determined as provided in Section 4 of this Agreement, together with a schedule of its investments, all as of the Valuation Time, certified on Municipal Bond Fund's behalf by its President (or any Vice President) and its Treasurer, and a certificate signed by Municipal Bond Fund's President (or any Vice President) and its Treasurer, dated as of the Exchange Date, certifying that as of the Valuation Time and as of the Exchange Date there has been no material adverse change in the financial position of Limited Maturity Portfolio since June 30, 1997, other than changes in its portfolio securities since that date or changes in the market value of its portfolio securities. (c) That Municipal Bond Fund shall have furnished to Limited Maturity Trust a certificate signed by Municipal Bond Fund's President (or any Vice President) and its Treasurer, dated as of the Exchange Date, certifying that, as of the Valuation Time and as of the Exchange Date all representations and warranties of Municipal Bond Fund made in this Agreement are true and correct in all material respects with the same effect as if made at and as of such dates, and that Municipal Bond Fund has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to each of such dates. (d) That there shall not be any material litigation pending with respect to the matters contemplated by this Agreement. (e) That the Limited Maturity Trust shall have received an opinion as to Maryland law of Wilmer, Cutler & Pickering, Maryland counsel to the Municipal Bond Fund, in form satisfactory to Limited Maturity Trust and dated the Exchange Date, to the effect that (i) Municipal Bond Fund is a corporation duly organized, validly existing and in good standing in conformity with the laws of the State of Maryland; (ii) the Corresponding Shares of Limited Maturity Portfolio to be delivered to stockholders of the State Funds as provided for by this Agreement are duly authorized and, upon delivery, will be validly issued and outstanding and fully paid and nonassessable by Municipal Bond Fund, and no stockholder of Municipal Bond Fund has any preemptive right to subscription or purchase in respect thereof (pursuant to the Articles of Incorporation, as amended, or the by-laws of Municipal Bond Fund or, to the best of such counsel's knowledge, otherwise); (iii) this Agreement has been duly authorized, executed and delivered by Municipal Bond Fund, and represents a valid and binding contract, enforceable in accordance with its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors' rights generally and court decisions with respect thereto; provided, that such counsel shall express no opinion with respect to the application of equitable principles in any proceeding, whether at law or in equity; (iv) the execution and delivery of this Agreement does not, and the consummation of the Reorganization will not, violate the Articles of Incorporation, as amended, the by-laws of Municipal Bond Fund or Maryland law; (v) no consent, approval, authorization or order of any Maryland court or governmental authority is required for the consummation by Municipal Bond Fund of the Reorganization, except such as have been obtained under Maryland law; and (vi) such opinion is I-9 solely for the benefit of Limited Maturity Trust and its Trustees and officers. In giving the opinion set forth above, Wilmer, Cutler & Pickering may state that it is relying on certificates of officers of Limited Maturity Trust and Municipal Bond Fund with regard to matters of fact and certain certificates and written statements of government officials with respect to the good standing of Limited Maturity Trust and Municipal Bond Fund. (f) That Limited Maturity Trust shall have received an opinion of Rogers & Wells, as counsel to Municipal Bond Fund, in form satisfactory to Limited Maturity Trust and dated the Exchange Date, to the effect that (i) no consent, approval, authorization or order of any United States Federal court or governmental authority is required for the consummation by Municipal Bond Fund of the Reorganization, except such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act and the published rules and regulations of the Commission thereunder and under applicable state securities laws, if any; (ii) the N-14 Registration Statement has become effective under the 1933 Act, no stop order suspending the effectiveness of the N-14 Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the 1933 Act, and the N-14 Registration Statement, and each amendment or supplement thereto, as of their respective effective dates, appear on their face to be appropriately responsive in all material respects to the requirements of the 1933 Act, the 1934 Act and the 1940 Act and the published rules and regulations of the Commission thereunder; (iii) the descriptions in the N-14 Registration Statement of statutes, legal and governmental proceedings and contracts and other documents are accurate and fairly present the information required to be shown; and (iv) such counsel does not know of any statutes, legal or governmental proceedings or contracts or other documents related to the Reorganization of a character required to be described in the N-14 Registration Statement which are not described therein or, if required to be filed, filed as required; (v) the execution and delivery of this Agreement does not, and the consummation of the Reorganization will not, violate any material provision of any agreement (known to such counsel) to which Municipal Bond Fund is a party or by which Municipal Bond Fund is bound; (vi) Municipal Bond Fund, to the knowledge of such counsel, is not required to qualify to do business as a foreign corporation in any jurisdiction, except as may be required by state securities laws, and except where each has so qualified or the failure so to qualify would not have a material adverse effect on Municipal Bond Fund, or its stockholders; (vii) such counsel does not have actual knowledge of any material suit, action or legal or administrative proceeding pending or threatened against Municipal Bond Fund, the unfavorable outcome of which would materially and adversely affect Municipal Bond Fund; and (viii) all corporate actions required to be taken by Municipal Bond Fund to authorize this Agreement and to effect the Reorganization have been duly authorized by all necessary corporate actions on the part of Municipal Bond Fund. Such opinion also shall state that (x) while such counsel cannot make any representation as to the accuracy or completeness of statements of fact in the N-14 Registration Statement or any amendment or supplement thereto, nothing has come to its attention that would lead it to believe that, on the respective effective dates of the N-14 Registration Statement and any amendment or supplement thereto, (1) the N-14 Registration Statement or any amendment or supplement thereto contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and (2) the prospectus included in the N-14 Registration Statement contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (y) such counsel does not express any opinion or belief as to the financial statements or other financial or statistical data relating to Limited Maturity Portfolio contained or incorporated by reference in the N-14 Registration Statement. In giving the opinion set forth above, Rogers & Wells may state that it is relying on certificates of officers of the Municipal Bond Fund with regard to matters of fact and certain certificates and written statements of governmental officials with respect to the good standing of the Municipal Bond Fund and on the opinion of Wilmer, Cutler & Pickering as to matters of Maryland law. (g) That the Municipal Bond Fund on behalf of Limited Maturity Portfolio shall have received a private letter ruling from the Internal Revenue Service to the effect that for Federal income tax purposes (i) the transfer of substantially all of the Investments to Limited Maturity Portfolio in exchange solely for shares of Limited Maturity Portfolio as provided in this Agreement will constitute a reorganization within the meaning of Section 368(a)(1)(C) of the Code, and each State Fund and Limited Maturity Portfolio will be deemed to be a "party" to the Reorganization within the meaning of Section 368(b); (ii) in accordance with Section 361(a) of the Code, I-10 no gain or loss will be recognized to any State Fund as a result of the asset transfer solely in exchange for shares of Limited Maturity Portfolio or on the distribution of Limited Maturity Portfolio stock to stockholders of the respective State Fund under Section 361(c)(1); (iii) under Section 1032 of the Code, no gain or loss will be recognized to Limited Maturity Portfolio on the receipt of assets of the State Funds in exchange for shares of Limited Maturity Portfolio; (iv) in accordance with Section 354(a)(1) of the Code, no gain or loss will be recognized to the stockholders of any State Fund on the receipt of Corresponding Shares of Limited Maturity Portfolio in exchange for their shares of such State Fund; (v) in accordance with Section 362(b) of the Code, the tax basis of the assets of each State Fund in the hands of Limited Maturity Portfolio will be the same as the tax basis of such assets in the hands of such State Fund immediately prior to the consummation of the Reorganization; (vi) in accordance with Section 358 of the Code, immediately after the Reorganization, the tax basis of the Corresponding Shares of Limited Maturity Portfolio received by the stockholders of each State Fund in the Reorganization will be equal, in the aggregate, to the tax basis of the shares of such State Fund surrendered in exchange; (vii) in accordance with Section 1223 of the Code, a stockholder's holding period for the Corresponding Shares of Limited Maturity Portfolio will be determined by including the period for which such stockholder held the shares of the State Fund exchanged therefor, provided, that such State Fund shares were held as a capital asset; (viii) in accordance with Section 1223 of the Code, Limited Maturity Portfolio's holding period with respect to the assets transferred by each State Fund will include the period for which the assets were held by such State Fund; and (ix) the taxable year of each State Fund will end on the effective date of the Reorganization, and pursuant to Section 381(a) of the Code and regulations thereunder, Limited Maturity Portfolio will succeed to and take into account certain tax attributes of such State Fund, such as earnings and profits, capital loss carryovers and method of accounting. (h) That all proceedings taken by the Municipal Bond Fund and its counsel in connection with the Reorganization and all documents incidental thereto shall be satisfactory in form and substance to the Limited Maturity Trust. (i) That the N-14 Registration Statement shall have become effective under the 1933 Act, and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of the Municipal Bond Fund, contemplated by the Commission. (j) That the Limited Maturity Trust shall have received from Deloitte & Touche llp a letter dated as of the effective date of the N-14 Registration Statement and a similar letter dated within five days prior to the Exchange Date, in form and substance satisfactory to the Limited Maturity Trust, to the effect that (i) they are independent public accountants with respect to the Municipal Bond Fund within the meaning of the 1933 Act and the applicable published rules and regulations thereunder; (ii) in their opinion, the financial statements and supplementary information of Limited Maturity Portfolio included or incorporated by reference in the N-14 Registration Statement and reported on by them comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder; and (iii) on the basis of limited procedures agreed upon by the Limited Maturity Trust and the Municipal Bond Fund and described in such letter (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of any unaudited interim financial statements and unaudited supplementary information of Limited Maturity Portfolio included in the N-14 Registration Statement, and inquiries of certain officials of the Municipal Bond Fund responsible for financial and accounting matters, nothing came to its attention that caused them to believe that (a) such unaudited financial statements and related unaudited supplementary information do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder, (b) such unaudited financial statements are not fairly presented in conformity with generally accepted accounting principles, applied on a basis substantially consistent with that of the audited financial statements, or (c) such unaudited supplementary information is not fairly stated in all material respects in relation to the unaudited financial statements taken as a whole; and (iv) on the basis of limited procedures agreed upon by the Limited Maturity Trust and the Municipal Bond Fund and described in such letter (but not an examination in accordance with generally accepted auditing standards), the information relating to Limited Maturity Portfolio appearing in the N-14 Registration Statement, which I-11 information is expressed in dollars (or percentages derived from such dollars) (with the exception of performance comparisons, if any), if any, has been obtained from the accounting records of the Municipal Bond Fund or from schedules prepared by officials of the Municipal Bond Fund having responsibility for financial and reporting matters and such information is in agreement with such records, schedules or computations made therefrom. (k) That the Commission shall not have issued an unfavorable advisory report under Section 25(b) of the 1940 Act, nor instituted or threatened to institute any proceeding seeking to enjoin consummation of the Reorganization under Section 25(c) of the 1940 Act, and no other legal, administrative or other proceeding shall be instituted or threatened which would materially affect the financial condition of the Municipal Bond Fund or would prohibit the Reorganization. (l) That the Limited Maturity Trust shall have received from the Commission such orders or interpretations as Brown & Wood llp, as counsel to the Limited Maturity Trust, deems reasonably necessary or desirable under the 1933 Act and the 1940 Act in connection with the Reorganization, provided, that such counsel shall have requested such orders as promptly as practicable, and all such orders shall be in full force and effect. 9. The Municipal Bond Fund Conditions. The obligations of the Municipal Bond Fund hereunder shall be subject to the following conditions: (a) That this Agreement shall have been adopted, and the Reorganization shall have been approved, by the Board of Trustees of the Limited Maturity Trust and by the affirmative vote of the holders of a majority of the shares of beneficial interest of each of the State Funds issued and outstanding and entitled to vote thereon, voting separately as a class; and that the Limited Maturity Trust shall have delivered to the Municipal Bond Fund a copy of the resolution approving this Agreement adopted by the Limited Maturity Trust's Board of Trustees, and a certificate setting forth the vote of the stockholders of each State Fund obtained, each certified by the Secretary of the Limited Maturity Trust. (b) That the Limited Maturity Trust shall have furnished to the Municipal Bond Fund a statement of each State Fund's assets and liabilities, with values determined as provided in Section 4 of this Agreement, together with a schedule of investments with their respective dates of acquisition and tax costs, all as of the Valuation Time, certified on the Limited Maturity Trust's behalf by its President (or any Vice President) and its Treasurer, and a certificate of both such officers, dated the Exchange Date, certifying that as of the Valuation Time and as of the Exchange Date there has been no material adverse change in the financial position of each State Fund since July 31, 1997, other than changes in the Investments since that date or changes in the market value of the Investments. (c) That the Limited Maturity Trust shall have furnished to the Municipal Bond Fund a certificate signed by the Limited Maturity Trust's President (or any Vice President) and its Treasurer, dated the Exchange Date, certifying that as of the Valuation Time and as of the Exchange Date all representations and warranties of the Limited Maturity Trust made in this Agreement are true and correct in all material respects with the same effect as if made at and as of such dates and the Limited Maturity Trust has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to such dates. (d) That the Limited Maturity Trust shall have delivered to the Municipal Bond Fund a letter from Deloitte & Touche llp, dated the Exchange Date, stating that such firm has performed a limited review of the Federal, state and local income tax returns of the Limited Maturity Trust with respect to each State Fund for the period ended July 31, 1997 (which returns originally were prepared and filed by the Limited Maturity Trust), and that based on such limited review, nothing came to their attention which caused them to believe that such returns did not properly reflect, in all material respects, the Federal, state and local income taxes of the Limited Maturity Trust for the period covered thereby; and that for the period from August 1, 1997, to and including the Exchange Date and for any taxable year of the Limited Maturity Trust ending upon the termination of the last State Fund to be so terminated, such firm has performed a limited review to ascertain the amount of applicable Federal, state and local taxes, and has determined that either such amount has been paid or reserves established for I-12 payment of such taxes, this review to be based on unaudited financial data; and that based on such limited review, nothing has come to their attention which caused them to believe that the taxes paid or reserves set aside for payment of such taxes were not adequate in all material respects for the satisfaction of Federal, state and local taxes for the period from August 1, 1997, to and including the Exchange Date and for any taxable year of the Limited Maturity Trust ending upon the termination of the last State Fund to be so terminated or that the Limited Maturity Trust would not continue to qualify as a regulated investment company for Federal income tax purposes. (e) That there shall not be any material litigation pending with respect to the matters contemplated by this Agreement. (f) That the Municipal Bond Fund shall have received an opinion of Bingham Dana llp, Massachusetts counsel to the Limited Maturity Trust, in form satisfactory to the Municipal Bond Fund and dated the Exchange Date, to the effect that (i) the Limited Maturity Trust is a trust with transferable shares validly existing and in good standing in conformity with the laws of the Commonwealth of Massachusetts; (ii) this Agreement has been duly authorized, executed and delivered by the Limited Maturity Trust, and represents a valid and binding contract, enforceable in accordance with its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors' rights generally and court decisions with respect thereto, provided, that such counsel shall express no opinion with respect to the application of equitable principles in any proceeding, whether at law or in equity; (iii) the Limited Maturity Trust has the power to sell, assign, transfer and deliver the assets transferred by it hereunder and, upon consummation of the Reorganization in accordance with the terms of this Agreement, the Limited Maturity Trust will have duly transferred such assets and liabilities in accordance with this Agreement; (iv) the execution and delivery of this Agreement does not, and the consummation of the Reorganization will not, violate the Declaration of Trust, as amended, the by- laws of the Limited Maturity Trust or Massachusetts law; (v) no consent, approval, authorization or order of any Massachusetts court or governmental authority is required for the consummation by the Limited Maturity Trust of the Reorganization, except such as have been obtained under Massachusetts law; and (vi) such opinion is solely for the benefit of the Municipal Bond Fund and its Directors and officers. In giving the opinion set forth above, Bingham Dana llp may state that it is relying on certificates of officers of the Limited Maturity Trust and the Municipal Bond Fund with regard to matters of fact and certain certificates and written statements of government officials with respect to the good standing of the Limited Maturity Trust. (g) That the Municipal Bond Fund shall have received an opinion of Brown & Wood llp, as counsel to the Limited Maturity Trust, in form satisfactory to the Municipal Bond Fund and dated the Exchange Date, with respect to the matters specified in Section 8(f) of this Agreement and such other matters as the Municipal Bond Fund reasonably may deem necessary or desirable. (h) That the Municipal Bond Fund shall have received a private letter ruling from the Internal Revenue Service with respect to the matters specified in Section 8(g) of this Agreement. (i) That the Investments to be transferred to the Municipal Bond Fund shall not include any assets or liabilities which the Municipal Bond Fund, by reason of charter limitations or otherwise, may not properly acquire or assume. (j) That all proceedings taken by the Limited Maturity Trust and its counsel in connection with the Reorganization and all documents incidental thereto shall be satisfactory in form and substance to the Municipal Bond Fund. (k) That the N-14 Registration Statement shall have become effective under the 1933 Act and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of the Limited Maturity Trust, contemplated by the Commission. I-13 (l) That the Municipal Bond Fund shall have received from Deloitte & Touche llp a letter dated as of the effective date of the N-14 Registration Statement and a similar letter dated within five days prior to the Exchange Date, in form and substance satisfactory to the Municipal Bond Fund, to the effect that (i) they are independent public accountants with respect to the Limited Maturity Trust within the meaning of the 1933 Act and the applicable published rules and regulations thereunder; (ii) in their opinion, the financial statements and supplementary information of each State Fund included or incorporated by reference in the N-14 Registration Statement and reported on by them comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder; (iii) on the basis of limited procedures agreed upon by the Limited Maturity Trust and the Municipal Bond Fund and described in such letter (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of any unaudited interim financial statements and unaudited supplementary information of each State Fund included in the N-14 Registration Statement, and inquiries of certain officials of the Limited Maturity Trust responsible for financial and accounting matters, nothing came to their attention that caused them to believe that (a) such unaudited financial statements and related unaudited supplementary information do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder, (b) such unaudited financial statements are not fairly presented in conformity with generally accepted accounting principles, applied on a basis substantially consistent with that of the audited financial statements, or (c) such unaudited supplementary information is not fairly stated in all material respects in relation to the unaudited financial statements taken as a whole; and (iv) on the basis of limited procedures agreed upon by the Limited Maturity Trust and the Municipal Bond Fund and described in such letter (but not an examination in accordance with generally accepted auditing standards), the information relating to each State Fund appearing in the N-14 Registration Statement, which information is expressed in dollars (or percentages derived from such dollars) (with the exception of performance comparisons, if any), if any, has been obtained from the accounting records of the Limited Maturity Trust or from schedules prepared by officials of the Limited Maturity Trust having responsibility for financial and reporting matters and such information is in agreement with such records, schedules or computations made therefrom. (m) That the Commission shall not have issued an unfavorable advisory report under Section 25(b) of the 1940 Act, nor instituted or threatened to institute any proceeding seeking to enjoin consummation of the Reorganization under Section 25(c) of the 1940 Act, and no other legal, administrative or other proceeding shall be instituted or threatened which would materially affect the financial condition of the Limited Maturity Trust or would prohibit the Reorganization. (n) That the Municipal Bond Fund shall have received from the Commission such orders or interpretations as Rogers & Wells, as counsel to the Municipal Bond Fund, deems reasonably necessary or desirable under the 1933 Act and the 1940 Act in connection with the Reorganization, provided, that such counsel shall have requested such orders as promptly as practicable, and all such orders shall be in full force and effect. (o) That prior to the Exchange Date, the Limited Maturity Trust shall have declared a dividend or dividends which, together with all such previous dividends, shall have the effect of distributing to stockholders of each State Fund all of such State Fund's investment company taxable income for the period from August 1, 1997 to and including the Exchange Date, if any (computed without regard to any deduction for dividends paid), and all of such State Fund's net capital gain, if any, realized for the period from August 1, 1997 to and including the Exchange Date. 10. Termination, Postponement and Waivers. (a) Notwithstanding anything contained in this Agreement to the contrary, this Agreement may be terminated and the Reorganization abandoned at any time (whether before or after adoption thereof by the stockholders of each State Fund) prior to the Exchange Date, or the Exchange Date may be postponed, (i) by mutual consent of the Board of Trustees of the Limited Maturity Trust and the Board of Directors of the Municipal Bond Fund; (ii) by the Board of Trustees of the Limited Maturity Trust if any condition of the Limited I-14 Maturity Trust's obligations set forth in Section 8 of this Agreement has not been fulfilled or waived by such Board; or (iii) by the Board of Directors of the Municipal Bond Fund if any condition of the Municipal Bond Fund's obligations set forth in Section 9 of this Agreement has not been fulfilled or waived by such Board. (b) If the transactions contemplated by this Agreement have not been consummated by August 31, 1998, this Agreement automatically shall terminate on that date, unless a later date is mutually agreed to by the Board of Trustees of the Limited Maturity Trust and the Board of Directors of the Municipal Bond Fund. (c) In the event of termination of this Agreement pursuant to the provisions hereof, the same shall become void and have no further effect, and there shall not be any liability on the part of either the Limited Maturity Trust or the Municipal Bond Fund or persons who are their trustees, directors, officers, agents or stockholders in respect of this Agreement. (d) At any time prior to the Exchange Date, any of the terms or conditions of this Agreement may be waived by the Board of Trustees of the Limited Maturity Trust or the Board of Directors of the Municipal Bond Fund, respectively (whichever is entitled to the benefit thereof), if, in the judgment of such Board after consultation with its counsel, such action or waiver will not have a material adverse effect on the benefits intended under this Agreement to the stockholders of each State Fund and Limited Maturity Portfolio, respectively, on behalf of which such action is taken. In addition, the Board of Trustees of the Limited Maturity Trust and the Board of Directors of the Municipal Bond Fund have delegated to FAM the ability to make non- material changes to the transaction if it deems it to be in the best interests of the Limited Maturity Trust and the Municipal Bond Fund to do so. (e) The respective representations and warranties contained in Sections 1 and 2 of this Agreement shall expire with, and be terminated by, the consummation of the Reorganization, and neither the Limited Maturity Trust nor the Municipal Bond Fund nor any of their officers, directors or trustees, agents or stockholders shall have any liability with respect to such representations or warranties after the Exchange Date. This provision shall not protect any officer, director or trustee, agent or stockholder of the Limited Maturity Trust or the Municipal Bond Fund against any liability to the entity for which that officer, director or trustee, agent or stockholder so acts or to its stockholders, to which that officer, director or trustee, agent or stockholder otherwise would be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties in the conduct of such office. (f) If any order or orders of the Commission with respect to this Agreement shall be issued prior to the Exchange Date and shall impose any terms or conditions which are determined by action of the Board of Trustees of the Limited Maturity Trust and the Board of Directors of the Municipal Bond Fund to be acceptable, such terms and conditions shall be binding as if a part of this Agreement without further vote or approval of the stockholders of the State Funds unless such terms and conditions shall result in a change in the method of computing the number of shares of Limited Maturity Portfolio to be issued to the Limited Maturity Trust for distribution to the stockholders of the State Funds in which event, unless such terms and conditions shall have been included in the proxy solicitation materials furnished to the stockholders of the State Funds prior to the meetings at which the Reorganization shall have been approved, this Agreement shall not be consummated and shall terminate unless the Limited Maturity Trust promptly shall call a special meeting of stockholders of each State Fund at which such conditions so imposed shall be submitted for approval. 11. Indemnification. (a) The Limited Maturity Trust hereby agrees to indemnify and hold the Municipal Bond Fund harmless from all loss, liability and expense (including reasonable counsel fees and expenses in connection with the contest of any claim) which the Municipal Bond Fund may incur or sustain by reason of the fact that (i) the Municipal Bond Fund shall be required to pay any corporate obligation of the Limited Maturity Trust, whether consisting of tax deficiencies or otherwise, based upon a claim or claims against the Limited Maturity Trust or the State Funds which were omitted or not fairly reflected in the financial statements to be delivered to the I-15 Municipal Bond Fund in connection with the Reorganization; (ii) any representations or warranties made by the Limited Maturity Trust in this Agreement should prove to be false or erroneous in any material respect; (iii) any covenant of the Limited Maturity Trust has been breached in any material respect; or (iv) any claim is made alleging that (a) the N-14 Registration Statement included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or (b) the Proxy Statement and Prospectus delivered to the stockholders of the State Funds and forming a part of the N- 14 Registration Statement included any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except insofar as such claim is based on information with respect to the Municipal Bond Fund. (b) The Municipal Bond Fund hereby agrees to indemnify and hold the Limited Maturity Trust harmless from all loss, liability and expenses (including reasonable counsel fees and expenses in connection with the contest of any claim) which the Limited Maturity Trust may incur or sustain by reason of the fact that (i) any representations or warranties made by the Municipal Bond Fund in this Agreement should prove false or erroneous in any material respect, (ii) any covenant of the Municipal Bond Fund has been breached in any material respect, or (iii) any claim is made alleging that (a) the N-14 Registration Statement included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, not misleading or (b) the Proxy Statement and Prospectus delivered to stockholders of the State Funds and forming a part of the N-14 Registration Statement included any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except insofar as such claim is based on information with respect to Limited Maturity Trust. (c) In the event that any claim is made against the Municipal Bond Fund in respect of which indemnity may be sought by the Municipal Bond Fund from the Limited Maturity Trust under Section 11(a) of this Agreement, or in the event that any claim is made against the Limited Maturity Trust in respect of which indemnity may be sought by the Limited Maturity Trust from the Municipal Bond Fund under Section 11(b) of this Agreement, then the party seeking indemnification (the "Indemnified Party"), with reasonable promptness and before payment of such claim, shall give written notice of such claim to the other party (the "Indemnifying Party"). If no objection as to the validity of the claim is made in writing to the Indemnified Party by the Indemnifying Party within thirty (30) days after the giving of notice hereunder, then the Indemnified Party may pay such claim and shall be entitled to reimbursement therefor, pursuant to this Agreement. If, prior to the termination of such thirty-day period, objection in writing as to the validity of such claim is made to the Indemnified Party, the Indemnified Party shall withhold payment thereof until the validity of such claim is established (i) to the satisfaction of the Indemnifying Party, or (ii) by a final determination of a court of competent jurisdiction, whereupon the Indemnified Party may pay such claim and shall be entitled to reimbursement thereof, pursuant to this Agreement, or (iii) with respect to any tax claims, within seven (7) calendar days following the earlier of (A) an agreement between the Limited Maturity Trust and the Municipal Bond Fund that an indemnity amount is payable, (B) an assessment of a tax by a taxing authority, or (c) a "determination" as defined in Section 1313(a) of the Code. For purposes of this Section 11, the term "assessment" shall have the same meaning as used in Chapter 63 of the Code and Treasury Regulations thereunder, or any comparable provision under the laws of the appropriate taxing authority. In the event of any objection by the Indemnifying Party, the Indemnifying Party promptly shall investigate the claim, and if it is not satisfied with the validity thereof, the Indemnifying Party shall conduct the defense against such claim. All costs and expenses incurred by the Indemnifying Party in connection with such investigation and defense of such claim shall be borne by it. These indemnification provisions are in addition to, and not in limitation of, any other rights the parties may have under applicable law. 12. Other Matters. (a) Pursuant to Rule 145 under the 1933 Act, and in connection with the issuance of any shares to any person who at the time of the Reorganization is, to its knowledge, an affiliate of a party to the Reorganization I-16 pursuant to Rule 145(c), the Municipal Bond Fund will cause to be affixed upon the certificate(s) issued to such person (if any) a legend as follows: THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT TO MERRILL LYNCH MUNICIPAL BOND FUND, INC. (OR ITS STATUTORY SUCCESSOR) OR ITS PRINCIPAL UNDERWRITER UNLESS (I) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933 OR (II) IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE FUND, SUCH REGISTRATION IS NOT REQUIRED. and, further, that stop transfer instructions will be issued to the Municipal Bond Fund's transfer agent with respect to such shares. The Limited Maturity Trust will provide the Municipal Bond Fund on the Exchange Date with the name of any stockholder of any State Fund who is to the knowledge of the Limited Maturity Trust an affiliate of it on such date. (b) All covenants, agreements, representations and warranties made under this Agreement and any certificates delivered pursuant to this Agreement shall be deemed to have been material and relied upon by each of the parties, notwithstanding any investigation made by them or on their behalf. (c) Any notice, report or demand required or permitted by any provision of this Agreement shall be in writing and shall be made by hand delivery, prepaid certified mail or overnight service, addressed to the Limited Maturity Trust or the Municipal Bond Fund, in either case at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, Attn: Arthur Zeikel, President. (d) This Agreement supersedes all previous correspondence and oral communications between the parties regarding the Reorganization, constitutes the only understanding with respect to the Reorganization, may not be changed except by a letter of agreement signed by each party and shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed in said state. (e) A copy of the Limited Maturity Trust's Declaration of Trust is on file with the Secretary of State of The Commonwealth of Massachusetts. The Municipal Bond Fund acknowledges that the obligations of or arising out of this instrument are not binding upon any of the Limited Maturity Trust's trustees, officers, employees, agents or stockholders individually, but are binding solely upon the assets and property of the Limited Maturity Trust. The Municipal Bond Fund further acknowledges that the assets and liabilities of each series of the Limited Maturity Trust are separate and distinct and that the obligations of or arising out of this instrument are binding solely upon the assets or property of the series on whose behalf the Limited Maturity Trust has executed this Agreement. (f) Copies of the Articles of Incorporation, as amended, of the Municipal Bond Fund are on file with the Department of Assessments and Taxation of the State of Maryland and notice is hereby given that this instrument is executed on behalf of the Directors of the Municipal Bond Fund. This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be deemed to be an original but all such counterparts together shall constitute but one instrument. I-17 Merrill Lynch Multi-State Limited Maturity Municipal Series Trust /s/ Terry K. Glenn By: _________________________________ Attest: /s/ Lawrence A. Rogers _____________________________________ Merrill Lynch Municipal Bond Fund, Inc. /s/ Terry K. Glenn By: _________________________________ Attest: /s/ Lawrence A. Rogers _____________________________________ I-18 EXHIBIT II RATINGS OF MUNICIPAL BONDS DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") MUNICIPAL BOND RATINGS AAA Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future. BAA Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payment and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. BA Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. CAA Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. CA Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes possess the strongest investment attributes are designated by the symbols Aa1, A1, Baa1, Ba1 and B1. II-1 Short-term Notes: The four ratings of Moody's for short-term notes are MIG1/VMIG1, MIG2/VMIG2, MIG3/VMIG3 and MIG4/VMIG4; MIG1/VMIG1 denotes "best quality . . . strong protection by established cash flows"; MIG2/VMIG2 denotes "high quality" with ample margins of protection; MIG3/VMIG3 notes are of "favorable quality . . . but . . . lacking the undeniable strength of the preceding grades"; MIG4/VMIG4 notes are of "adequate quality . . . [p]rotection commonly regarded as required of an investment security is present . . . there is specific risk". DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS Moody's Commercial Paper ratings are opinions of the ability of issuers to repay punctually promissory obligations not having an original maturity in excess of nine months. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers: Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of short-term promissory obligations. Prime-1 repayment ability will often be evidenced by many of the following characteristics: leading market positions in well-established industries; high rates of return on funds employed; conservative capitalization structure with moderate reliance on debt and ample asset protection; broad margins in earning coverage of fixed financial charges and high internal cash generation; and well-established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of short-term promissory obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. Issuers rated Not Prime do not fall within any of the Prime rating categories. DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES ("STANDARD & POOR'S") MUNICIPAL DEBT RATINGS A Standard & Poor's municipal debt rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program. It takes into consideration the creditworthiness of guarantors, insurers or other forms of credit enhancement on the obligation. The debt rating is not a recommendation to purchase, sell or hold a financial obligation, inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished by the obligors or obtained by Standard & Poor's from other sources 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. The ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances. The ratings are based, in varying degrees, on the following considerations: II-2 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. AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to meet its financial commitment on the obligation is extremely strong. AA Debt rated "AA" differs from the highest-rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong. A Debt rated "A" is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher- rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong. BBB Debt rated "BBB" exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. BB Debt rated "BB", "B", "CCC", "CC" and "C" are regarded as having B significant speculative characteristics. "BB" indicates the least degree of speculation and "C" the highest degree of speculation. While such CCC bonds will likely have some quality and protective characteristics, CC these may be outweighed by large uncertainties or major exposures to C adverse conditions. D Debt 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. Plus (+) or Minus (--): The ratings from "AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS A Standard & Poor's Commercial Paper Rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into several categories, ranging from "A" for the highest-quality obligations to "D" for the lowest. These categories are as follows: A-1 This designation indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation. A-2 Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated "A-1". II-3 A-3 Issues carrying this designation have an adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. B Issues rated "B" are regarded as having only speculative capacity for timely payment. C This rating is assigned to short-term debt obligations with a doubtful capacity for payment. D Debt rated "D" is in payment default. The "D" rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. A Commercial Paper rating is not a recommendation to purchase or sell a security. The ratings are based on current information furnished to Standard & Poor's by the issuer and obtained by Standard & Poor's from other sources it considers reliable. The ratings may be changed, suspended or withdrawn as a result of changes in, or unavailability of, such information. DESCRIPTION OF STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS A Standard & Poor's note rating reflects the liquidity factors and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment: . Amortization schedule--the larger the final maturity relative to other maturities, the more likely it will be treated as a note. . Source of payment--the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note. Note rating symbols are as follows: SP-1 Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation. SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes. SP-3 Speculative capacity to pay principal and interest. DESCRIPTION OF FITCH INVESTORS SERVICE, INC. ("FITCH") INVESTMENT GRADE BOND RATINGS Fitch investment grade bond ratings provide a guide to investors in determining the credit risk associated with a particular security. The ratings represent Fitch's assessment of the issuer's ability to meet the obligations of a specific debt issue or class of debt in a timely manner. The rating takes into consideration special features of the issue, its relationship to other obligations of the issuer, the current and prospective financial condition and operating performance of the issuer and of any guarantor, as well as the economic and political environment that might affect the issuer's future financial strength and credit quality. II-4 Fitch ratings do not reflect any credit enhancement that may be provided by insurance policies or financial guaranties unless otherwise indicated. Bonds carrying the same rating are of similar but not necessarily identical credit quality since the rating categories do not fully reflect small differences in the degrees of credit risk. Fitch ratings are not recommendations to buy, sell or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor or the tax-exempt nature or taxability of payments made in respect of any security. Fitch ratings are based on information obtained from issuers, other obligors, underwriters, their experts and other sources Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of such information. Ratings may be changed, suspended, or withdrawn as a result of changes in, or the unavailability of, information or for other reasons. AAA Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated "F-1+". A Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore, impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Plus (+) or Minus (--): Plus and minus signs are used with a rating symbol to indicate the relative position of a credit within the rating category. Plus and minus signs, however, are not used in the "AAA" category. NR Indicates that Fitch does not rate the specific issue. CONDITIONAL A conditional rating is premised on the successful completion of a project or the occurrence of a specific event. SUSPENDED A rating is suspended when Fitch deems the amount of information available from the issuer to be inadequate for rating purposes. WITHDRAWN A rating will be withdrawn when an issue matures or is called or refinanced and, at Fitch's discretion, when an issuer fails to furnish proper and timely information. II-5 FITCHALERT Ratings are placed on FitchAlert to notify investors of an occurrence that is likely to result in a rating change and the likely direction of such change. These are designated as "Positive", indicating a potential upgrade, "Negative", for potential downgrade, or "Evolving", where ratings may be raised or lowered. FitchAlert is relatively short-term, and should be resolved within 12 months. Ratings Outlook: An outlook is used to describe the most likely direction of any rating change over the intermediate term. It is described as "Positive" or "Negative". The absence of a designation indicates a stable outlook. DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS Fitch speculative grade bond ratings provide a guide to investors in determining the credit risk associated with a particular security. The ratings ("BB" to "C") represent Fitch's assessment of the likelihood of timely payment of principal and interest in accordance with the terms of obligation for bond issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an assessment of the ultimate recovery value through reorganization or liquidation. The rating takes into consideration special features of the issue, its relationship to other obligations of the issuer, the current and prospective financial condition and operating performance of the issuer and any guarantor, as well as the economic and political environment that might affect the issuer's future financial strength. Bonds that have the same rating are of similar but not necessarily identical credit quality since rating categories cannot fully reflect the differences in degrees of credit risk. BB Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. B Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue. CCC Bonds have certain identifiable characteristics which, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment. CC Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time. C Bonds are in imminent default in payment of interest or principal. Bonds are in default on interest and/or principal payments. Such bonds DDD are extremely speculative and should be valued on the basis of their DD ultimate recovery value in liquidation or reorganization of the obligor. D "DDD" represents the highest potential for recovery on these bonds, and "D" represents the lowest potential for recovery. Plus (+) or Minus (--): Plus and minus signs are used with a rating symbol to indicate the relative position of a credit within the rating category. Plus and minus signs, however, are not used in the "DDD," "DD" or "D" categories. II-6 DESCRIPTION OF FITCH INVESTMENT GRADE SHORT-TERM RATINGS Fitch's short-term ratings apply to debt obligations that are payable on demand or have original maturities of generally up to three years, including commercial paper, certificates of deposit, medium-term notes and municipal and investment notes. The short-term rating places greater emphasis than a long-term rating on the existence of liquidity necessary to meet the issuer's obligations in a timely manner. Fitch short-term ratings are as follows: F-1+Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. F-1 Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated "F-1+". F-2 Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned "F-1+" and "F-1" ratings. F-3 Fair Credit Quality. Issues assigned this rating have characteristics suggesting that the degree of assurance for timely payment is adequate; however, near-term adverse changes could cause these securities to be rated below investment grade. F-S Weak Credit Quality. Issues assigned this rating have characteristics suggesting a minimal degree of assurance for timely payment and are vulnerable to near-term adverse changes in financial and economic conditions. D Default. Issues assigned this rating are in actual or imminent payment default. LOC The symbol "LOC" indicates that the rating is based on a letter of credit issued by a commercial bank. II-7 EXHIBIT III SECTIONS 86 THROUGH 98 OF CHAPTER 156B OF THE MASSACHUSETTS GENERAL LAWS (THE MASSACHUSETTS BUSINESS CORPORATION LAW) (S) 86. SECTIONS APPLICABLE TO APPRAISAL; PREREQUISITES If a corporation proposes to take a corporate action as to which any section of this chapter provides that a stockholder who objects to such action shall have the right to demand payment for his shares and an appraisal thereof, sections eighty-seven to ninety-eight, inclusive, shall apply except as otherwise specifically provided in any section of this chapter. Except as provided in sections eighty-two and eighty-three, no stockholder shall have such right unless (1) he files with the corporation before the taking of the vote of the shareholders on such corporate action, written objection to the proposed action stating that he intends to demand payment for his shares if the action is taken and (2) his shares are not voted in favor of the proposed action. (S) 87. STATEMENT OF RIGHTS OF OBJECTING STOCKHOLDERS IN NOTICE OF MEETING; FORM The notice of the meeting of stockholders at which the approval of such proposed action is to be considered shall contain a statement of the rights of objecting stockholders. The giving of such notice shall not be deemed to create any rights in any stockholder receiving the same to demand payment for his stock, and the directors may authorize the inclusion in any such notice of a statement of opinion by the management as to the existence or non-existence of the right of the stockholders to demand payment for their stock on account of the proposed corporate action. The notice may be in such form as the directors or officers calling the meeting deem advisable, but the following form of notice shall be sufficient to comply with this section: "If the action proposed is approved by the stockholders at the meeting and effected by the corporation, any stockholder (1) who files with the corporation before the taking of the vote on the approval of such action, written objection to the proposed action stating that he intends to demand payment for his shares if the action is taken and (2) whose shares are not voted in favor of such action has or may have the right to demand in writing from the corporation (or, in the case of a consolidation or merger, the name of the resulting or surviving corporation shall be inserted), within twenty days after the date of mailing to him of notice in writing that the corporate action has become effective, payment for his shares and an appraisal of the value thereof. Such corporation and any such stockholder shall in such cases have the rights and duties and shall follow the procedure set forth in sections 88 to 98, inclusive, of chapter 156B of the General Laws of Massachusetts." (S) 88. NOTICE OF EFFECTIVENESS OF ACTION OBJECTED TO The corporation taking such action, or in the case of a merger or consolidation the surviving or resulting corporation, shall, within ten days after the date on which such corporate action became effective, notify each stockholder who filed a written objection meeting the requirements of section eighty-six and whose shares were not voted in favor of the approval of such action, that the action approved at the meeting of the corporation of which he is a stockholder has become effective. The giving of such notice shall not be deemed to create any rights in any stockholder receiving the same to demand payment for his stock. The notice shall be sent by registered or certified mail, addressed to the stockholder at his last known address as it appears in the records of the corporation. (S) 89. DEMAND FOR PAYMENT; TIME FOR PAYMENT If within twenty days after the date of mailing of a notice under subsection (e) of section eighty-two, subsection (f) of section eighty-three, or section eighty-eight, any stockholder to whom the corporation was required to give such notice shall demand in writing from the corporation taking such action, or in the case of a consolidation or merger from the resulting or surviving corporation, payment for his stock, the corporation upon which such demand is made shall pay to him the fair value of his stock within thirty days after the expiration of the period during which such demand may be made. III-1 (S) 90. DEMAND FOR DETERMINATION OF VALUE; BILL IN EQUITY; VENUE If during the period of thirty days provided for in section eighty-nine the corporation upon which such demand is made and any such objecting stockholder fail to agree as to the value of such stock, such corporation or any such stockholder may within four months after the expiration of such thirty-day period demand a determination of the value of the stock of all such objecting stockholders by a bill in equity filed in the superior court in the county where the corporation in which such objecting stockholder held stock had or has its principal office in the commonwealth. (S) 91. PARTIES TO SUIT TO DETERMINE VALUE; SERVICE If the bill is filed by the corporation, it shall name as parties respondent all stockholders who have demanded payment for their shares and with whom the corporation has not reached agreement as to the value thereof. If the bill is filed by a stockholder, he shall bring the bill in his own behalf and in behalf of all other stockholders who have demanded payment for their shares and with whom the corporation has not reached agreement as to the value thereof, and service of the bill shall be made upon the corporation by subpoena with a copy of the bill annexed. The corporation shall file with its answer a duly verified list of all such other stockholders, and such stockholders shall thereupon be deemed to have been added as parties to the bill. The corporation shall give notice in such form and returnable on such date as the court shall order to each stockholder party to the bill by registered or certified mail, addressed to the last known address of such stockholder as shown in the records of the corporation, and the court may order such additional notice by publication or otherwise as it deems advisable. Each stockholder who makes demand as provided in section eighty- nine shall be deemed to have consented to the provisions of this section relating to notice, and the giving of notice by the corporation to any such stockholder in compliance with the order of the court shall be a sufficient service of process on him. Failure to give notice to any stockholder making demand shall not invalidate the proceedings as to other stockholders to whom notice was properly given, and the court may at any time before the entry of a final decree make supplementary orders of notice. (S) 92. DECREE DETERMINING VALUE AND ORDERING PAYMENT; VALUATION DATE After hearing the court shall enter a decree determining the fair value of the stock of those stockholders who have become entitled to the valuation of and payment for their shares, and shall order the corporation to make payment of such value, together with interest, if any, as hereinafter provided, to the stockholders entitled thereto upon the transfer by them to the corporation of the certificates representing such stock if certificated or, if uncertificated, upon receipt of an instruction transferring such stock to the corporation. For this purpose, the value of the shares shall be determined as of the day preceding the date of the vote approving the proposed corporate action and shall be exclusive of any element of value arising from the expectation or accomplishment of the proposed corporate action. (S) 93. REFERENCE TO SPECIAL MASTER The court in its discretion may refer the bill or any question arising thereunder to a special master to hear the parties, make findings and report the same to the court, all in accordance with the usual practice in suits in equity in the superior court. (S) 94. NOTATION ON STOCK CERTIFICATES OF PENDENCY OF BILL On motion the court may order stockholder parties to the bill to submit their certificates of stock to the corporation for notation thereon of the pendency of the bill and may order the corporation to note such pendency in its records with respect to any uncertificated shares held by such stockholder parties, and may on motion dismiss the bill as to any stockholder who fails to comply with such order. III-2 (S) 95. COSTS; INTEREST The costs of the bill, including the reasonable compensation and expenses of any master appointed by the court, but exclusive of fees of counsel or of experts retained by any party, shall be determined by the court and taxed upon the parties to the bill, or any of them, in such manner as appears to be equitable, except that all costs of giving notice to stockholders as provided in this chapter shall be paid by the corporation. Interest shall be paid upon any award from the date of the vote approving the proposed corporate action, and the court may on application of any interested party determine the amount of interest to be paid in the case of any stockholder. (S) 96. DIVIDENDS AND VOTING RIGHTS AFTER DEMAND FOR PAYMENT Any stockholder who has demanded payment for his stock as provided in this chapter shall not thereafter be entitled to notice of any meeting of stockholders or to vote such stock for any purpose and shall not be entitled to the payment of dividends or other distribution on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the date of the vote approving the proposed corporate action) unless: (1) A bill shall not be filed within the time provided in section ninety; (2) A bill, if filed, shall be dismissed as to such stockholder; or (3) Such stockholder shall with the written approval of the corporation, or in the case of a consolidation or merger, the resulting or surviving corporation, deliver to it a written withdrawal of his objections to and an acceptance of such corporate action. Notwithstanding the provision of clauses (1) to (3), inclusive, said stockholder shall have only the rights of a stockholder who did not so demand payment for his stock as provided in this chapter. (S) 97. STATUS OF SHARES PAID FOR The shares of the corporation paid for by the corporation pursuant to the provisions of this chapter shall have the status of treasury stock, or in the case of a consolidation or merger the shares or the securities of the resulting or surviving corporation into which the shares of such objecting stockholder would have been converted had he not objected to such consolidation or merger shall have the status of treasury stock or securities. (S) 98. EXCLUSIVE REMEDY; EXCEPTION The enforcement by a stockholder of his right to receive payment for his shares in the manner provided in this chapter shall be an exclusive remedy except that this chapter shall not exclude the right of such stockholder to bring or maintain an appropriate proceeding to obtain relief on the ground that such corporate action will be or is illegal or fraudulent as to him. III-3 STATEMENT OF ADDITIONAL INFORMATION MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST MERRILL LYNCH MUNICIPAL BOND FUND, INC. P.O. BOX 9011 PRINCETON, NEW JERSEY 08543-9011 (609) 282-2800 This Statement of Additional Information is not a prospectus and should be read in conjunction with the Proxy Statement and Prospectus of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the "Trust") and Merrill Lynch Municipal Bond Fund, Inc. (the "Municipal Bond Fund") dated November 24, 1997 (the "Proxy Statement and Prospectus"), which has been filed with the Securities and Exchange Commission and can be obtained, without charge, by calling at 1-800-456-4587, ext. 123 or by writing to Municipal Bond Fund at the above address. This Statement of Additional Information has been incorporated by reference into the Proxy Statement and Prospectus. Further information about Limited Maturity Portfolio is contained in and incorporated by reference to the Municipal Bond Fund's Prospectus, dated October 7, 1997 and Municipal Bond Fund's Statement of Additional Information, dated October 7, 1997 which are incorporated by reference into this Statement of Additional Information. The Municipal Bond Fund's Statement of Additional Information accompanies this Statement of Additional Information. Further information about each of the State Funds is contained in and incorporated by reference to the Trust's Prospectus, dated November 27, 1996, and the Trust's Statement of Additional Information, dated November 27, 1996, which are incorporated by reference into this Statement of Additional Information. The Trust's Statement of Additional Information accompanies this Statement of Additional Information. The Commission maintains a Web site (http://www.sec.gov) that contains material incorporated by reference and other information regarding the Trust and the Municipal Bond Fund. THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS NOVEMBER 24, 1997 TABLE OF CONTENTS General Information...................................................... 2 Financial Statements..................................................... 2 Pro Forma Combined Schedule of Investments for the Municipal Bond Fund and the Trust as of July 31, 1997 (unaudited)........................... F-1 Pro Forma Combined Statement of Assets and Liabilities for the Municipal Bond Fund and the Trust as of July 31, 1997 (unaudited)................. F-19 Pro Forma Combined Statement of Operations for the Municipal Bond Fund and the Trust as of July 31, 1997 (unaudited)........................... F-23
GENERAL INFORMATION The stockholders of the Trust holding shares of Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund, Merrill Lynch Michigan Limited Maturity Municipal Bond Fund, Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund, Merrill Lynch New York Limited Maturity Municipal Bond Fund and Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund (collectively referred to herein as the "State Funds") are being asked to approve the acquisition of substantially all of the assets of the State Funds, and the assumption of substantially all of the liabilities of the State Funds by Limited Maturity Portfolio (the "Limited Maturity Portfolio"), a series of the Municipal Bond Fund in exchange solely for an equal aggregate value of shares of Limited Maturity Portfolio and the subsequent termination of the State Funds as series of the Trust (the "Reorganization"). The Municipal Bond Fund is an open-end management investment company organized as a Maryland corporation. A Special Meeting of Stockholders of the State Funds to consider the Reorganization will be held at 800 Scudders Mill Road, Plainsboro, New Jersey, on Monday, January 5, 1998, at 9:00 a.m., New York time. For detailed information about the Reorganization, stockholders of the State Funds should refer to the Proxy Statement and Prospectus. For further information about Limited Maturity Portfolio, State Fund stockholders should refer to Municipal Bond Fund's Statement of Additional Information, dated October 7, 1997, which accompanies this Statement of Additional Information and is incorporated by reference herein. For further information about the State Funds, stockholders should refer to the Statement of Additional Information of the Trust, dated November 27, 1996, which accompanies this Statement of Additional Information and is incorporated by reference herein. FINANCIAL STATEMENTS Pro forma financial statements reflecting consummation of the Reorganization are included herein. LIMITED MATURITY PORTFOLIO Audited financial statements and accompanying notes for the year ended June 30, 1997, and the independent auditors' report thereon, dated August 15, 1997, of Limited Maturity Portfolio are contained in the Municipal Bond Fund's Statement of Additional Information, dated October 7, 1997, which accompanies this Statement of Additional Information and is incorporated by reference herein. STATE FUNDS Audited financial statements and accompanying notes for the year ended July 31, 1997, and the independent auditor's report thereon, dated September 12, 1997, of the Trust (including statements for each State Fund) are contained in the Trust's Annual Report for the fiscal year ended July 31, 1997, which accompanies this Statement of Additional Information and is incorporated by reference herein. 2 PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST JULY 31, 1997 (UNAUDITED) SCHEDULE OF INVESTMENTS
NEW NEW LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY TOTAL --------- --------- ------------- --------- --------- --------- S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1a) (NOTE 1a) (NOTE 1a) (NOTE 1a) (NOTE 1a) (NOTE 1a) - ------------------------------------------------------------------------------------------------------------------------- ALABAMA- A1+ NR* $ 2,400 Birmingham, 0.5% Alabama, Medical Clinic Board Revenue Bonds (U.A.H.S.F.), VRDN, 5.50% due 12/01/2026 (b).. $ 2,400 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- ARIZONA- A-1 P1 100 Apache County, 0.6% Arizona, IDA, IDR (Tucson Electric Power- Springerville Project), VRDN, Series C, 3.75% due 12/15/2018 (b)............. -- $ 100 -- -- -- -- A1+ VMIG1# 100 Arizona Health Facilities Authority Revenue Bonds (Arizona Voluntary Hospital Federation), VRDN, Series B, 3.70% due 10/01/2015 (b)(f).......... -- 100 -- -- -- -- AAA Aaa 200 Arizona State Transportation Board, Excise Tax Revenue Bonds (Maricopa County Regional Area Roads), Series A, 5.75% due 7/01/2004 (c)............. -- 217 -- -- -- -- NR* Aaa 100 Arizona Water Infrastructure, Finance Authority Revenue Bonds (Water Quality Financial Assistance), Series A, 4.50% due 7/01/2003 (d)............. -- 101 -- -- -- -- AA- A1 200 Central Arizona Water Conservation District, Contract Revenue Bonds (Central Arizona Project), Series B, 6.50% due 5/01/2001 (a)... -- 220 -- -- -- -- NR* VMIG1# 120 Chandler, Arizona, IDA, IDR, Refunding (SMP II, LP), VRDN, 3.50% due 12/01/2015 (b).. -- 120 -- -- -- -- A1+ P1 100 Maricopa County, Arizona, Pollution Control Corporation, PCR, Refunding (Arizona Public Service Company), VRDN, Series B, 3.55% due 5/01/2029 (b)............. -- 100 -- -- -- -- AAA Aaa 480 Phoenix, Arizona, Airport Revenue Refunding Bonds, AMT, Series C, 5.70% due 7/01/2003 (d)... -- 512 -- -- -- -- PRO FORMA PENNSYLVANIA FOR LIMITED COMBINED MATURITY FUND TOTAL ------------ --------- S&P MOODY'S FACE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1a) (NOTE 1a) - ------------------------------------------------------------------------------------ ALABAMA- A1+ NR* $ 2,400 Birmingham, 0.5% Alabama, Medical Clinic Board Revenue Bonds (U.A.H.S.F.), VRDN, 5.50% due 12/01/2026 (b).. -- $ 2,400 - ------------------------------------------------------------------------------------ ARIZONA- A-1 P1 100 Apache County, 0.6% Arizona, IDA, IDR (Tucson Electric Power- Springerville Project), VRDN, Series C, 3.75% due 12/15/2018 (b)............. -- 100 A1+ VMIG1# 100 Arizona Health Facilities Authority Revenue Bonds (Arizona Voluntary Hospital Federation), VRDN, Series B, 3.70% due 10/01/2015 (b)(f).......... -- 100 AAA Aaa 200 Arizona State Transportation Board, Excise Tax Revenue Bonds (Maricopa County Regional Area Roads), Series A, 5.75% due 7/01/2004 (c)............. -- 217 NR* Aaa 100 Arizona Water Infrastructure, Finance Authority Revenue Bonds (Water Quality Financial Assistance), Series A, 4.50% due 7/01/2003 (d)............. -- 101 AA- A1 200 Central Arizona Water Conservation District, Contract Revenue Bonds (Central Arizona Project), Series B, 6.50% due 5/01/2001 (a)... -- 220 NR* VMIG1# 120 Chandler, Arizona, IDA, IDR, Refunding (SMP II, LP), VRDN, 3.50% due 12/01/2015 (b).. -- 120 A1+ P1 100 Maricopa County, Arizona, Pollution Control Corporation, PCR, Refunding (Arizona Public Service Company), VRDN, Series B, 3.55% due 5/01/2029 (b)............. -- 100 AAA Aaa 480 Phoenix, Arizona, Airport Revenue Refunding Bonds, AMT, Series C, 5.70% due 7/01/2003 (d)... -- 512
F-1 PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED) JULY 31, 1997 (UNAUDITED)
NEW NEW LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY TOTAL --------- --------- ------------- --------- --------- --------- S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1a) (NOTE 1a) (NOTE 1a) (NOTE 1a) (NOTE 1a) (NOTE 1a) - ------------------------------------------------------------------------------------------------------------------------- ARIZONA AA- Aa $ 200 Phoenix, (CONCLUDED) Arizona, Civic Improvement Corporation, Water System Revenue Bonds, Junior Lien, 5% due 7/01/2006... -- $ 208 -- -- -- -- AA+ Aa1 250 Phoenix, Arizona, Refunding, UT, 5.70% due 7/01/1999....... -- 258 -- -- -- -- A+ Aa 200 Pima County, Arizona, Refunding, Series A, 5.60% due 7/01/1999... -- 206 -- -- -- -- AAA Aaa 200 Pima County, Arizona, Sewer Revenue Bonds, 6.20% due 7/01/2002 (a) (c)............. -- 220 -- -- -- -- A1+ P1 100 Pinal County, Arizona, IDA, PCR, (Magma Copper/Newmont Mining Corporation), VRDN, 3.70% due 12/01/2009 (b).. -- 100 -- -- -- -- A1+ NR* 100 Tempe, Arizona, IDA, M/F Revenue Bonds (Elliots Crossing), VRDN, 3.754% due 10/01/2008 (b).. -- 100 -- -- -- -- A+ A1 150 Tucson, Arizona, Street and Highway User Revenue Refunding Bonds, 5.90% 7/01/2003....... -- 163 -- -- -- -- AAA Aaa 200 Yuma County, Arizona, Jail District Revenue Bonds, 4.30% due 7/01/1999 (c)... -- 201 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- ARKANSAS- NR* Aa 460 Arkansas State 0.1% Student Loan Authority Revenue Bonds, AMT, Senior Series A-1, 5.50% due 12/01/1998...... $ 469 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- CALIFORNIA- SP1+ MIG1# 5,000 Los Angeles 5.5% County, California, Local Educational Agencies, COP, TRAN, Series B, 4.50% due 9/30/1998 (e)... 5,032 -- -- -- -- -- SP1+ MIG1# 7,500 Los Angeles, California, Unified School District, TRAN, Series B, 4.50% due 10/01/1998.. 7,552 -- -- -- -- -- SP1+ MIG1# 7,500 Sacramento, California, GO, UT, TRAN, 4.50% due 9/30/1998... 7,554 -- -- -- -- -- SP1+ NR* 5,000 Santa Barbara County, California, TRAN, Series A, 4.50% due 10/01/1998...... 5,034 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- PRO FORMA PENNSYLVANIA FOR LIMITED COMBINED MATURITY FUND TOTAL ------------ --------- S&P MOODY'S FACE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1a) (NOTE 1a) - ---------------------------------------------------------------------------------------------------- ARIZONA AA- Aa $ 200 Phoenix, (CONCLUDED) Arizona, Civic Improvement Corporation, Water System Revenue Bonds, Junior Lien, 5% due 7/01/2006... -- $ 208 AA+ Aa1 250 Phoenix, Arizona, Refunding, UT, 5.70% due 7/01/1999....... -- 258 A+ Aa 200 Pima County, Arizona, Refunding, Series A, 5.60% due 7/01/1999... -- 206 AAA Aaa 200 Pima County, Arizona, Sewer Revenue Bonds, 6.20% due 7/01/2002 (a) (c)............. -- 220 A1+ P1 100 Pinal County, Arizona, IDA, PCR, (Magma Copper/Newmont Mining Corporation), VRDN, 3.70% due 12/01/2009 (b).. -- 100 A1+ NR* 100 Tempe, Arizona, IDA, M/F Revenue Bonds (Elliots Crossing), VRDN, 3.754% due 10/01/2008 (b).. -- 100 A+ A1 150 Tucson, Arizona, Street and Highway User Revenue Refunding Bonds, 5.90% 7/01/2003....... -- 163 AAA Aaa 200 Yuma County, Arizona, Jail District Revenue Bonds, 4.30% due 7/01/1999 (c)... -- 201 - ---------------------------------------------------------------------------------------------------- ARKANSAS- NR* Aa 460 Arkansas State 0.1% Student Loan Authority Revenue Bonds, AMT, Senior Series A-1, 5.50% due 12/01/1998...... -- 469 - ---------------------------------------------------------------------------------------------------- CALIFORNIA- SP1+ MIG1# 5,000 Los Angeles 5.5% County, California, Local Educational Agencies, COP, TRAN, Series B, 4.50% due 9/30/1998 (e)... -- 5,032 SP1+ MIG1# 7,500 Los Angeles, California, Unified School District, TRAN, Series B, 4.50% due 10/01/1998.. -- 7,552 SP1+ MIG1# 7,500 Sacramento, California, GO, UT, TRAN, 4.50% due 9/30/1998... -- 7,554 SP1+ NR* 5,000 Santa Barbara County, California, TRAN, Series A, 4.50% due 10/01/1998...... -- 5,034 - ---------------------------------------------------------------------------------------------------
F-2 PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED) JULY 31, 1997 (UNAUDITED)
NEW NEW LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY TOTAL --------- --------- ------------- --------- --------- --------- S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------- CONNECTICUT- AAA Aaa $ 2,160 Bridgeport, 2.5% Connecticut, Refunding, GO, UT, Series A, 4.40% due 9/01/1998 (c)... $ 2,172 -- -- -- -- -- AAA Aaa 8,900 Connecticut State Special Assessment Revenue Refunding Bonds (Unemployment Compensation Advance Fund), Series A, 5.50% due 5/15/2001 (c)... 9,329 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- DISTRICT OF A1+ VMIG1# 10,000 District of COLUMBIA-2.2% Columbia, General Fund Recovery Bonds, VRDN, Series B- 2, 5.25% due 6/01/2003 (b)... 10,000 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- FLORIDA-1.2% AAA Aaa 4,000 Florida School Boards Association Inc., Lease Revenue Bonds (Orange County School Board Project) 6.80% due 7/01/1998 (c)............. 4,109 -- -- -- -- -- A1+ VMIG1# 1,500 Hillsborough County, Florida, IDA, PCR, Refunding (Tampa Electric Company Project), VRDN, 4% due 5/15/2018 (b)............. 1,500 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- GEORGIA-2.7% Burke County, Georgia, Development Authority, PCR (Plant Vogtle Project): A-1 VMIG1# 1,600 (Georgia Power Company), VRDN, 2nd Series, 4.30% due 8/12/1997 (b).. 1,600 -- -- -- -- -- A NR* 6,410 (Oglethorpe Power Company), Series B, 3.95% due 1/01/1999... 6,409 -- -- -- -- -- AAA Aaa 4,000 Georgia Municipal Electric Authority, General Power Revenue Refunding Bonds, Series D, 6% due 1/01/2000 (c)... 4,178 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- HAWAII-1.9% AAA Aaa 3,200 Hawaii State, GO, Refunding, Series CO, 5% due 3/01/2001 (f)............. 3,395 -- -- -- -- -- A+ Aa3 5,250 Hawaii State, GO, UT, Series CH, 4.75% due 11/01/1999...... 5,333 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- ILLINOIS-5.8% AA- NR* 10,000 Chicago, Illinois, Board of Education, COP (School Reform Equipment Acquisition), 4.60% due 12/01/1999...... 10,085 -- -- -- -- -- PRO FORMA PENNSYLVANIA FOR LIMITED COMBINED MATURITY FUND TOTAL ------------ --------- S&P MOODY'S FACE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) - ----------------------------------------------------------------------------------------------------- CONNECTICUT- AAA Aaa $ 2,160 Bridgeport, 2.5% Connecticut, Refunding, GO, UT, Series A, 4.40% due 9/01/1998 (c)... -- $ 2,172 AAA Aaa 8,900 Connecticut State Special Assessment Revenue Refunding Bonds (Unemployment Compensation Advance Fund), Series A, 5.50% due 5/15/2001 (c)... -- 9,329 - ----------------------------------------------------------------------------------------------------- DISTRICT OF A1+ VMIG1# 10,000 District of COLUMBIA-2.2% Columbia, General Fund Recovery Bonds, VRDN, Series B- 2, 5.25% due 6/01/2003 (b)... -- 10,000 - ----------------------------------------------------------------------------------------------------- FLORIDA-1.2% AAA Aaa 4,000 Florida School Boards Association Inc., Lease Revenue Bonds (Orange County School Board Project) 6.80% due 7/01/1998 (c)............. -- 4,109 A1+ VMIG1# 1,500 Hillsborough County, Florida, IDA, PCR, Refunding (Tampa Electric Company Project), VRDN, 4% due 5/15/2018 (b)............. -- 1,500 - ----------------------------------------------------------------------------------------------------- GEORGIA-2.7% Burke County, Georgia, Development Authority, PCR (Plant Vogtle Project): A-1 VMIG1# 1,600 (Georgia Power Company), VRDN, 2nd Series, 4.30% due 8/12/1997 (b).. -- 1,600 A NR* 6,410 (Oglethorpe Power Company), Series B, 3.95% due 1/01/1999... -- 6,409 AAA Aaa 4,000 Georgia Municipal Electric Authority, General Power Revenue Refunding Bonds, Series D, 6% due 1/01/2000 (c)... -- 4,178 - ---------------------------------------------------------------------------------------------------- HAWAII-1.9% AAA Aaa 3,200 Hawaii State, GO, Refunding, Series CO, 5% due 3/01/2001 (f)............. -- 3,395 A+ Aa3 5,250 Hawaii State, GO, UT, Series CH, 4.75% due 11/01/1999...... -- 5,333 - ---------------------------------------------------------------------------------------------------- ILLINOIS-5.8% AA- NR* 10,000 Chicago, Illinois, Board of Education, COP (School Reform Equipment Acquisition), 4.60% due 12/01/1999...... -- 10,085
F-3 PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED) JULY 31, 1997 (UNAUDITED)
NEW NEW LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY TOTAL --------- --------- ------------- --------- --------- --------- S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) - -------------------------------------------------------------------------------------------------------------------------- ILLINOIS AA- Baa1 $ 5,000 Chicago, (CONCLUDED) Illinois, School Financing Authority, 7.25% due 6/01/1998... $ 5,106 -- -- -- -- -- AAA Aaa 3,000 Cook County, Illinois, High School District No. 205, Revenue Refunding Bonds (Thorton Township), UT, 5.60% due 6/01/1998 (f)(g).......... 3,046 -- -- -- -- -- Illinois State, Refunding, UT: AA Aa3 4,600 3.90% due 12/01/1998...... 4,597 -- -- -- -- -- AAA Aaa 3,500 5.125% due 12/01/1999 (f).. 3,588 -- -- -- -- -- - -------------------------------------------------------------------------------------------------------------------------- KENTUCKY- Kentucky State 2.0% Property and Buildings Commission, Revenue Refunding Bonds: A+ A 5,000 (Project No. 55), 4.10% due 9/01/1998....... 5,011 -- -- -- -- -- A+ A 4,000 (Project No. 56), 5% due 11/01/1998...... 4,051 -- -- -- -- -- - -------------------------------------------------------------------------------------------------------------------------- LOUISIANA- A1+ VMIG1# 5,000 Louisiana State 5.4% Recovery District Sales Tax Revenue Bonds, 4.25% due 7/01/1998 (d)(g).......... 5,024 -- -- -- -- -- AAA Aaa 19,230 Louisiana State Refunding, Series A, 5.50% due 8/01/1998 (f)............. 19,542 -- -- -- -- -- - -------------------------------------------------------------------------------------------------------------------------- MASSACHUSETTS- NR* A1 285 Boston, 3.3% Massachusetts, Economic Development and Industrial Corporation, Public Parking Facility, Series 1990, 5% due 7/01/2015....... -- -- $ 290 -- -- -- AAA Aaa 250 Boston Massachusetts, GO, UT, Series A 5% due 11/01/2004 (f).. -- -- 259 -- -- -- AAA Aaa 300 Chelsea, Massachusetts, School Project Loan Act of 1948, UT, 6% due 6/15/2002 (c)... -- -- 323 -- -- -- AAA Aaa 215 Fall River, Massachusetts, GO, 6.30% due 6/01/1988 (d)... -- -- 219 -- -- -- NR* Aa3 225 Framingham, Massachusetts, GO, 4.50% due 7/15/2005....... -- -- 227 -- -- -- AAA Aaa 200 Lynn, Massachusetts, Water and Sewer Commission, Refunding, 4.95% due 12/01/2002 (f)............. -- -- 206 -- -- -- PRO FORMA PENNSYLVANIA FOR LIMITED COMBINED MATURITY FUND TOTAL ------------ --------- S&P MOODY'S FACE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) - ------------------------------------------------------------------------------------------------------ ILLINOIS AA- Baa1 $ 5,000 Chicago, (CONCLUDED) Illinois, School Financing Authority, 7.25% due 6/01/1998... -- $ 5,106 AAA Aaa 3,000 Cook County, Illinois, High School District No. 205, Revenue Refunding Bonds (Thorton Township), UT, 5.60% due 6/01/1998 (f)(g).......... -- 3,046 Illinois State, Refunding, UT: AA Aa3 4,600 3.90% due 12/01/1998...... -- 4,597 AAA Aaa 3,500 5.125% due 12/01/1999 (f).. -- 3,588 - ------------------------------------------------------------------------------------------------------ KENTUCKY- Kentucky State 2.0% Property and Buildings Commission, Revenue Refunding Bonds: A+ A 5,000 (Project No. 55), 4.10% due 9/01/1998....... -- 5,011 A+ A 4,000 (Project No. 56), 5% due 11/01/1998...... -- 4,051 - ------------------------------------------------------------------------------------------------------ LOUISIANA- A1+ VMIG1# 5,000 Louisiana State 5.4% Recovery District Sales Tax Revenue Bonds, 4.25% due 7/01/1998 (d)(g).......... -- 5,024 AAA Aaa 19,230 Louisiana State Refunding, Series A, 5.50% due 8/01/1998 (f)............. -- 19,542 - ------------------------------------------------------------------------------------------------------ MASSACHUSETTS- NR* A1 285 Boston, 3.3% Massachusetts, Economic Development and Industrial Corporation, Public Parking Facility, Series 1990, 5% due 7/01/2015....... -- 290 AAA Aaa 250 Boston Massachusetts, GO, UT, Series A 5% due 11/01/2004 (f).. -- 259 AAA Aaa 300 Chelsea, Massachusetts, School Project Loan Act of 1948, UT, 6% due 6/15/2002 (c)... -- 323 AAA Aaa 215 Fall River, Massachusetts, GO, 6.30% due 6/01/1988 (d)... -- 219 NR* Aa3 225 Framingham, Massachusetts, GO, 4.50% due 7/15/2005....... -- 227 AAA Aaa 200 Lynn, Massachusetts, Water and Sewer Commission, Refunding, 4.95% due 12/01/2002 (f)............. -- 206
F-4 PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED) JULY 31, 1997 (UNAUDITED)
NEW NEW LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY TOTAL --------- --------- ------------- --------- --------- --------- S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------- MASSACHUSETTS A+ A1 $ 100 Massachusetts (CONTINUED) Bay Transportation Authority, Massachusetts General Transportation System, Series A, 4.90% due 3/01/2004....... -- -- $ 102 -- -- -- AAA Aaa 250 Massachusetts Education Loan Authority, Education Loan Revenue Refunding Bonds, AMT, Issue E, Series B, 5.50% due 7/01/2001 (c)............. -- -- 261 -- -- -- A+ A1 750 Massachusetts State GO, Refunding Series B, 6.25% due 8/01/2001....... -- -- 806 -- -- -- Massachusetts State Health and Educational Facilities Authority Revenue Bonds: A1+ VMIG1# 200 (Capital Asset Program), VRDN, Series B, 3.45% due 7/01/2005 (b)(d).......... -- -- 200 -- -- -- A1+ VMIG1# 100 (Capital Asset Program), VRDN, Series C, 3.50% due 7/01/2005 (b)(d)......... -- -- 100 -- -- -- AAA Aaa 200 Refunding (Baystate Medical Center), Series D, 4.60% due 7/01/2002 (f)............. -- -- 202 -- -- -- NR* MIG1# 100 Massachusetts State Industrial Finance Agency, Health Care Facility Revenue Bonds (Beverly Enterprises- DEDHM), VRDN, 3.65% due 4/01/2009 (b)... -- -- 100 -- -- -- AAA Aaa 200 Massachusetts State Industrial Finance Agency, Revenue Refunding Bonds (Worcester Polytechnic), Series II, 4.50% due 9/01/2002 (d)............. -- -- 202 -- -- -- AA A1 300 Massachusetts State Special Obligation Revenue Bonds (Highway Improvement Loan), Series A, 5.90% due 6/01/2001....... -- -- 318 -- -- -- AAA Aaa 250 Massachusetts State Water Resource Authority, Series A, 6.75% due 7/15/2002 (a)... -- -- 282 -- -- -- NR* Aaa 150 Nantucket, Massachusetts, GO, 5.75% due 7/15/2005 (d)... -- -- 163 -- -- -- PRO FORMA PENNSYLVANIA FOR LIMITED COMBINED MATURITY FUND TOTAL ------------ --------- S&P MOODY'S FACE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) - --------------------------------------------------------------------------------------------------- MASSACHUSETTS A+ A1 $ 100 Massachusetts (CONTINUED) Bay Transportation Authority, Massachusetts General Transportation System, Series A, 4.90% due 3/01/2004....... -- $ 102 AAA Aaa 250 Massachusetts Education Loan Authority, Education Loan Revenue Refunding Bonds, AMT, Issue E, Series B, 5.50% due 7/01/2001 (c)............. -- 261 A+ A1 750 Massachusetts State GO, Refunding Series B, 6.25% due 8/01/2001....... -- 806 Massachusetts State Health and Educational Facilities Authority Revenue Bonds: A1+ VMIG1# 200 (Capital Asset Program), VRDN, Series B, 3.45% due 7/01/2005 (b)(d).......... -- 200 A1+ VMIG1# 100 (Capital Asset Program), VRDN, Series C, 3.50% due 7/01/2005 (b)(d)......... -- 100 AAA Aaa 200 Refunding (Baystate Medical Center), Series D, 4.60% due 7/01/2002 (f)............. -- 202 NR* MIG1# 100 Massachusetts State Industrial Finance Agency, Health Care Facility Revenue Bonds (Beverly Enterprises- DEDHM), VRDN, 3.65% due 4/01/2009 (b)... -- 100 AAA Aaa 200 Massachusetts State Industrial Finance Agency, Revenue Refunding Bonds (Worcester Polytechnic), Series II, 4.50% due 9/01/2002 (d)............. -- 202 AA A1 300 Massachusetts State Special Obligation Revenue Bonds (Highway Improvement Loan), Series A, 5.90% due 6/01/2001....... -- 318 AAA Aaa 250 Massachusetts State Water Resource Authority, Series A, 6.75% due 7/15/2002 (a)... -- 282 NR* Aaa 150 Nantucket, Massachusetts, GO, 5.75% due 7/15/2005 (d)... -- 163
F-5 PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED) JULY 31, 1997 (UNAUDITED)
NEW NEW LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY TOTAL --------- --------- ------------- --------- --------- --------- S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) - --------------------------------------------------------------------------------------------------------------------------- MASSACHUSETTS NR* A1 $ 500 New England (CONCLUDED) Education Loan Marketing Corporation, Massachusetts Student Loan Revenue Bonds, AMT, Sub-Issue F, 6.60% due 9/01/2002....... -- -- $ 536 -- -- -- A- A1 10,160 New England Education Loan Marketing Corporation Refunding Bonds Massachusetts Student Loan), Series D, 4.75% due 7/01/1998... $ 10,226 -- -- -- -- -- AA Aa1 100 Peabody, Massachusetts, GO, Series A, 4.50% due 8/01/2000....... -- -- 101 -- -- -- - --------------------------------------------------------------------------------------------------------------------------- MICHIGAN- AAA Aaa 200 Anchor Bay, 4.1% Michigan, School District, UT, 6.30% due 5/01/2004 (d)... -- -- -- $ 222 -- -- AA Aa2 110 Ann Arbor Michigan, School District, Public Schools, Refunding, UT, 4.75% due 5/01/2000... -- -- -- 112 -- -- AAA Aaa 105 Chelsea, Michigan, School District, UT, 6.75% due 5/01/2002 (f)... -- -- -- 116 -- -- AAA Aaa 150 Chippewa Valley, Michigan, Schools, Refunding, UT, 4.90% due 5/01/2004 (f)... -- -- -- 154 -- -- AAA Aaa 250 Dearborn, Michigan, Economic Development Corporation, Hospital Revenue Bonds (Oakwood Obligated Group), Series A, 6.95% due 8/15/2001 (a)(d).. -- -- -- 280 -- -- Detroit, Michigan, Distributable State Aid (c): AAA Aaa 8,000 7.20% due 5/01/2009 (a)... 8,583 -- -- -- -- -- AAA Aaa 200 Refunding, UT, 5.70% due 5/01/2001....... -- -- -- 210 -- -- AAA Aaa 250 Detroit, Michigan, Water Supply System, Revenue Refunding Bonds, 6.20% due 7/01/2004 (f)............. -- -- -- 274 -- -- AAA Aaa 200 Eastern Michigan University, General Revenue Refunding Bonds, 5.40% due 6/01/1998 (c)... -- -- -- 203 -- -- PRO FORMA PENNSYLVANIA FOR LIMITED COMBINED MATURITY FUND TOTAL ------------ --------- S&P MOODY'S FACE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) - ------------------------------------------------------------------------------------------------------- MASSACHUSETTS NR* A1 $ 500 New England (CONCLUDED) Education Loan Marketing Corporation, Massachusetts Student Loan Revenue Bonds, AMT, Sub-Issue F, 6.60% due 9/01/2002....... -- $ 536 A- A1 10,160 New England Education Loan Marketing Corporation Refunding Bonds Massachusetts Student Loan), Series D, 4.75% due 7/01/1998... -- 10,226 AA Aa1 100 Peabody, Massachusetts, GO, Series A, 4.50% due 8/01/2000....... -- 101 - ------------------------------------------------------------------------------------------------------- MICHIGAN- AAA Aaa 200 Anchor Bay, 4.1% Michigan, School District, UT, 6.30% due 5/01/2004 (d)... -- 222 AA Aa2 110 Ann Arbor Michigan, School District, Public Schools, Refunding, UT, 4.75% due 5/01/2000... -- 112 AAA Aaa 105 Chelsea, Michigan, School District, UT, 6.75% due 5/01/2002 (f)... -- 116 AAA Aaa 150 Chippewa Valley, Michigan, Schools, Refunding, UT, 4.90% due 5/01/2004 (f)... -- 154 AAA Aaa 250 Dearborn, Michigan, Economic Development Corporation, Hospital Revenue Bonds (Oakwood Obligated Group), Series A, 6.95% due 8/15/2001 (a)(d).. -- 280 Detroit, Michigan, Distributable State Aid (c): AAA Aaa 8,000 7.20% due 5/01/2009 (a)... -- 8,583 AAA Aaa 200 Refunding, UT, 5.70% due 5/01/2001....... -- 210 AAA Aaa 250 Detroit, Michigan, Water Supply System, Revenue Refunding Bonds, 6.20% due 7/01/2004 (f)............. -- 274 AAA Aaa 200 Eastern Michigan University, General Revenue Refunding Bonds, 5.40% due 6/01/1998 (c)... -- 203
F-6 PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED) JULY 31, 1997 (UNAUDITED)
NEW NEW LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY TOTAL --------- --------- ------------- --------- --------- --------- S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------ MICHIGAN AAA Aaa $ 200 Gull Lake, (CONCLUDED) Michigan, Community School District, GO, UT, 6.80% due 5/01/2001 (a)(f).......... -- -- -- $ 222 -- -- Michigan Municipal Bond Authority Revenue Bonds: AAA Aaa 200 (Local Government Loan Program), Series C, 5.50% due 5/01/2003 (d)............. -- -- -- 212 -- -- AA Aa2 450 Refunding (Local Government- Qualified School), Series A, 6% due 5/01/2001....... -- -- -- 478 -- -- AA+ Aa1 200 (State Revolving Fund), 7% due 10/01/2004 (g)............. -- -- -- 231 -- -- Michigan State Building Authority, Revenue Refunding Bonds, Series I: AA- A1 6,000 5.80% due 10/01/1998...... $ 6,128 -- -- -- -- -- AA- A1 200 6.40% due 10/01/2004...... -- -- -- 218 -- -- AA- A1 200 Michigan State Comprehensive Transportation, Revenue Refunding Bonds, Series B, 5.625% due 5/15/2003... -- -- -- 213 -- -- NR* Aaa 100 Michigan State Hospital Finance Authority Revenue Bonds (McLaren Obligated Group), Series A, 7.50% due 9/15/2001 (a)... -- -- -- 114 -- -- AA Aa2 200 Michigan State Recreation Program, GO, 6% due 11/01/2004.. -- -- -- 219 -- -- AAA Aaa 160 Michigan State, Underground Storage Tank Financial Assurance Authority, Revenue Refunding Bonds, Series I, 6% due 5/01/2004 (c)... -- -- -- 175 -- -- AAA Aaa 235 Royal Oak, Michigan, Refunding, UT, 4% due 10/01/1997 (c).. -- -- -- 235 -- -- - ------------------------------------------------------------------------------------------------------------------------ MINNESOTA- AAA Aaa 2,385 Metropolitan 1.2% Council, Minnesota (St. Paul Metropolitan Area Transit), UT, Series C, 4.75% due 2/01/2000....... 2,427 -- -- -- -- -- AAA Aaa 2,965 Minnesota State, HFA (Rental Housing), Refunding Bonds, Series D, 4.50% due 8/01/1999 (d)............. 2,991 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------ PRO FORMA PENNSYLVANIA FOR LIMITED COMBINED MATURITY FUND TOTAL ------------ --------- S&P MOODY'S FACE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) - --------------------------------------------------------------------------------------------------- MICHIGAN AAA Aaa $ 200 Gull Lake, (CONCLUDED) Michigan, Community School District, GO, UT, 6.80% due 5/01/2001 (a)(f).......... -- $ 222 Michigan Municipal Bond Authority Revenue Bonds: AAA Aaa 200 (Local Government Loan Program), Series C, 5.50% due 5/01/2003 (d)............. -- 212 AA Aa2 450 Refunding (Local Government- Qualified School), Series A, 6% due 5/01/2001....... -- 478 AA+ Aa1 200 (State Revolving Fund), 7% due 10/01/2004 (g)............. -- 231 Michigan State Building Authority, Revenue Refunding Bonds, Series I: AA- A1 6,000 5.80% due 10/01/1998...... -- 6,128 AA- A1 200 6.40% due 10/01/2004...... -- 218 AA- A1 200 Michigan State Comprehensive Transportation, Revenue Refunding Bonds, Series B, 5.625% due 5/15/2003... -- 213 NR* Aaa 100 Michigan State Hospital Finance Authority Revenue Bonds (McLaren Obligated Group), Series A, 7.50% due 9/15/2001 (a)... -- 114 AA Aa2 200 Michigan State Recreation Program, GO, 6% due 11/01/2004.. -- 219 AAA Aaa 160 Michigan State, Underground Storage Tank Financial Assurance Authority, Revenue Refunding Bonds, Series I, 6% due 5/01/2004 (c)... -- 175 AAA Aaa 235 Royal Oak, Michigan, Refunding, UT, 4% due 10/01/1997 (c).. -- 235 - --------------------------------------------------------------------------------------------------- MINNESOTA- AAA Aaa 2,385 Metropolitan 1.2% Council, Minnesota (St. Paul Metropolitan Area Transit), UT, Series C, 4.75% due 2/01/2000....... -- 2,427 AAA Aaa 2,965 Minnesota State, HFA (Rental Housing), Refunding Bonds, Series D, 4.50% due 8/01/1999 (d)............. -- 2,991 - ---------------------------------------------------------------------------------------------------
F-7 PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED) JULY 31, 1997 (UNAUDITED)
NEW NEW LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY TOTAL --------- --------- ------------- --------- --------- --------- S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------- MISSISSIPPI- NR* Aaa $10,000 Mississippi 2.2% Higher Education Assistance Corporation, Student Loan Revenue Bonds, AMT, Series B, 4.80% due 9/01/1998....... $ 10,076 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- NEBRASKA- A+ A1 6,250 Nebraska Public 1.4% Power District Revenue Bonds (Consumer Public Power District), 4.90% due 7/01/1998....... 6,309 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- NEW JERSEY- NR* Aaa 300 Bergen County, 4.4% New Jersey, General Improvement Bonds, UT, 5.20% due 10/01/1999.. -- -- -- -- $ 308 -- NR* NR* 400 East Orange, New Jersey, BAN (Water and Sewer), GO, UT, 4.75% due 8/28/1997....... -- -- -- -- 400 -- AAA Aaa 600 Elizabeth, New Jersey, General Improvement and Sewer Utility, Refunding, GO, UT, 6% due 8/15/2004 (c)... -- -- -- -- 659 -- SP1+ VMIG1# 300 Mercer County, New Jersey, Improvement Authority Revenue Bonds, VRDN, 3.35% due 11/01/1998 (b).. -- -- -- -- 300 -- AA+ Aaa 400 Monmouth County, New Jersey, General Improvement Bonds, GO, UT, 6.625% due 8/01/2000....... -- -- -- -- 419 -- AAA Aaa 300 Morris County, New Jersey, General Improvement Bonds, GO, 4.625% due 8/15/2003....... -- -- -- -- 307 -- NR* NR* 195 New Brunswick, New Jersey, Temporary Notes, UT, 4% due 12/09/1997...... -- -- -- -- 195 -- AAA Aaa 1,000 New Jersey EDA, Market Transition Facility Revenue Bonds, Senior Lien, Series A, 7% due 7/01/2004 (d)............. -- -- -- -- 1,148 -- A1+ VMIG1# 300 New Jersey EDA, Natural Gas Facilities Revenue Bonds (NUI Corporation Project), VRDN, AMT, Series A, 3.30% due 6/01/2026 (b)(c).......... -- -- -- -- 300 -- PRO FORMA PENNSYLVANIA FOR LIMITED COMBINED MATURITY FUND TOTAL ------------ --------- S&P MOODY'S FACE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) - --------------------------------------------------------------------------------------------------- MISSISSIPPI- NR* Aaa $10,000 Mississippi 2.2% Higher Education Assistance Corporation, Student Loan Revenue Bonds, AMT, Series B, 4.80% due 9/01/1998....... -- $10,076 - --------------------------------------------------------------------------------------------------- NEBRASKA- A+ A1 6,250 Nebraska Public 1.4% Power District Revenue Bonds (Consumer Public Power District), 4.90% due 7/01/1998....... -- 6,309 - --------------------------------------------------------------------------------------------------- NEW JERSEY- NR* Aaa 300 Bergen County, 4.4% New Jersey, General Improvement Bonds, UT, 5.20% due 10/01/1999.. -- 308 NR* NR* 400 East Orange, New Jersey, BAN (Water and Sewer), GO, UT, 4.75% due 8/28/1997....... -- 400 AAA Aaa 600 Elizabeth, New Jersey, General Improvement and Sewer Utility, Refunding, GO, UT, 6% due 8/15/2004 (c)... -- 659 SP1+ VMIG1# 300 Mercer County, New Jersey, Improvement Authority Revenue Bonds, VRDN, 3.35% due 11/01/1998 (b).. -- 300 AA+ Aaa 400 Monmouth County, New Jersey, General Improvement Bonds, GO, UT, 6.625% due 8/01/2000....... -- 419 AAA Aaa 300 Morris County, New Jersey, General Improvement Bonds, GO, 4.625% due 8/15/2003....... -- 307 NR* NR* 195 New Brunswick, New Jersey, Temporary Notes, UT, 4% due 12/09/1997...... -- 195 AAA Aaa 1,000 New Jersey EDA, Market Transition Facility Revenue Bonds, Senior Lien, Series A, 7% due 7/01/2004 (d)............. -- 1,148 A1+ VMIG1# 300 New Jersey EDA, Natural Gas Facilities Revenue Bonds (NUI Corporation Project), VRDN, AMT, Series A, 3.30% due 6/01/2026 (b)(c).......... -- 300
F-8 PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED) JULY 31, 1997 (UNAUDITED)
NEW NEW LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY TOTAL --------- --------- ------------- --------- --------- --------- S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) - ---------------------------------------------------------------------------------------------------------------------------- NEW JERSEY NR* NR* $ 3,000 New Jersey, EDA, (CONTINUED) Economic Growth Revenue Bonds (Greater Mercer County), VRDN, Series C, 4.25% due 11/01/2011 (b).. $ 3,000 -- -- -- -- -- A1+ Aaa 200 New Jersey EDA, Water Facilities Revenue Refunding Bonds (United Water of New Jersey, Inc. Project), VRDN, AMT, Series A, 3% due 11/01/2026 (b)(c).. -- -- -- -- $ 200 -- A1+ VMIG1# 200 New Jersey Sports and Exposition Authority Revenue Bonds (State Contract), VRDN, Series C, 3.45% due 9/01/2024 (b)(d).......... -- -- -- -- 200 -- AAA Aaa 5,715 New Jersey State Educational Facilities Authority Revenue Bonds (Higher Educational Facilities Trust Fund), Series A, 5.125% due 9/01/1999 (c)... 5,844 -- -- -- -- -- AAA Aaa 300 New Jersey State Educational Facilities Authority Revenue Bonds (Princeton University), Series E, 4.05% due 7/01/2000... -- -- -- -- 301 -- AA+ Aa1 4,250 New Jersey State, Refunding, UT, Series O, 5.10% due 2/15/2000... 4,361 -- -- -- -- -- NR* Aaa 200 New Jersey State Transportation Trust Fund Authority (Transportation System), Series A, 5.40% due 12/15/2002 (g).. -- -- -- -- 212 -- AAA VMIG1# 300 New Jersey State Turnpike Authority, Turnpike Revenue Refunding Bonds, VRDN, Series D, 3.30% due 1/01/2018 (b)(f).......... -- -- -- -- 300 -- NR* Aa2 400 Ocean County, New Jersey, Utilities Authority, Wastewater Revenue Bonds, Series A, 6.125% due 1/01/2003... -- -- -- -- 436 -- A1+ VMIG1# 300 Port Authority of New York and New Jersey, Special Obligation Revenue Bonds (Versatile Structure Obligation), VRDN, Series 3, 3.55% due 6/01/2020 (b)... -- -- -- -- 300 -- PRO FORMA PENNSYLVANIA FOR LIMITED COMBINED MATURITY FUND TOTAL ------------ --------- S&P MOODY'S FACE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) - --------------------------------------------------------------------------------------------------------- NEW JERSEY NR* NR* $ 3,000 New Jersey, EDA, (CONTINUED) Economic Growth Revenue Bonds (Greater Mercer County), VRDN, Series C, 4.25% due 11/01/2011 (b).. -- $ 3,000 A1+ Aaa 200 New Jersey EDA, Water Facilities Revenue Refunding Bonds (United Water of New Jersey, Inc. Project), VRDN, AMT, Series A, 3% due 11/01/2026 (b)(c).. -- 200 A1+ VMIG1# 200 New Jersey Sports and Exposition Authority Revenue Bonds (State Contract), VRDN, Series C, 3.45% due 9/01/2024 (b)(d).......... -- 200 AAA Aaa 5,715 New Jersey State Educational Facilities Authority Revenue Bonds (Higher Educational Facilities Trust Fund), Series A, 5.125% due 9/01/1999 (c)... -- 5,844 AAA Aaa 300 New Jersey State Educational Facilities Authority Revenue Bonds (Princeton University), Series E, 4.05% due 7/01/2000... -- 301 AA+ Aa1 4,250 New Jersey State, Refunding, UT, Series O, 5.10% due 2/15/2000... -- 4,361 NR* Aaa 200 New Jersey State Transportation Trust Fund Authority (Transportation System), Series A, 5.40% due 12/15/2002 (g).. -- 212 AAA VMIG1# 300 New Jersey State Turnpike Authority, Turnpike Revenue Refunding Bonds, VRDN, Series D, 3.30% due 1/01/2018 (b)(f).......... -- 300 NR* Aa2 400 Ocean County, New Jersey, Utilities Authority, Wastewater Revenue Bonds, Series A, 6.125% due 1/01/2003... -- 436 A1+ VMIG1# 300 Port Authority of New York and New Jersey, Special Obligation Revenue Bonds (Versatile Structure Obligation), VRDN, Series 3, 3.55% due 6/01/2020 (b)... -- 300
F-9 PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED) JULY 31, 1997 (UNAUDITED)
NEW NEW LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY TOTAL --------- --------- ------------- --------- --------- --------- S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------- NEW JERSEY AAA Aaa $ 125 Somerset County, (CONCLUDED) New Jersey, GO, UT, 5.875% due 12/01/2001...... -- -- -- -- $ 134 -- A1+ P1 200 Union County, New Jersey, Industrial Pollution Control Financing Authority, Refunding Bonds (Exxon Project), 3.10% due 10/01/2024...... -- -- -- -- 200 -- AA+ Aaa 340 Union County, New Jersey, Refunding, GO, UT, 5.875% due 3/01/1999....... -- -- -- -- 350 -- - ------------------------------------------------------------------------------------------------------------------------- NEW MEXICO- AA Aa2 5,000 New Mexico State 1.1% Severance Tax Revenue Bonds, 4.50% due 7/01/1999....... $ 5,051 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- NEW YORK- AAA Aaa 600 Clifton Park, 13.1% New York, Water Authority, Water System Revenue Bonds, Series A, 6.375% due 10/01/2002 (a)(f).......... -- -- -- -- -- $ 671 Nassau County, New York, General Improvement Bonds, UT (f): AAA Aaa 400 Series O, 5.625% due 8/01/2004....... -- -- -- -- -- 430 AAA Aaa 700 Series Q, 5.10% due 8/01/2003... -- -- -- -- -- 729 AAA Aaa 750 New York City, New York, IDA, Civic Facilities Revenue Bonds (USTA National Tennis Center Project), 6% due 11/15/2002 (e).. -- -- -- -- -- 819 New York City, New York, Municipal Assistance Corporation: AA- Aa2 4,550 Refunding Bonds, Series E, 5.50% due 7/01/2000....... 4,732 -- -- -- -- -- AA Aa2 800 Series 68, 7.10% due 7/01/2000....... -- -- -- -- 860 New York City, New York, Municipal Water Finance Authority, Water and Sewer System Revenue Bonds, VRDN (b)(f): A1+ VMIG1# 600 Series A, 3.60% due 6/15/2025... -- -- -- -- -- 600 A1+ VMIG1# 1,600 Series G, 3.65% due 6/15/2024... 1,500 -- -- -- -- 100 PRO FORMA PENNSYLVANIA FOR LIMITED COMBINED MATURITY FUND TOTAL ------------ --------- S&P MOODY'S FACE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) - --------------------------------------------------------------------------------------------------- NEW JERSEY AAA Aaa $ 125 Somerset County, (CONCLUDED) New Jersey, GO, UT, 5.875% due 12/01/2001...... -- $ 134 A1+ P1 200 Union County, New Jersey, Industrial Pollution Control Financing Authority, Refunding Bonds (Exxon Project), 3.10% due 10/01/2024...... -- 200 AA+ Aaa 340 Union County, New Jersey, Refunding, GO, UT, 5.875% due 3/01/1999....... -- 350 - --------------------------------------------------------------------------------------------------- NEW MEXICO- AA Aa2 5,000 New Mexico State 1.1% Severance Tax Revenue Bonds, 4.50% due 7/01/1999....... -- 5,051 - --------------------------------------------------------------------------------------------------- NEW YORK- AAA Aaa 600 Clifton Park, 13.1% New York, Water Authority, Water System Revenue Bonds, Series A, 6.375% due 10/01/2002 (a)(f).......... -- 671 Nassau County, New York, General Improvement Bonds, UT (f): AAA Aaa 400 Series O, 5.625% due 8/01/2004....... -- 430 AAA Aaa 700 Series Q, 5.10% due 8/01/2003... -- 729 AAA Aaa 750 New York City, New York, IDA, Civic Facilities Revenue Bonds (USTA National Tennis Center Project), 6% due 11/15/2002 (e).. -- 819 New York City, New York, Municipal Assistance Corporation: AA- Aa2 4,550 Refunding Bonds, Series E, 5.50% due 7/01/2000....... -- 4,732 AA Aa2 800 Series 68, 7.10% due 7/01/2000....... -- 860 New York City, New York, Municipal Water Finance Authority, Water and Sewer System Revenue Bonds, VRDN (b)(f): A1+ VMIG1# 600 Series A, 3.60% due 6/15/2025... -- 600 A1+ VMIG1# 1,600 Series G, 3.65% due 6/15/2024... -- 1,600
F-10 PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED) JULY 31, 1997 (UNAUDITED)
NEW NEW LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY TOTAL --------- --------- ------------- --------- --------- --------- S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------- NEW YORK BBB+ Baa1 $ 610 New York City, (CONTINUED) New York, Refunding, UT, Series A, 6% due 8/01/2000....... -- -- -- -- -- $ 641 A- A2 11,820 New York State Crossover Refunding, 7.80% due 11/15/1998.. $ 12,391 -- -- -- -- -- New York State Dormitory Revenue Bonds: AAA Aaa 500 (College and University Education Loans), AMT, 6.30% due 7/01/2002 (d)... -- -- -- -- -- 547 BBB Baa1 6,675 (Consolidated City University System) Series A, 4.50% due 7/01/1998....... 6,714 -- -- -- -- -- BBB Baa1 10,885 (Consolidated City University System), Series A, 4.75% due 7/01/1999....... 11,028 -- -- -- -- -- AA Aa 700 Refunding (Cornell University), 5% due 7/01/2005.. -- -- -- -- -- 732 AAA Aaa 3,000 (State University Educational) Series A, 7.125% due 5/15/2017(a).... 3,220 -- -- -- -- -- A- Aa 400 New York State Environmental Facilities Corporation, PCR, State Water Revolving Fund (New York City Municipal Water Finance Authority Project), Series E, 5.60% due 6/15/1999....... -- -- -- -- -- 412 A- A2 600 New York State Environmental Quality, GO, 6% due 12/01/2004.. -- -- -- -- -- 658 New York State, GO: A- A2 505 6% due 7/15/2006....... -- -- -- -- -- 559 A- A2 735 Refunding, Series B, 6.25% due 8/15/2004.. -- -- -- -- -- 815 New York State Local Government Assistance Corporation (a): A A3 625 Series A, 7% due 4/01/2001... -- -- -- -- -- 698 AAA Aaa 600 Series D, 7% due 4/01/2002... -- -- -- -- -- 682 PRO FORMA PENNSYLVANIA FOR LIMITED COMBINED MATURITY FUND TOTAL ------------ --------- S&P MOODY'S FACE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) - -------------------------------------------------------------------------------- NEW YORK BBB+ Baa1 $ 610 New York City, (CONTINUED) New York, Refunding, UT, Series A, 6% due 8/01/2000....... -- $ 641 A- A2 11,820 New York State Crossover Refunding, 7.80% due 11/15/1998.. -- 12,391 New York State Dormitory Revenue Bonds: AAA Aaa 500 (College and University Education Loans), AMT, 6.30% due 7/01/2002 (d)... -- 547 BBB Baa1 6,675 (Consolidated City University System) Series A, 4.50% due 7/01/1998....... -- 6,714 BBB Baa1 10,885 (Consolidated City University System), Series A, 4.75% due 7/01/1999....... -- 11,028 AA Aa 700 Refunding (Cornell University), 5% due 7/01/2005.. -- 732 AAA Aaa 3,000 (State University Educational) Series A, 7.125% due 5/15/2017(a).... -- 3,220 A- Aa 400 New York State Environmental Facilities Corporation, PCR, State Water Revolving Fund (New York City Municipal Water Finance Authority Project), Series E, 5.60% due 6/15/1999....... -- 412 A- A2 600 New York State Environmental Quality, GO, 6% due 12/01/2004.. -- 658 New York State, GO: A- A2 505 6% due 7/15/2006....... -- 559 A- A2 735 Refunding, Series B, 6.25% due 8/15/2004.. -- 815 New York State Local Government Assistance Corporation (a): A A3 625 Series A, 7% due 4/01/2001... -- 698 AAA Aaa 600 Series D, 7% due 4/01/2002... -- 682
F-11 PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED) JULY 31, 1997 (UNAUDITED)
NEW NEW LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY TOTAL --------- --------- ------------- --------- --------- --------- S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE STATE RATINGS RATINGS VALUE ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------- NEW YORK New York State (CONCLUDED) Medical Care Facilities Finance Agency, Revenue Bonds, Series A: AAA Aaa $ 725 (Mental Health Services Facilities), 7.75% due 2/15/2001 (a)... -- -- -- -- -- $ 825 AA Aa 650 (Secured Mortgage Program, Adult Day Care), 6% due 11/15/2003 (i)............. -- -- -- -- -- 702 AA NR* 675 New York State Tax Exempt Revenue Bonds (Rochester Museum of Science), 5.60% due 12/01/2015.. -- -- -- -- -- 679 AAA VMIG1# 100 New York State Thruway Authority, General Revenue Bonds, VRDN, 3.60% due 1/01/2024 (b) (f)............. -- -- -- -- -- 100 BBB Aaa 5,000 New York State Urban Development Corporation, Revenue Bonds (State Facilities), 7.60 due 4/01/2020 (a)... $ 5,668 -- -- -- -- -- BBB Baa1 450 New York State Urban Development Corporation, Revenue Refunding Bonds (Center for Industrial Innovation Project), 4.60% due 1/01/1998... -- -- -- -- -- 451 AAA Aaa 760 Port Authority of New York and New Jersey, Refunding, AMT UT, Consolidated 97th Series, 7.10% due 7/15/2003 (f)... -- -- -- -- -- 867 A1+ VMIG1# 200 Syracuse, New York, IDA, Civic Facility Revenue Bonds (Multi- Model Syracuse University Project), VRDN, 3.50% due 3/01/2023 (b)... -- -- -- -- -- 200 Triborough Bridge and Tunnel Authority, New York, Revenue Bonds: A+ Aa 340 Series R, 6.90% due 1/01/2000... -- -- -- -- -- 363 A1+ VMIG1# 200 Special Obligation, VRDN, 3.60% due 1/01/2024 (b) (f)............. -- -- -- -- -- 200 - ------------------------------------------------------------------------------------------------------------------------- PRO FORMA PENNSYLVANIA FOR LIMITED COMBINED MATURITY FUND TOTAL ------------ --------- S&P MOODY'S FACE VALUE VALUE STATE RATINGS RATINGS VALUE ISSUE (NOTE 1A) (NOTE 1A) - ----------------------------------------------------------------------------------- NEW YORK New York State (CONCLUDED) Medical Care Facilities Finance Agency, Revenue Bonds, Series A: AAA Aaa $ 725 (Mental Health Services Facilities), 7.75% due 2/15/2001 (a)... -- $ 825 AA Aa 650 (Secured Mortgage Program, Adult Day Care), 6% due 11/15/2003 (i)............. -- 702 AA NR* 675 New York State Tax Exempt Revenue Bonds (Rochester Museum of Science), 5.60% due 12/01/2015.. -- 679 AAA VMIG1# 100 New York State Thruway Authority, General Revenue Bonds, VRDN, 3.60% due 1/01/2024 (b) (f)............. -- 100 BBB Aaa 5,000 New York State Urban Development Corporation, Revenue Bonds (State Facilities), 7.60 due 4/01/2020 (a)... -- 5,668 BBB Baa1 450 New York State Urban Development Corporation, Revenue Refunding Bonds (Center for Industrial Innovation Project), 4.60% due 1/01/1998... -- 451 AAA Aaa 760 Port Authority of New York and New Jersey, Refunding, AMT UT, Consolidated 97th Series, 7.10% due 7/15/2003 (f)... -- 867 A1+ VMIG1# 200 Syracuse, New York, IDA, Civic Facility Revenue Bonds (Multi- Model Syracuse University Project), VRDN, 3.50% due 3/01/2023 (b)... -- 200 Triborough Bridge and Tunnel Authority, New York, Revenue Bonds: A+ Aa 340 Series R, 6.90% due 1/01/2000... -- 363 A1+ VMIG1# 200 Special Obligation, VRDN, 3.60% due 1/01/2024 (b) (f)............. -- 200 - -----------------------------------------------------------------------------------
F-12 PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED) JULY 31, 1997 (UNAUDITED)
NEW NEW LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY TOTAL --------- --------- ------------- --------- --------- --------- S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------- OHIO-8.2% AAA Aaa $ 2,000 Cincinnati, Ohio, City School District, TAN, Series B, 5% due 12/01/1998 (c).. $ 2,028 -- -- -- -- -- NR* Aa1 6,000 Franklin County, Ohio, Hospital Revenue Refunding Bonds (US Health Corp.), Series B, 4.50% due 12/01/2020...... 6,065 -- -- -- -- -- A+ VMIG1# 7,000 Ohio State Air Quality Development Authority, Revenue Refunding Bonds (Ohio Edison Project), Series A, 4.35% due 2/01/2014....... 7,021 -- -- -- -- -- AAA Aa1 12,400 Ohio State Highway, GO, Series V, 4.70% due 5/15/2000... 12,623 -- -- -- -- -- AAA Aaa 3,500 Ohio State Public Facilities Commission (Higher Education Capital Facilities), Series II-A, 4.375% due 11/01/1999 (d).. 3,530 -- -- -- -- -- NR* Aaa 6,000 Student Loan Funding Corporation, Cincinnati, Ohio, Student Loan Revenue Refunding Bonds, AMT, Series C, 5.70% due 7/01/1999....... 6,156 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- OKLAHOMA- AA Aa 2,400 Tulsa, Oklahoma, 0.5% GO, UT, 5.125% due 5/01/1999... 2,448 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- OREGON-0.7% A1+ VMIG1# 3,000 Port Saint Helens, Oregon, PCR (Portland General Electric Company Project), VRDN, Series A, 3.35% due 4/01/2010 (b)............. 3,000 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- PENNSYLVANIA- NR* VMIG1# 100 Allegheny 5.1% County, Pennsylvania, Hospital Development Authority Revenue Bonds (Presbyterian University Hospital), ACES, Series B1, 3.60% due 3/01/2018 (b)............. -- -- -- -- -- -- AAA Aaa 400 Beaver County, Pennsylvania, Hospital Authority, Revenue Refunding Bonds (Medical Center of Beaver County, Inc.), 5.70% due 7/01/1999 (a)... -- -- -- -- -- -- PRO FORMA PENNSYLVANIA FOR LIMITED COMBINED MATURITY FUND TOTAL ------------ --------- S&P MOODY'S FACE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) - -------------------------------------------------------------------------------- OHIO-8.2% AAA Aaa $ 2,000 Cincinnati, Ohio, City School District, TAN, Series B, 5% due 12/01/1998 (c).. -- $ 2,028 NR* Aa1 6,000 Franklin County, Ohio, Hospital Revenue Refunding Bonds (US Health Corp.), Series B, 4.50% due 12/01/2020...... -- 6,065 A+ VMIG1# 7,000 Ohio State Air Quality Development Authority, Revenue Refunding Bonds (Ohio Edison Project), Series A, 4.35% due 2/01/2014....... -- 7,021 AAA Aa1 12,400 Ohio State Highway, GO, Series V, 4.70% due 5/15/2000... -- 12,623 AAA Aaa 3,500 Ohio State Public Facilities Commission (Higher Education Capital Facilities), Series II-A, 4.375% due 11/01/1999 (d).. -- 3,530 NR* Aaa 6,000 Student Loan Funding Corporation, Cincinnati, Ohio, Student Loan Revenue Refunding Bonds, AMT, Series C, 5.70% due 7/01/1999....... -- 6,156 - -------------------------------------------------------------------------------- OKLAHOMA- AA Aa 2,400 Tulsa, Oklahoma, 0.5% GO, UT, 5.125% due 5/01/1999... -- 2,448 - -------------------------------------------------------------------------------- OREGON-0.7% A1+ VMIG1# 3,000 Port Saint Helens, Oregon, PCR (Portland General Electric Company Project), VRDN, Series A, 3.35% due 4/01/2010 (b)............. 3,000 - -------------------------------------------------------------------------------- PENNSYLVANIA- NR* VMIG1# 100 Allegheny 5.1% County, Pennsylvania, Hospital Development Authority Revenue Bonds (Presbyterian University Hospital), ACES, Series B1, 3.60% due 3/01/2018 (b)............. $ 100 100 AAA Aaa 400 Beaver County, Pennsylvania, Hospital Authority, Revenue Refunding Bonds (Medical Center of Beaver County, Inc.), 5.70% due 7/01/1999 (a)... 412 412
F-13 PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED) JULY 31, 1997 (UNAUDITED)
NEW NEW LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY TOTAL --------- --------- ------------- --------- --------- --------- S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------- PENNSYLVANIA- AA Aa $ 1,000 Bucks County, (CONTINUED) Pennsylvania, UT, Series A, 5.95% due 3/01/2000....... -- -- -- -- -- -- NR* NR* 300 Emmaus, Pennsylvania, General Authority Revenue Bonds, VRDN, Sub-Series E-9, 3.70% due 3/01/2024 (b)... -- -- -- -- -- -- A1+ NR* 300 Harrisburg, Pennsylvania, Authority Revenue Bonds (Pooled Financing Fund), VRDN, 3.85% due 7/01/2021 (b)... -- -- -- -- -- -- A1+ Aaa 150 Lehigh County, Pennsylvania, Authority Water Revenue Bonds, VRDN, 3.60% due 11/01/2004 (b)(f).......... -- -- -- -- -- -- NR* VMIG1# 300 Pennsylvania Energy Development Authority, Energy Development Revenue Bonds (B&W Ebensburg Project), VRDN, AMT, 3.70% due 12/01/2011 (b).. -- -- -- -- -- -- Pennsylvania State Higher Educational Facilities Authority, College and University Revenue Refunding Bonds, Series A: -- -- -- -- -- A+ Aa3 380 (Thomas Jefferson University), 5.75% due 8/15/1998....... -- -- -- -- -- -- AA Aa2 275 (University of Pennsylvania), 4.70% due 9/01/1997...... -- -- -- -- -- -- AAA Aaa 8,675 Pennsylvania State, Refunding Bonds, GO, UT, 5.25% due 11/15/1998 (f).. $ 8,821 -- -- -- -- -- AAA Aaa 255 Pennsylvania State Turnpike Commission, Turnpike Revenue Refunding Bonds, Series O, 5.35% due 12/01/2002 (f)............. -- -- -- -- -- -- Philadelphia, Pennsylvania, Hospitals and Higher Education Facilities Authority, Hospital Revenue Bonds: A1+ VMIG1# 3,600 (Children's Hospital of Pennsylvania Project), 3.65% due 8/01/1997 (a)............. 3,600 -- -- -- -- -- PRO FORMA PENNSYLVANIA FOR LIMITED COMBINED MATURITY FUND TOTAL ------------ --------- S&P MOODY'S FACE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) - -------------------------------------------------------------------------------- PENNSYLVANIA- AA Aa $ 1,000 Bucks County, (CONTINUED) Pennsylvania, UT, Series A, 5.95% due 3/01/2000....... $1,047 $ 1,047 NR* NR* 300 Emmaus, Pennsylvania, General Authority Revenue Bonds, VRDN, Sub-Series E-9, 3.70% due 3/01/2024 (b)... 300 300 A1+ NR* 300 Harrisburg, Pennsylvania, Authority Revenue Bonds (Pooled Financing Fund), VRDN, 3.85% due 7/01/2021 (b)... 300 300 A1+ Aaa 150 Lehigh County, Pennsylvania, Authority Water Revenue Bonds, VRDN, 3.60% due 11/01/2004 (b)(f).......... 150 150 NR* VMIG1# 300 Pennsylvania Energy Development Authority, Energy Development Revenue Bonds (B&W Ebensburg Project), VRDN, AMT, 3.70% due 12/01/2011 (b).. 300 300 Pennsylvania State Higher Educational Facilities Authority, College and University Revenue Refunding Bonds, Series A: A+ Aa3 380 (Thomas Jefferson University), 5.75% due 8/15/1998....... 387 387 AA Aa2 275 (University of Pennsylvania), 4.70% due 9/01/1997...... 275 275 AAA Aaa 8,675 Pennsylvania State, Refunding Bonds, GO, UT, 5.25% due 11/15/1998 (f).. -- 8,821 AAA Aaa 255 Pennsylvania State Turnpike Commission, Turnpike Revenue Refunding Bonds, Series O, 5.35% due 12/01/2002 (f)............. 269 269 Philadelphia, Pennsylvania, Hospitals and Higher Education Facilities Authority, Hospital Revenue Bonds: A1+ VMIG1# 3,600 (Children's Hospital of Pennsylvania Project), 3.65% due 8/01/1997 (a)............. -- 3,600
F-14 PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED) JULY 31, 1997 (UNAUDITED)
NEW NEW LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY TOTAL --------- --------- ------------- --------- --------- --------- S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------- PENNSYLVANIA- NR* Aaa $ 1,000 (Children's (CONCLUDED) Hospital of Philadelphia Project), Series A, 6.50% due 2/15/2002 (a)... -- -- -- -- -- -- A- NR* 650 (Children's Seashore House), Series B, 7% due 8/15/2003....... -- -- -- -- -- -- SP1+ MIG1# 300 Philadelphia, Pennsylvania, TRAN, Series A, 4.50% due 6/30/1998....... -- -- -- -- -- AAA Aaa 4,145 Pittsburgh, Pennsylvania, Refunding, UT, Series A, 5% due 3/01/2000 (d)... $ 4,235 -- -- -- -- -- AAA Aaa 400 Union County, Pennsylvania, Higher Educational Facilities Financing Authority, Revenue Refunding Bonds (Bucknell University), 6% due 4/01/2002 (d)............. -- -- -- -- -- -- AAA Aaa 325 Washington County, Pennsylvania, Lease Authority, Municipal Facility Pooled Capital Revenue Bonds (Shadyside Hospital Project), Series C, Sub-Series C1-A, 7.45% due 6/15/2000 (a)(c)(g)....... -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- SOUTH AA A1 8,250 Greenville CAROLINA- County, South 1.8% Carolina, School District, UT, 4% due 3/01/1999... 8,261 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- TENNESSEE- AA NR* 11,885 Clarksville, 2.6% Tennessee, Public Building Authority, Revenue Refunding Bonds (Pooled Loan Program), 4.40% due 12/01/1998.. 11,945 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- TEXAS-6.1% Brazos, Texas, Higher Education Authority Inc., Student Loan Revenue Refunding Bonds, AMT: NR* Aaa 2,200 Senior Lien, Series A-2, 5.45% due 6/01/1998...... 2,225 -- -- -- -- -- NR* Aa 5,135 Series C-1, 5.60% due 11/01/1997...... 5,155 -- -- -- -- -- AA Aa 2,900 Fort Worth, Texas, Water and Sewer Revenue Bonds, 5.90% due 2/15/2001....... 3,067 -- -- -- -- -- PRO FORMA PENNSYLVANIA FOR LIMITED COMBINED MATURITY FUND TOTAL ------------ --------- S&P MOODY'S FACE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) - ------------------------------------------------------------------------------------------- PENNSYLVANIA- NR* Aaa $ 1,000 (Children's (CONCLUDED) Hospital of Philadelphia Project), Series A, 6.50% due 2/15/2002 (a)... $1,109 $ 1,109 A- NR* 650 (Children's Seashore House), Series B, 7% due 8/15/2003....... 724 724 SP1+ MIG1# 300 Philadelphia, Pennsylvania, TRAN, Series A, 4.50% due 6/30/1998....... 301 301 AAA Aaa 4,145 Pittsburgh, Pennsylvania, Refunding, UT, Series A, 5% due 3/01/2000 (d)... -- 4,235 AAA Aaa 400 Union County, Pennsylvania, Higher Educational Facilities Financing Authority, Revenue Refunding Bonds (Bucknell University), 6% due 4/01/2002 (d)............. 430 430 AAA Aaa 325 Washington County, Pennsylvania, Lease Authority, Municipal Facility Pooled Capital Revenue Bonds (Shadyside Hospital Project), Series C, Sub-Series C1-A, 7.45% due 6/15/2000 (a)(c)(g)....... 363 363 - ------------------------------------------------------------------------------------------- SOUTH AA A1 8,250 Greenville CAROLINA- County, South 1.8% Carolina, School District, UT, 4% due 3/01/1999... -- 8,261 - ------------------------------------------------------------------------------------------- TENNESSEE- AA NR* 11,885 Clarksville, 2.6% Tennessee, Public Building Authority, Revenue Refunding Bonds (Pooled Loan Program), 4.40% due 12/01/1998.. -- 11,945 - ------------------------------------------------------------------------------------------- TEXAS-6.1% Brazos, Texas, Higher Education Authority Inc., Student Loan Revenue Refunding Bonds, AMT: NR* Aaa 2,200 Senior Lien, Series A-2, 5.45% due 6/01/1998...... -- 2,225 NR* Aa 5,135 Series C-1, 5.60% due 11/01/1997...... -- 5,155 AA Aa 2,900 Fort Worth, Texas, Water and Sewer Revenue Bonds, 5.90% due 2/15/2001....... -- 3,067
F-15 PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED) JULY 31, 1997 (UNAUDITED)
NEW NEW LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY TOTAL --------- --------- ------------- --------- --------- --------- S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------- TEXAS Harris County, (CONCLUDED) Texas, Health Facilities Development Corporation, Hospital Revenue Bonds, VRDN (b): A1+ NR* $ 9,000 (Methodist Hospital), 5.50% due 12/01/2025.. $ 9,000 -- -- -- -- -- A1+ NR* 1,000 (Saint Luke's Episcopal Hospital), Series B, 5.50% due 2/15/2016 (a)............. 1,000 -- -- -- -- -- AAA Aaa 2,600 Houston, Texas, Water and Sewer Systems, Revenue Refunding Bonds, Junion Lien, Series C, 5.90% due 12/01/1999 (c)............. 2,707 -- -- -- -- -- NR* Aaa 2,455 Panhandle- Plains, Texas, Higher Education Authority Inc., Student Loan Revenue Refunding Bonds, Series C, 4.15% due 9/01/1997... 2,456 -- -- -- -- -- A+ A2 2,000 Texas Municipal Power Agency, Revenue Refunding Bonds, GO, Series A, 4.25% due 9/01/1997....... 2,001 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- UTAH-1.0% AAA Aaa 4,700 Utah State, Building and Highway Revenue Bonds, GO, UT, 4.40% due 7/01/1999....... 4,742 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- VIRGINIA-2.2% AAA Aaa 7,060 Virginia State, GO, UT, 5% due 6/01/2001....... 7,303 -- -- -- -- -- AA Aa 2,555 Virginia State Transportation Board, Transportation Contract Revenue Bonds (US Route 58 Corridor), Series B, 5% due 5/15/2000....... 2,618 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- WASHINGTON- AAA Aaa 5,000 Seattle, 3.2% Washington, Metropolitan Seattle Municipality Sewer Revenue Bonds, Series U, 6.60% due 1/01/2032 (a)(f).......... 5,483 -- -- -- -- -- Washington State, Refunding Bonds, Motor Vehicle Fuel Tax: AA Aa+ 2,000 Series R-94B, 4.20% due 9/01/1998....... 2,007 -- -- -- -- -- AA Aa+ 2,285 Series R-96A, 5% due 7/01/1998....... 2,310 -- -- -- -- -- AA Aa+ 4,655 Series R-96B, 5% due 7/01/1998....... 4,705 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- PRO FORMA PENNSYLVANIA FOR LIMITED COMBINED MATURITY FUND TOTAL ------------ --------- S&P MOODY'S FACE VALUE VALUE STATE RATINGS RATINGS AMOUNT ISSUE (NOTE 1A) (NOTE 1A) - -------------------------------------------------------------------------------- TEXAS Harris County, (CONCLUDED) Texas, Health Facilities Development Corporation, Hospital Revenue Bonds, VRDN (b): A1+ NR* $ 9,000 (Methodist Hospital), 5.50% due 12/01/2025.. -- $ 9,000 A1+ NR* 1,000 (Saint Luke's Episcopal Hospital), Series B, 5.50% due 2/15/2016 (a)............. -- 1,000 AAA Aaa 2,600 Houston, Texas, Water and Sewer Systems, Revenue Refunding Bonds, Junion Lien, Series C, 5.90% due 12/01/1999 (c)............. -- 2,707 NR* Aaa 2,455 Panhandle- Plains, Texas, Higher Education Authority Inc., Student Loan Revenue Refunding Bonds, Series C, 4.15% due 9/01/1997... -- 2,456 A+ A2 2,000 Texas Municipal Power Agency, Revenue Refunding Bonds, GO, Series A, 4.25% due 9/01/1997....... -- 2,001 - ----------------------------------------------------------------------------------- UTAH-1.0% AAA Aaa 4,700 Utah State, Building and Highway Revenue Bonds, GO, UT, 4.40% due 7/01/1999....... -- 4,742 - ----------------------------------------------------------------------------------- VIRGINIA-2.2% AAA Aaa 7,060 Virginia State, GO, UT, 5% due 6/01/2001....... -- 7,303 AA Aa 2,555 Virginia State Transportation Board, Transportation Contract Revenue Bonds (US Route 58 Corridor), Series B, 5% due 5/15/2000....... -- 2,618 - ----------------------------------------------------------------------------------- WASHINGTON- AAA Aaa 5,000 Seattle, 3.2% Washington, Metropolitan Seattle Municipality Sewer Revenue Bonds, Series U, 6.60% due 1/01/2032 (a)(f).......... -- 5,483 Washington State, Refunding Bonds, Motor Vehicle Fuel Tax: AA Aa+ 2,000 Series R-94B, 4.20% due 9/01/1998....... -- 2,007 AA Aa+ 2,285 Series R-96A, 5% due 7/01/1998....... -- 2,310 AA Aa+ 4,655 Series R-96B, 5% due 7/01/1998....... -- 4,705 - -----------------------------------------------------------------------------------
F-16 PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED) JULY 31, 1997 (UNAUDITED)
NEW NEW LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY TOTAL --------- --------- ------------- --------- --------- --------- S&P MOODY'S FACE VALUE VALUE VALUE VALUE VALUE VALUE STATE RATINGS RATINGS VALUE ISSUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) - ------------------------------------------------------------------------------------------------------------------------- WISCONSIN- NR* VMIG1# $ 4,000 Mequon, 7.8% Wisconsin, BAN, 4.10% due 11/01/1998...... $ 4,001 -- -- -- -- -- AA+ Aa1 6,510 Milwaukee, Wisconsin, Metropolitan Sewer District, GO, UT, Series A 4.25% due 10/01/2000...... 6,548 -- -- -- -- -- A A1 2,795 Wisconsin Housing and Economic Development Authority, Housing Revenue Refunding Bonds, Series C, 4.30% due 11/01/1997.. 2,800 -- -- -- -- -- AA Aa2 4,385 Wisconsin State, GO, Series C, 5.50% due 5/01/2000....... 4,550 -- -- -- -- -- AAA NR* 5,720 Wisconsin State Health and Educational Facilities Authority Revenue Bonds (Medical College of Wisconsin), Series D, 7.35% due 12/01/15.... 6,372 -- -- -- -- -- AA Aa2 11,000 Wisconsin State, GO, UT, Refunding, Series 3, 4.25% due 11/01/1999.. 11,068 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- PUERTO RICO- A1+ VMIG1# 100 Puerto Rico 0.4% Commonwealth, Government Development Bank, Refunding, VRDN, 3.25% due 12/01/2015 (b).. -- $ 100 -- -- -- -- A- Baa1 1,000 Puerto Rico Municipal Finance Agency, GO, UT, Series A, 5.80% due 7/01/2004....... -- -- -- -- -- -- Puerto Rico Public Buildings Authority, Guaranteed Public Education and Health Facilities: A Baa1 250 Refunding, Series K, 6.60% due 7/01/2004.. -- -- $ 276 -- -- -- AAA Aaa 200 Series L, 6.875% due 7/01/2002 (a)... -- -- -- $ 227 -- -- - ------------------------------------------------------------------------------------------------------------------------- PRO FORMA PENNSYLVANIA FOR LIMITED COMBINED MATURITY FUND TOTAL ------------ --------- S&P MOODY'S FACE VALUE VALUE STATE RATINGS RATINGS VALUE ISSUE (NOTE 1A) (NOTE 1A) - ------------------------------------------------------------------------------------ WISCONSIN- NR* VMIG1# $ 4,000 Mequon, 7.8% Wisconsin, BAN, 4.10% due 11/01/1998...... -- $ 4,001 AA+ Aa1 6,510 Milwaukee, Wisconsin, Metropolitan Sewer District, GO, UT, Series A 4.25% due 10/01/2000...... -- 6,548 A A1 2,795 Wisconsin Housing and Economic Development Authority, Housing Revenue Refunding Bonds, Series C, 4.30% due 11/01/1997.. -- 2,800 AA Aa2 4,385 Wisconsin State, GO, Series C, 5.50% due 5/01/2000....... -- 4,550 AAA NR* 5,720 Wisconsin State Health and Educational Facilities Authority Revenue Bonds (Medical College of Wisconsin), Series D, 7.35% due 12/01/15.... -- 6,372 AA Aa2 11,000 Wisconsin State, GO, UT, Refunding, Series 3, 4.25% due 11/01/1999.. -- 11,068 - ------------------------------------------------------------------------------------- PUERTO RICO- A1+ VMIG1# 100 Puerto Rico 100 0.4% Commonwealth, Government Development Bank, Refunding, VRDN, 3.25% due 12/01/2015 (b).. -- A- Baa1 1,000 Puerto Rico Municipal Finance Agency, GO, UT, Series A, 5.80% due 7/01/2004....... $1,067 1,067 Puerto Rico Public Buildings Authority, Guaranteed Public Education and Health Facilities: A Baa1 250 Refunding, Series K, 6.60% due 7/01/2004.. -- 276 AAA Aaa 200 Series L, 6.875% due 7/01/2002 (a)... -- 227 - -------------------------------------------------------------------------------------
F-17 PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST--(CONTINUED) JULY 31, 1997 (UNAUDITED)
NEW NEW LIMITED ARIZONA MASSACHUSETTS MICHIGAN JERSEY YORK PENNSYLVANIA MATURITY LIMITED LIMITED LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY MATURITY MATURITY --------- --------- ------------- --------- --------- --------- ------------ VALUE VALUE VALUE VALUE VALUE VALUE VALUE (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A) - -------------------------------------------------------------------------------------------------------------------------- Total $418,216 $3,026 $5,173 $4,115 $6,669 $14,340 $7,534 Investments (Cost $454,952)-- 100.8%.......... Liabilities in Excess of Other Assets -- (0.8%).......... Net Assets -- 100.0%......... - -------------------------------------------------------------------------------------------------------------------------- PRO FORMA FOR COMBINED FUND ---------- VALUE (NOTE 1A) - ---------------------------------------------------------------- Total Investments (Cost $454,952)-- 100.8%.......... $459,073 Liabilities in Excess of Other Assets -- (0.8%).......... (3,824) Net Assets -- ---------- 100.0%......... $455,249 ========== - ---------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------
(a) Prerefunded. (b) The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at July 31, 1997. (c) AMBAC Insured. (d) MBIA Insured. (e) FSA Insured. (f) FGIC Insured. (g) Escrowed to maturity. (h) The interest rate is subject to change periodically and inversely based upon prevailing market rates. The interest rate shown is the rate in effect at July 31, 1997. (i) SONYMA Insured. * Not rated. # Highest short-term rating by Moody's Investors Service, Inc. See Notes to Financial Statements. F-18 The following unaudited pro forma Combined Statement of Assets and Liabilities for the Combined Fund has been derived from the Statements of Assets and Liabilities of the Funds at July 31, 1997 and such information has been adjusted to give effect to the Reorganization as if the Reorganization had occurred at July 31, 1997. The pro forma Combined Statement of Assets and Liabilities is presented for informational purposes only and does not purport to be indicative of the financial condition that actually would have resulted if the Reorganization had been consummated at July 31, 1997. The pro forma Combined Statement of Assets and Liabilities should be read in conjunction with the Funds' financial statements and related notes thereto which are incorporated by reference in this Statement of Additional Information. MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
AS OF JULY 31, 1997 ------------------------------------------------------------- LIMITED ARIZONA MASSACHUSETTS MICHIGAN NEW JERSEY MATURITY LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY ------------ ---------- ------------- ---------- ---------- ASSETS: Investments, at value* (Note 1a).............. $418,215,979 $3,025,568 $5,173,140 $4,115,441 $6,668,628 Cash.................... 59,153 323,206 59,786 90,032 50,867 Receivables: Interest............... 4,495,525 15,409 60,377 58,775 85,004 Capital shares sold.... 380,598 -- -- -- -- Securities sold........ 100,281 101,366 -- -- 52,156 Investment advisor (Note 2).............. -- 16,241 21,354 23,142 2,475 Deferred organization expenses (Note 1e)..... -- -- 2,615 2,302 3,758 Prepaid registration fees and other assets (Note 1e).............. 35,641 11,380 7,698 243 7,803 ------------ ---------- ---------- ---------- ---------- Total assets............ 423,287,177 3,493,170 5,324,970 4,289,935 6,870,691 ------------ ---------- ---------- ---------- ---------- LIABILITIES: Payables: Securities purchased... 6,556,147 101,467 101,326 -- 441,227 Capital shares redeemed.............. 2,176,323 -- 36,244 -- 68,809 Dividends to shareholders (Note 1f)................... 434,370 2,974 5,338 4,454 5,671 Investment adviser (Note 2).............. 117,997 -- -- -- -- Distributor (Note 2)... 17,816 680 942 548 1,286 Accrued expenses and other liabilities 106,743 30,654 45,369 33,588 31,097 ------------ ---------- ---------- ---------- ---------- Total liabilities....... 9,409,396 135,775 189,219 38,590 548,090 ------------ ---------- ---------- ---------- ---------- NET ASSETS: Net assets.............. $413,877,781 $3,357,395 $5,135,751 $4,251,345 $6,322,601 ============ ========== ========== ========== ========== NET ASSETS CONSIST OF: Class A Common Stock, $0.10 par value+....... $ 3,414,712 $ 6,974 $ 13,507 $ 13,557 $ 17,100 Class B Common Stock, $0.10 par value++...... 533,032 20,997 27,957 13,979 40,478 Class C Common Stock, $0.10 par value+++..... 1,291 355 2,741 12 2,624 Class D Common Stock, $0.10 par value++++.... 205,668 4,684 6,956 14,589 2,350 Paid-in capital in excess of par.......... 411,724,853 3,221,545 5,218,428 4,198,169 6,241,536 Undistributed (accumulated) realized capital gains (losses) on investments--net (Note 5)............... (4,763,818) 16,274 (300,979) (150,077) (167,187) Accumulated distributions in excess of realized gain on investments--net (Note 1f).................... -- -- -- (1,779) -- Unrealized appreciation on investments--net.... 2,762,043 86,566 167,141 162,895 185,700 ------------ ---------- ---------- ---------- ---------- Net assets.............. $413,877,781 $3,357,395 $5,135,751 $4,251,345 $6,322,601 ============ ========== ========== ========== ========== NET ASSET VALUE: Class A: Net assets............. $340,141,818 $ 709,319 $1,355,818 $1,368,162 $1,734,544 ------------ ---------- ---------- ---------- ---------- Shares outstanding..... 34,147,124 69,741 135,068 135,574 170,998 ------------ ---------- ---------- ---------- ---------- Net asset value and redemption price per share................. $ 9.96 $ 10.17 $ 10.04 $ 10.09 $ 10.14 ============ ========== ========== ========== ========== Class B: Net assets............. $ 53,107,866 $2,135,376 $2,806,894 $1,410,732 $4,108,454 ------------ ---------- ---------- ---------- ---------- Shares outstanding..... 5,330,319 209,967 279,567 139,786 404,782 ------------ ---------- ---------- ---------- ---------- Net asset value and redemption price per share................. $ 9.96 $ 10.17 $ 10.04 $ 10.09 $ 9.19 ============ ========== ========== ========== ========== Class C: Net assets............. $ 128,373 $ 36,084 $ 274,926 $ 1,231 $ 241,191 ------------ ---------- ---------- ---------- ---------- Shares outstanding..... 12,913 3,545 27,406 122 26,241 ------------ ---------- ---------- ---------- ---------- Net asset value and redemption price per share................. $ 9.94 $ 10.18 $ 10.03 $ 10.09 $ 9.19 ============ ========== ========== ========== ==========
F-19 (continued)
AS OF JULY 31, 1997 ----------------------------------------------------------- LIMITED ARIZONA MASSACHUSETTS MICHIGAN NEW JERSEY MATURITY LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY ------------ ---------- ------------- ---------- ---------- Class D: Net assets............. $ 20,499,724 $ 476,616 $ 698,113 $1,471,220 $ 238,412 ------------ ---------- ---------- ---------- ---------- Shares outstanding..... 2,056,678 46,841 69,563 145,888 23,497 ------------ ---------- ---------- ---------- ---------- Net asset value and redemption price per share................. $ 9.97 $ 10.18 $ 10.04 $ 10.08 $ 10.15 ============ ========== ========== ========== ========== - -------- * Identified cost....... $415,453,936 $2,939,002 $5,005,999 $3,952,546 $6,482,928 ============ ========== ========== ========== ========== + Authorized shares- Class A................ 150,000,000 ++ Authorized shares- Class B................ 150,000,000 +++ Authorized shares- Class C................ 150,000,000 ++++ Authorized shares- Class D................ 150,000,000
See Notes to Financial Statements. F-20 The following unaudited pro forma Combined Statement of Assets and Liabilities for the Combined Fund has been derived from the Statements of Assets and Liabilities of the Funds at July 31, 1997 and such information has been adjusted to give effect to the Reorganization as if the Reorganization had occurred at July 31, 1997. The pro forma Combined Statement of Assets and Liabilities is presented for informational purposes only and does not purport to be indicative of the financial condition that actually would have resulted if the Reorganization had been consummated at July 31, 1997. The pro forma Combined Statement of Assets and Liabilities should be read in conjunction with the Funds' financial statements and related notes thereto which are incorporated by reference in this Statement of Additional Information. MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)-- (CONTINUED)
AS OF JULY 31, 1997 ------------------------------------------------------- NEW YORK PENNSYLVANIA PRO FORMA LIMITED LIMITED FOR COMBINED MATURITY MATURITY ADJUSTMENTS FUND ----------- ------------ ------------ ------------ ASSETS: Investments, at value* (Note 1a);............. $14,340,013 $7,534,238 $459,073,007 Cash.................... 63,618 30,350 $ 16,314 (1) 693,326 Receivables: Interest............... 190,115 117,057 5,022,262 Capital shares sold.... 12,515 84,550 477,663 Securities sold........ -- 100,010 353,813 Investment advisor (Note 2).............. 5,218 9,090 77,520 Deferred organization expenses (Note 1e)..... 4,123 3,516 (16,314)(1) -- Prepaid registration fees and other assets (Note 1e).............. 7,385 5,267 75,417 ----------- ---------- ------------ ------------ Total assets............ 14,622,987 7,884,078 -- 465,773,008 ----------- ---------- ------------ ------------ LIABILITIES: Payables: Securities purchased... -- 100,000 7,300,167 Capital shares redeemed.............. 619 4,035 2,286,030 Dividends to shareholders (Note 1f)................... 15,836 7,338 16,274 (2) 492,255 Investment adviser (Note 2).............. -- -- 117,997 Distributor (Note 2)... 2,764 1,677 25,713 Accrued expenses and other liabilities...... 38,433 32,371 318,255 ----------- ---------- ------------ ------------ Total liabilities....... 57,652 145,421 16,274 10,540,417 ----------- ---------- ------------ ------------ NET ASSETS: Net assets.............. $14,565,335 $7,738,657 $ (16,274) $455,232,591 =========== ========== ============ ============ NET ASSETS CONSIST OF: Class A Common Stock, $0.10 par value+....... $ 25,477 $ 7,190 $ 1,581 (3) $ 3,500,098 Class B Common Stock, $0.10 par value++...... 80,271 50,185 (233,867)(3) 533,032 Class C Common Stock, $0.10 par value+++..... 659 77 (6,468)(3) 1,291 Class D Common Stock, $0.10 par value++++.... 36,009 18,177 246,804 (3) 535,237 Paid-in capital in excess of par.......... 14,108,036 7,509,162 (8,050)(3) 452,213,679 Undistributed (accumulated) realized capital gains (losses) on investments-net (Note 5)..................... (224,431) (63,042) (16,274) (5,669,534) Accumulated distributions in excess of realized gain on investments-net (Note 1f).................... -- -- (1,779) Unrealized appreciation on investments-net..... 539,314 216,908 4,120,567 ----------- ---------- ------------ ------------ Net assets.............. $14,565,335 $7,738,657 $ (16,274) $455,232,591 =========== ========== ============ ============ NET ASSET VALUE: Class A: Net assets............. $ 2,605,219 $ 735,726 $ (3,438)(3) $348,647,168 ----------- ---------- ------------ ------------ Shares outstanding..... 254,768 71,902 15,808 (3) 35,000,983 ----------- ---------- ------------ ------------ Net asset value and redemption price per share................. $ 10.23 $ 10.23 $ 9.96 =========== ========== ============ Class B: Net assets............. $ 8,209,327 $5,134,207 $(23,804,990)(3) $ 53,107,866 ----------- ---------- ------------ ------------ Shares outstanding..... 802,714 501,850 (2,338,666)(3) 5,330,319 ----------- ---------- ------------ ------------ Net asset value and redemption price per share................. $ 10.23 $ 10.23 $ 9.96 =========== ========== ============ Class C: Net assets............. $ 67,418 $ 7,869 $ (628,719)(3) $ 128,373 ----------- ---------- ------------ ------------ Shares outstanding..... 6,593 766 (64,673)(3) 12,913 ----------- ---------- ------------ ------------ Net asset value and redemption price per share................. $ 10.23 $ 10.27 $ 9.94 =========== ========== ============
F-21 (continued)
AS OF JULY 31, 1997 ----------------------------------------------------- NEW YORK PENNSYLVANIA PRO FORMA LIMITED LIMITED FOR COMBINED MATURITY MATURITY ADJUSTMENTS FUND ----------- ------------ ----------- ------------ Class D: Net assets.............. $ 3,683,371 $1,860,855 $24,420,873 (3) $ 53,349,184 ----------- ---------- ----------- ------------ Shares outstanding...... 360,094 181,770 2,468,038 (3) 5,352,369 ----------- ---------- ----------- ------------ Net asset value and redemption price per share.................. $ 10.23 $ 10.24 9.97 =========== ========== ============ - -------- *Identified cost......... $13,800,699 $7,317,330 $454,952,440 ----------- ---------- ------------
(1) Reimbursement of the remaining unamortized deferred organization costs by the original shareholder. (2) Reflects payment of undistributed capital gains. (3) Reflects the estimated conversion ratio. Holders of Class B and Class C will receive shares of Class D of the Combined Fund. See Notes to Financial Statements. F-22 The following unaudited pro forma combined statement of operations for the Combined Fund has been derived from the statements of operations of the Funds for the twelve months ended July 31, 1997, and such information has been adjusted to give effect to the Reorganization as if the Reorganization has occurred on August 1, 1996. The pro forma combined statement of operations is presented for informational purposes only and does not purport to be indicative of the results of operations that actually would have resulted if the Reorganization had been consummated on August 1, 1996 nor which may result from future operations. The pro forma combined statement of operations should be read in conjunction with the Funds' financial statements and related notes thereto which are incorporated by reference in this Statement of Additional Information. MERRILL LYNCH MUNICIPAL BOND FUND, INC AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE TWELVE MONTHS ENDED JULY 31, 1997 -------------------------------------------------------- LIMITED ARIZONA MASSACHUSETTS MICHIGAN NEW JERSEY MATURITY LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY ----------- -------- ------------- -------- ---------- INVESTMENT INCOME (NOTE 1D): Interest and amortization of premium and discount earned..... $19,889,679 $173,856 $312,359 $208,473 $347,105 EXPENSES: Investment advisory fees (Note 2)................ 1,528,848 13,268 22,132 14,977 25,494 Account maintenance and distribution fees--Class B (Note 2).............. 217,923 8,883 13,723 5,934 15,927 Accounting services (Note 2)................ 40,044 33,811 48,536 41,011 26,609 Professional fees....... 20,115 34,098 44,247 39,131 35,447 Registration fees (Note le)..................... 6,444 22,601 21,398 22,074 16,112 Transfer agent fees-- Class A (Note 2)........ 79,565 503 606 634 805 Printing and shareholder reports................. 26,442 5,160 6,388 5,905 -- Custodian fees.......... 42,801 2,727 2,369 1,853 3,205 Transfer agent fees-- Class B (Note 2)........ 18,000 1,885 2,061 952 2,147 Directors' fees and expenses................ 5,437 2,403 3,557 2,071 3,919 Pricing services........ 11,589 2,247 2,512 3,369 1,913 Account maintenance fees--Class D (Note 2).. 17,953 373 717 1,085 409 Amortization of organization expenses (Note le)............... -- -- 1,984 1,743 2,852 Transfer agent fees-- Class D (Note 2)........ 3,589 239 307 442 164 Account maintenance and distribution fees--Class C (Note 2).............. 608 157 402 1 402 Transfer agent fees-- Class C (Note 2)........ 66 81 130 4 118 Other................... 4,924 2,695 2,069 14,366 1,694 ----------- -------- -------- -------- -------- Total expenses before reimbursement........... 2,024,348 131,131 173,138 155,552 137,217 Reimbursement of expenses................ -- (85,705) (95,062) (107,880) (51,282) ----------- -------- -------- -------- -------- Total expenses after reimbursement........... 2,024,348 45,426 78,076 47,672 85,935 ----------- -------- -------- -------- -------- Investment income--net.. 17,865,331 128,430 234,283 160,801 261,170 ----------- -------- -------- -------- --------
F-23
FOR THE TWELVE MONTHS ENDED JULY 31, 1997 ------------------------------------------------------- LIMITED ARIZONA MASSACHUSETTS MICHIGAN NEW JERSEY MATURITY LIMITED LIMITED LIMITED LIMITED PORTFOLIO MATURITY MATURITY MATURITY MATURITY ----------- -------- ------------- -------- ---------- REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS--NET (NOTES 1D & 3): Realized gain (loss) on investments............ 1,679,262 87,712 51,279 21,697 126,030 Change in unrealized appreciation on investments--net....... 624,270 (58,065) (12,363) 38,238 (105,889) ----------- -------- -------- -------- -------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............. $20,168,863 $158,077 $273,199 $220,736 $281,311 =========== ======== ======== ======== ========
See Notes to Financial Statements. F-24 The following unaudited pro forma combined statement of operations for the Combined Fund has been derived from the statements of operations of the Funds for the twelve months ended July 31, 1997, and such information has been adjusted to give effect to the Reorganization as if the Reorganization has occurred on August 1, 1996. The pro forma combined statement of operations is presented for informational purposes only and does not purport to be indicative of the results of operations that actually would have resulted if the Reorganization had been consummated on August 1, 1996 nor which may result from future operations. The pro forma combined statement of operations should be read in conjunction with the Funds' financial statements and related notes thereto which are incorporated by reference in this Statement of Additional Information. MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST PRO FORMA COMBINED STATEMENT OF OPERATIONS--(CONTINUED) (UNAUDITED)
FOR THE TWELVE MONTHS ENDED JULY 31, 1997 ------------------------------------------------- PRO FORMA NEW YORK PENNSYLVANIA FOR LIMITED LIMITED COMBINED MATURITY MATURITY ADJUSTMENTS(1) FUND -------- ------------ -------------- ----------- INVESTMENT INCOME (NOTE 1D): Interest and amortization of premium and discount earned...................... $812,885 $402,719 $22,147,076 EXPENSES: Investment advisory fees (Note 2).................... 57,645 29,758 1,692,122 Account maintenance and distribution fees-Class B (Note 2).................... 32,533 20,568 315,491 Accounting services (Note 2).......................... 34,860 42,078 (220,000) 46,949 Professional fees........... 34,696 38,410 (206,951) 39,193 Registration fees (Note 1e)......................... 20,605 16,392 125,626 Transfer agent fees-Class A (Note 2).................... 848 280 83,241 Printing and shareholder reports..................... 19,539 4,570 (33,000) 35,004 Custodian fees.............. 3,614 2,902 59,471 Transfer agent fees-Class B (Note 2).................... 3,545 2,641 31,231 Directors' fees and expenses.................... 8,418 4,231 (21,000) 9,036 Pricing services............ 3,925 2,379 27,934 Account maintenance fees- Class D (Note 2)............ 4,216 1,831 26,584 Amortization of organization expenses (Note 1e).......... 3,123 2,668 12,370 Transfer agent fees-Class D (Note 2).................... 1,276 651 6,668 Account maintenance and distribution fees-Class C (Note 2).................... 234 7 1,811 Transfer agent fees-Class C (Note 2).................... 75 9 483 Other....................... -- 2,196 27,944 -------- -------- --------- ----------- Total expenses before reimbursement............... 229,152 171,571 (480,951) 2,541,158 Reimbursement of expenses... (76,880) (64,142) 480,951 -- -------- -------- --------- ----------- Total expenses after reimbursement............... 152,272 107,429 -- 2,541,158 -------- -------- --------- ----------- Investment income-net....... 660,613 295,290 -- 19,605,918 -------- -------- --------- ----------- REALIZED & UNREALIZED GAIN ON INVESTMENTS-NET (NOTES 1D & 3): Realized gain on investments................. 36,848 37,824 2,040,652 Change in unrealized appreciation on investments- net......................... 214,688 56,086 756,965 -------- -------- --------- ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS... $912,149 $389,200 $ -- $22,403,535 ======== ======== ========= ===========
- ---- (1) Reflects the anticipated savings of the combination. See Notes to Financial Statements. F-25 MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES: Merrill Lynch Municipal Bond Fund, Inc. ("the Fund") is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. These unaudited financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented. All such adjustments are of a normal recurring nature. The Fund's Portfolios offer four classes of shares under the Merrill Lynch Select PricingSM System. Shares of Class A and Class D are sold with a front-end sales charge. Shares of Class B and Class C may be subject to a contingent deferred sales charge. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class B, Class C and Class D shares bear certain expenses related to the account maintenance of such shares, and Class B and Class C shares also bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to its account maintenance and distribution expenditures. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Municipal bonds and money market securities are traded primarily in the over-the-counter markets and are valued at the most recent bid price or yield equivalent as obtained from dealers that make markets in such securities. Positions in future contracts and options thereon, which are traded on exchanges, are valued at closing prices as of the close of such exchanges. Assets for which market quotations are not readily available are valued at fair value on a consistent basis using methods determined in good faith by the combined Portfolios' Board of Directors, including valuations furnished by a pricing service retained by the Fund, which may utilize a matrix system for valuations. The procedures of the pricing service and its valuations are reviewed by the officers of the Fund under the general supervision of the Board of Directors. (b) Derivative financial instruments--The combined portfolio may engage in various portfolio strategies to seek to increase its return by hedging its portfolio against adverse movements in the debt markets. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. . Financial futures contracts--The combined Portfolio may purchase or sell interest rate futures contracts and options on such futures contracts for the purpose of hedging the market risk on existing securities or the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the combined Portfolio deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the combined Portfolio agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the combined Portfolio as unrealized gains or losses. When the contract is closed, the combined Portfolio records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. (c) Income taxes--It is the combined Portfolio's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. (d) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Interest income is recognized on the accrual basis. Discounts and market premiums are amortized into interest income. Realized gains and losses on security transactions are determined on the identified cost basis. (e) Deferred organization expenses and prepaid registration fees--Deferred organization expenses are charged to expense on a straight-line basis over a five-year period. Prepaid registration fees are charged to expenses as the related shares are issued. F-26 MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST NOTES TO PRO FORMA FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) (f) Dividends and distributions--Dividends from net investment income are declared daily and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. Distributions in excess of realized capital gains are due primarily to differing tax treatments for post-October losses. 2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES: The combined Portfolio has entered into an Investment Advisory Agreement with Fund Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The combined Portfolio has also entered into a Distribution Agreement and Distribution Plans with Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of Merrill Lynch Group, Inc. FAM is responsible for the management of the Fund's portfolios and provides the necessary personnel, facilities, equipment and certain other services necessary to the operation of the Fund. For such services, the Limited Maturity Portfolio pays a monthly fee based upon the aggregate daily value of the net assets of the Portfolio and the Fund's Insured Portfolio and National Portfolio at the following annual rates: 0.40% of these Portfolios' aggregate average daily net assets not exceeding $250 million; 0.375% of such average daily net assets in excess of $250 million but not exceeding $400 million; 0.35% of such average daily net assets in excess of $400 million but not exceeding $550 million; and 0.325% of such average daily net assets in excess of $550 million. Also, Arizona Limited Maturity, Massachusetts Limited Maturity, Michigan Limited Maturity, New Jersey Limited Maturity, New York Limited Maturity, and Pennsylvania Limited Maturity pay a monthly fee at the annual rate of 0.35% of that Fund's average daily net assets. For the twelve months ended July 31, 1997 FAM had voluntarily waived management fees and reimbursed each Portfolio for additional expenses as follows:
ARIZONA MASSACHUSETTS MICHIGAN LIMITED MATURITY LIMITED MATURITY LIMITED MATURITY ---------------- ---------------- ---------------- Management fee.......... $13,268 $22,132 $14,977 Additional expenses..... $72,437 $72,930 $92,903 NEW JERSEY NEW YORK PENNSYLVANIA LIMITED MATURITY LIMITED MATURITY LIMITED MATURITY ---------------- ---------------- ---------------- Management fee.......... $25,494 $57,645 $29,758 Additional expenses..... $25,788 $19,235 $34,384
Pursuant to the distribution plans (the "Distribution Plans") adopted by the combined Portfolio in accordance with Rule 12b-1 under the Investment Company Act of 1940, the combined Portfolio pays the Distributor ongoing account maintenance and distribution fees. The fees are accrued daily and paid monthly at annual rates based upon the average daily net assets of the shares as follows:
ACCOUNT MAINTENANCE FEES DISTRIBUTION FEES ------------------------ ----------------- Class B....................... 0.15% 0.20% Class C....................... 0.15% 0.20% Class D....................... 0.10%
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account maintenance and distribution services to the combined Portfolio. The ongoing account maintenance fee compensates the Distributor and MLPF&S for F-27 MERRILL LYNCH MUNICIPAL BOND FUND, INC. AND MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST NOTES TO PRO FORMA FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) providing account maintenance services to Class B, Class C and Class D shareholders. The ongoing distribution fee compensates the Distributor and MLPF&S for providing shareholder and distribution-related services to Class B and Class C shareholders. For the twelve months ended July 31, 1997, MLFD earned underwriting discounts and direct commissions and MLPF&S earned dealer concessions on sales of the combined Portfolio's Class A and Class D shares as follows:
LIMITED ARIZONA MASSACHUSETTS MATURITY LIMITED LIMITED PORTFOLIO MATURITY MATURITY --------- -------- ------------- Class A: MLFD.................................... $ 1,097 $ 7 $ -- MLPF&S.................................. 9,522 194 -- Class D: MLFD.................................... $ 1,630 $ 199 $ 9 MLPF&S.................................. 18,560 2,172 205
NEW MICHIGAN JERSEY NEW YORK PENNSYLVANIA LIMITED LIMITED LIMITED LIMITED MATURITY MATURITY MATURITY MATURITY -------- -------- -------- ------------ Class A: MLFD............................. $ 8 $-- $ -- $ -- MLPF&S........................... 68 -- 5 -- Class D: MLFD............................. $ 46 $ 2 $ 70 $ 5 MLPF&S........................... 350 48 767 210
MLPF&S received contingent deferred sales charges relating to transactions in Class B shares of beneficial interest as follows:
CLASS B SHARES -------------- Limited Maturity Portfolio.... $ 3,200 Arizona Limited Maturity...... 427 Massachusetts Limited Maturity..................... 3,151 Michigan Limited Maturity..... 397 New Jersey Limited Maturity... 4,461 New York Limited Maturity..... 18,743 Pennsylvania Limited Maturity..................... 878
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary of ML & Co., is the combined Portfolio's transfer agent. Accounting services are provided to the combined Portfolio by FAM at cost. Certain officers and/or directors of the combined Portfolio are officers and/or directors of FAM, PSI, MLFD, MLFDS, and/or ML & Co. F-28 PART C OTHER INFORMATION ITEM 15. INDEMNIFICATION. Section 2-418 of the General Corporation Law of the State of Maryland, Article VI of the Registrant's Articles of Incorporation, Article VI of the Registrant's By-Laws and the Registrant's Investment Advisory Agreement with Fund Asset Management, Inc. (now known as Fund Asset Management, L.P.; the "Investment Adviser") provide for indemnification. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"), may be provided to directors, officers and controlling persons of each Fund, pursuant to the foregoing provisions or otherwise, each Fund has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and, therefore, is unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by a Fund of expenses incurred or paid by a director, officer or controlling person of the Registrant in connection with any successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities 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 Securities Act and will be governed by the final adjudication of such issue. Reference is made to (i) Section Six of the Purchase Agreement relating to the Registrant's Common Stock, a form of which previously was filed as an exhibit to the Common Stock Registration Statement (as defined below), and (ii) Section Seven of the Purchase Agreement relating to the Registrant's AMPS, a form of which previously was filed as an exhibit to the AMPS Registration Statement (as defined below), for provisions relating to the indemnification of the underwriter. ITEM 16. EXHIBITS. (1)(a) --Articles of Incorporation (incorporated by reference to Exhibit 1 to Post-Effective Amendment No. 4 to Registrant's Registration Statement on Form N-1, filed October 31, 1980 ("Post-Effective Amendment No. 4")). (1)(b) --Articles of Amendment (incorporated by reference to Exhibit 1 to Post-Effective Amendment No. 13 to Registrant's Registration Statement on Form N-1A, filed October 12, 1988 ("Post-Effective Amendment No. 13")). (1)(c) --Articles Supplementary to the Articles of Incorporation increasing the authorized capital stock of the Insured Portfolio (incorporated by reference to Exhibit 1(c) to Post-Effective Amendment No. 15 to Registrant's Registration Statement on Form N-1A, filed October 29, 1990). (1)(d) --Articles Supplementary to the Articles of Incorporation establishing Class B Common Stock of Limited Maturity Portfolio (incorporated by reference to Exhibit 1(d) to Post-Effective Amendment No. 16 to Registrant's Registration Statement on Form N-1A, filed September 1, 1992). (2) --By-Laws of the Registrant (incorporated by reference to Exhibit 2 to Post-Effective Amendment No. 13). (3) --Not applicable. (4) --Form of Agreement and Plan of Reorganization between the Registrant and Merrill Lynch Multi-State Limited Maturity Municipal Series Trust(a). (5) --Specimen certificates for Class A shares of Limited Maturity Portfolio Series Common Stock of Registrant (incorporated by reference to Exhibit 4 to Post-Effective Amendment No. 4).
C-1 (6) --Advisory Agreement between the Registrant and Fund Asset Management, Inc. (incorporated by reference to Exhibit 5 to Post-Effective Amendment No. 4). (7)(a) --Form of Amended Class A Shares Distribution Agreement between the Registrant and Merrill Lynch Funds Distributor, Inc. (including Form of Selected Dealers Agreement) (incorporated by reference to Exhibit 6 to Post-Effective Amendment No. 20 to the Registrant's Registration Statement on Form N-1A, filed October 31, 1995 ("Post-Effective Amendment No. 20")). (7)(b) --Form of Class B Shares Distribution Agreement between the Registrant and Merrill Lynch Funds Distributor, Inc. (including Form of Selected Dealers Agreement) (incorporated by reference to Exhibit 6 to Post-Effective Amendment No. 20). (7)(c) --Form of Class C Shares Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc. (incorporated by reference to Exhibit 6 to Post- Effective Amendment No. 20). (7)(d) --Form of Class D Shares Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc. (incorporated by reference to Exhibit 6 to Post- Effective Amendment No. 20). (8) --None. (9) --Custodian Agreement between the Registrant and The Bank of New York (incorporated by reference to Exhibit 8 to Post-Effective amendment No. 13). (10)(a) --Amended and Restated Class B Shares Distribution Plan of Registrant (including Class B Shares Distribution Plan Sub-Agreement of the Registrant) (incorporated by reference to Exhibit 15 to Post- Effective Amendment No. 20). (10)(b) --Form of Class C Shares Distribution Plan of Registrant (including Class C Shares Distribution Plan Sub-Agreement) (incorporated by reference to Exhibit 15 to Post- Effective Amendment No. 20). (10)(c) --Form of Class D Shares Distribution Plan of Registrant (including Class D Shares Distribution Plan Sub-Agreement) (incorporated by reference to Exhibit 15 to Post- Effective Amendment No. 20). (11) --Opinion and Consent of Rogers & Wells, counsel for the Registrant. (12) --Private Letter Ruling from the Internal Revenue Service(b). (13) --Not applicable. (14)(a) --Consent of Deloitte & Touche llp, independent auditors for the Registrant, as to Merrill Lynch Municipal Bond Fund, Inc. (14)(b) --Consent of Deloitte & Touche llp, independent auditors for the Registrant, as to Merrill Lynch Multi-State Limited Maturity Municipal Series Trust. (15) --Not applicable. (16) --Power of Attorney (Included on the signature page of the Registration Statement). (17)(a) --Declaration pursuant to Rule 24f-2 under the Investment Company Act of 1940 of the Registrant (incorporated by reference to Registrant's Requisition Statement on Form N-1, filed September 16, 1977). (17)(b) --Prospectus dated October 7, 1997, and Statement of Additional Information dated October 7, 1997, of the Registrant. (17)(c) --Prospectus dated November 27, 1996, and Statement of Additional Information dated November 27, 1996, of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust. (17)(d) --Annual Report to Stockholders of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust for the fiscal year ended July 31, 1997. (17)(e) --Annual Report to Stockholders of Merrill Lynch Municipal Bond Fund, Inc. for the fiscal year ended June 30, 1997.
- -------- (a)Included in Exhibit I to the Proxy Statement and Prospectus contained in this Registration Statement. (b)To be filed by amendment. ITEM 17. Undertakings. (a) The Registrant undertakes to suspend offering of the shares of Common Stock covered hereby until it amends its Prospectus contained herein if (1) subsequent to the effective date of this Registration Statement, its net asset value per share of Common Stock declines more than 10 percent from its net asset value per share of Common Stock as of the effective date of this Registration Statement, or (2) its net asset value per share of Common Stock increases to an amount greater than its net proceeds as stated in the Prospectus contained herein. C-2 (b) The Registrant undertakes that: (1) For the purpose of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 497(h) under the Securities Act shall be deemed to be a part of the registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) Registrant undertakes to file, by post-effective amendment, a copy of the Internal Revenue Service private letter ruling applied for, within a reasonable time after receipt of such ruling. C-3 SIGNATURES AS REQUIRED BY THE SECURITIES ACT OF 1933, THIS AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED ON BEHALF OF THE REGISTRANT, IN THE TOWNSHIP OF PLAINSBORO AND STATE OF NEW JERSEY, ON THE 24TH DAY OF NOVEMBER, 1997. MERRILL LYNCH MUNICIPAL BOND FUND, INC. (Registrant) /s/ Terry K. Glenn ___________________________________ (TERRY K. GLENN, EXECUTIVE VICE PRESIDENT) AS REQUIRED BY THE SECURITIES ACT OF 1933, THIS AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURES TITLE DATE President (Principal Arthur Zeikel* Executive Officer) - ------------------------------------- and Director (ARTHUR ZEIKEL) Treasurer (Principal Gerald M. Richard* Financial and - ------------------------------------- Accounting Officer) (GERALD M. RICHARD) Director Ronald W. Forbes* - ------------------------------------- (RONALD W. FORBES) Director Cynthia Montgomery* - ------------------------------------- (CYNTHIA A. MONTGOMERY) Director Charles C. Reilly* - ------------------------------------- (CHARLES C. REILLY) Director Kevin A. Ryan* - ------------------------------------- (KEVIN A. RYAN) Director Richard R. West* - ------------------------------------- (RICHARD R. WEST) /s/ Terry K. Glenn November 24, 1997 By: ____________________________ (TERRY K. GLENN, ATTORNEY-IN-FACT) C-4 EX-11 2 OPINION OF COUNSEL EXHIBIT 11 ROGERS & WELLS 200 PARK AVENUE NEW YORK, NEW YORK 10166 TELEPHONE: (212) 878-8000 FACSIMILE: (212) 878-8375 November 24, 1997 Merrill Lynch Municipal Bond Fund, Inc. P.O. Box 9011 Princeton, New Jersey 08543-9011 Ladies and Gentlemen: We have acted as counsel for Merrill Lynch Municipal Bond Fund, Inc., a Maryland corporation (the "Fund"), in connection with the preparation and filing with the Securities and Exchange Commission under the Securities Act of 1933, as amended, of a Registration Statement on Form N-14 (File Nos. 333- 37349 and 811-2688) (the "Registration Statement") relating to the issuance by the Fund of its shares of Limited Maturity Portfolio Common Stock, par value $0.10 per share (the "Shares"), in exchange for substantially all of the assets of, and the assumption of substantially all of the liabilities of, Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund, Merrill Lynch Michigan Limited Maturity Municipal Bond Fund, Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund, Merrill Lynch New York Limited Maturity Municipal Bond Fund and Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund, each a series (collectively, the "State Funds") of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, a Massachusetts business trust (the "Trust"). In so acting, we have examined and relied upon originals or copies, certified or otherwise identified to our satisfaction, of such corporate records, documents, certificates and other instruments as in our judgment are necessary or appropriate to enable us to render the opinions expressed below. Based upon the foregoing, and such examination of law as we have deemed necessary, we are of the opinion that: 1. The Fund has been duly incorporated and is a validly existing corporation in good standing under the laws of the State of Maryland. 2. The issuance of the Shares in consideration for the acquisition by the Fund of substantially all of the assets of, and the assumption by the Fund of substantially all of the liabilities of, the State Funds in the transaction described in the Registration Statement have been duly authorized and, when issued as contemplated in the Registration Statement, the Shares will be legally issued, fully paid and non-assessable. We hereby consent to the filing of this opinion with the Securities and Exchange Commission as an Exhibit to the Registration Statement. In giving this consent, we do not admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the Rules and Regulations of the Securities and Exchange Commission thereunder. Our opinion is limited to the laws of the State of New York, the corporate laws of the State of Maryland and the federal laws of the United States of America. As to certain matters governed by the laws of the State of Maryland, we have relied on the opinion of Wilmer, Cutler & Pickering. Very truly yours, /s/ Rogers & Wells EX-14.(A) 3 INDEPENDENT AUDITORS' CONSENT INDEPENDENT AUDITORS' CONSENT Merrill Lynch Municipal Bond Fund, Inc.: We consent to the incorporation by reference in this Registration Statement on Form N-14 of our report dated August 15, 1997 appearing in the annual report to shareholders of the Merrill Lynch Municipal Bond Fund, Inc. for the year ended June 30, 1997, which is included in the Merrill Lynch Municipal Bond Fund, Inc. Statement of Additional Information dated October 7, 1997, and to the references to us under the captions "Comparison of the State Funds and Limited Maturity Portfolio--Financial Highlights" and "Experts" appearing in the Proxy Statement and Prospectus, which is part of such Registration Statement. Deloitte & Touche LLP Princeton, New Jersey November 24, 1997 EX-14.(B) 4 INDEPENDENT AUDITORS' CONSENT EXHIBIT 14(b) INDEPENDENT AUDITORS' CONSENT Merrill Lynch Multi-State Limited Maturity Municipal Series Trust: We consent to the incorporation by reference in this Registration Statement on Form N-14 of our report dated September 12, 1997 appearing in the annual report to shareholders of the Merrill Lynch Multi-State Limited Maturity Municipal Series Trust for the year ended July 31, 1997, and to the references to us under the captions "Comparison of the State Funds and Limited Maturity Portfolio--Financial Highlights" and "Experts" appearing in the Proxy Statement and Prospectus, which is part of such Registration Statement. Deloitte & Touche LLP Princeton, New Jersey November 24, 1997 EX-17.(B) 5 M/L MUNICIPAL BOND PROSPECTUS AND SAI EXHIBIT 17(b) PROSPECTUS OCTOBER 7, 1997 MERRILL LYNCH MUNICIPAL BOND FUND, INC. P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800 ------------------------ Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") is a professionally managed, diversified, open-end investment company that seeks to provide shareholders with as high a level of income exempt from Federal income taxes as is consistent with the investment policies of each of its Portfolios and prudent investment management. The Fund is a series fund and is comprised of three separate Portfolios, each of which invests primarily in a diversified portfolio of tax-exempt Municipal Bonds, principally consisting of state, municipal and public authority securities. Each of the Portfolios pursues its investment objective through the separate investment policies described below: Insured Portfolio invests primarily in long-term, investment grade Municipal Bonds, each of which is covered by portfolio insurance guaranteeing the timely payment of principal at maturity and interest. National Portfolio invests primarily in long-term medium to lower grade Municipal Bonds offering higher yields than the Insured Portfolio but also subject to greater risks than investment grade Municipal Bonds. Limited Maturity Portfolio invests primarily in investment grade Municipal Bonds with a maximum maturity not to exceed four years and, depending on market conditions, an average maturity of less than two years is anticipated. The Limited Maturity Portfolio can be expected to offer the lowest yield of the three Portfolios, but it will be subject to less market risk than the longer-term Portfolios. For more information on the Fund's investment objective and policies, please see "Investment Objective and Policies" on page 19. ------------------------ Each Portfolio is, in effect, a separate fund issuing its own shares. Pursuant to the Merrill Lynch Select Pricing(SM) System, each Portfolio of the Fund offers four classes of shares, each with a different combination of sales charges, ongoing fees and other features. Class C shares of the Limited Maturity Portfolio are available only through the Exchange Privilege. 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 8. Class A and Class D shares of the Fund's Portfolios may be purchased directly from Merrill Lynch Funds Distributor, Inc. (the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 ((609) 282-2800), or from securities dealers that have entered into selected dealer agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). Class B and Class C shares of the Fund's Portfolios may only be purchased either directly from the Distributor or Merrill Lynch. See "Purchase of Shares" below. The minimum initial purchase for shares of each Portfolio is $1,000, and the minimum subsequent purchase in each Portfolio is $50 except that for participants in certain fee-based programs the minimum initial purchase is $500 and the minimum subsequent purchase is $50. Merrill Lynch may charge its customers a processing fee (presently $5.35) for confirming purchases and repurchases. Purchases and redemptions made directly through the Fund's transfer agent are not subject to the processing fee. See "Purchase of Shares" and "Redemption of Shares." The net investment income of each Portfolio is declared daily and paid monthly. ------------------------ 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 sets forth in concise form the information about the Fund that a prospective investor should know before investing in the Fund. Investors should read and retain this Prospectus for future reference. Additional information about the Fund has been filed with the Securities and Exchange Commission (the "Commission") in a Statement of Additional Information, dated October 7, 1997, and is available upon request and without charge, by calling or writing the Fund at the address and telephone number set forth above. 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 Fund. The Statement of Additional Information is hereby incorporated by reference into this Prospectus. ------------------------ FUND ASSET MANAGEMENT--INVESTMENT ADVISER MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR INSURED PORTFOLIO FEE TABLE A general comparison of the sales arrangements and other nonrecurring and recurring expenses applicable to shares of the Fund follows:
CLASS A(a) CLASS B(b) CLASS C CLASS D ----------- ----------------------- -------------- --------- SHAREHOLDER TRANSACTION EXPENSES: Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)...... 4.00%(c) None None 4.00%(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) 4.00% during the first 1.00% for one None(d) year, decreasing 1.00% year(f) annually thereafter to 0.0% after the fourth year(e) Exchange Fee............................... None None None None ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS): Investment Advisory Fees(g)................ 0.36% 0.36% 0.36% 0.36% 12b-1 Fees(h): Account Maintenance Fees................... None 0.25% 0.25% 0.25% Distribution Fees.......................... None 0.50% 0.55% None (Class B shares convert to Class D shares automatically after approximately ten years and cease being subject to distribution fees) Other Expenses: Custodial Fees........................... 0.01% 0.01% 0.01% 0.01% Shareholder Servicing Costs(i)........... 0.03% 0.04% 0.05% 0.03% Other.................................... 0.04% 0.03% 0.03% 0.04% ------ ----- ----- ----- Total Other Expenses................... 0.08% 0.08% 0.09% 0.08% ------ ----- ----- ----- Total Fund Operating Expenses.............. 0.44% 1.19% 1.25% 0.69% ====== ===== ===== =====
- --------------- (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 33. (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 36. (c) Reduced for purchases of $25,000 and over and waived for purchases of Class A shares in connection with certain fee-based programs. Class A or Class D purchases of $1,000,000 or more may not be subject to an initial sales charge. See "Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and Class D Shares" -- page 33. (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 1.00% 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 45. (e) The CDSC may be modified in connection with certain fee-based programs. See "Shareholder Services -- Fee-Based Programs" -- page 45. (f) The CDSC may be waived in connection with certain fee-based programs. See "Shareholder Services -- Fee-Based Programs" -- page 45. (g) See "Management of the Fund -- Management and Advisory Arrangements" -- page 28. (h) See "Purchase of Shares -- Distribution Plans" -- page 39. (i) See "Management of the Fund -- Transfer Agency Services" -- page 29. 2 INSURED PORTFOLIO EXAMPLE:
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF: ------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- An investor would pay the following expenses on a $1,000 investment including the maximum $40 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 2, (2) a 5% annual return throughout the periods and (3) redemption at the end of the period (including any applicable CDSC for Class B and Class C shares): Class A................................................... $ 44 $ 54 $ 64 $ 93 Class B................................................... $ 52 $ 58 $ 65 $144 Class C................................................... $ 23 $ 40 $ 69 $151 Class D................................................... $ 47 $ 61 $ 77 $122 An investor would pay the following expenses on the same $1,000 investment assuming no redemption at the end of the period: Class A................................................... $ 44 $ 54 $ 64 $ 93 Class B................................................... $ 12 $ 38 $ 65 $144 Class C................................................... $ 13 $ 40 $ 69 $151 Class D................................................... $ 47 $ 61 $ 77 $122
The foregoing Fee Table is intended to assist investors in understanding the costs and expenses that a shareholder in the Fund investing in the Insured Portfolio 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 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 charge permitted under the Conduct Rules of the National Association of Securities Dealers, Inc. ("NASD"). Merrill Lynch may charge its customers a processing fee (presently $5.35) for confirming purchases and redemptions. Purchases and redemptions made directly through the Fund's transfer agent are not subject to the processing fee. See "Purchase of Shares" and "Redemption of Shares." 3 NATIONAL PORTFOLIO FEE TABLE A general comparison of the sales arrangements and other nonrecurring and recurring expenses applicable to shares of the Fund follows:
CLASS A(a) CLASS B(b) CLASS C CLASS D ---------- ----------------------- -------------- --------- SHAREHOLDER TRANSACTION EXPENSES: Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)....... 4.00%(c) None None 4.00%(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) 4.00% during the first 1.0% for one None(d) year, decreasing 1.00% year(f) annually thereafter to 0.0% after the fourth year(e) Exchange Fee................................ None None None None ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS): Investment Advisory Fees(g)................. 0.48% 0.48% 0.48% 0.48% 12b-1 Fees(h): Account Maintenance Fees.................. None 0.25% 0.25% 0.25% Distribution Fees......................... None 0.50% 0.55% None (Class B shares convert to Class D shares automatically after approximately ten years and cease being subject to distribution fees) Other Expenses: Custodial Fees............................ 0.01% 0.01% 0.01% 0.01% Shareholder Servicing Costs(i)............ 0.04% 0.05% 0.05% 0.04% Other..................................... 0.02% 0.02% 0.02% 0.02% ------ ----- ----- ----- Total Other Expenses.................... 0.07% 0.08% 0.08% 0.07% ------ ----- ----- ----- Total Fund Operating Expenses............. 0.55% 1.31% 1.36% 0.80% ====== ===== ===== =====
- --------------- (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 33. (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 36. (c) Reduced for purchases of $25,000 and over and waived for purchases of Class A shares in connection with certain fee-based programs. Class A and Class D purchases of $1,000,000 or more may not be subject to an initial sales charge. See "Purchases of Shares -- Initial Sales Charge Alternatives -- Class A and Class D Shares" -- page 33. (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 1.0% 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 45. (e) The CDSC may be modified in connection with certain fee-based programs. See "Shareholder Services -- Fee-Based Programs" -- page 45. (f) The CDSC may be waived in connection with certain fee-based programs. See "Shareholder Services -- Fee-Based Programs" -- page 45. (g) See "Management of the Fund -- Management and Advisory Arrangements" -- page 28. (h) See "Purchase of Shares -- Distribution Plans" -- page 39. (i) See "Management of the Fund -- Transfer Agency Services" -- page 29. 4 NATIONAL PORTFOLIO EXAMPLE:
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF: ------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- An investor would pay the following expenses on a $1,000 investment including the maximum $40 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 periods and (3) redemption at the end of the period (including any applicable CDSC for Class B and Class C shares): Class A................................................... $ 45 $ 57 $ 70 $106 Class B................................................... $ 53 $ 62 $ 72 $158 Class C................................................... $ 24 $ 43 $ 74 $164 Class D................................................... $ 48 $ 65 $ 83 $135 An investor would pay the following expenses on the same $1,000 investment assuming no redemption at the end of the period: Class A................................................... $ 45 $ 57 $ 70 $106 Class B................................................... $ 13 $ 42 $ 72 $158 Class C................................................... $ 14 $ 43 $ 74 $164 Class D................................................... $ 48 $ 65 $ 83 $135
The foregoing Fee Table is intended to assist investors in understanding the costs and expenses that a shareholder in the Fund investing in the National Portfolio 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 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 charge permitted under the Conduct Rules of the NASD. Merrill Lynch may charge its customers a processing fee (presently $5.35) for confirming purchases and redemptions. Purchases and redemptions made directly through the Fund's transfer agent are not subject to the processing fee. See "Purchase of Shares" and "Redemption of Shares." 5 LIMITED MATURITY PORTFOLIO FEE TABLE A general comparison of the sales arrangements and other nonrecurring and recurring expenses applicable to shares of the Fund follows:
CLASS A(a) CLASS B(b) CLASS C* CLASS D ----------- ----------------------- -------------- --------- SHAREHOLDER TRANSACTION EXPENSES: Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)...... 1.00%(c) None None 1.00%(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) 1.00% during the first 1.00% for one None(d) year, decreasing to year(f) 0.0% after the first year(e) Exchange Fee............................... None None None None ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS): Investment Advisory Fee(g)................. 0.33% 0.33% 0.33% 0.33% 12b-1 Fees(h): Account Maintenance Fees................. None 0.15% 0.15% 0.10% Distribution Fees(g)..................... None 0.20% 0.20% None (Class B shares convert to Class D shares automatically after approximately ten years and cease being subject to distribution fees) Other Expenses: Custodial Fees........................... 0.01% 0.01% 0.01% 0.01% Shareholder Servicing Costs(i)........... 0.02% 0.03% 0.04% 0.02% Other.................................... 0.03% 0.03% 0.02% 0.02% ------ ----- ----- ----- Total Other Expenses................... 0.06% 0.07% 0.07% 0.05% ------ ----- ----- ----- Total Fund Operating Expenses.............. 0.39% 0.75% 0.75% 0.48% ====== ===== ===== =====
- --------------- (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 33. (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 36. (c) Reduced for purchases of $100,000 and over and waived for purchases of Class A shares in connection with certain fee-based programs. Class A and Class D purchases of $100,000,000 or more may not be subject to an initial sales charge. See "Purchases of Shares -- Initial Sales Charge Alternatives -- Class A and Class D Shares" -- page 33. (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 45. (e) The CDSC may be modified in connection with certain fee-based programs. See "Shareholder Services -- Fee-Based Programs" -- page 45. (f) The CDSC may be waived in connection with certain fee-based programs. See "Shareholder Services -- Fee-Based Programs" -- page 45. (g) See "Management of the Fund -- Management and Advisory Arrangements" -- page 28. (h) See "Purchase of Shares -- Distribution Plans" -- page 39. (i) See "Management of the Fund -- Transfer Agency Services" -- page 29. * Class C shares of the Limited Maturity Portfolio are available only through the Exchange Privilege. See page 46. 6 LIMITED MATURITY PORTFOLIO EXAMPLE:
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF: ------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- An investor would pay the following expenses on a $1,000 investment including the maximum $10 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 6, (2) a 5% annual return throughout the periods and (3) redemption at the end of the period (including any applicable CDSC for Class B and Class C shares): Class A................................................... $ 14 $ 22 $ 32 $ 59 Class B................................................... $ 18 $ 24 $ 42 $ 93 Class C*.................................................. $ 18 $ 24 $ 42 $ 93 Class D................................................... $ 15 $ 25 $ 37 $ 70 An investor would pay the following expenses on the same $1,000 investment assuming no redemption at the end of the period: Class A................................................... $ 14 $ 22 $ 32 $ 59 Class B................................................... $ 8 $ 24 $ 42 $ 93 Class C*.................................................. $ 8 $ 24 $ 42 $ 93 Class D................................................... $ 15 $ 25 $ 37 $ 70
- --------------- * Class C shares of the Limited Maturity Portfolio are available only through the Exchange Privilege. The foregoing Fee Table is intended to assist investors in understanding the costs and expenses that a shareholder in the Fund investing in the Limited Maturity Portfolio 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 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 charge permitted under the Conduct Rules of the NASD. Merrill Lynch may charge its customers a processing fee (presently $5.35) for confirming purchases and redemptions. Purchases and redemptions made directly through the Fund's transfer agent are not subject to the processing fee. See "Purchase of Shares" and "Redemption of Shares." 7 MERRILL LYNCH SELECT PRICING(SM) SYSTEM Each Portfolio of the Fund offers four classes of shares under the Merrill Lynch Select Pricing(SM) System. The shares of each class 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, and for the Insured Portfolio and National Portfolio only, shares of Class C are sold to investors choosing the deferred sales charge alternatives. Class C shares of the Limited Maturity Portfolio are offered only through the exchange privilege and may not be purchased except through exchange of Class C shares of another Portfolio or another Fund. 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 Fund Asset Management, L.P. ("FAM" or the "Investment Adviser"), an affiliate of MLAM. Funds advised by MLAM or FAM that utilize 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 the Fund's Portfolios represents an identical interest in the investment portfolio of the applicable Portfolio 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 fees and account maintenance fees that are imposed on Class B and Class C shares of a Portfolio, as well as the account maintenance fees that are imposed on the Class D shares, will be imposed directly against those classes and not against all assets of the relevant Portfolio 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 Portfolio 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 Privileges." 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 the 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 and 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. More detailed information as to each class of shares is set forth under "Purchase of Shares." 8 INSURED AND NATIONAL PORTFOLIOS
- ------------------------------------------------------------------------------------------------- ACCOUNT MAINTENANCE DISTRIBUTION CONVERSION CLASS SALES CHARGE(1) FEE FEE FEATURE - ------------------------------------------------------------------------------------------------- A Maximum 4.00% initial No No No sales charge(2)(3) - ------------------------------------------------------------------------------------------------- B CDSC for a period of 4 0.25% 0.50% B shares convert to D shares years, automatically after at a rate of 4.00% during approximately ten years(5) the first year, decreasing 1.00% annually to 0.0%(4) - ------------------------------------------------------------------------------------------------- C 1.00% CDSC for one year 0.25% 0.55% No decreasing to 0.0% after the first year(6) - ------------------------------------------------------------------------------------------------- D Maximum 4.00% initial 0.25% No No sales charge(3) - -------------------------------------------------------------------------------------------------
LIMITED MATURITY PORTFOLIO
- ------------------------------------------------------------------------------------------------- ACCOUNT MAINTENANCE DISTRIBUTION CONVERSION CLASS SALES CHARGE(1) FEE FEE FEATURE - ------------------------------------------------------------------------------------------------- A Maximum 1.00% initial No No No sales charge(2)(3) - ------------------------------------------------------------------------------------------------- B CDSC at a rate of 1.00% 0.15% 0.20% B shares convert to during the first year, D shares automatically decreasing to 0.0% after after approximately the first year(4) ten years(5) - ------------------------------------------------------------------------------------------------- C* 1.00% CDSC for one year 0.15% 0.20% No decreasing to 0.0% after the first year(6) - ------------------------------------------------------------------------------------------------- D Maximum 1.00% initial 0.10% No No sales charge(3) - -------------------------------------------------------------------------------------------------
- --------------- (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 $25,000 or more for the Insured and National Portfolios and $100,000 or more for the Limited Maturity Portfolio and waived for purchases of Class A shares in connection with certain fee-based programs. Class A and Class D share purchases of $1,000,000 or more may not be subject to an initial sales charge but instead may be subject to a 1.0% CDSC for the Insured and National Portfolios and a 0.20% CDSC for the Limited Maturity Portfolio, if redeemed within one year. 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 the conversion and holding periods for certain retirement plans was modified. Also, Class B shares of certain other MLAM-advised mutual funds into which exchanges may be made have an eight year conversion period. If Class B shares of the 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. * Class C shares of the Limited Maturity Portfolio are available only through the Exchange Privilege. See page 46. 9 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 who currently own Class A shares of a Portfolio in a shareholder account are entitled to purchase additional Class A shares of that Portfolio in that account. Other eligible investors include participants in certain fee-based programs. In addition, Class A shares will be offered at net asset value to Merrill Lynch & Co., Inc. ("ML & Co.") and its subsidiaries (the term "subsidiaries," when used herein with respect to ML & Co., includes MLAM, FAM and certain other entities directly or indirectly wholly owned and controlled by ML & Co.) and their directors and employees and to members of the Boards of MLAM-advised mutual funds. The maximum initial sales charge is 4.00% for the Insured and National Portfolios and 1.00% for the Limited Maturity Portfolio and is reduced for purchases of $25,000 and over for the Insured and National Portfolios and of $100,000 or over for the Limited Maturity Portfolio, and waived for purchases by participants in certain fee-based programs. Purchases of $1,000,000 or more may not be subject to an initial sales charge but such purchases may be subject to a CDSC of 1.00% (for the Insured and National Portfolios) or 0.20% (for the Limited Maturity Portfolio) 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 the investors'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 0.25% (in the case of the Insured Portfolio and the National Portfolio) and 0.15% (in the case of the Limited Maturity Portfolio) of the Portfolio's average net assets attributable to the Class B shares and an ongoing distribution fee of 0.50% (in the case of the Insured Portfolio and the National Portfolio) and 0.20% (in the case of the Limited Maturity Portfolio) of the Portfolio's average net assets attributable to Class B shares. Class B shares are also subject to a CDSC if they are redeemed within four years of purchase (in the case of the Insured Portfolio and National Portfolio) or within one year of purchase (in the case of the Limited Maturity Portfolio). Such CDSC may be modified in connection with certain fee-based programs. Approximately ten years after issuance, Class B shares of the Portfolio will convert automatically into Class D shares of the Portfolio, which are subject to an account maintenance fee but 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 Portfolio 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 a 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 10 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 do not incur a sales charge when they are purchased, but they are subject to an ongoing account maintenance fee of 0.25% (in the case of the Insured Portfolio and the National Portfolio) and 0.15% (in the case of the Limited Maturity Portfolio) of average net assets and an ongoing distribution fee of 0.55% (in the case of the Insured Portfolio and the National Portfolio) and 0.20% (in the case of the Limited Maturity Portfolio) of average net assets. Class C shares are also subject to a 1.00% CDSC if they are redeemed within one year of purchase. Such CDSC may be waived in connection with certain fee-based programs. Although Class C shares are subject to a CDSC for only one year (as compared to four years for Class B of the Insured Portfolio and National Portfolio), Class C shares have no conversion feature and, accordingly, an investor who purchases Class C shares will be subject to account maintenance fees and higher distribution fees that will be imposed on Class C shares for an indefinite period subject to annual approval by the Fund's Board of Directors and regulatory limitations. Class C shares of the Limited Maturity Portfolio are available only through the Exchange Privilege. See "Shareholder Services -- Exchange Privileges." Class D:Class D shares incur an initial sales charge when they are purchased and are subject to an ongoing account maintenance fee of 0.25% (in the case of the Insured Portfolio and the National Portfolio) and 0.10% (in the case of the Limited Maturity Portfolio) of average net assets. The maximum initial sales charge is 4.00% (for the Insured Portfolio and the National Portfolio) and 1.00% (for the Limited Maturity Portfolio) and is reduced for purchases of $25,000 or more for the Insured Portfolio or for the National Portfolio, and is reduced for purchases of $100,000 or more for the Limited Maturity Portfolio. Class D shares are not subject to an ongoing distribution fee or any CDSC when they are redeemed. Purchases of $1,000,000 or more may not be subject to an initial sales charge but such purchase may be subject to a CDSC of 1.00% (for the Insured and National Portfolios) or 0.20% (for the Limited Maturity Portfolio) 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 in connection with certain fee-based programs. Class D shares also will be issued upon conversion of Class B shares as described above under "Class B." See "Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and Class D Shares." The following is a discussion of the factors that investors should consider in determining the method of purchasing shares under the Merrill Lynch Select Pricing(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 of the 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 deferred sales charges imposed in connection with purchases of Class B or Class C 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 11 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 who 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 Alternatives. Because no initial sales charges are deducted at the time of purchase, Class B and Class C 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 alternatives 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 Portfolio will be converted into Class D shares of that Portfolio 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. Other investors, however, may elect to purchase Class C shares if they determine that it is advantageous to have all their assets invested initially and they are uncertain as to the length of time they intend to hold their assets in MLAM-advised mutual funds. Although Class C shareholders are subject to a shorter CDSC period at a lower rate, they forgo the Class B conversion feature, making their investment 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." 12 FINANCIAL HIGHLIGHTS The financial information in the table below in connection with shares of the Insured Portfolio, National Portfolio and the Limited Maturity Portfolio has been audited in conjunction with the annual audits of the financial statements of the Portfolios by Deloitte & Touche LLP, independent auditors. Financial statements for the fiscal year ended June 30, 1997 and the independent auditors' report thereon are included in the Statement of Additional Information. Further information about the performance of the Fund is contained in the Fund's most recent annual report to shareholders, which may be obtained, without charge, by calling or by writing the Fund 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 financial statements:
INSURED PORTFOLIO ---------------------------------------------------------------------------------------- CLASS A ---------------------------------------------------------------------------------------- FOR THE YEAR ENDED JUNE 30, ---------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year....... $ 7.91 $ 7.92 $ 7.88 $ 8.64 $ 8.26 $ 7.92 $ 7.86 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Investment income -- net................ .45 .44 .46 .47 .50 .52 .54 Realized and unrealized gain (loss) on investments -- net.................... .15 (.01) .18 (.53) .49 .41 .12 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations......... .60 .43 .64 (.06) .99 .93 .66 ---------- ---------- ---------- ---------- ---------- ---------- ---------- LESS DIVIDENDS AND DISTRIBUTIONS: Investment income -- net................ (.45) (.44) (.46) (.47) (.50) (.52) (.54) Realized gain on investments -- net..... -- -- (.14) (.23) (.11) (.07) (.06) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions........ (.45) (.44) (.60) (.70) (.61) (.59) (.60) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of year............. $ 8.06 $ 7.91 $ 7.92 $ 7.88 $ 8.64 $ 8.26 $ 7.92 ========== ========== ========== ========== ========== ========== ========== TOTAL INVESTMENT RETURN:* Based on net asset value per share....... 7.72% 5.51% 8.60% (1.08%) 12.41% 12.11% 8.84% ========== ========== ========== ========== ========== ========== ========== RATIOS TO AVERAGE NET ASSETS: Expenses................................. .44% .43% .43% .42% .42% .44% .45% ========== ========== ========== ========== ========== ========== ========== Investment income -- net................. 5.58% 5.55% 5.78% 5.53% 5.94% 6.44% 6.90% ========== ========== ========== ========== ========== ========== ========== SUPPLEMENTAL DATA: Net assets, end of year (in thousands)... $1,441,785 $1,572,835 $1,706,064 $1,941,741 $2,225,188 $2,062,591 $1,984,307 ========== ========== ========== ========== ========== ========== ========== Portfolio turnover....................... 74.40% 78.49% 35.61% 28.34% 43.86% 22.50% 33.12% ========== ========== ========== ========== ========== ========== ==========
1990 1989 1988 ---------- ---------- ---------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year....... $ 7.97 $ 7.69 $ 7.79 ---------- ---------- ---------- Investment income -- net................ .55 .58 .57 Realized and unrealized gain (loss) on investments -- net.................... (.11) .28 .00 ---------- ---------- ---------- Total from investment operations......... .44 .86 .57 ---------- ---------- ---------- LESS DIVIDENDS AND DISTRIBUTIONS: Investment income -- net................ (.55) (.58) (.57) Realized gain on investments -- net..... -- -- (.10) ---------- ---------- ---------- Total dividends and distributions........ (.55) (.58) (.67) ---------- ---------- ---------- Net asset value, end of year............. $ 7.86 $ 7.97 $ 7.69 ========== ========== ========== TOTAL INVESTMENT RETURN:* Based on net asset value per share....... 5.76% 11.62% 7.75% ========== ========== ========== RATIOS TO AVERAGE NET ASSETS: Expenses................................. .46% .49% .52% ========== ========== ========== Investment income -- net................. 7.03% 7.46% 7.55% ========== ========== ========== SUPPLEMENTAL DATA: Net assets, end of year (in thousands)... $2,019,166 $2,013,219 $1,982,997 ========== ========== ========== Portfolio turnover....................... 23.20% 45.49% 33.98% ========== ========== ==========
- --------------- * Total investment returns exclude the effects of sales loads. 13 FINANCIAL HIGHLIGHTS (CONTINUED) The following per share data and ratios have been derived from information provided in the financial statements:
INSURED PORTFOLIO ---------------------------------------------------------------------------------------------- CLASS B ---------------------------------------------------------------------------------------------- FOR THE YEAR ENDED JUNE 30, FOR THE PERIOD ------------------------------------------------------------------------------ OCT. 21, 1988+ TO JUNE 30, 1997 1996 1995 1994 1993 1992 1991 1990 1989 -------- -------- -------- -------- -------- -------- -------- -------- -------------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period................. $ 7.91 $ 7.92 $ 7.87 $ 8.63 $ 8.26 $ 7.92 $ 7.86 $ 7.97 $ 7.81 -------- -------- -------- -------- -------- -------- -------- -------- ------ Investment income -- net........... .39 .38 .40 .40 .44 .46 .48 .49 .36 Realized and unrealized gain (loss) on investments -- net...... .14 (.01) .19 (.53) .48 .41 .12 (.11) .16 -------- -------- -------- -------- -------- -------- -------- -------- ------ Total from investment operations................ .53 .37 .59 (.13) .92 .87 .60 .38 .52 -------- -------- -------- -------- -------- -------- -------- -------- ------ LESS DIVIDENDS AND DISTRIBUTIONS: Investment income -- net........... (.39) (.38) (.40) (.40) (.44) (.46) (.48) (.49) (.36) Realized gain on investments -- net...... -- -- (.14) (.23) (.11) (.07) (.06) -- -- -------- -------- -------- -------- -------- -------- -------- -------- ------ Total dividends and distributions............. (.39) (.38) (.54) (.63) (.55) (.53) (.54) (.49) (.36) -------- -------- -------- -------- -------- -------- -------- -------- ------ Net asset value, end of period.................... $ 8.05 $ 7.91 $ 7.92 $ 7.87 $ 8.63 $ 8.26 $ 7.92 $ 7.86 $ 7.97 ======== ======== ======== ======== ======== ======== ======== ======== ============= TOTAL INVESTMENT RETURN:** Based on net asset value per share................. 6.78% 4.71% 7.91% (1.81%) 11.44% 11.27% 8.02% 4.98% 6.88%# ======== ======== ======== ======== ======== ======== ======== ======== ============= RATIOS TO AVERAGE NET ASSETS: Expenses................... 1.19% 1.19% 1.19% 1.17% 1.18% 1.19% 1.20% 1.22% 1.23%* ======== ======== ======== ======== ======== ======== ======== ======== ============= Investment income -- net... 4.82% 4.80% 5.03% 4.78% 5.17% 5.69% 6.13% 6.27% 6.58%* ======== ======== ======== ======== ======== ======== ======== ======== ============= SUPPLEMENTAL DATA: Net assets, end of period (in thousands)............ $560,105 $723,090 $782,748 $866,193 $911,307 $706,016 $537,755 $408,641 $175,707 ======== ======== ======== ======== ======== ======== ======== ======== ============= Portfolio turnover......... 74.40% 78.49% 35.61% 28.34% 43.86% 22.50% 33.12% 23.20% 45.49% ======== ======== ======== ======== ======== ======== ======== ======== =============
CLASS C CLASS D -------------------------------------- -------------------------------------- FOR THE FOR THE FOR THE PERIOD FOR THE FOR THE FOR THE PERIOD YEAR ENDED YEAR ENDED OCT. 21, 1994+ YEAR ENDED YEAR ENDED OCT. 21, 1994+ JUNE 30, JUNE 30, TO JUNE 30, JUNE 30, JUNE 30, TO JUNE 30, 1997 1996 1995 1997 1996 1995 ---------- ---------- -------------- ---------- ---------- -------------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period................. $ 7.91 $ 7.92 $ 7.68 $ 7.91 $ 7.92 $ 7.68 ----- ----- ----- ----- ----- ----- Investment income -- net........... .38 .38 .27 .43 .42 .29 Realized and unrealized gain (loss) on investments -- net...... .15 (.01) .38 .15 (.01) .38 ----- ----- ----- ----- ----- ----- Total from investment operations................ .53 .37 .65 .58 .41 .67 ----- ----- ----- ----- ----- ----- LESS DIVIDENDS AND DISTRIBUTIONS: Investment income -- net........... (.38) (.38) (.27) (.43) (.42) (.29) Realized gain on investments -- net...... -- -- (.14) -- -- (.14) ----- ----- ----- ----- ----- ----- Total dividends and distributions............. (.38) (.38) (.41) (.43) (.42) (.43) ----- ----- ----- ----- ----- ----- Net asset value, end of period.................... $ 8.06 $ 7.91 $ 7.92 $ 8.06 $ 7.91 $ 7.92 ========== ========== ============= ========== ========== ============= TOTAL INVESTMENT RETURN:** Based on net asset value per share................. 6.86% 4.65% 8.83%# 7.46% 5.25% 9.24%# ========== ========== ============= ========== ========== ============= RATIOS TO AVERAGE NET ASSETS: Expenses................... 1.25% 1.24% 1.23%* 69% .68% .68%* ========== ========== ============= ========== ========== ============= Investment income -- net... 4.77% 4.75% 4.93% 5.33% 5.31% 5.50%* ========== ========== ============= ========== ========== ============= SUPPLEMENTAL DATA: Net assets, end of period (in thousands)............ $ 11,922 $ 18,936 $7,756 $ 38,422 $ 51,772 $ 26,015 ========== ========== ============= ========== ========== ============= Portfolio turnover......... 74.40% 78.49% 35.61% 74.40% 78.49% 35.61% ========== ========== ============= ========== ========== =============
- --------------- * Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of Operations. # Aggregate total investment return. 14 FINANCIAL HIGHLIGHTS (CONTINUED) The following per share data and ratios have been derived from information provided in the financial statements:
NATIONAL PORTFOLIO ------------------------------------------------------------------------------------ CLASS A ------------------------------------------------------------------------------------ FOR THE YEAR ENDED JUNE 30, ------------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 1992 1991 -------- -------- ---------- ---------- ---------- ---------- ---------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year.......... $ 10.11 $ 10.02 $ 10.08 $ 11.02 $ 10.64 $ 10.17 $ 10.12 -------- -------- ---------- ---------- ---------- ---------- ---------- Investment income -- net................... .60 .60 .60 .62 .67 .71 .73 Realized and unrealized gain(loss) on investments -- net....................... .27 .09 .15 (.64) .57 .58 .05 -------- -------- ---------- ---------- ---------- ---------- ---------- TOTAL FROM INVESTMENT OPERATIONS............ .87 .69 .75 (.02) 1.24 1.29 .78 -------- -------- ---------- ---------- ---------- ---------- ---------- LESS DIVIDENDS AND DISTRIBUTIONS: Investment income -- net................... (.60) (.60) (.60) (.62) .67 .71 .73 Realized gain on investments -- net........ -- -- (.19) (.30) (.19) (.11) -- In excess of realized gain on investments -- net....................... -- -- (.02) -- -- -- -- -------- -------- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions........... (.60) (.60) (.81) (.92) (.86) (.82) (.73) -------- -------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of year................ $ 10.38 $ 10.11 $ 10.02 $ 10.08 $ 11.02 $ 10.64 $ 10.17 ======== ======== ========== ========== ========== ========== ========== TOTAL INVESTMENT RETURN:* Based on net asset value per share.......... 8.84% 6.98% 7.89% (.47)% 12.19% 13.09% 7.94% ======== ======== ========== ========== ========== ========== ========== RATIOS TO AVERAGE NET ASSETS: Expenses.................................... .55% .56% .56% .55% .55% .55% .55% ======== ======== ========== ========== ========== ========== ========== Investment income -- net.................... 5.86% 5.89% 6.01% 5.72% 6.23% 6.80% 7.20% ======== ======== ========== ========== ========== ========== ========== SUPPLEMENTAL DATA: Net assets, end of period (in thousands).... $983,650 $983,550 $1,059,440 $1,203,181 $1,353,805 $1,278,055 $1,255,820 ======== ======== ========== ========== ========== ========== ========== Portfolio turnover.......................... 99.52% 95.09% 103.65% 73.33% 65.43% 50.94% 75.25% ======== ======== ========== ========== ========== ========== ==========
1990 1989 1988 ---------- ---------- ---------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year.......... $ 10.31 $ 9.94 $ 10.12 ---------- ---------- ---------- Investment income -- net................... .74 .77 .76 Realized and unrealized gain(loss) on investments -- net....................... (.19) .37 (.11) ---------- ---------- ---------- TOTAL FROM INVESTMENT OPERATIONS............ .55 1.14 .65 ---------- ---------- ---------- LESS DIVIDENDS AND DISTRIBUTIONS: Investment income -- net................... .74 .77 .76 Realized gain on investments -- net........ -- -- (.07) In excess of realized gain on investments -- net....................... -- -- -- ---------- ---------- ---------- Total dividends and distributions........... (.74) (.77) (.83) ---------- ---------- ---------- Net asset value, end of year................ $ 10.12 $ 10.31 $ 9.94 ========== ========== ========== TOTAL INVESTMENT RETURN:* Based on net asset value per share.......... 5.53% 11.89% 6.89% ========== ========== ========== RATIOS TO AVERAGE NET ASSETS: Expenses.................................... .55% .55% .55% ========== ========== ========== Investment income -- net.................... 7.27% 7.63% 7.79% ========== ========== ========== SUPPLEMENTAL DATA: Net assets, end of period (in thousands).... $1,365,541 $1,445,116 $1,467,982 ========== ========== ========== Portfolio turnover.......................... 48.80% 76.73% 72.77% ========== ========== ==========
- --------------- * Total investment returns exclude the effects of sales loads. 15 FINANCIAL HIGHLIGHTS (CONTINUED) The following per share data and ratios have been derived from information provided in the financial statements:
NATIONAL PORTFOLIO ---------------------------------------------------------------------------------------------- CLASS B ---------------------------------------------------------------------------------------------- FOR THE FOR THE YEAR ENDED JUNE 30, PERIOD ------------------------------------------------------------------------------ OCT. 21, 1988+ TO JUNE 30, 1997 1996 1995 1994 1993 1992 1991 1990 1989 -------- -------- -------- -------- -------- -------- -------- -------- -------------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.............................. $ 10.11 $ 10.02 $ 10.07 $ 11.02 $ 10.63 $ 10.16 $ 10.11 $ 10.30 $ 10.14 -------- -------- -------- -------- -------- -------- -------- -------- ------- Investment income -- net............ .52 .52 .52 .54 .59 .63 .65 .66 .48 Realized and unrealized gain (loss) on investments -- net............. .26 .09 .16 (.65) .58 .58 .05 (.19) .16 -------- -------- -------- -------- -------- -------- -------- -------- ------- Total from investment operations..... .78 .61 .68 (.11) 1.17 1.21 .70 .47 .64 -------- -------- -------- -------- -------- -------- -------- -------- ------- LESS DIVIDENDS AND DISTRIBUTIONS: Investment income -- net............ (.52) (.52) (.52) (.54) (.59) (.63) (.65) (.66) (.48) Realized gain on investments -- net................ -- -- (.19) (.30) (.19) (.11) -- -- -- In excess of realized gain on investments -- net................ -- -- (.02) -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- ------- Total dividends and distributions.... (.52) (.52) (.73) (.84) (.78) (.74) (.65) (.66) (.48) -------- -------- -------- -------- -------- -------- -------- -------- ------- Net asset value, end of period....... $ 10.37 $ 10.11 $ 10.02 $ 10.07 $ 11.02 $ 10.63 $ 10.16 $ 10.11 $ 10.30 ======== ======== ======== ======== ======== ======== ======== ======== ======= TOTAL INVESTMENT RETURN:** Based on net asset value per share... 7.92% 6.17% 7.28% (1.39%) 11.45% 12.25% 7.14% 4.74% 6.48%# ======== ======== ======== ======== ======== ======== ======== ======== ======= RATIOS TO AVERAGE NET ASSETS: Expenses............................. 1.31% 1.32% 1.32% 1.30% 1.31% 1.31% 1.31% 1.31% 1.31%* ======== ======== ======== ======== ======== ======== ======== ======== ======= Investment income -- net............. 5.10% 5.13% 5.25% 4.97% 5.46% 6.03% 6.43% 6.52% 6.74%* ======== ======== ======== ======== ======== ======== ======== ======== ======= SUPPLEMENTAL DATA: Net assets, end of period (in thousands).......................... $415,103 $399,341 $419,933 $459,169 $424,071 $286,375 $213,581 $179,362 $ 97,196 ======== ======== ======== ======== ======== ======== ======== ======== ======= Portfolio turnover................... 99.52% 95.09% 103.65% 73.33% 65.43% 50.94% 75.25% 48.80% 76.73% ======== ======== ======== ======== ======== ======== ======== ======== ======= CLASS C CLASS D -------------------------------------- -------------------------------------- FOR THE FOR THE FOR THE FOR THE PERIOD FOR THE FOR THE PERIOD YEAR ENDED YEAR ENDED OCT. 21, 1994+ YEAR ENDED YEAR ENDED OCT. 21, 1994+ JUNE 30, JUNE 30, TO JUNE 30, JUNE 30, JUNE 30, TO JUNE 30, 1997 1996 1995 1997 1996 1995 ---------- ---------- -------------- ---------- ---------- -------------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period.............................. $ 10.11 $ 10.03 $ 9.85 $ 10.12 $ 10.03 $ 9.85 ------- ------- ------ ------- ------- ------- Investment income -- net............ .52 .52 .36 .58 .57 .40 Realized and unrealized gain (loss) on investments -- net............. .27 .08 .39 .27 .09 .39 ------- ------- ------ ------- ------- ------- Total from investment operations..... .79 .60 .75 .85 .66 .79 ------- ------- ------ ------- ------- ------- LESS DIVIDENDS AND DISTRIBUTIONS: Investment income -- net............ (.52) (.52) (.36) (.58) (.57) (.40) Realized gain on investments -- net................ -- -- (.19) -- -- (.19) In excess of realized gain on investments -- net................ -- -- (.02) -- -- (.02) ------- ------- ------ ------- ------- ------- Total dividends and distributions.... (.52) (.52) (.57) (.58) (.57) (.61) ------- ------- ------ ------- ------- ------- Net asset value, end of period....... $ 10.38 $ 10.11 $ 10.03 $ 10.39 $ 10.12 $ 10.03 ======= ======= ====== ======= ======= ======= TOTAL INVESTMENT RETURN:** Based on net asset value per share... 7.97% 6.01% 7.97%# 8.57% 6.71% 8.37%# ======= ======= ====== ======= ======= ======= RATIOS TO AVERAGE NET ASSETS: Expenses............................. 1.36% 1.37% 1.37%* .80% .81% .81%* ======= ======= ====== ======= ======= ======= Investment income -- net............. 5.04% 5.08% 5.21%* 5.60% 5.64% 5.78%* ======= ======= ====== ======= ======= ======= SUPPLEMENTAL DATA: Net assets, end of period (in thousands).......................... $ 28,096 $ 13,291 $ 5,195 $ 51,038 $ 43,884 $ 19,656 ======= ======= ====== ======= ======= ======= Portfolio turnover................... 99.52% 95.09% 103.65% 99.52% 95.09% 103.65% ======= ======= ====== ======= ======= =======
- --------------- * Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of operations. # Aggregate total investment return. 16 FINANCIAL HIGHLIGHTS (CONTINUED) The following per share data and ratios have been derived from information provided in the financial statements:
LIMITED MATURITY PORTFOLIO ------------------------------------------------------------------------------------- CLASS A ------------------------------------------------------------------------------------- FOR THE YEAR ENDED JUNE 30, ------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- -------- -------- -------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year...... $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.91 $ 9.75 $ 9.71 $ 9.73 -------- -------- -------- -------- -------- -------- -------- -------- Investment income -- net............... .39 .38 .38 .37 .41 .50 .57 .60 Realized and unrealized gain (loss) on investments -- net................... .04 (.01) .05 (.14) .10 .16 .04 (.02) -------- -------- -------- -------- -------- -------- -------- -------- Total from investment operations........ .43 .37 .43 .23 .51 .66 .61 .58 -------- -------- -------- -------- -------- -------- -------- -------- LESS DIVIDENDS AND DISTRIBUTIONS: Investment income -- net............... (.39) (.38) (.38) (.37) (.41) (.50) (.57) (.60) Realized gain on investments -- net.... (.02) -- -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- Total dividends and distributions:...... (.41) (.38) (.38) (.37) (.41) (.50) (.57) (.60) -------- -------- -------- -------- -------- -------- -------- -------- Net asset value, end of year............ $ 9.93 $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.91 $ 9.75 $ 9.71 ======== ======== ======== ======== ======== ======== ======== ======== TOTAL INVESTMENT RETURN:* Based on net asset value per share...... 4.40% 3.75% 4.53% 2.30% 5.28% 6.93% 6.45% 6.16% ======== ======== ======== ======== ======== ======== ======== ======== RATIOS TO AVERAGE NET ASSETS: Expenses................................ .39% .44% .41% .40% .41% .40% .40% .40% ======== ======== ======== ======== ======== ======== ======== ======== Investment income -- net................ 3.93% 3.83% 3.86% 3.68% 4.13% 5.02% 5.88% 6.21% ======== ======== ======== ======== ======== ======== ======== ======== SUPPLEMENTAL DATA: Net assets, end of year (in thousands)............................. $343,641 $417,097 $536,474 $790,142 $846,736 $613,407 $350,549 $352,005 ======== ======== ======== ======== ======== ======== ======== ======== Portfolio turnover...................... 61.90% 88.32% 37.33% 45.67% 65.43% 96.32% 93.06% 106.44% ======== ======== ======== ======== ======== ======== ======== ========
1989 1988 -------- -------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year...... $ 9.75 $ 9.83 -------- -------- Investment income -- net............... .58 .53 Realized and unrealized gain (loss) on investments -- net................... (.02) (.07) -------- -------- Total from investment operations........ .56 .46 -------- -------- LESS DIVIDENDS AND DISTRIBUTIONS: Investment income -- net............... (.58) (.53) Realized gain on investments -- net.... -- (.01) -------- -------- Total dividends and distributions:...... (.58) (.54) -------- -------- Net asset value, end of year............ $ 9.73 $ 9.75 ======== ======== TOTAL INVESTMENT RETURN:* Based on net asset value per share...... 5.96% 4.83% ======== ======== RATIOS TO AVERAGE NET ASSETS: Expenses................................ .41% .40% ======== ======== Investment income -- net................ 6.00% 5.42% ======== ======== SUPPLEMENTAL DATA: Net assets, end of year (in thousands)............................. $385,794 $567,158 ======== ======== Portfolio turnover...................... 228.78% 146.01% ======== ======== - --------------- * Total investment returns exclude the effects of sales loads. 17 FINANCIAL HIGHLIGHTS (CONTINUED) The following per share data and ratios have been deferred from the information provided in the financial statements.
LIMITED MATURITY PORTFOLIO --------------------------------------------------------------------------------- CLASS B CLASS C ------------------------------------------------------- ----------------------- FOR THE FOR THE YEAR ENDED JUNE 30, PERIOD FOR THE FOR THE --------------------------------------- NOV. 2, 1992+ YEAR ENDED YEAR ENDED TO JUNE 30, JUNE 30, JUNE 30, 1997 1996 1995 1994 1993 1997 1996 ------- ------- -------- -------- ------------- ---------- ---------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period............. $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.93 9.88 $ 9.92 ----- ------- -------- -------- ------- ------- ----- Investment income -- net......................... .36 .35 .35 .33 .24 .35 .34 Realized and unrealized gain (loss) on investments -- net.............................. .05 (.01) .05 (.14) .08 .05 (.04) ----- ------- -------- -------- ------- ------- ----- Total from investment operations................. .41 .34 .40 .19 .32 .40 .30 ----- ------- -------- -------- ------- ------- ----- LESS DIVIDENDS AND DISTRIBUTIONS: Investment income -- net........................ (.36) (.35) (.35) (.33) (.24) (.35) (.34) Realized gain on investments -- net............. (.02) -- -- -- -- (.02) -- ----- ------- -------- -------- ------- ------- ----- Total dividends and distributions................ (.38) (.35) (.35) (.33) (.24) (.37) (.34) ----- ------- -------- -------- ------- ------- ----- Net asset value, end of period................... $ 9.94 $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.91 $ 9.88 ===== ======= ======== ======== ======= ======= ===== TOTAL INVESTMENT RETURN:** Based on net asset value per share............... 4.13% 3.37% 4.14% 1.98% 3.26%# 4.11% 2.97% ===== ======= ======== ======== ======= ======= ===== RATIOS TO AVERAGE NET ASSETS: Expenses........................................ .75% .80% .78% .76% .76%# .75% .80% ===== ======= ======== ======== ======= ======= ===== Investment income -- net......................... 3.58% 3.46% 3.50% 3.33% 3.60%* 3.57% 3.41% ===== ======= ======== ======== ======= ======= ===== SUPPLEMENTAL DATA: Net assets, end of period (in thousands)......... $54,275 $71,075 $129,581 $145,534 $95,179 $ 108 $ 94 ===== ======= ======== ======== ======= ======= ===== Portfolio turnover............................... 61.90% 88.32% 37.33% 45.67% 65.43% 61.90% 88.32% ===== ======= ======== ======== ======= ======= =====
CLASS D ---------------------------------------- FOR THE FOR THE PERIOD FOR THE FOR THE PERIOD OCT. 21, 1994+ YEAR ENDED YEAR ENDED OCT. 21, 1994+ TO JUNE 30, JUNE 30, JUNE 30, TO JUNE 30, 1995 1997 1996 1995 -------------- ---------- ---------- -------------- Increase (Decrease) in Net Asset Value: PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period............. $ 9.83 $ 9.91 $ 9.93 $ 9.83 ------ ----- ------- ------- Investment income -- net......................... .25 .38 .37 .26 Realized and unrealized gain (loss) on investments -- net.............................. .09 .05 (.02) .10 ------ ----- ------- ------- Total from investment operations................. .34 .43 .35 .36 ------ ----- ------- ------- LESS DIVIDENDS AND DISTRIBUTIONS: Investment income -- net........................ (.25) (.38) (.37) (.26) Realized gain on investments -- net............. -- (.02) -- -- ------ ----- ------- ------- Total dividends and distributions................ (.25) (.40) (.37) (.26) ------ ----- ------- ------- Net asset value, end of period................... $ 9.92 $ 9.94 $ 9.91 $ 9.93 ====== ===== ======= ======= TOTAL INVESTMENT RETURN:** Based on net asset value per share............... 3.52%# 4.40% 3.55% 3.73%# ====== ===== ======= ======= RATIOS TO AVERAGE NET ASSETS: Expenses........................................ .70%* .48% .54% .53%* ====== ===== ======= ======= Investment income -- net......................... 3.61%* 3.84% 3.71% 3.78%* ====== ===== ======= ======= SUPPLEMENTAL DATA: Net assets, end of period (in thousands)......... $3,965 $ 20,383 $ 15,886 $ 11,258 ====== ===== ======= ======= Portfolio turnover............................... 37.33% 61.90% 88.32% 37.33% ====== ===== ======= =======
- --------------- *Annualized. **Total investment returns exclude the effects of sales loads. +Commencement of Operations. #Aggregate total investment return. 18 INVESTMENT OBJECTIVE AND POLICIES The investment objective of the Fund is to provide shareholders with as high a level of income exempt from Federal income taxes as is consistent with the investment policies of each Portfolio and prudent investment management. The Fund is comprised of three separate portfolios, Insured Portfolio, National Portfolio and Limited Maturity Portfolio (collectively, the "Portfolios" and each, a "Portfolio"), each of which is, in effect, a separate fund issuing its own shares. Each Portfolio seeks to achieve its objective by investing in a diversified portfolio of obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies and instrumentalities, the interest on which is exempt from Federal income tax (such obligations are herein referred to as "Municipal Bonds"). Municipal Bonds include general obligations bonds, revenue or special obligation bonds, industrial development bonds, variable rate demand notes, and short-term tax-exempt municipal obligations such as tax anticipation notes. Each Portfolio at all times, except during temporary defensive periods, maintains at least 80% of its net assets invested in Municipal Bonds. In addition, each Portfolio may not purchase securities other than Municipal Bonds and Temporary Investments described below. These are fundamental policies of each Portfolio and may not be changed without a vote of the majority of the outstanding shares of the Portfolio. Each Portfolio currently contemplates that it will not invest more than 25% of its total assets (taken at market value) in Municipal Bonds whose issuers are located in the same state. There can be no assurance that the objective of any Portfolio can be attained. While the Fund does not intend to realize taxable investment income, each Portfolio has the authority to invest as much as 20% of its net assets on a temporary basis in taxable money market securities with remaining maturities not in excess of one year from the date of purchase ("Temporary Investments") for liquidity purposes or as a temporary investment of cash pending investment of such cash in Municipal Bonds. In addition, the 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 Investment Adviser, market conditions warrant. Temporary Investments consist of U.S. Government securities, U.S. Government agency securities, domestic bank certificates of deposit and bankers' acceptances, short-term corporate debt securities such as commercial paper, and repurchase agreements. From time to time, the Fund may realize capital gains that will constitute taxable income. In addition, the Fund may invest in certain tax-exempt securities that are classified as "private activity bonds," which may subject certain investors to an alternative minimum tax. (At June 30, 1997, approximately 16.9% of the Insured Portfolio's, approximately 14.4% of the National Portfolio's and approximately 7.47% of the Limited Maturity Portfolio's net assets were invested in "private activity bonds.") These figures should not be considered representative of the respective Portfolio's private activity bond positions for any future period. See "Dividends, Distributions and Taxes." Certain instruments in which the Fund may invest may be characterized as derivative instruments. The Insured Portfolio, the National Portfolio and the Limited Maturity Portfolio are authorized to engage in transactions in financial futures contracts only for hedging purposes. For a more complete description of futures transactions, see "Financial Futures Contracts and Derivatives" below and the Statement of Additional Information. Investment in the Fund offers several benefits. The Fund offers investors the opportunity to receive income exempt from Federal income taxes from a diversified, professionally managed portfolio of Municipal Bonds. The 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 are at least partially offset by the fact that there are expenses in operating an investment company. Such expenses 19 consist primarily of the investment advisory fee and operational expenses, including, in the case of the Insured Portfolio, premiums for insurance on portfolio securities. INVESTMENT POLICIES OF THE PORTFOLIOS Each Portfolio pursues its investment objective through the separate investment policies described below. These policies differ with respect to the maturity and quality of portfolio securities in which a Portfolio may invest, and these policies can be expected to affect the yield on each Portfolio and the degree of market, financial and interest rate risk to which the Portfolio is subject. Generally, Municipal Bonds with longer maturities tend to produce higher yields and are subject to greater market fluctuations as a result of changes in interest rates ("market risk") than are Municipal Bonds with shorter maturities. In addition, lower rated Municipal Bonds generally will provide a higher yield than higher rated Municipal Bonds of similar maturity but are subject to greater market risk and are also subject to a greater degree of risk with respect to the ability of the issuer to meet its principal and interest obligations ("financial risk"). A Portfolio's net asset value may fall when interest rates rise and rise when interest rates fall. In general, Municipal Bonds with longer maturities will be subject to greater volatility resulting from interest rate fluctuation than will Municipal Bonds with shorter maturities ("interest rate risk"). See "Appendix -- Description of Ratings" for information with respect to ratings assigned to Municipal Bonds and Temporary Investments by rating agencies. INSURED PORTFOLIO The Insured Portfolio may invest in investment grade Municipal Bonds covered by portfolio insurance guaranteeing the timely payment of principal at maturity and interest. Investment grade Municipal Bonds are those rated at the date of purchase in the four highest rating categories of Standard & Poor's Ratings Services ("S&P") (AAA, AA, A and BBB) or Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A and Baa) in the case of long-term debt, rated MIG 1 through MIG 4 by Moody's or in the four highest bond ratings of, or rated SP-1+ through SP-2 by, S&P in the case of short-term notes, and rated P-1 or P-2 in the case of Moody's or A-1+ through A-2 by S&P in the case of tax-exempt commercial paper. Depending on market conditions, it is expected that Municipal Bonds with maturities beyond five years will comprise a major portion of this Portfolio. The Insured Portfolio may invest only in Municipal Bonds that, at the time of purchase, either (1) are insured under an insurance policy purchased by the Fund or (2) are insured under an insurance policy obtained by the issuer thereof or any other party from an insurance carrier meeting the criteria of the Fund set forth below. The Fund has purchased from AMBAC Indemnity Corporation ("AMBAC"), Municipal Bond Investors Assurance Corporation ("MBIA") and Financial Security Assurance Inc. ("FSA"), separate Mutual Fund Insurance Policies (the "Policies"), each of which guarantees the payment of principal and interest on specified eligible Municipal Bonds purchased by the Insured Portfolio ("Insured Municipal Bonds"). Consequently, some of the Insured Municipal Bonds in the Insured Portfolio may be insured by AMBAC, while others may be insured by MBIA or FSA. The Policies generally have the same characteristics and features. A Municipal Bond is eligible for coverage if it meets certain requirements of the insurance company set forth in a Policy. Additional information regarding these eligibility requirements is set forth in the Statement of Additional Information. In the event interest or principal on an Insured Municipal Bond is not paid when due, AMBAC or MBIA or FSA (depending on which Policy covers the bond) is obligated under its Policy to make payment not later than 30 days after it has been notified by, and provided with documentation from, the Fund that such nonpayment has occurred. The insurance feature reduces financial 20 risk, but the cost thereof and the restrictions on investments imposed by the guidelines in the insurance policy reduce the yield to shareholders. The Policies will be effective only as to Insured Municipal Bonds beneficially owned by the Insured Portfolio. In the event of a sale of any Municipal Bonds held by the Insured Portfolio, the issuer of the relevant Policy is liable only for those payments of interest and principal that are then due and owing. The Policies do not guarantee the market value of the Insured Municipal Bonds or the value of the shares of the Insured Portfolio. It is the intention of the Insured Portfolio, however, to retain any insured securities that are in default or in significant risk of default and to place a value on the insurance, which ordinarily will be the difference between the market value of the defaulted security and the market value of similar securities that are not in default. In certain circumstances, however, the Fund's management may determine that an alternative value for the insurance, such as the difference between the market value of the defaulted security and its par value, is more appropriate. As the result of the value placed on the insurance with respect to securities held in the Insured Portfolio that were in default at the end of the Fund's last fiscal year, such securities were effectively valued at par. The Insured Portfolio's ability to manage its portfolio will be limited to the extent it holds defaulted securities, which may limit its ability in certain circumstances to purchase other Municipal Bonds. See "Net Asset Value" in the Statement of Additional Information for a more complete description of the Insured Portfolio's method of valuing defaulted securities and securities that have a significant risk of default. Further information with respect to portfolio insurance is also set forth in the Statement of Additional Information. AMBAC, MBIA and FSA may not withdraw coverage on securities insured by their Policies and held by the Insured Portfolio so long as they remain in the Insured Portfolio. AMBAC, MBIA and FSA may not cancel their Policies for any reason except failure to pay premiums when due. AMBAC and FSA have reserved the right at any time upon written notice to the Fund to refuse to insure any additional municipal securities purchased by the Insured Portfolio after the effective date of such notice. The Board of Directors of the Fund has reserved the right to terminate any of the Policies if it determines that the benefits to the Insured Portfolio of having its portfolio insured are not justified by the expense involved. The premiums for the Policies are paid by the Insured Portfolio and the yield on the Portfolio is reduced thereby. The Investment Adviser estimates that the current cost of the annual premiums will range from approximately 0.08% to 0.20% of the average net assets of the Insured Portfolio. The estimate is based on the expected composition of the Portfolio. NATIONAL PORTFOLIO The National Portfolio invests primarily in a portfolio of medium to lower grade Municipal Bonds with maturities beyond five years. This Portfolio normally can be expected to offer the highest yields of the three Portfolios, but also be subject to the highest market and financial risks. Because an investment in the National Portfolio entails relatively greater risks, it may not be an appropriate investment for all investors. Although the investment policies of the National Portfolio are not governed by specific rating categories, the Fund will seek to invest primarily in medium and lower grade Municipal Bonds, including short-term tax-exempt notes, tax-exempt commercial paper and variable rate tax-exempt demand notes. Medium grade long-term debt obligations are those rated A and BBB by S&P or A and Baa by Moody's, and unrated obligations that the Investment Adviser believes are of comparable quality. Lower grade obligations (commonly known as "junk bonds") are those rated below BBB or Baa, and unrated obligations that the Investment Adviser believes are of comparable quality. Lower grade obligations will generally be more speculative with respect to 21 the capacity of the issuer to make interest and principal payments. Because issuers of Municipal Bonds having these characteristics may choose not to have their obligations rated, it is possible that a substantial portion of the National Portfolio's portfolio may consist of obligations that are not rated. Unrated bonds are not necessarily of lower quality than rated bonds, but the market for rated bonds is often broader. It is not the present intention of the National Portfolio to invest over 35% of its assets in securities rated below Baa by Moody's or in securities rated below BBB by S&P. Junk bonds are generally considered to have varying degrees of speculative characteristics. Consequently, although junk bonds 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 junk bonds will be made only when, in the judgment of the Fund's management, such securities provide attractive total return potential relative to the risk of such securities, as compared to higher quality debt securities. The National Portfolio will not invest in debt securities in the lowest rating categories (those rated CC or lower by S&P or Ca or lower by Moody's) unless the Fund's management believes that the financial condition of the issuer or the protection afforded the particular securities is stronger than would otherwise be indicated by such low ratings. The National Portfolio does not intend to purchase debt securities that are in default or that the Fund's management believes will be in default. The Statement of Additional Information contains a more detailed description of the risks involved in purchasing junk bonds. The table below shows the market value, by S&P rating category, of the securities held by the National Portfolio at June 30, 1997:
% NET RATING ASSETS --------------------------------------------------------------------- ----- AAA.................................................................. 43.9 AA................................................................... 13.1 A.................................................................... 12.2 BBB.................................................................. 13.2 BB................................................................... 3.3 NR*.................................................................. 9.6 ---- 95.3 ====
- --------------- * Bonds that are not rated by S&P. Such bonds may be rated by nationally recognized statistical rating organizations other than S&P, or may not be rated by any of such organizations. With respect to the percentage of the Portfolio's assets invested in such securities, the Investment Adviser believes that 2.9% are of comparable quality to bonds rated AAA, 0.3% are of comparable quality to bonds rated AA, 3.2% are of comparable quality to bonds rated A, 0.6% are of comparable quality to bonds rated BBB, 1.9% are of comparable quality to bonds rated BB and 0.7% are of comparable quality to bonds rated B. This determination is based on the Investment Adviser's own internal evaluation and does not necessarily reflect how such securities would be rated by S&P if it were to rate the securities. It is expected that the National Portfolio will consist primarily of revenue bonds emphasizing hospital, health care, public utility and housing issues. LIMITED MATURITY PORTFOLIO The Limited Maturity Portfolio invests primarily in a portfolio of short-term investment grade Municipal Bonds. Municipal Bonds in the Limited Maturity Portfolio will be either Municipal Bonds with a remaining 22 maturity of less than four years or short-term municipal notes, which typically are issued with a maturity of not more than one year. The Limited Maturity Portfolio will treat Municipal Bonds that it has the option to require the issuer to redeem within four years as having a remaining maturity of less than four years, even if the period to the stated maturity date of such Bonds is greater than four years. Municipal notes include tax anticipation notes, bond anticipation notes and revenue anticipation notes. The Limited Maturity Portfolio can be expected to offer a lower yield than the longer-term Portfolios. Interest rates on short-term Municipal Bonds may fluctuate more widely from time to time than interest rates on long-term Municipal Bonds. However, because of the shorter maturities, the market value of the Municipal Bonds held by the Limited Maturity Portfolio can be expected to fluctuate less in value as a result of changes in interest rates. The Limited Maturity Portfolio will invest only in Municipal Bonds rated at the date of purchase in the four highest rating categories by S&P (AAA, AA, A and BBB) or Moody's (Aaa, Aa, A and Baa) in the case of long-term debt, rated by Moody's as MIG 1 through MIG 4, or rated SP-1+ through SP-2 by S&P in the case of short-term tax-exempt notes, and rated by Moody's P-1 through P-2 or rated A-1+ through A-3 by S&P in the case of tax-exempt commercial paper. The Limited Maturity Portfolio will also invest in other Municipal Bonds deemed to qualify for such ratings and in variable rate tax-exempt demand notes. Securities rated in the lowest of these categories are considered to have some speculative characteristics. The Limited Maturity Portfolio may continue to hold securities that, after being purchased by the Portfolio, are downgraded to a rating lower than those set forth above. DESCRIPTION OF MUNICIPAL BONDS Municipal Bonds include debt obligations issued to obtain funds for various public purposes, including construction of a wide range of public facilities, refunding of outstanding obligations and obtaining funds for general operating expenses and loans to other public institutions and facilities. In addition, certain types of industrial development bonds are issued by or on behalf of public authorities to finance various privately operated facilities, including pollution control facilities. Such obligations are included within the term Municipal Bonds if the interest paid thereon is exempt from Federal income tax. Municipal Bonds also include short-term tax-exempt municipal obligations such as tax anticipation notes, bond anticipation notes, revenue anticipation notes, variable rate demand notes and Public Housing Authority notes that are fully secured by a pledge of the full faith and credit of the United States. The two principal classifications of Municipal Bonds are "general obligation" and "revenue" or "special obligation" bonds. General obligation bonds are secured by the issuer's pledge of faith, credit, and taxing power for the payment of principal and interest. Revenue or special obligation bonds are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue source such as from the user of the facility being financed. Industrial development bonds are in most cases revenue bonds and do not generally constitute the pledge of the credit or taxing power of the issuer of such bonds. The payment of the principal of and interest on such industrial revenue bonds depends solely on the ability of the user of the facilities financed by the bonds to meet its financial obligations and the pledge, if any, of real and personal property so financed as security for such payment. A Portfolio may also include "moral obligation" bonds, which are normally issued by special purpose public authorities. If an issuer of moral obligation bonds is unable to meet its obligations, the repayment of such bonds becomes a moral commitment but not a legal obligation of the state or municipality in question. 23 Municipal Bonds may at times be purchased or sold on a delayed delivery basis or a when-issued basis. These transactions arise when securities are purchased or sold by a Portfolio with payment and delivery taking place in the future, often a month or more after the purchase. The payment obligation and the interest rate are each fixed at the time the buyer enters into the commitment. The Fund will only make commitments to purchase such securities with the intention of actually acquiring the securities, but the Fund may sell these securities prior to the settlement date if the Investment Adviser deems it advisable. Purchasing Municipal Bonds on a when-issued basis involves the risk that the yields available in the market when the delivery takes place may actually be higher than those obtained in the transaction itself; if yields so increase, the value of the when-issued obligation will generally decrease. When a Portfolio engages in when-issued and delayed delivery transactions, the Portfolio relies on the buyer or seller, as the case may be, to consummate the trade. Failure of the buyer or seller to do so may result in the Portfolio's missing the opportunity of obtaining a price considered to be advantageous. The Fund will maintain a separate account as its custodian bank consisting of cash or liquid Municipal Bonds (valued on a daily basis) equal at all times to the amount of the when-issued commitment. Variable rate demand notes ("VRDNs") are tax-exempt obligations that contain a floating or variable interest rate adjustment formula and an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest upon a short notice period not to exceed seven days. The interest rates are adjustable at intervals ranging from daily up to six months to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market value of the VRDN at approximately the par value of the VRDN upon the adjustment date. The adjustments are typically based upon the prime rate of a bank or some other appropriate interest rate adjustment index. The Fund may also invest in VRDNs in the form of participation interests ("Participating VRDNs") in variable rate tax-exempt obligations held by a financial institution, typically a commercial bank ("institution"). Participating VRDNs provide the Fund with a specified undivided interest (up to 100%) of the underlying obligation and the right to demand payment of the unpaid principal balance plus accrued interest on the Participating VRDNs from the institution upon a specified number of days' notice, not to exceed seven days. In addition, the Participating VRDN is backed by an irrevocable letter of credit or guaranty of the institution. The Fund has an undivided interest in the underlying obligation and thus participates on the same basis as the institution in such obligation except that the institution typically retains fees out of the interest paid on the obligation for servicing the obligation, providing the letter of credit and issuing the repurchase commitment. The Fund has been advised by its counsel to the effect that the interest received on Participating VRDNs will be treated as interest from tax-exempt obligations as long as the Fund does not invest more than a limited amount (not more than 20%) of its total assets in such investments and certain other conditions are met. It is contemplated that the Fund will not invest more than a limited amount of its total assets in Participating VRDNs. 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 maturity of the obligation, and the rating of the issue. The ability of a Portfolio to achieve its investment objective is also dependent on the continuing ability of the issuers of the Municipal Bonds in which the Portfolio 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, within a particular classification and between classifications, depending 24 on numerous factors. Furthermore, the rights of holders of Municipal Bonds and the obligations of the issuers of such Municipal Bonds may be subject to applicable bankruptcy, insolvency and similar laws and court decisions affecting the rights of creditors generally and such laws, if any, that may be enacted by Congress or state legislatures imposing a moratorium on the payment of principal and interest or imposing other constraints or conditions on the payment of principal of and interest on Municipal Bonds. From time to time, proposals have been introduced before Congress for the purpose of restricting or eliminating the federal income tax exemption for interest on Municipal Bonds. It may be expected that similar proposals may be introduced in the future. If such a proposal were enacted, the ability of the Portfolios to pay "exempt-interest" dividends might be adversely affected and the Fund would re-evaluate its investment objective and policies and consider changes in its structure. See "Additional Information -- Dividends and Distributions" and "Additional Information -- Federal Income Taxes." FORWARD COMMITMENTS Each Portfolio may purchase Municipal Bonds on a forward commitment basis at fixed purchase terms. The purchase will be recorded on the date the Portfolio enters into the commitment and the value of the security will thereafter be reflected in the calculation of the Portfolio's net asset value. The value of the security on the delivery date may be more or less than its purchase price. A separate account of the Portfolio will be established with its custodian consisting of cash or liquid Municipal Bonds having a market value at all times at least equal to the amount of the forward commitment. FINANCIAL FUTURES CONTRACTS AND DERIVATIVES The Portfolios are authorized to purchase and sell certain financial futures contracts ("futures contracts") and options on such futures contracts solely for the purpose of hedging their investments in Municipal Bonds against declines in value and to hedge against increases in the cost of securities the Portfolios intend to purchase. 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 futures contracts, to make and accept a cash settlement, at a specific future time for a specified price. A sale of financial futures contracts 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 futures contracts. A purchase of financial futures contracts 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 futures contracts. The Portfolios intend to trade in futures contracts based upon The Bond Buyer Municipal Bond Index, a price-weighted measure of the market value of 40 large, recently issued tax-exempt bonds, and to engage in transactions in exchange-traded futures contracts on U.S. Treasury securities and options on such futures. If making or accepting delivery of the underlying commodity is not desired, a position in a futures contract or an option on a futures contract may be terminated only by entering into an offsetting transaction on the exchange on which the position was established and only if there is a liquid market for such contract. If it is not economically practicable, or otherwise possible to close a futures position or certain option positions entered into by a Portfolio, the Portfolio could be required to make continuing daily cash payments of variation margin in the event of adverse price movements. In such situations, if the Portfolio 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. In addition, the Portfolio may be required to perform under the terms of its contracts. The 25 inability to close futures or options positions could also have an adverse impact on the Portfolio's ability to hedge effectively. There is also risk of loss by a Portfolio of margin deposits in the event of bankruptcy of a broker with whom the Portfolio has an open position in a futures contract, or the exchange or clearing organization on which that contract is traded. The Portfolios may also engage in transactions in other futures contracts, such as futures contracts on other municipal bond indexes that may become available, if the Investment Adviser believes such contracts would be appropriate for hedging the Portfolios' investments in Municipal Bonds. Utilization of futures or option contracts involves the risk of imperfect correlation in movements in the price of such contracts and movements in the price of the security or securities that are the subject of the hedge. If the price of the futures or option contract moves more or less than the price of the security or securities that are the subject of the hedge, a Portfolio will experience a gain or loss that will not be completely offset by movements in the price of such security, which could occur as a result of many factors, including where the securities underlying futures or option contracts 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 an index futures contract. The trading of futures contracts or options on futures contracts based on indexes of securities also involves a risk of imperfect correlation between the value of the futures contracts and the value of the underlying index. The anticipated spread between such values or in the correlation between the futures contract and the underlying security may be affected by differences in markets, such as margin requirements, market liquidity and the participation of speculators in the futures markets. Moreover, when a Portfolio enters into transactions in futures contracts on U.S. Treasury securities, or options on such contracts, the underlying securities will not correspond to securities held by the Portfolio. Finally, in the case of futures contracts on U.S. Treasury securities and options on such futures contracts, the anticipated correlation of price movements between U.S. Treasury securities underlying the futures or options and Municipal Bonds may be adversely affected by economic, political, legislative or other developments which have a disparate impact on the respective markets for such securities. Under regulations of the Commodity Futures Trading Commission ("CFTC"), the futures trading activities described herein will not result in the Portfolios being deemed to be "commodity pools," as defined under such regulations, provided that certain restrictions are adhered to. In particular, among other requirements, the Portfolios may either (a) purchase and sell futures contracts only for bona fide hedging purposes, as defined under CFTC regulations, or (b) limit any transaction not qualifying as bona fide hedging so that the sum of the amount of initial margin deposits and premiums paid on such positions would not exceed 5% of the market value of a Portfolio's net assets. Margin deposits may consist of cash or securities acceptable to the broker and the relevant contract market. When a Portfolio purchases a futures contract, it will maintain an amount of cash, cash equivalents or commercial paper or other liquid securities in a segregated account with the Fund's custodian, so that the amount segregated plus the amount of initial margin and option premiums held in the account of its broker equals the value represented by the futures contract, as reflected by its daily settlement price, thereby ensuring that the use of such futures contract is unleveraged. It is not anticipated that transactions in the futures contracts will have the effect of increasing portfolio turnover. Reference is made to the Statement of Additional Information for further information on financial futures contracts. 26 INDEXED AND INVERSE FLOATING OBLIGATIONS The Fund may invest in a variety of instruments that may be characterized as "Derivative Securities." The Fund may invest in Municipal Bonds, the return on which is based on a particular index of value or interest rates. For example, the Fund may invest in Municipal Bonds that pay interest based on an index of Municipal Bond interest rates or based on the value of gold or some other commodity. The principal amount payable upon maturity of certain Municipal Bonds also may be based on the value of an index. Also, the Fund may invest in so-called "inverse floating obligations" or "residual interest bonds" on which the interest rates typically decline as market rates increase and increase as market rates decline. To the extent the 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. 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 exempt securities increase or decrease in response to such changes. As a result, the market values of such securities will generally be more volatile than the market values of fixed-rate tax exempt securities. To seek to limit the volatility of these securities, the Fund may purchase inverse floating obligations with shorter term maturities or which contain limitations on the extent to which the interest rate may vary. The Investment Adviser believes that indexed and inverse floating obligations represent a flexible portfolio management instrument for the Fund that allows the Investment Adviser to vary the degree of investment leverage relatively efficiently under different market conditions. Certain investments in such obligations may be illiquid. The Fund may not invest in such illiquid obligations if such investments, together with other illiquid investments, would exceed 10% of the Fund's net assets. INVESTMENT RESTRICTIONS The Fund has adopted a number of restrictions and policies relating to the investment of its 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 (including a majority of the shares of each Portfolio). One such restriction prohibits the Fund from entering into a repurchase agreement if, as a result thereof, more than 10% of the total assets of any Portfolio (taken at market value at the time of each investment) would be subject to repurchase agreements maturing in more than seven days. Investors are referred to the Statement of Additional Information for a complete description of such restrictions and policies. MANAGEMENT OF THE FUND BOARD OF DIRECTORS The Board of Directors of the Fund consists of six individuals, five of whom are not "interested persons" of the Fund as defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Directors of the Fund are responsible for the overall supervision of the operations of the Fund and perform the various duties imposed on the directors of investment companies by the Investment Company Act. 27 The Directors are: ARTHUR ZEIKEL* -- President of the Investment Adviser and its affiliate, MLAM; President and Director of Princeton Services, Inc. ("Princeton Services"); Executive Vice President of ML & Co.; and Director of Merrill Lynch Funds Distributor, Inc. (the "Distributor"). RONALD W. FORBES -- Professor of Finance, School of Business State University of New York at Albany. CYNTHIA A. MONTGOMERY -- Professor of Competition and Strategy, Harvard Business School. CHARLES C. REILLY -- Former Adjunct Professor, Columbia University Graduate School of Business. KEVIN A. RYAN -- Professor of Education, Boston University; Founder and current Director of The Boston University Center for Advancement of Ethics and Character. RICHARD R. WEST -- Dean Emeritus, New York University Leonard N. Stern School of Business Administration. - --------------- * Interested person, as defined in the Investment Company Act, of the Fund. MANAGEMENT AND ADVISORY ARRANGEMENTS The Investment Adviser to the Fund is FAM, an affiliate of MLAM, an indirect subsidiary of ML & Co., a financial services holding company and the parent of Merrill Lynch. The address of FAM is P.O. Box 9011, Princeton, New Jersey 08543-9011. FAM or MLAM acts as the investment adviser for more than 140 registered investment companies. As of August 31, 1997, the Investment Adviser and MLAM had a total of $267.7 billion in investment company and other portfolio assets under management, including accounts of certain affiliates of the Investment Adviser. Subject to the supervision of the Directors of the Fund, the Investment Adviser is responsible for the actual management of the Fund's portfolio and constantly reviews the Fund's holdings in light of its own research and analysis and that from other relevant sources. The responsibility for making decisions to buy, sell or hold a particular security rests with the Investment Adviser. The Investment Adviser performs certain other administrative services for the Fund and provides all of the office space, facilities, equipment and necessary personnel for management of the Fund. For its services as Investment Adviser, the Fund pays FAM a monthly fee based upon the aggregate average net assets of the three Portfolios. For the fiscal year ended June 30, 1997, the fee paid by the Fund to FAM was $16,555,920, of which $8,042,098 was received with respect to the Insured Portfolio (representing 0.36% of its average net assets), $6,961,453 was received with respect to the National Portfolio (representing 0.48% of its average net assets) and $1,552,369 was received with respect to the Limited Maturity Portfolio (representing 0.33% of its average net assets). The Investment Advisory Agreement obligates each Portfolio to pay certain expenses incurred in its operation and a portion of the Fund's general administrative expenses allocated on the basis of the asset size of the respective Portfolios. The Fund's total expenses for the fiscal year ended June 30, 1997 were $28,449,431, of which $14,925,877 was attributable to the Insured Portfolio (representing 0.44%, 1.19%, 1.25%, and 0.69% of average net assets for Class A, Class B, Class C and Class D shares, respectively), $11,465,595 was attributable to the National Portfolio representing 0.55%, 1.31%, 1.36%, and 0.80% of average net assets for Class A, Class B, Class C and Class D shares, respectively), and $2,057,959 was attributable to the Limited 28 Maturity Portfolio (representing 0.39%, 0.75%, 0.75%, and 0.48% of average net assets for Class A, Class B, Class C and Class D shares, respectively). FAM was not required to reduce its fee or reimburse any of the Fund's expenses for the fiscal year ended June 30, 1997. The Fund pays certain expenses incurred in its operations including, among other things, taxes; expenses for legal and auditing services; and costs of printing proxies, stock certificates, shareholder reports, prospectuses and statements of additional information. Also, accounting services are provided to the Fund by the Investment Adviser and the Fund reimburses the Investment Adviser for its costs in connection with such services. For the fiscal year ended June 30, 1997, the Fund reimbursed the Investment Adviser $433,527 for accounting services, of which $249,511 was received with respect to the Insured Portfolio, $142,298 was received with respect to the National Portfolio and $41,718 was received with respect to the Limited Maturity Portfolio. Kenneth A. Jacob has served as the Portfolio Manager for the Insured Portfolio since 1995 and is primarily responsible for its day-to-day management. Peter J. Hayes has served as the Portfolio Manager for the Limited Maturity Portfolio and is primarily responsible for its day-to-day management. Walter O'Connor has served as the Portfolio Manager for the National Portfolio and is primarily responsible for its day-to-day management. TRANSFER AGENCY SERVICES Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which is a subsidiary of ML & Co., acts as the Fund'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 and the opening and maintenance of shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer Agent receives an annual fee of up to $11.00 per Class A or Class D account and up to $14.00 per Class B or Class C account and is entitled to reimbursement for certain transaction charges and out-of-pocket expenses incurred by the Transfer Agent under the Transfer Agency Agreement. Additionally, a $0.20 monthly closed account charge will be assessed to 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 June 30, 1997, the Insured, National and Limited Maturity Portfolios of the Fund incurred fees totaling $1,467,879, pursuant to the Transfer Agency Agreement. CODE OF ETHICS The Board of Directors of the Fund has adopted a Code of Ethics under Rule 17j-1 of the Investment Company Act that incorporates the Code of Ethics of the Investment Adviser (together, the "Codes"). The Codes significantly restrict the personal investing activities of all employees of the Investment Adviser and, as described below, impose additional, more onerous, restrictions on fund investment personnel. 29 The Codes require that all employees of the Investment Adviser 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 Investment Adviser include a ban on acquiring any securities in a "hot" initial public offering and a prohibition from profiting on short-term trading in securities. In addition, no employee may purchase or sell any security which at the time is being purchased or sold (as the case may be), or to the knowledge of the employee is being considered for purchase or sale, by any fund advised by the Investment Adviser. Furthermore, the Codes provide for trading "blackout periods" which prohibit trading by investment personnel of the Fund within periods of trading by the Fund in the same (or equivalent) security (15 or 30 days depending upon the transaction). PURCHASE OF SHARES The Distributor, an affiliate of both the Investment Adviser and Merrill Lynch, acts as the Distributor of the shares of each Portfolio. Shares may be purchased directly from the Distributor or from other securities dealers, including Merrill Lynch, with whom the Distributor has entered into selected dealer agreements; however, 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 Fund is offering shares in four classes of its Portfolios 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 (the "initial sales charge alternative") or on a deferred basis (the "deferred sales charge alternative") depending upon the class of shares selected by the investor under the Merrill Lynch Select Pricing(SM) System, as described below. Net asset value per share will be determined in the manner set forth under "Additional Information -- Determination of Net Asset Value." The minimum initial purchase in each Portfolio is $1,000 and the minimum subsequent purchase in each Portfolio is $50 except that for participants in certain fee-based programs the minimum initial purchase is $500 and the minimum subsequent purchase is $50. Merrill Lynch may charge its customers a processing fee (currently $5.35) to confirm a sale of shares. Purchases made directly through the Fund's transfer agent are not subject to the processing fee. As to purchase orders received by selected dealers prior to the close of the New York Stock Exchange, which includes orders received after the close on the previous day, the applicable offering price will be based on the net asset value determined on the day the order is placed with the Distributor, provided the order is received by the Distributor prior to 4:30 p.m., New York City time, on that day. Any order may be rejected by the Distributor or the Fund. Neither the Distributor nor the dealers are permitted to withhold placing orders to benefit themselves by a price change. The Fund reserves the right to suspend the sale of its shares to the public in response to conditions in the Municipal Bond markets, or otherwise. Each of the Portfolios 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 shares are sold to investors choosing the initial sales charge alternatives and shares of Class B and Class C shares are sold to investors choosing the deferred sales charge alternatives. Class C shares of the Limited Maturity Portfolio are available only through the Exchange Privilege and may not be purchased except through exchange of Class C shares of another Portfolio or another MLAM-advised mutual fund. Because retirement plans qualified under Section 401 of the Internal 30 Revenue Code of 1986, as amended (the "Code"), will be unable to benefit from the tax-exempt dividends of the Fund, the shares of the Fund may not be suitable investments for such retirement plans. Investors should determine whether under their particular circumstances it is more advantageous to incur the initial sales charge or to have the initial purchase price invested with the Portfolio with the investment thereafter being subject to a CDSC and ongoing distribution 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 the Merrill Lynch Select Pricing(SM) System on page 8. Each Class A, Class B, Class C and Class D share of a Portfolio represents an identical interest in the Portfolio 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 deferred sales charges, distribution fees and account maintenance fees that are imposed on Class B and Class C shares, as well as the account maintenance fees that are imposed on Class D shares, will be imposed directly against those classes and not against all assets of the Fund and, accordingly, such charges will not affect the net asset value of any other class or have any impact on investors choosing another sales charge option. Dividends paid by a Portfolio for each class of shares will be calculated in the same manner at the same time and will differ only to the extent that account maintenance and distribution fees and any incremental transfer agency costs relating to a particular class are borne exclusively by that class. Class B, Class C and Class D shares each have exclusive voting rights with respect to the Rule 12b-1 distribution plan adopted with respect to such class pursuant to which account maintenance and/or distribution fees are paid (except that Class B shareholders may vote upon any material changes to expenses charged under the Class D Distribution Plan). See "Distribution Plans" below. Each class has different exchange privileges. See "Shareholder Services -- Exchange Privileges." Investors should understand that the purpose and function of the initial sales charges with respect to Class A and Class D shares are the same as those of the deferred sales charges and distribution fees with respect to Class B and Class C shares in that the sales charges and distribution fees applicable to each class provide for the financing of the distribution of the shares of the 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. 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. 31 INSURED AND NATIONAL PORTFOLIOS
- ------------------------------------------------------------------------------------------------- ACCOUNT MAINTENANCE DISTRIBUTION CONVERSION CLASS SALES CHARGE(1) FEE FEE FEATURE - ------------------------------------------------------------------------------------------------- A Maximum 4.00% initial sales charge(2)(3) No No No - ------------------------------------------------------------------------------------------------- B CDSC for a period of 4 0.25% 0.50% B shares convert to D shares years, at a rate of 4.00% automatically after during the first year, approximately ten years(5) decreasing 1.00% annually to 0.0%(4) - ------------------------------------------------------------------------------------------------- C 1.00% CDSC for one year 0.25% 0.55% No decreasing to 0.0% after the first year(6) - ------------------------------------------------------------------------------------------------- D Maximum 4.00% initial sales 0.25% No No charge(3) - -------------------------------------------------------------------------------------------------
LIMITED MATURITY PORTFOLIO
- ------------------------------------------------------------------------------------------------- ACCOUNT MAINTENANCE DISTRIBUTION CONVERSION CLASS SALES CHARGE(1) FEE FEE FEATURE - ------------------------------------------------------------------------------------------------- A Maximum 1.00% initial sales No No No charge(2)(3) - ------------------------------------------------------------------------------------------------- B CDSC at a rate of 1.00% 0.15% 0.20% B shares convert to D shares during the first year, automatically after decreasing to 0.0% after the approximately ten years(5) first year(4) - ------------------------------------------------------------------------------------------------- C* 1.00% CDSC for one year 0.15% 0.20% No decreasing to 0.0% after the first year(6) - ------------------------------------------------------------------------------------------------- D Maximum 1.00% initial sales 0.10% No No charge(3) - -------------------------------------------------------------------------------------------------
- --------------- (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 $25,000 or more for the Insured and National Portfolios and $100,000 or more for the Limited Maturity Portfolio and waived for purchases of Class A shares by participants in 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 1.0% CDSC for the Insured and National Portfolios and 0.20% CDSC for the Limited Maturity Portfolio, for one year. 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 the conversion and holding periods for certain retirement plans was modified. Also, Class B shares of certain other MLAM-advised mutual funds into which exchanges may be made have an eight-year conversion period. If Class B shares of the 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. * Class C shares of the Limited Maturity Portfolio are available only through the Exchange Privilege. See page 46. 32 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. The public offering price of Class A and Class D shares of the Portfolios, for purchasers choosing the initial sales charge alternative, is the next determined net asset value plus varying sales charges (i.e., sales loads), as set forth below: CLASS A AND CLASS D SHARES OF INSURED AND NATIONAL PORTFOLIOS
SALES CHARGE ----------------------------------------------------------- DISCOUNT TO SALES LOAD AS SALES LOAD AS SELECT DEALERS AS A A PERCENTAGE OF A PERCENTAGE* OF PERCENTAGE OF AMOUNT OF PURCHASE OFFERING PRICE NET AMOUNT INVESTED OFFERING PRICE - ----------------------------------------------- --------------- ------------------- ------------------- Less than $25,000.............................. 4.00% 4.17% 3.75% $25,000 but less than $50,000.................. 3.75 3.90 3.50 $50,000 but less than $100,000................. 3.25 3.36 3.00 $100,000 but less than $250,000................ 2.50 2.56 2.25 $250,000 but less than $1,000,000.............. 1.50 1.52 1.25 $1,000,000 and over**.......................... 0.00 0.00 0.00
CLASS A AND CLASS D SHARES OF LIMITED MATURITY PORTFOLIO
SALES CHARGE ----------------------------------------------------------- DISCOUNT TO SALES LOAD AS SALES LOAD AS SELECT DEALERS AS A A PERCENTAGE OF A PERCENTAGE* OF PERCENTAGE OF AMOUNT OF PURCHASE OFFERING PRICE NET AMOUNT INVESTED OFFERING PRICE - ----------------------------------------------- --------------- ------------------- ------------------- Less than $100,000............................. 1.00% 1.01% .95% $100,000 but less than $250,000................ .75 .75 .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
- --------------- * Rounded to the nearest one-hundredth percent. ** The initial sales charge may be waived on Class A and Class D purchases of $1,000,000 or more made on or after October 21, 1994, but such purchases may be subject to a CDSC of 1.00% for the Insured and National Portfolios and 0.20% for the Limited Maturity Portfolio, if the shares are redeemed within one year after purchase. Such CDSC may be waived in connection with certain fee-based programs. The Distributor may reallow discounts to securities dealers with whom it has agreements and retain the balance over such discount. At times the Distributor may reallow the entire sales charge to selected dealers, in which case such dealers may be deemed to be underwriters within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), and subject to liability as such. The Distributor will retain the entire sales 33 charge on orders placed directly with it. The proceeds from account maintenance fees are used to compensate Merrill Lynch for providing continuing account maintenance activities. During the fiscal year ended June 30, 1997, the Insured Portfolio, the National Portfolio and the Limited Maturity Portfolio sold 4,575,281, 7,233,788 and 2,507,909 Class A shares, respectively, for aggregate net proceeds of $36,693,201, $74,396,433 and $24,924,435, respectively. The gross sales charges for the sale of Class A shares of the Insured Portfolio, the National Portfolio and the Limited Maturity Portfolio for that period were $192,703, $166,061, and $12,434, of which Merrill Lynch received $168,171 for the Insured Portfolio, $149,402 for the National Portfolio and $11,295, for the Limited Maturity Portfolio, and the Distributor received $24,532(1) for the Insured Portfolio, $16,659(2) for the National Portfolio and $1,139(3) for the Limited Maturity Portfolio. For the fiscal year ended June 30, 1997, the Distributor did not receive any CDSCs with respect to redemption within one year after purchase of Class A shares purchased subject to a front-end sales charge waiver for the Insured, the National and the Limited Maturity Portfolios. During the fiscal year ended June 30, 1997, the Insured Portfolio, the National Portfolio and the Limited Maturity Portfolio sold 12,779,520, 10,536,060, and 3,468,693 Class D shares, respectively, for aggregate net proceeds of $101,973,172, $108,053,333 and $34,441,741, respectively. The gross sales charges for the sale of Class D shares of the Insured Portfolio, the National Portfolio and the Limited Maturity Portfolio for that period were $76,775, $110,841, and $21,653, of which the Merrill Lynch received $69,053 for the Insured Portfolio, $98,975 for the National Portfolio and $20,019, for the Limited Maturity Portfolio, and the Distributor received $7,722(4), for the Insured Portfolio, $11,866(5) for the National Portfolio and $1,634 for the Limited Maturity Portfolio. For the fiscal year ended June 30, 1997, the Distributor received CDSC proceeds of $180,983 and $177,957 with respect to redemption within one year after purchase of Class D shares purchased subject to a front-end sales charge waiver for the Insured and National Portfolios, respectively. For the same period the Distributor did not receive any CDSC proceeds with respect to redemption within one year after purchase of Class D shares purchased subject to a front-end sales charge waiver for the Limited Maturity Portfolio. Eligible Class A Investors. Class A shares are offered to a limited group of investors and also will be issued upon reinvestment of dividends from outstanding Class A shares. Investors that currently own Class A shares of a Portfolio in a shareholder account, including participants in the Merrill Lynch Blueprint(SM) program, are entitled to purchase additional Class A shares of that Portfolio in that account. Class A shares are available at net asset value to corporate warranty insurance reserve fund programs and U.S. branches of foreign banking institutions, provided that the program or branch has $3 million or more initially invested in MLAM-advised mutual funds. Also eligible to purchase Class A shares at net asset value are participants in certain investment programs, including TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides discretionary trustee services, collective investment trusts for which Merrill Lynch Trust Company - --------------- (1) Includes $4,806 in direct commissions received by MLFD. (2) Includes $114 in direct commissions received by MLFD. (3) Includes $138 in direct commissions received by MLFD. (4) Includes $56 in direct commissions received by MLFD. (5) Includes $56 in direct commissions received by MLFD. 34 serves as trustee, certain Merrill Lynch investment programs that offer pricing alternatives for securities transactions and purchases made in connection with certain fee-based programs. In addition, Class A shares will be 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 mutual funds, including the Fund. 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 Fund also may purchase Class A shares of the Fund if certain conditions set forth in the Statement of Additional Information are met (for closed-end funds that commenced operations prior to October 21, 1994). In addition, Class A shares of the Fund 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 the Fund 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 under "Eligible Class A Investors." See "Shareholder Services -- Fee-Based Programs." Provided applicable threshold requirements are met, Class D shares are offered at net asset value to Employee Access(SM) Accounts available through authorized employers. Subject to certain conditions, Class A and Class D shares are offered at net asset value to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc., and Class A shares are offered at net asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc., who wish to reinvest in shares of the Fund 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. Class D shares are offered with reduced sales charges and, in certain circumstances, at net asset value, to participants in the Merrill Lynch Blueprint(SM) Program. Additional information concerning these reduced initial sales charges is set forth in the Statement of Additional Information. Employee Access(SM) Accounts. Class A or Class D shares are offered at net asset value to Employee Access Accounts available through employers that provide employer sponsored retirement or savings plans that are eligible to purchase such shares at net asset value. The initial minimum investments for such accounts is $500, except that the initial minimum investments for shares purchased for such accounts pursuant to the Automatic Investment Program is $50. 35 DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES Investors choosing the deferred sales charge alternatives should consider Class B shares if they intend to hold their shares for an extended period of time and Class C shares if they are uncertain as to the length of time they intend to hold their assets in MLAM-advised mutual funds. The public offering price of Class B and Class C shares for investors choosing the deferred sales charge alternatives is the next determined net asset value per share without the imposition of a sales charge at the time of purchase. As discussed below, Class B shares of the Insured and National Portfolios are subject to a four year CDSC and Class B shares of the Limited Maturity Portfolio are subject to a one year CDSC, while Class C shares of each Portfolio are subject only to a one year 1.00% CDSC. On the other hand, approximately ten years after Class B shares 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 the relevant Portfolio and thereafter will be subject to lower continuing fees. See "Conversion of Class B Shares to Class D Shares" below. Class C shares of the Limited Maturity Portfolio are available only through the Exchange Privilege. Both Class B and Class C shares of each Portfolio are subject to an account maintenance fee of 0.25% (in the case of the National and Insured Portfolios) and 0.15% (in the case of the Limited Maturity Portfolio) of net assets. Class B and Class C shares of the Insured and National Portfolios are subject to distribution fees equal to 0.50% and 0.55%, respectively, of net assets. Class B and Class C shares of the Limited Maturity portfolio are subject to a distribution fee of 0.20% of net assets. See "Distribution Plans." The proceeds from account maintenance fees are used to compensate Merrill Lynch for providing continuing account maintenance activities. Class B and Class C shares are sold without an initial sales charge so that the Fund will receive the full amount of the investor's purchase payment. Merrill Lynch compensates its financial consultants for selling Class B and Class C shares at the time of purchase from its own funds. See "Distribution Plans" below. Proceeds from the CDSC and the distribution fee are paid to the Distributor and are used in whole or in part by the Distributor to defray the expenses of dealers (including Merrill Lynch) related to providing distribution-related services to the Fund in connection with the sale of the Class B and Class C shares, such as the payment of compensation to financial consultants for selling Class B and Class C shares from its own funds. The combination of the CDSC and the ongoing distribution fee facilitates the ability of the Fund to sell the Class B and Class C shares without a sales charge being deducted at the time of purchase. Approximately ten years after issuance, Class B shares of a Portfolio will convert automatically into Class D shares of that Portfolio, which are subject to an account maintenance fee but 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 the 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. Imposition of the CDSC and the distribution fee on Class B and Class C 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 the Fund exercising the exchange privilege described under "Shareholder Services -- Exchange Privileges" will continue to be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares acquired as a result of the exchange. 36 Contingent Deferred Sales Charge -- Class B Shares. Class B shares of the Insured and National Portfolios redeemed within four years of purchase and Class B shares of the Limited Maturity Portfolio redeemed within one year of purchase, may be subject to a CDSC at the rates set forth below charged as a percentage of the dollar amount subject thereto. The charge will be assessed on an amount equal to the lesser of the 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 the redemption of shares received upon the reinvestment of dividends or capital gains distributions. Effective on or about May 12, 1997, the Class B CDSC also will be waived for any Class B shares purchased within eligible Employee Access(SM) Accounts. The following table sets forth the rates of the CDSC on Class B shares applicable for the period starting October 21, 1994:
INSURED OR CDSC AS A NATIONAL PORTFOLIO; PERCENTAGE OF YEAR SINCE PURCHASE DOLLAR AMOUNT PAYMENT MADE SUBJECT TO CHARGE --------------------- ----------------- 0-1.......................................................... 4.00% 1-2.......................................................... 3.00% 2-3.......................................................... 2.00% 3-4.......................................................... 1.00% 4 and thereafter............................................. 0.00%
LIMITED MATURITY CDSC AS A PORTFOLIO; PERCENTAGE OF YEAR SINCE PURCHASE DOLLAR AMOUNT PAYMENT MADE SUBJECT TO CHARGE --------------------- ----------------- 0-1.......................................................... 1.0% 1 and thereafter............................................. 0.0%
For the fiscal year ended June 30, 1997, the Distributor received $1,906,615 in CDSCs with respect to redemptions of Class B shares, amounting to $979,435, $868,705 and $58,475 in the Insured, National and Limited Maturity Portfolios, respectively, 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. In determining whether a CDSC is applicable to a redemption, the calculation will be made in a manner that results in the lowest possible applicable rate being charged. Therefore, with respect to the Insured and National Portfolios, it will be assumed that the redemption is first of shares held for over four years or shares acquired pursuant to reinvestment of dividends or distributions and then of shares held longest during the applicable four-year period. It will be assumed, with respect to the Limited Maturity Portfolio, that the redemption is 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. 37 To provide an example, assume an investor purchased 100 Class B shares of the Insured Portfolio at $10 per share (at a cost of $1,000) and in the third year after purchase, the net asset value per share is $12 and, during such time, the investor has acquired 10 additional shares upon dividend reinvestment. If at such time the investor makes his or her first redemption of 50 shares (proceeds of $600), 10 shares will not be subject to charge because of dividend reinvestment. With respect to the remaining 40 shares, the CDSC is applied only to the original cost of $10 per share and not the increase in net asset value of $2 per share. Therefore, $400 of the $600 redemption proceeds will be charged at a rate of 2.00% (the applicable rate in the third year after purchase for shares purchased on or after October 21, 1994). Additional information concerning the waiver of the Class B CDSC is set forth in the Statement of Additional Information. Contingent Deferred Sales Charges -- Class C Shares. Class C shares that are redeemed within one year of purchase may be subject to a 1.00% CDSC 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 Class C CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no Class C CDSC will be assessed on shares derived from reinvestment of dividends or capital gains distributions. The Class C CDSC may be waived in connection with certain fee-based programs. See "Shareholder Services -- Fee-Based Programs." The following table sets forth the rates of the contingent deferred sales charge on the Class C shares of the Insured, National and Limited Maturity Portfolios:
CONTINGENT DEFERRED SALES CHARGE AS A PERCENTAGE OF YEAR SINCE PURCHASE DOLLAR AMOUNT PAYMENT MADE SUBJECT TO CHARGE ------------------------------------------------------------ ------------------- 0-1......................................................... 1.00% thereafter.................................................. 0.00%
In determining whether a Class C CDSC is applicable to a redemption, the calculation will be made in the manner that results in the lowest possible 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. For the fiscal year ended June 30, 1997, the Distributor received $17,583 in CDSCs with respect to redemptions of Class C shares, amounting to $6,915, $10,273 and $395 in the Insured, National and Limited Maturity Portfolios, respectively, 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. Conversion of Class B Shares to Class D Shares. After approximately ten years (the "Conversion Period"), Class B shares of a Portfolio will be converted automatically into Class D shares of the relevant Portfolio. Class D shares are subject to an ongoing account maintenance fee of 0.25% (in the case of Insured 38 Portfolio and National Portfolio) and 0.10% (in the case of the Limited Maturity Portfolio) of net assets but 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 the Fund in a single account will result in less than $50 worth of Class B shares being left in the account, all of the Class B shares of the Fund held in the account on the Conversion Date will be converted to Class D shares of the 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 onto the holding period for the shares acquired. The Conversion Period also may be modified in connection with certain fee-based programs. See "Shareholder Services -- Fee-Based Programs." DISTRIBUTION PLANS The Fund has adopted separate distribution plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a "Distribution Plan") with respect to the account maintenance and/or distribution fees paid by the Fund to the Distributor with respect to such classes. The Class B and Class C Distribution Plans provide for the payment of account maintenance fees and distribution fees, and the Class D Distribution Plan provides for the payment of account maintenance fees. The Distribution Plans for Class B, Class C and Class D shares each provide that the Fund pays the Distributor an account maintenance fee relating to the shares of the relevant class of a Portfolio, accrued daily and paid monthly, at the annual rate of 0.25% (in the case of the Class B, Class C and Class D shares of the Insured Portfolio and the National Portfolio) and 0.15% (in the case of Class B and Class C shares of the Limited Maturity) and 0.10% (in the case of the Class D shares of the Limited Maturity Portfolio) of the average daily net assets of the Portfolio 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. 39 The Distribution Plans for Class B and Class C shares each provide that the Fund also pays the Distributor a distribution fee relating to the shares of the relevant class of a Portfolio, accrued daily and paid monthly, at the annual rate of 0.50% and 0.55% for the Class B and Class C shares, respectively, of the Insured and National Portfolios and 0.20% for the Class B and Class C shares of the Limited Maturity Portfolio of the average daily net assets of the Portfolio 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 Portfolio. 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 Fund in that the deferred sales charges provide for the financing of the distribution of the Fund's Class B and Class C shares. Prior to July 6, 1993, the Fund paid the Distributor an ongoing distribution fee, accrued daily and paid monthly, at the annual rate of 0.75% (in the case of the Insured Portfolio and National Portfolio) and 0.35% (in the case of the Limited Maturity Portfolio) of the average daily net assets of the Class B shares of the respective Portfolio (the "Prior Plan") to compensate the Distributor and Merrill Lynch for providing account maintenance and distribution-related activities and services to Class B shareholders. The fee rate payable and the services provided under the Prior Plan are identical to the aggregate fee rate payable and the services provided under the Distribution Plan, the difference being that the account maintenance and distribution services have been unbundled. For the fiscal year ended June 30, 1997, the Insured, National and Limited Maturity Portfolios paid the Distributor $4,901,030, $3,073,016, and $222,614, respectively, pursuant to the Class B Distribution Plan (based on average net assets subject to the Class B Distribution Plan of approximately $653.5 million, $409.7 million, and $63.6 million, respectively), all of which were paid to Merrill Lynch for providing account maintenance and distribution-related activities and services in connection with Class B shares. For the fiscal year ended June 30, 1997, the Insured, National and Limited Maturity Portfolios paid the Distributor $134,437, $162,696, and $634, respectively, pursuant to the Class C Distribution Plan (based on average net assets subject to the Class C Distribution Plan of approximately $16.8 million, $20.3 million, and $0.2 million, respectively), all of which were paid to Merrill Lynch for providing account maintenance and distribution-related activities and services in connection with Class C shares. For the fiscal year ended June 30, 1997, the Insured, National and Limited Maturity Portfolios paid the Distributor $116,523, $126,564, and $17,810, respectively, pursuant to the Class D Distribution Plan (based on average net assets subject to the Class D Distribution Plan of approximately $46.6 million, $50.6 million, and $17.8 million, respectively), all of which were paid to Merrill Lynch for providing account maintenance services in connection with Class D shares. The payments under the Distribution Plans are based on a percentage of average daily net assets attributable to the relevant shares regardless of the amount of expenses incurred and, accordingly, distribution-related revenues from Distribution Plans may be more or less than distribution-related expenses. Information with respect to the distribution-related revenues and expenses incurred by the Distributor and Merrill Lynch is presented to the Directors for their consideration in connection with their deliberations as to the continuance of the Class B and Class C Distribution Plans. This information is presented 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 40 the fully allocated accrual basis, revenues consist of account maintenance fees, the distribution fees, the CDSCs and certain other related revenues, and expenses consist of financial consultant compensation, branch office and regional operation center selling and transaction procession expenses, advertising, sales promotion and marketing expenses, corporate overhead and interest expense. On the direct expense and revenue/cash basis, revenues consist of the account maintenance fees, distribution fees and the CDSCs, and expenses consist of financial consultant compensation. As of December 31, 1996, the last date for which fully allocated accrual data is available, the fully allocated accrual revenues incurred by the Distributor and Merrill Lynch since October 21, 1988 (commencement of operations) with respect to Class B shares of the Insured Portfolio exceeded fully allocated expenses for that period by $28,142,845 (representing 4.13% of the Insured Portfolio's Class B net assets at that date), and the fully allocated accrual revenues incurred by the Distributor and Merrill Lynch during that period with respect to Class B shares of the National Portfolio exceeded the fully allocated accrual expenses for that period by $13,052,833 (representing 3.28% of the National Portfolio's Class B net assets at that date). The fully allocated accrual revenues incurred by the Distributor and Merrill Lynch during the period from November 2, 1992 (commencement of operations) to December 31, 1996, with respect to Class B shares of the Limited Maturity Portfolio exceeded fully allocated expenses by $1,480,421 (representing 2.35% of the Limited Maturity Portfolio's Class B net assets at that date). As of June 30, 1997, direct cash revenues received with respect to the Class B shares of the Insured Portfolio for the period since October 21, 1988 (commencement of operations) exceeded direct cash expenses by $30,395,737 (representing 5.43% of Insured Portfolio Class B net assets at that date) and direct cash revenues received with respect to Class B shares of the National Portfolio for the same period exceeded direct cash expenses by $14,736,843 (representing 3.55% of National Portfolio Class B net assets at that date). As of June 30, 1997, direct cash revenues received with respect to the Class B shares of the Limited Maturity Portfolio for the period since November 2, 1992 (commencement of operations) exceeded direct cash expenses by $1,584,188 (representing 2.92% of Limited Maturity Portfolio Class B net assets at that date). With respect to Class C shares, as of December 31, 1996, the last date for which fully allocated accrual data is available, the fully allocated accrual revenues incurred by the Distributor and Merrill Lynch since October 21, 1994 (commencement of operations) with respect to Class C shares of the Insured Portfolio exceeded fully allocated expenses for that period by $112,698 (representing 0.55% of the Insured Portfolio's Class C net assets at that date), and the fully allocated accrual revenues incurred by the Distributor and Merrill Lynch during that period with respect to Class C shares of the National Portfolio exceeded the fully allocated accrual expenses for that period by $75,014 (representing 0.40% of the National Portfolio's Class C net assets at that date) and the fully allocated accrual expenses incurred by the Distributor and Merrill Lynch during that period with respect to Class C shares of the Limited Maturity Portfolio exceeded the fully allocated accrual revenues for that period by $1,128 (representing 0.50% of the Limited Maturity Portfolio's Class C net assets at that date). As of June 30, 1997, direct cash revenues received with respect to the Class C shares of the Insured Portfolio for the period since October 21, 1994 (commencement of operations) exceeded direct cash expenses by $152,980 (representing 1.28% of Insured Portfolio Class C net assets at that date), and the direct cash revenues received with respect to the Class C shares of the National Portfolio for the same period exceeded direct cash expenses by $144,667 (representing 0.51% of National Portfolio Class C net assets at that date) and the direct cash expenses with respect to Class C shares of the Limited Maturity Portfolio exceeded direct cash revenues by $812 (representing 0.76% of Limited Maturity Portfolio Class C net assets at that date). 41 The Fund has no obligation with respect to distribution and/or account maintenance related expenses incurred by the Distributor and Merrill Lynch in connection with the Class B, Class C and Class D shares, and there is no assurance that the Board of Directors of the Fund will approve the continuation 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 Directors will be asked to take into consideration expenses incurred in connection with the account maintenance and/or distribution of each Class of a Portfolio separately. The initial sales charges, the account maintenance fee, the distribution fee and/or the CDSCs received with respect to the one class of a Portfolio will not be used to subsidize the sale of shares of another class of the same Portfolio or of any class of another Portfolio. 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 "Deferred Sales Charge Alternatives -- Class B and Class C Shares -- Conversion of Class B 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 Fund's distribution fee and the CDSC borne by the Class B and Class C but not the account maintenance fees. The maximum sales charge rule is applied separately to each class and Portfolio. As applicable to a Portfolio, the maximum sales charge rule limits the aggregate of distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares and Class C shares of that Portfolio, computed separately (defined to exclude shares issued pursuant to dividend reinvestments and exchanges), plus (2) interest on the unpaid balance for the respective classes, 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). 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 (referred to as the "voluntary maximum") in connection with the Class B shares is 6.75% of eligible gross sales. The Distributor retains the right to stop waiving the interest charge at any time. To the extent payments would exceed the voluntary maximum, the 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, the Fund will continue to make payments of the account maintenance fees. 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. REDEMPTION OF SHARES The Fund is required to redeem for cash all shares of each Portfolio upon receipt of a written request in proper form. The redemption price is the net asset value per share of the Portfolio 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 declared 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 the relevant Portfolio at such time. If a shareholder redeems all of the shares in his account, he will receive, in addition to the net asset value of the shares redeemed, a separate check representing all dividends declared but unpaid. If a shareholder redeems a portion of the shares in his 42 account, the dividends declared but unpaid on the shares redeemed will be distributed on the next dividend payment date. As set forth below, special procedures are available pursuant to which shareholders may redeem by check. REDEMPTION A shareholder wishing to redeem shares may do so by tendering the shares directly to the Transfer Agent, Merrill Lynch Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered other than by mail should be delivered to Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice of redemption in the case of shares deposited with the Transfer Agent may be accomplished by a letter requesting redemption. Proper notice of redemption in the case of shares for which certificates have been issued may be accomplished by a written letter as noted above accompanied by the certificate(s) for the shares to be redeemed. The notice in either event requires the signature(s) of all persons in whose name(s) the shares are registered, signed exactly as their name(s) appear(s) on the Transfer Agent's register or on the certificate(s), as the case may be. The signature(s) on the redemption request must be guaranteed by an "eligible guarantor institution" as such is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, the existence and validity of which may be verified by the Transfer Agent through the use of industry publications. Notarized signatures are not sufficient. Examples of eligible guarantor institutions include most commercial banks and other broker dealers (including for example, Merrill Lynch branch offices). Information regarding other financial institutions that qualify as "eligible guarantor institutions" may be obtained from the Transfer Agent. 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, payment will be mailed within seven days of receipt of a proper notice of redemption. At various times the Fund may be requested to redeem shares of a Portfolio for which it has not yet received good payment. The Fund may delay or cause to be delayed the mailing of a redemption check until such time as it has assured itself that good payment (e.g., cash, Federal funds, or a certified check drawn on a United States bank) has been collected for the purchase of such shares. Normally this delay will not exceed ten days. REPURCHASE The Fund will also repurchase shares of each Portfolio through a shareholder's listed securities dealer. The Fund will normally accept orders to repurchase shares by wire or telephone from dealers for their customers at the net asset value next computed after receipt of the order by the dealer, provided that the request for repurchase is received by the dealer prior to the close of business on the New York Stock Exchange on the day received and is received by the Fund from the dealer not later than 4:30 p.m., New York City time, on the same day. Dealers have the responsibility of submitting such repurchase requests to the Fund not later than 4:30 p.m., New York City time, in order to obtain that day's closing price. These repurchase arrangements are for the convenience of shareholders and do not involve a charge by the Fund (other than any applicable CDSC). Securities dealers that do not have selected dealer agreements with the Distributor may impose a charge on the shareholder for transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its customers a processing fee (currently $5.35) to confirm a repurchase of shares. Redemptions made 43 directly through the Fund's Transfer Agent are not subject to the processing fee. The Fund reserves the right to reject any order for repurchase. The exercise of this right of rejection might adversely affect shareholders seeking redemption through the repurchase procedure. For shareholders redeeming through their listed securities dealer, payment for full and fractional shares will be made by the securities dealer 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 As described in further detail in the Statement of Additional Information, holders of Class A or Class D shares of any of the three Portfolios who have redeemed their shares have a one-time privilege to reinstate their accounts by purchasing Class A or Class D, as the case may be, shares of the same Portfolio, in which they had invested 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 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 Each Portfolio offers a number of shareholder services designed to facilitate investment in its shares at no extra cost to the investor. Below is a description of these services. Full details as to each of these services and copies of the various plans described below can be obtained from the Fund. INVESTMENT ACCOUNT Each shareholder whose account is maintained with the Transfer Agent has an Investment Account and will receive a statement, 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. These statements will also show any other activity in the account since the preceding statement. After the end of each year, shareholders will receive Federal income tax information regarding dividends and capital gain distributions. A shareholder may make additions to his Investment Account at any time by purchasing shares at the applicable public offering price either through a securities dealer that has entered into a selected dealer agreement with the Distributor or by mail 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 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 44 proceeds can be transferred to the account at the new firm or such shareholder must continue to maintain an Investment Account at the Transfer Agent for those Class A or Class D shares. Shareholders interested in transferring their Class B or Class C shares from Merrill Lynch and who do not wish to have an Investment Account maintained for such shares at the Transfer Agent may request their new brokerage firm to maintain such shares in an account registered in the name of the brokerage firm for the benefit of the shareholder at the Transfer Agent. Share certificates are issued only for full shares and only upon the specific request of the shareholder. Certificates representing all or only part of the full shares in an Investment Account may be requested by a shareholder directly from the Transfer Agent. AUTOMATIC INVESTMENT PLAN An Automatic Investment Plan is available whereby the Transfer Agent is authorized through pre-authorized checks of $50 or more to charge the regular bank account of the shareholder on a monthly basis to provide systematic additions of shares of the Fund to the shareholder's Investment Account. Shareholders whose positions in any Portfolio of the Fund are maintained in a CMA(R) or CBA(R) account may participate in the CMA(R) or CBA(R) Automated Investment Program, through which investments in any Portfolio of the Fund may be made on a regularly scheduled basis ranging from weekly to semiannually in amounts of $100 or more. 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 that will be exchanged for Class A shares. Initial or deferred sales charges otherwise due in connection with such exchanges may be waived or modified, as may the Conversion Period applicable to the deposited shares. Termination of participation in a Program may result in the redemption of shares held therein or the automatic exchange thereof to another class at net asset value, which may be shares of a money market fund. In addition, upon termination of participation in a Program, shares that have been held for less than specified periods within such Program may be subject to a fee based upon the current value of such shares. These Programs also generally prohibit such shares from being transferred to another account at Merrill Lynch, to another broker-dealer or to the Transfer Agent. Except in limited circumstances (which may also involve an exchange as described above), such shares must be redeemed and another class of shares purchased (which may involve the imposition of initial or deferred sales charges and distribution and account maintenance fees) in order for the investment not to be subject to Program fees. Additional information regarding a specific Program (including charges and limitations on transferability applicable to shares that may be held in such Program) is available in such Program's client agreement and from the Transfer Agent at 1-800-MER-FUND or (800) 637-3863. AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS All dividends and capital gains distributions are automatically reinvested in full and fractional shares of the respective Portfolio, without a sales charge at the net asset value of the shares of the respective Portfolio as of the close of business on the payable date of the dividend or distribution. A shareholder may at any time, by 45 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 capital gains distributions, or both, paid in cash, rather than reinvested, in which event payment will be mailed on or about the payment date. The Fund is not responsible for any failure of delivery to the shareholder's addresses of record and no interest will accrue on amounts represented by uncashed distribution or redemption checks. Cash payments can also be directed to the shareholder's bank account. No CDSC will be imposed upon redemption of shares issued as a result of the automatic reinvestment of dividends or capital gains distributions. SYSTEMATIC WITHDRAWAL PLANS A shareholder of any of the three Portfolios may elect to receive systematic withdrawal payments from his or her Investment Account in the form of payments by check or through automatic payment by direct deposit to his or her bank account on either a monthly or calendar quarterly basis. A shareholder whose shares are held within a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R) Systematic Redemption Program, subject to certain conditions. With respect to redemptions of Class B and 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 Charge -- Class B Shares" and "Contingent Deferred Sales Charges -- Class C Shares." Where the systematic withdrawal plan is applied to Class B Shares, upon conversion of the last Class B shares in an account to Class D shares, the systematic withdrawal plan will automatically be applied thereafter to Class D shares. See "Purchase of Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to Class D Shares." EXCHANGE PRIVILEGES U.S. Shareholders of each class of shares of a Portfolio who have held all or part of their shares in the Portfolio for at least 15 days may exchange their shares for shares of certain other Portfolios of the Fund, or with certain other MLAM-advised mutual funds. Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may exchange Class A shares of a Portfolio for Class A shares of another Portfolio or a second MLAM-advised mutual fund if the shareholder holds any Class A shares of the other Portfolio or 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 other Portfolio or second fund. If the Class A shareholder wants to exchange Class A shares for shares of another Portfolio or a second MLAM-advised mutual fund, and the shareholder does not hold Class A shares of the other Portfolio or second fund in his account at the time of the exchange and is not otherwise eligible to acquire Class A shares of the other Portfolio or second fund, the shareholder will receive Class D shares of the other Portfolio or second fund as a result of the exchange. Class D shares also may be exchanged for Class A shares of another Portfolio or a second MLAM-advised mutual fund at any time as long as, at the time of the exchange, the 46 shareholder holds Class A shares of the other Portfolio or second fund in the account in which the exchange is made or is otherwise eligible to purchase Class A shares of the other Portfolio or 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 of a Portfolio will be exchangeable with shares of the same class of another Portfolio or other MLAM-advised mutual funds. Class C shares of the Limited Maturity Portfolio are available only through the Exchange Privilege. Shares of a Portfolio that are subject to a CDSC will be 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 the Portfolio. 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 Portfolio is "tacked" to the holding period for the newly acquired shares of the other fund or Portfolio. Class A, Class B, Class C and Class D shares also will be exchangeable for shares of certain MLAM-advised money market funds specifically designated as available for exchange by holders of Class A, Class B, Class C or Class D shares. The period of time that Class A, Class B, Class C or Class D shares are held in a money market fund, however, will not count toward satisfaction of the holding period requirement for reduction of any CDSC imposed on such shares, if any, and, with respect to Class B shares, toward satisfaction of the Conversion Period. Class B shareholders of a Portfolio exercising the exchange privilege will continue to be subject to the CDSC schedule applicable to that Portfolio if such schedule is higher than the CDSC schedule relating to the new Class B shares. In addition, Class B shares of a Portfolio acquired through use of the exchange privilege will be subject to the CDSC schedule applicable to that Portfolio 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. PORTFOLIO TRANSACTIONS No Portfolio has any obligation to deal with any dealer or group of dealers in the execution of transactions in portfolio securities. Municipal Bonds and money market securities in which each Portfolio invests are traded primarily in the over-the-counter market. Where possible, each Portfolio 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 Fund to obtain the best net results taking into account such factors as price (including the applicable dealer spread), the size, type and difficulty of the transaction involved, the firm's general execution and operational facilities, and the firm's risk in positioning the securities involved and the provision of supplemental investment research by the firm. While the Fund generally seeks 47 reasonably competitive spreads or commissions, the Fund will not necessarily be paying the lowest spread or commission available. Municipal Bonds and money market securities are generally traded on a net basis and do not normally involve either brokerage commissions or transfer taxes. The cost of the portfolio securities transactions of each Portfolio consists primarily of dealer or underwriter spreads. Under the Investment Company Act, persons affiliated with the Fund, including Merrill Lynch, are prohibited from dealing with the Fund as a principal in the purchase and sale of securities. The Fund has obtained an exemptive order permitting it to engage in certain principal transactions involving high-quality short-term Municipal Bonds. In addition, the Fund may not purchase Municipal Bonds from any underwriting syndicate of which Merrill Lynch is a member except pursuant to procedures approved by the Board of Directors which comply with rules adopted by the Securities and Exchange Commission. Affiliated persons of the Fund may serve as its broker in over-the-counter transactions conducted on an agency basis. ADDITIONAL INFORMATION DIVIDENDS AND DISTRIBUTIONS The net investment income of each Portfolio is declared as dividends daily immediately prior to the determination of the net asset value of each Portfolio on that day. The net investment income of each Portfolio for dividend purposes consists of interest earned on portfolio securities, less expenses, in each case computed since the most recent determination of net asset value. Expenses of each Portfolio, including the advisory fee and Class B, Class C and Class D account maintenance and Class B and Class C distribution fees (if applicable), are accrued daily. Dividends of net investment income are declared daily and reinvested monthly in the form of additional full and fractional shares of each Portfolio at net asset value unless the shareholder elects to receive such dividends in cash. The per share dividend distributions on each class of shares of each of the three Portfolios will be reduced as a result of any account maintenance, distribution and transfer agency fees applicable to that class. Shares will accrue dividends as long as they are issued and outstanding. Shares are issued and outstanding as of the settlement date of a purchase order to the settlement date of a redemption order. Net realized capital gains, if any, are declared and distributed to the Fund's shareholders at least annually. Capital gains distributions will be automatically reinvested in shares unless the shareholder elects to receive such distributions in cash. See "Shareholder Services -- Automatic Reinvestment of Dividends and Capital Gains Distributions" for information as to how to elect either dividend reinvestment or cash payments. Any portions of dividends and distributions that are taxable to shareholders as described below are subject to income tax whether they are reinvested in shares of any Portfolio or received in cash. FEDERAL INCOME TAXES Each Portfolio of the Fund generally will be treated as a separate corporation for Federal income tax purposes. Each Portfolio has qualified and expects to continue to qualify for the special tax treatment afforded regulated investment companies under the Internal Revenue Code of 1986, as amended (the "Code"). If each 48 Portfolio qualifies for that tax treatment, it will not be subject to Federal income tax on that part of its net ordinary income and net realized long-term capital gains that it distributes to its shareholders. Each Portfolio has qualified and expects to continue to qualify to pay "exempt-interest" dividends as defined in the Code. If it so qualifies, dividends or any part thereof (other than any capital gain distributions) paid by the Portfolio that are attributable to interest on tax-exempt obligations and designated by the Portfolio as exempt-interest dividends in a written notice mailed to the Portfolio's shareholders within sixty days after the close of its taxable year may be treated by shareholders for all purposes as items of interest excludable from their gross income under Section 103(a) of the Code. The recipient of tax-exempt income is required to report such income on his or her Federal income tax return. However, a shareholder is advised to consult his or her tax adviser with respect to whether exempt-interest dividends retain the exclusion under Section 103(a) if such shareholder would be treated as a "substantial user" under Section 147(a)(1) of the Code with respect to some or all of the tax-exempt obligations held by the Portfolio. The Code provides that interest on indebtedness incurred or continued to purchase or carry shares of the Portfolio is not deductible to the extent attributable to exempt-interest dividends. Also, any losses realized by individuals who dispose of shares of the Fund within six months of their purchase are disallowed to the extent of any exempt-interest dividends received with respect to such shares. Each Portfolio may realize capital gains, which will constitute taxable income. Any distributions designated as capital gain dividends, i.e., as being made from the Portfolio's net long-term capital gains (whether from tax-exempt or taxable obligations) in a written notice furnished annually to shareholders are taxable to shareholders as gains from the sale or exchange of a capital asset held for more than one year, regardless of a shareholder's holding period for shares of the Portfolio. In addition, if, after April 30, 1993, a Portfolio acquired tax-exempt obligations having market discount (generally, obligations acquired for a price less than their principal amount), any gain on the disposition or retirement of such obligations will be treated as ordinary income to the extent of accrued market discount. Dividends paid by each Portfolio from its taxable income (i.e., interest on money market securities) and distributions of net realized short-term capital gains (whether from tax-exempt or taxable obligations) are taxable to shareholders as ordinary income. Some shareholders may be subject to a 31% withholding tax ("backup withholding") on reportable dividends, capital gains distributions and redemption payments. Backup withholding is not required with respect to dividends representing "exempt-interest." Generally, shareholders subject to backup withholding will be those for whom no certified taxpayer identification number is on file with the Fund or who, to the Fund's knowledge, have furnished an incorrect number. When establishing an account, an investor must certify under penalties of perjury that such number is correct and that he is not otherwise subject to backup withholding. 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. A loss realized on a sale or exchange of shares of the Fund will be disallowed if other Fund shares are acquired (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period 49 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. Individual shareholders of the Fund may be subject to alternative minimum tax to the extent the Fund holds "private activity" bonds. The Fund expects that it will hold private activity bonds; however, in general, an individual shareholder filing a joint return who does not have any tax preference items subject to the alternative minimum tax other than income received from the Fund derived from private activity bonds would have to receive more than $45,000 of such income from the Fund before becoming subject to the alternative minimum tax. Exempt-interest dividends paid by the Fund, whether or not attributable to private activity bonds, may increase a corporate shareholder's alternative minimum taxable income. In addition, the payment of exempt-interest dividends may increase a corporate shareholder's liability for the environmental tax imposed on a corporation's alternative minimum taxable income (computed without regard to either the alternative tax net operating loss deduction or the environmental tax deduction) at a rate of $12 per $10,000 (0.12%) of alternative minimum taxable income in excess of $2,000,000. The tax will be imposed even if the corporation is not required to pay an alternative minimum tax. The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury Regulations currently in effect. For the complete provisions, reference should be made to the pertinent Code sections and the Treasury Regulations promulgated thereunder. The Code and these Regulations are subject to change by legislative or administrative action either prospectively or retroactively. The Statement of Additional Information sets forth additional information regarding other tax aspects of investment in the Fund. Ordinary income and capital gains dividends may also be subject to State and local taxes. STATE AND LOCAL TAXES Depending upon the extent of the Fund's activities in those states and localities in which its offices are maintained or in which its agents or independent contractors are located, the Fund may be subject to the tax laws of such states or localities. In addition, the exemption of interest income for Federal income tax purposes does not necessarily result in exemption under the income or other tax laws of any state or local taxing authority. The laws of the several states and local taxing authorities vary with respect to the taxation of such interest income, and each holder of shares of the Fund is advised to consult his or her own tax adviser in that regard. The Fund will report annually the percentage of interest income received by each Portfolio during the preceding year on tax-exempt obligations, indicating, on a state-by-state basis, the source of such income. DETERMINATION OF NET ASSET VALUE The net asset value of the shares of all classes of each Portfolio is determined once daily, Monday through Friday, immediately after the declaration of dividends as of 15 minutes after the close of business on the New York Stock Exchange (generally 4:00 p.m., New York City time), on each day that the New York Stock Exchange is open for trading or on any other day on which there is sufficient trading in portfolio securities that the net asset value of a Portfolio's shares may be materially affected. The New York Stock Exchange 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. The net asset value per share is 50 computed by dividing the sum of the value of the portfolio securities held by each Portfolio plus any cash or other assets minus all liabilities by the total number of shares outstanding at such time, rounded to the nearest cent. Expenses, including the investment advisory fees payable to FAM and account maintenance and/or distribution fees payable to the distributor are accrued daily. The per share net asset value of Class A shares of a Portfolio generally will be higher than the per share net asset value of shares of the other classes of that Portfolio, 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 and higher transfer agency 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 distribution and higher 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 four classes of a Portfolio will tend to converge (although not necessarily meet) immediately after the payment of dividends or distributions, which will differ by approximately the amount of expense accrual differentials among the classes. The Municipal Bonds and money market securities in which each Portfolio invests are traded primarily in the over-the-counter markets and are valued at the most recent bid price or yield equivalent as obtained from dealers that make markets in such securities. Positions in futures contracts are valued at closing prices for such contracts established by the exchange on which they are traded on each day during which trading is conducted thereon. Assets for which market quotations are not readily available are valued at fair value on a consistent basis using methods determined in good faith by the Board of Directors, including valuations furnished by a pricing service retained by the Fund, which may utilize a matrix system for valuations. PERFORMANCE DATA From time to time the 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 separately for the Class A, Class B, Class C and Class D shares of the Portfolios 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 will be 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 and the maximum sales charge in the case of Class A and Class D shares. Dividends paid with respect to all shares of a Portfolio, 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 distribution fees, account maintenance fees and any incremental transfer agency costs relating to a class of shares will be borne exclusively by that class. The Fund will include performance data for all classes of shares of the Portfolios in any advertisement or information including performance data for such Portfolios. 51 The Fund 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 charge will not be included. 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; 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. See "Purchase of Shares." The 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 investment in the Fund at the beginning of each specified period. Yield quotations will be computed based on a 30-day period by dividing (a) the net income based on the yield of each security earned during the period by (b) the average daily number of shares outstanding during the period that were entitled to receive dividends multiplied by the maximum offering price per share on the last day of the period. Tax equivalent yield quotations will be computed by dividing (a) the part of the Fund's yield that is tax-exempt by (b) one minus a stated tax rate and adding the result to that part, if any, of the Fund's yield that is not tax-exempt. The yield for the 30-day period ending June 30, 1997 was:
LIMITED MATURITY INSURED PORTFOLIO NATIONAL PORTFOLIO PORTFOLIO ----------------- ------------------ -------- Class A............................ 4.91% 4.92% 3.90% Class B............................ 4.36% 4.37% 3.58% Class C............................ 4.30% 4.32% 3.56% Class D............................ 4.66% 4.68% 3.80%
The tax equivalent yield for the same period (based on a tax rate of 28%) was:
LIMITED MATURITY INSURED PORTFOLIO NATIONAL PORTFOLIO PORTFOLIO ----------------- ------------------ -------- Class A............................ 6.82% 6.83% 5.42% Class B............................ 6.06% 6.07% 4.97% Class C............................ 5.97% 6.00% 4.94% Class D............................ 6.47% 6.50% 5.28%
Total return, yield and tax equivalent yield figures are based on the Fund's historical performance and are not intended to indicate future performance. The Fund's total return, yield and tax equivalent yield will vary depending on market conditions, the securities comprising the Portfolio, the Portfolio's operating expenses and the amount of realized and unrealized net capital gains or losses during the period. The value of an investment in a Portfolio will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. On occasion, the Fund may compare its performance to that of the Standard & Poor's 500 Index, the Value Line Composite Index, the Dow Jones Industrial Average, or performance data contained in publications such as Lipper Analytical Services, Inc., Morningstar Publications, Inc., Money Magazine, U.S. News & World Report, Business Week, CDA Investment Technology, Inc., Forbes Magazine or Fortune 52 Magazine. As with other performance data, performance comparisons should not be considered indicative of the Fund's relative performance for any future period. TRANSFER AGENT Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is responsible for the issuance, transfer and redemption of shares and the opening, maintenance and servicing of shareholder accounts. See "Management of the Fund -- Transfer Agency Services." CUSTODIAN The Bank of New York, 90 Washington Street, 12th Floor, New York, New York 10286, is the Fund's Custodian. COUNSEL AND AUDITOR Rogers & Wells, counsel to the Fund, passes upon legal matters for the Fund in connection with the shares offered by this Prospectus. Deloitte & Touche LLP, independent auditors, are auditors of the Fund. SHAREHOLDER REPORTS The Fund issues to its shareholders quarterly reports containing unaudited financial statements and annual reports containing financial statements examined by auditors approved annually by the Directors. Only one copy of each shareholder report and certain shareholder communications will be mailed to each identified shareholder regardless of the number of accounts such shareholder has. If a shareholder wishes to receive separate copies of each report and communication for each of the shareholder's related accounts the shareholder should notify in writing: Merrill Lynch Financial Data Services, Inc. P.O. Box 45289 Jacksonville, Florida 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. If you have any questions regarding this please call your Merrill Lynch Financial Consultant or Merrill Lynch Financial Data Services, Inc. at (800) 637-3863. ADDITIONAL INFORMATION This Prospectus does not contain all the information included in the Registration Statement filed with the Commission under the Securities Act with respect to the securities offered hereby, certain portions of which have been omitted pursuant to the rules and regulations of the Commission. The Statement of Additional Information, dated October 7, 1997, which forms a part of the Registration Statement, is incorporated by reference into this Prospectus. The Statement of Additional Information may be obtained without charge as provided on the cover page of this Prospectus. The Registration Statement, including the exhibits filed therewith, may be examined at the office of the Commission in Washington, D.C. To the knowledge of the Fund, no person or entity owned beneficially 5% or more of any class of the Fund's shares on September 1, 1997. 53 [This page is intentionally left blank] 54 MERRILL LYNCH MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 1) - -------------------------------------------------------------------------------- NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH BLUEPRINT(SM) PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT(SM) PROGRAM APPLICATION BY CALLING (800) 637-3766. - -------------------------------------------------------------------------------- 1. SHARE PURCHASE APPLICATION I, being of legal age, wish to purchase: (choose one) Insured Portfolio [ ] Class A [ ] Class B [ ] Class C [ ] Class D shares shares shares shares National Portfolio [ ] Class A [ ] Class B [ ] Class C [ ] Class D shares shares shares shares Limited Maturity Portfolio [ ] Class A [ ] Class B [ ] Class D shares shares shares
of Merrill Lynch Municipal Bond Fund and establish an Investment Account as described in the Prospectus. In the event that I am not eligible to purchase Class A shares, I understand that Class D shares will be purchased. Basis for establishing an Investment Account: A. I enclose a check for $.......... payable to Merrill Lynch Financial Data Services, Inc., as an initial investment (minimum $1,000). I understand that this purchase will be executed at the applicable offering price next to be determined after this Application is received by you. B. I already own shares of the following Merrill Lynch mutual funds that would qualify for the right of accumulation as outlined in the Statement of Additional Information: (Please list all funds. Use a separate sheet of paper if necessary.) 1. .......................................................... 4. .......................................................... 2. .......................................................... 5. .......................................................... 3. .......................................................... 6. .......................................................... Name............................................................................ First Name Initial Last Name Name of Co-Owner (if any)....................................................... First Name Initial Last Name Address ............................................................................... Date............................................................................ (Zip Code) Occupation ......................................... ................................................... Signature of Owner Occupation ......................................... Name and Address of Employer................................................. ............................................................................. ............................................................................. ................................................... ............................................................................. Signature of Owner Signature of Co-Owner (if any) - -------------------------------------------------------------------------------- 2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS Ordinary Income Dividends Long-Term Capital Gains --------------------------------- --------------------------------- SELECT [ ] Reinvest SELECT [ ] Reinvest ONE: [ ] Cash ONE: [ ] Cash --------------------------------- ---------------------------------
If no election is made, dividends and capital gains will be automatically reinvested at net asset value without a sales charge. IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [ ] CHECK OR [ ] DIRECT DEPOSIT TO BANK ACCOUNT IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW: I hereby authorize payment of dividend and capital gain distributions by direct deposit to my bank account and, if necessary, debit entries and adjustments for any credit entries made to my account in accordance with the terms I have selected on the Merrill Lynch Municipal Bond Fund Authorization Form. SPECIFY TYPE OF ACCOUNT (CHECK ONE) [ ] CHECKING [ ] SAVINGS Name on your Account............................................................ Bank Name....................................................................... Bank Number ................................................... Account Number.......................................................................... Bank Address.................................................................... I agree that this authorization will remain in effect until I provide written notification to Merrill Lynch Financial Data Services, Inc. amending or terminating this service. Signature of Depositor.......................................................... Signature of Depositor ...................................................... Date............................................................................ (If joint account, both must sign) NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION. 55 MERRILL LYNCH MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 1) -- (CONTINUED) 3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER Social Security Number or Taxpayer Identification Number Under penalty of perjury, I certify (1) that the number set forth above is my correct Social Security Number or Taxpayer Identification Number and (2) that I am not subject to backup withholding (as discussed in the Prospectus under "Dividends, Distributions and Taxes -- Federal Income Taxes") either because I have not been notified that I am subject thereto as a result of a failure to report all interest or dividends, or the Internal Revenue Service ("IRS") has notified me that I am no longer subject thereto. INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS. ............................................................. ............................................................ Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be presumed unless otherwise specified) - -------------------------------------------------------------------------------- 4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (SEE TERMS AND CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION) ......................, 19 . . . . Dear Sir/Madam: Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill Lynch Municipal Bond Fund or any other investment company with an initial sales charge or deferred sales charge for which the Merrill Lynch Funds Distributor, Inc. acts as distributor over the next 13-month period which will equal or exceed: Insured Portfolio [ ] $25,000 [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $1,000,000 National Portfolio [ ] $25,000 [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $1,000,000 Limited Maturity [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000 Portfolio
Each purchase will be made at the then reduced offering price applicable to the amount checked above, as described in the Merrill Lynch Municipal Bond Fund Prospectus. I agree to the terms and conditions of the Letter of Intention. I hereby irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my attorney, with full power of substitution, to surrender for redemption any or all shares of Merrill Lynch Municipal Bond Fund held as security. By:.............................................................. ............................................................... Signature of Owner Signature of Co-Owner (If registered in joint parties, both must sign)
In making purchases under this letter, the following are the related accounts on which reduced offering prices are to apply: (1) Name ................................................... (2) Name.................................................... Account Number ............................................ Account Number.............................................. - --------------------------------------------------------------------------------
5. FOR DEALER ONLY - --- Branch Office, Address, Stamp - --- = = === This form when completed should be mailed to: Merrill Lynch Municipal Bond Fund c/o Merrill Lynch Financial Data Services, Inc. P.O. Box 45289 Jacksonville, FL 32232-5289 We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in connection with transactions under this authorization form and agree to notify the Distributor of any purchases or sales made under a Letter of Intention, Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the shareholder's signature. ............................................................... Dealer Name and Address By ............................................................................. Authorized Signature of Dealer - --------- ------------ .............................. - --------- ------------ Branch-Code F/C No. F/C Last Name - --------- --------------- - --------- --------------- Dealer's Customer Account No. 56 MERRILL LYNCH MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 2) - -------------------------------------------------------------------------------- 1. ACCOUNT REGISTRATION ------------------------------------ Name of Owner....................................................................... First Name Initial Last Name ------------------------------------ Social Security No. or Taxpayer Identification No. Name of Co-Owner (if any)........................................................... First Name Initial Last Name Address............................................................................. .................................................................................... Account Number........................... (if existing account) (Zip Code) Name of Owner....................................................................... First Name Initial Last Name Name of Co-Owner (if any)........................................................... First Name Initial Last Name Address............................................................................. .................................................................................... (Zip Code)
- -------------------------------------------------------------------------------- 2. SYSTEMATIC WITHDRAWAL PLAN -- (SEE TERMS AND CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION) MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly, of [ ] Class A, [ ] Class B*, Class C* or [ ] Class D of the Insured Portfolio, [ ] Class A, [ ] Class B*, Class C* or [ ] Class D shares of the National Portfolio, or [ ] Class A, [ ] Class B*, Class C* or [ ] Class D shares of the Limited Maturity Portfolio in Merrill Lynch Municipal Bond Fund at cost or current offering price. Withdrawals to be made either (check one) [ ] Monthly on the 24th day of each month, or [ ] Quarterly on the 24th day of March, June, September and December. If the 24th falls on a weekend or holiday, the next succeeding business day will be utilized. Begin systematic withdrawal on ............... (month), or as soon as possible thereafter. SPECIFY THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU (CHECK ONE): [ ] $________ of [ ] Class A, [ ] Class B*, Class C* or [ ] Class D shares in the account. SPECIFY WITHDRAWAL METHOD: [ ] check or [ ] direct deposit to bank account (check one and complete part (a) or (b) below): DRAW CHECKS PAYABLE (CHECK ONE) (a) I hereby authorize payment by check [ ] as indicated in Item 1. [ ] to the order of.......................................................... Mail to (check one) [ ] the address indicated in Item 1. [ ] Name (Please Print)...................................................... Address......................................................................... ........................................................................... Signature of Owner ........................................................................ Date... Signature of Co-Owner (if any)............................................. (B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING THIS SERVICE. Specify type of account (check one): [ ] checking [ ] savings Name on your Account............................................................ Bank Name....................................................................... Bank Number ............................................................. Account Number.................................................................. Bank Address.................................................................... ................................................................................ Signature of Depositor .............................................................................. Date............................................................................ Signature of Depositor.......................................................... (If joint account, both must sign) NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION. - ------------------------------------ * Annual withdrawal cannot exceed 10% of the value of shares of such class held in the account at the time the election to join the systematic withdrawal plan is made. 57 MERRILL LYNCH MUNICIPAL BOND FUND -- AUTHORIZATION FORM (PART 2) -- (CONTINUED) - -------------------------------------------------------------------------------- 3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN I hereby request that Merrill Lynch Financial Data Services, Inc. draw an automated clearing house ("ACH") debit on my checking account as described below each month to purchase: (choose one) [ ] Class A shares [ ] Class B shares [ ] Class C shares* [ ] Class D shares of Merrill Lynch Municipal Bond Fund subject to the terms set forth below. In the event that I am not eligible to purchase Class A shares, I understand that Class D shares will be purchased. * Not available for the Limited Maturity Portfolio. MERRILL LYNCH FINANCIAL DATA SERVICES, INC. You are hereby authorized to draw an ACH debit each month on my bank account for investment in Merrill Lynch Municipal Bond Fund as indicated below: Amount of each ACH debit $................................................... Account Number............................................................... Please date and invest ACH debits on the 20th of each month beginning ................................................................................ ................................ (month) or as soon thereafter as possible. I agree that you are drawing these ACH debits voluntarily at my request and that you shall not be liable for any loss arising from any delay in preparing or failure to prepare any such debit. If I change banks or desire to terminate or suspend this program, I agree to notify you promptly in writing. I hereby authorize you to take any action to correct erroneous ACH debits of my bank account or purchases of fund shares including liquidating shares of the Fund and credit my bank account. I further agree that if a check or debit is not honored upon presentation, Merrill Lynch Financial Data Services, Inc. is authorized to discontinue immediately the Automatic Investment Plan and to liquidate sufficient shares held in my account to offset the purchase made with the dishonored debit. ................. ....................................... Date Signature of Depositor ....................................... Signature of Depositor (If joint account, both must sign) AUTHORIZATION TO HONOR ACH DEBITS DRAWN BY MERRILL LYNCH FINANCIAL DATA SERVICES, INC. To..........................................................................Bank (Investor's Bank) Bank Address.................................................................... City........................................ State .......... Zip Code.......... As a convenience to me, I hereby request and authorize you to pay and charge to my account ACH debits drawn on my account by and payable to Merrill Lynch Financial Data Services, Inc. I agree that your rights in respect to each such debit shall be the same as if it were a check drawn on you and signed personally by me. This authority is to remain in effect until revoked personally by me in writing. Until you receive such notice, you shall be fully protected in honoring any such debit. I further agree that if any such debit be dishonored, whether with or without cause and whether intentionally or inadvertently, you shall be under no liability. ................. ....................................... Date Signature of Depositor ................. ....................................... Bank Account Number Signature of Depositor (If joint account, both must sign) NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION. 58 APPENDIX DESCRIPTIONS OF RATINGS DESCRIPTIONS OF MOODY'S INVESTORS SERVICE, INC.'S MUNICIPAL BOND RATINGS Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa -- Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A -- Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa -- Bonds which are rated Baa are considered medium grade obligations; i.e.,they are neither highly protected nor poorly secured. Interest payments 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. Conditional Rating: Bonds for which the security depends upon the completion of some act or the fulfillment of some condition are rated conditionally. These are bonds secured by (a) earnings of projects under construction, (b) earnings of projects unseasoned in operation experience, (c) rentals which begin when A-1 facilities are completed, or (d) payments to which some other limiting condition attaches. Parenthetical rating denotes probable credit stature upon completion of construction or elimination of basis of condition. Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating classification from Aa through B in its municipal bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and a modifier 3 indicates that the issue ranks in the lower end of its generic rating category. Short-term Notes: The four ratings of Moody's for short-term notes are MIG 1, MIG 2, MIG 3 and MIG 4. MIG 1 denotes best quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing; MIG 2 denotes high quality. Margins of protection are ample although not so large as in the preceding group; MIG 3 denotes favorable quality. All security elements are accounted for but there is lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established; MIG 4 denotes adequate quality. Protection commonly regarded as required of an investment security is present and although not distinctly or predominantly speculative, there is specific risk. DESCRIPTIONS OF MOODY'S COMMERCIAL PAPER RATINGS Moody's Commercial Paper ratings are opinions of the ability to repay punctually promissory obligations having an original maturity not in excess of nine months. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers: Issuers rated Prime-1 (or related supporting institutions) have a superior capacity for repayment of short-term promissory obligations. Issuers rated Prime-2 (or related supporting institutions) have a strong capacity for repayment of short-term promissory obligations. Issuers rated Prime-3 (or related supporting institutions) have an acceptable capacity for repayment of short-term promissory obligations. Issuers rated Not Prime do not fall within any of the Prime rating categories. DESCRIPTIONS OF STANDARD & POOR'S RATINGS GROUP'S MUNICIPAL DEBT RATINGS A Standard & Poor's municipal debt rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers, or lessees. The debt rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished by the issuer or obtained by Standard & Poor's from other sources Standard & Poor's considers reliable. Standard & Poor's does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The rating may be changed, suspended or withdrawn as a result of changes in, or unavailability of, such information, or for other circumstances. A-2 The ratings are based, in varying degrees, on the following considerations: I. Likelihood of default-capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation; II. Nature of and provisions of the obligation; III. Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization or other arrangement under the laws of bankruptcy and other laws affecting creditor's rights. AAA Debt rated "AAA" have the highest rating assigned by Standard & Poor's to a debt obligation. Capacity to pay interest and repay principal is extremely strong. AA Debt rated "AA" have a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree. A Debt rated "A" have a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debts in higher rated categories. BBB Debt rated "BBB" are regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. BB Debt rated "BB," "B," "CCC" and "CC" are regarded, on balance, as predominantly B speculative with respect to capacity to pay interest and repay principal in CCC accordance with the terms of the obligation. "BB" indicates the lowest degree of CC speculation and "CC" the highest of speculation. While such debts will likely have some quality and protective characteristics, these are out-weighed by large uncertainties or major risk exposures to adverse conditions. C The rating "C" is reserved for income bonds on which no interest is being paid. D Debt rated "D" is in default, and payment of interest and/or repayment of principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. Provisional Ratings: The letter "p" indicates that the rating is provisional. A provisional rating assumes the successful completion of the project being financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of, or the risk of default upon failure of, such completion. The investor should exercise his own judgment with respect to such likelihood and risk. NR Indicates that no rating has been requested, that there is insufficient information on which to base a rating or that Standard & Poor's does not rate a particular type of obligation as a matter of policy.
A-3 DESCRIPTIONS OF STANDARD & POOR'S RATINGS GROUP'S COMMERCIAL PAPER RATINGS A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into four categories, ranging from "A" for the highest quality obligations to "D" for the lowest. The four categories are as follows: A Issues assigned this highest rating are regarded as having the greatest capacity for timely payment. Issues in this category are delineated with the numbers 1, 2 and 3 to indicate the relative degree of safety. A-1 This designation indicates that the degree of safety regarding timely payment is very strong. A-2 Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as high as for issues designated "A-1." A-3 Issues carrying this designation have a satisfactory capacity for timely payment. They are, however, somewhat more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. B Issues rated "B" are regarded as having only an adequate capacity for timely payment. However, such capacity may be damaged by changing conditions or short-term adversities. C This rating is assigned to short-term debt obligations with a doubtful capacity for payment. D This rating indicates that the issue is either in default or is expected to be in default upon maturity.
The commercial paper rating is not a recommendation to purchase or sell a security. The ratings are based on current information furnished to Standard & Poor's by the issuer or obtained by Standard & Poor's from other sources it considers reliable. The ratings may be changed, suspended, or withdrawn as a result of changes in or unavailability of, such information. DESCRIPTIONS OF STANDARD & POOR'S RATINGS SERVICES' NOTE RATINGS A Standard & Poor's note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment. -- Amortization schedule (the larger the final maturity relative to other maturities, the more likely it will be treated as a note). -- Source of Payment (the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note). Note rating symbols are as follows: SP-1 Very strong, or strong, capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+) designation. SP-2 Satisfactory capacity to pay principal and interest. SP-3 Speculative capacity to pay principal and interest.
A-4 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 FUND, THE INVESTMENT ADVISER, 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 PAGE ---- Fee Tables.............................. 2 Merrill Lynch Select Pricing (SM) System................................ 8 Financial Highlights.................... 13 Investment Objective and Policies....... 19 Investment Policies of the Portfolios... 20 Insured Portfolio..................... 20 National Portfolio.................... 21 Limited Maturity Portfolio............ 22 Description of Municipal Bonds........ 23 Forward Commitments................... 25 Financial Futures Contracts and Derivatives......................... 25 Indexed and Inverse Floating Obligations......................... 27 Investment Restrictions............... 27 Management of the Fund.................. 27 Board of Directors.................... 27 Management and Advisory Arrangements.. 28 Transfer Agency Services.............. 29 Code of Ethics........................ 29 Purchase of Shares...................... 30 Initial Sales Charge Alternatives -- Class A and Class D Shares.............................. 33 Deferred Sales Charge Alternatives -- Class B and Class C Shares....... 36 Distribution Plans.................... 39 Limitations on the Payment of Deferred Sales Charges....................... 42 Redemption of Shares.................... 42 Redemption............................ 43 Repurchase............................ 43 Reinstatement Privilege -- Class A and Class D Shares...................... 44 Shareholder Services.................... 44 Investment Account.................... 44 Automatic Investment Plan............. 45 Fee-Based Programs.................... 45 Automatic Reinvestment of Dividends and Capital Gains Distribution...... 45 Systematic Withdrawal Plans........... 46 Exchange Privileges................... 46 Portfolio Transactions.................. 47 Additional Information.................. 48 Dividends and Distributions........... 48 Federal Income Taxes.................. 48 State and Local Taxes................. 50 Determination of Net Asset Value...... 50 Performance Data...................... 51 Transfer Agent........................ 53 Custodian............................. 53 Counsel and Auditor................... 53 Shareholder Reports................... 53 Additional Information................ 53 Authorization Form...................... 55 Code #10051-1097 [Merrill Lynch Logo] MERRILL LYNCH MUNICIPAL BOND FUND, INC. [MERRILL LYNCH COMPASS] PROSPECTUS October 7, 1997 Distributor: Merrill Lynch Funds Distributor, Inc. This Prospectus should be retained for future reference. STATEMENT OF ADDITIONAL INFORMATION MERRILL LYNCH MUNICIPAL BOND FUND, INC. P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800 ------------------------ Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") is a professionally managed, diversified, open-end investment company that seeks to provide shareholders with as high a level of income exempt from Federal income taxes as is consistent with the investment policies of each of its Portfolios and prudent investment management. The Fund is comprised of three separate Portfolios: the Insured Portfolio, the National Portfolio and the Limited Maturity Portfolio, each of which invests primarily in a diversified portfolio of tax-exempt Municipal Bonds, principally consisting of state, municipal and public authority securities. The Fund is a series fund and is comprised of three separate Portfolios. Each Portfolio is, in effect, a separate fund issuing its own shares. Pursuant to the Merrill Lynch Select Pricing(SM) System, each Portfolio of the Fund offers four classes of shares, each with a different combination of sales charges, ongoing fees and other features. Class C shares of the Limited Maturity Portfolio are available only through the Exchange Privilege. The Merrill Lynch Select Pricing 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. ------------------------ This Statement of Additional Information of the Fund is not a prospectus and should be read in conjunction with the Prospectus of the Fund (the "Prospectus") dated October 7, 1997, which has been filed with the Securities and Exchange Commission (the "Commission") and is available upon oral or written request without charge. Copies of the Prospectus can be obtained by calling or writing the Fund at the above telephone number or address. This Statement of Additional Information has been incorporated by reference into the Prospectus. ------------------------ FUND ASSET MANAGEMENT -- INVESTMENT ADVISER MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR ------------------------ The date of this Statement of Additional Information is October 7, 1997. INVESTMENT OBJECTIVE AND POLICIES Reference is made to "Investment Objective and Policies" in the Prospectus for a discussion of the investment objective and policies of the Fund. At June 30, 1997, the average maturity of the Insured Portfolio, National Portfolio and the Limited Maturity Portfolio was approximately 19.01 years, 20.26 years and 1.7 years, respectively. INSURANCE ON PORTFOLIO SECURITIES Reference is made to the discussion of the Insured Portfolio under "Investment Policies of the Portfolios" in the Prospectus. As stated in the Prospectus, the Fund has purchased from AMBAC Indemnity Corporation ("AMBAC"), Municipal Bond Investors Assurance Corporation ("MBIA") and Financial Security Assurance Inc. ("FSA") separate Mutual Fund Insurance Policies (the "Policies"). The Policies guarantee the payment of principal at maturity and interest on all Municipal Bonds that are purchased by the Insured Portfolio at a time when they are eligible for insurance. Municipal Bonds are eligible for insurance if they are, at the time of purchase by the Insured Portfolio, identified separately or by category in qualitative guidelines furnished by AMBAC, MBIA or FSA and are in compliance with the aggregate limitations on amounts set forth in such guidelines. AMBAC, MBIA and/or FSA may withdraw particular securities from the classifications of securities eligible for insurance while continuing to insure previously acquired bonds of such ineligible issues so long as they remain in the Insured Portfolio and may limit the aggregate amount of each issue or category of municipal securities thereof. The restrictions on investment imposed by the eligibility requirement of the Policies may reduce the yield of the Insured Portfolio. RISK FACTORS IN TRANSACTIONS IN JUNK BONDS The National Portfolio may invest in Municipal Bonds that are rated below Baa by Moody's Investors Service, Inc. ("Moody's") or below BBB by Standard & Poor's Ratings Services ("S&P") or that, in the Investment Adviser's judgment, possess similar credit characteristics ("junk bonds"). See "Additional Information -- Rating Information" in the Prospectus for additional information regarding ratings of debt securities. The Investment Adviser considers the ratings assigned by S&P or Moody's as one of several factors in its independent credit analysis of issuers. Junk bonds are considered by S&P and Moody's to have varying degrees of speculative characteristics. Consequently, although junk bonds 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 junk bonds will be made only when, in the judgment of the Investment Adviser, such securities provide attractive total return potential relative to the risk of such securities, as compared to higher quality debt securities. The National Portfolio will not invest in debt securities in the lowest rating categories (those rated CC or lower by S&P or Ca or lower by Moody's) unless the Investment Adviser believes that the financial condition of the issuer or the protection afforded the particular securities is stronger than would otherwise be indicated by such low ratings. The National Portfolio does not intend to purchase debt securities that are in default or that the Investment Adviser believes will be in default. Issuers of junk bonds 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 generally are 2 greater than is the case with higher rated securities. For example, during an economic downturn or a sustained period of rising interest rates, issuers of high-yield securities may be more likely to experience financial stress, especially if such issuers 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 a period, such issuers may not have sufficient revenues to meet their interest payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific issuer developments, or the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by the issuer is significantly greater for the holders of junk bonds because such securities may be unsecured and may be subordinated to other creditors of the issuer. Junk bonds frequently have call or redemption features that would permit an issuer to repurchase the security from the National Portfolio. If a call were exercised by the issuer during a period of declining interest rates, the National Portfolio likely would have to replace such called security with a lower yielding security, thus decreasing the net investment income to the National Portfolio and dividends to shareholders. The National Portfolio may have difficulty disposing of certain junk bonds because there may be a thin trading market for such securities. Because not all dealers maintain markets in all junk bonds, there is no established secondary market for many of these securities, and the National Portfolio anticipates 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 junk bonds does exist, it is generally not as liquid as the secondary market for higher rated securities. Reduced secondary market liquidity may have an adverse impact on market price and the National Portfolio's ability to dispose of particular issues when necessary to meet its 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 the National Portfolio to obtain accurate market quotations for purposes of valuing its portfolio. Market quotations are generally available on many junk bonds 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 junk bonds acquired by the National Portfolio will be purchased upon issuance, which may involve special risks because the securities so acquired are new issues. In such instances, the National Portfolio 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 the National Portfolio 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 junk bonds, particularly in a thinly traded market. Factors adversely affecting the market value of such securities are likely to affect adversely the National Portfolio's net asset value. In addition, the National Portfolio 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. TRANSACTIONS IN FUTURES CONTRACTS The Insured Portfolio, the National Portfolio and the Limited Maturity Portfolio (collectively, the "Portfolios" and each, a "Portfolio") may engage in the purchase and sale of futures contracts on an index of municipal bonds or on U.S. Treasury securities, or options on such futures contracts, for hedging purposes 3 only. The Portfolios may sell such futures contracts in anticipation of a decline in the value of municipal bonds held by them or may purchase such futures contracts in anticipation of an increase in the cost of municipal bonds they intend to acquire. The Portfolios also are authorized to purchase and sell other financial futures contracts that in the opinion of management, provide an appropriate hedge for some or all of the Fund's portfolio securities. Because of low initial margin deposits made upon the opening of a futures position, futures transactions involve substantial leverage. As a result, relatively small movements in the price of the futures contract can result in substantial unrealized gains or losses. Because the Portfolios will engage in the purchase and sale of financial futures contracts 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 the Portfolios or decreases in the price of securities the Portfolios intend to acquire. Further, the Portfolios will maintain cash, cash equivalents and high-grade securities with the Fund's custodian, so that the amount segregated plus the initial margin equals the value represented by the futures contract purchased by the Portfolios, thereby ensuring that such transactions are actually unleveraged. Municipal bond index futures contracts commenced trading in June 1985, and it is possible that trading in such futures contracts will be less liquid than that in other futures contracts. The trading of futures contracts and options thereon is subject to certain market risks, such as trading halts, suspensions, exchange or clearing house equipment failures, government intervention or other disruptions of normal trading activity, which could at times make it difficult or impossible to liquidate existing positions. The liquidity of the market in futures contracts may be further adversely affected by "daily price fluctuation limits" established by contract markets, which limit the amount of a fluctuation in the price of a futures contract or option thereon 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 positions at prices beyond the limit. Prices of existing contracts have in the past moved the daily limit on a number of consecutive trading days. The Portfolios will enter into a futures position only if, in the judgment of the Investment Adviser, there appears to be an actively traded market for such futures contracts. The successful use of transactions in futures contracts and options thereon depends on the ability of the Investment Adviser correctly to forecast the direction and extent of price movements of these instruments, as well as price movements of the securities held by the Portfolios within a given time frame. To the extent these price movements are not correctly forecast or move in a direction opposite to that anticipated, the Portfolios 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, either Portfolio's total return for such period may be less than if it had not engaged in the hedging transaction. See "Additional Information -- Description of Financial Futures Contracts" below for a further discussion of the risks of futures trading. INVESTMENT RESTRICTIONS The Fund has adopted the following fundamental and non-fundamental restrictions and policies relating to the investment of its assets and its activities. The fundamental policies set forth below may not be changed without the approval of the holders of a majority of the Fund's outstanding voting securities, including a majority of the shares of each Portfolio affected (which for this purpose and under the Investment Company Act of 1940, as amended (the "Investment Company Act"), means the lesser of (i) 67% of the shares 4 represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares). Under the fundamental investment restrictions, none of the Portfolios of the Fund may: 1. Make any investment inconsistent with the Fund's classification as a diversified company under the Investment Company Act. 2. Invest more than 25% of its assets, taken at market value, in the securities of issuers in any particular industry (excluding the U.S. Government and its agencies and instrumentalities). 3. Make investments for the purpose of exercising control or management. 4. Purchase or sell real estate, except that to the extent permitted by applicable law, each Portfolio of the 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. 5. Make loans to other persons, except that the acquisition of bonds, debentures or other corporate debt securities and investments 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 each Portfolio of the 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 Fund's Prospectus and Statement of Additional Information, as they may be amended from time to time. 6. Issue senior securities to the extent such issuance would violate applicable law. 7. Borrow money, except that (i) each Portfolio of the Fund may borrow from banks (as defined in the Investment Company Act) in amounts up to 33 1/3% of its total assets (including the amount borrowed), (ii) each Portfolio of the Fund may, to the extent permitted by applicable law, borrow up to an additional 5% of its total assets for temporary purposes, (iii) each Portfolio of the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities and (iv) each Portfolio of the Fund may purchase securities on margin to the extent permitted by applicable law. The Fund may not pledge its assets other than to secure such borrowings or, to the extent permitted by the Fund'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. 8. Underwrite securities of other issuers except insofar as a Portfolio of the Fund technically may be deemed an underwriter under the Securities Act of 1933, as amended (the "Securities Act"), in selling portfolio securities. 9. Purchase or sell commodities or contracts on commodities, except to the extent that a Portfolio of the Fund may do so in accordance with applicable law and the Fund'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. The Fund has also adopted certain non-fundamental investment restrictions, which may be changed by the Investment Adviser without approval by the shareholders subject to the supervision by the Board of Directors. 5 Under the non-fundamental investment restrictions, none of the Portfolios of the Fund may: a. Purchase securities of other investment companies, except to the extent such purchases are permitted by applicable law. As a matter of policy, however, the 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 Investment Company Act, at any time its 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. The Fund currently does not intend to engage in short sales, except short sales "against the box." 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 Directors of the Fund has otherwise determined to be liquid pursuant to applicable law. Securities purchased in accordance with Rule 144A under the Securities Act (a "Rule 144A Security") and determined to be liquid by the Fund's Board of Directors are not subject to the limitations set forth in this investment restriction. d. Notwithstanding fundamental investment restriction (7) above, the Fund currently does not intend to borrow amounts in any Portfolio in excess of 10% of the total assets of such Portfolio, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes such as the redemption of Fund shares. In addition, the Fund will not purchase securities while borrowings are outstanding. MANAGEMENT OF THE FUND DIRECTORS AND OFFICERS The Directors and executive officers of the Fund, their ages and their principal occupations for at least the last five years are set forth below. Unless otherwise noted, the address of each Director and officer is P.O. Box 9011, Princeton, New Jersey 08543-9011. ARTHUR ZEIKEL (65) -- President and Director(1)(2) -- President of Merrill Lynch Asset Management, L.P. ("MLAM") (which term as used herein includes its corporate predecessors) since 1977; President of Fund Asset Management, L.P. ("FAM") (which term as used herein includes its corporate predecessors) since 1977; President and Director of Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Director of Merrill Lynch Funds Distributor, Inc. (the "Distributor") since 1977. RONALD W. FORBES (57) -- Director(2) -- 1400 Washington Avenue, Albany, New York 12222. Professor of Finance, School of Business, State University of New York at Albany since 1989. CYNTHIA A. MONTGOMERY (45) -- Director(2) -- Harvard Business School, Soldiers Field Road, Boston, Massachusetts 02163. Professor, Harvard Business School since 1989; Associate Professor, J.L. 6 Kellogg Graduate School of Management, Northwestern University from 1985 to 1989; Assistant Professor, Graduate School of Business Administration, The University of Michigan from 1979 to 1985; Director, UNUM Corporation since 1990 and Director of Newell Co. since 1995. CHARLES C. REILLY (66) -- Director(2) -- 9 Hampton Harbor Road, Hampton Bays, New York 11946. Self-employed financial consultant since 1990; President and Chief Investment Officer of Versus Capital, Inc. from 1979 to 1990; Senior Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct Professor, Columbia University Graduate School of Business, from 1990 to 1991; Adjunct Professor, Wharton School, The University of Pennsylvania from 1989 to 1990; Partner, Small Cities Cable Television since 1986. KEVIN A. RYAN (64) -- Director(2) -- 127 Commonwealth Avenue, Chestnut Hill, Massachusetts 02167. Founder and current Director of The Boston University Center for the Advancement of Ethics and Character; Professor of Education at Boston University since 1982; formerly taught on the faculties of The University of Chicago, Stanford University and Ohio State University. RICHARD R. WEST (59) -- Director(2) -- Box 604, Genoa, Nevada 89411. Professor of Finance since 1984 and Dean from 1984 to 1993, and currently Dean Emeritus of New York University, Leonard N. Stern School of Business Administration; Director of Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate holding company), and Alexander's Inc. (real estate company). TERRY K. GLENN (57) -- Executive Vice President(1)(2) -- Executive Vice President of MLAM and FAM since 1983; Executive Vice President and Director of Princeton Services since 1993; President of the Distributor since 1986 and Director thereof since 1991; President of Princeton Administrators, L.P. since 1988. VINCENT R. GIORDANO (53) -- Senior Vice President(1)(2) -- Senior Vice President of the Investment Adviser and MLAM since 1984; Senior Vice President of Princeton Services since 1993; portfolio manager of the Investment Adviser since 1977 and Vice President from 1980 to 1984. DONALD C. BURKE (37) -- Vice President(2) -- First Vice President of MLAM since 1997; Vice President and Director of Taxation of MLAM since 1990. KENNETH A. JACOB (46) -- Vice President(1)(2) -- First Vice President of MLAM since 1997; Vice President of the Investment Adviser since 1984; employee of MLAM since 1978. GERALD M. RICHARD (48) -- Treasurer(1)(2) -- Senior Vice President and Treasurer of the Investment Adviser and MLAM since 1984; Senior Vice President and Treasurer of Princeton Services since 1993; Vice President of the Distributor since 1981 and Treasurer since 1984. PETER J. HAYES (38) -- Vice President(1)(2) -- First Vice President of MLAM since 1997; Vice President of MLAM since 1988. WALTER O'CONNOR (35) -- Vice President(1)(2) -- Director of MLAM since 1997; Vice President of MLAM since 1993; Assistant Vice President of MLAM from 1991 to 1993; Assistant Vice President of Prudential Securities from 1984 to 1991. 7 BARBARA G. FRASER (53) -- Secretary(2) -- First Vice President of MLAM since 1997; Vice President of the Investment Adviser and MLAM since 1996. - --------------- (1) Interested person, as defined in the Investment Company Act, of the Fund. (2) Such a Director or officer is a Director or officer of certain other investment companies for which the Investment Adviser or MLAM acts as investment adviser. COMPENSATION OF DIRECTORS At September 30, 1997, the Directors and officers of the Fund as a group (14 persons) owned an aggregate of less than 1% of the outstanding shares of the Fund. At that date, Mr. Zeikel, an officer and Director of the Fund, and the other officers of the Fund, owned less than 1% of the outstanding Common Stock of ML & Co. Pursuant to the terms of the Investment Advisory Agreement, the Investment Adviser pays all compensation of officers and employees of the Fund as well as the fees of all Directors of the Fund who are affiliated persons of the Investment Adviser. The Fund pays each Director not affiliated with the Investment Adviser (each a "non-interested Director") an annual fee of $3,000 plus a fee of $400 per meeting attended, together with such Director's actual out-of-pocket expenses relating to attendance at meetings. The Fund also compensates members of its Audit and Nominating Committee (the "Committee"), which consists of all of the non-interested Directors with a fee of $2,900 per year. The Chairman of the Audit Committee is paid an additional annual fee of $1,000. For the fiscal year ended June 30, 1997, fees and expenses paid to the non-interested Directors of the Fund aggregated $52,926. The following table sets forth the compensation paid by the Fund to the non-interested Directors for the fiscal year ended June 30, 1997 and the aggregate compensation paid by all investment companies advised by MLAM and its affiliate, FAM ("MLAM/FAM-Advised Funds") to the non-interested Directors for the calendar year ended December 31, 1996:
AGGREGATE COMPENSATION FROM FUND AND PENSION OR RETIREMENT MLAM/FAM-ADVISED COMPENSATION BENEFITS ACCRUED AS FUNDS PAID TO DIRECTOR/TRUSTEE FROM FUND PART OF FUND EXPENSE DIRECTOR(1) - ---------------------------------------- ------------ ---------------------- ---------------- Ronald W. Forbes........................ $ 9,200 None $142,500 Cynthia A. Montgomery................... 9,200 None 142,500 Charles C. Reilly....................... 10,200 None 293,833 Kevin A. Ryan........................... 9,200 None 142,500 Richard R. West......................... 9,200 None 272,833
- --------------- (1) The Directors serve on the boards of MLAM/FAM-Advised Funds as follows: Mr. Forbes (28 registered investment companies consisting of 41 portfolios); Ms. Montgomery (28 registered investment companies consisting of 41 portfolios); Mr. Reilly (46 registered investment companies consisting of 59 portfolios); Mr. Ryan (28 registered investment companies consisting of 41 portfolios); and Mr. West (47 registered investment companies consisting of 69 portfolios). MANAGEMENT AND ADVISORY ARRANGEMENTS FAM, a subsidiary of MLAM, an indirect subsidiary of ML & Co., acts as the investment adviser for the Fund and provides the Fund with management services. While FAM is at all times subject to the direction of 8 the Board of Directors of the Fund, under the Investment Advisory Agreement FAM is responsible for the actual management of each Portfolio and constantly reviews the holdings of each Portfolio in light of its own research analysis and analyses from other relevant sources. The responsibility for making decisions to buy, sell or hold a particular security rests with FAM. FAM provides the portfolio managers for each Portfolio, who consider analyses from various sources, make the necessary investment decisions and place transactions accordingly. FAM is also obligated to perform certain administrative and management services for the Fund and is obligated to provide all the office space, facilities, equipment and personnel necessary to perform its duties under the Agreement. Securities held by the Fund may also be held by other funds for which FAM or MLAM acts as an adviser or by investment advisory clients of MLAM. If purchases or sales of securities for the Fund or other funds for which FAM or MLAM acts as investment adviser or for their advisory clients 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 Investment Adviser or MLAM during the same period may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. Advisory Fee. As compensation for its services to the Portfolios, the Investment Adviser receives at the end of each month a fee with respect to each Portfolio. The fee for each Portfolio is determined based on the annual advisory fee rates for that Portfolio set forth in the table below. These fee rates are applied to the average daily net assets of each Portfolio, with the reduced rates shown below applicable to portions of the assets of each Portfolio to the extent that the aggregate of the average daily net assets of the three combined Portfolios exceeds $250 million, $400 million, $550 million and $1.5 billion (each such amount being a "breakpoint level"). The portion of the assets of a Portfolio to which the rate at each breakpoint level applies will be determined on a "uniform percentage" basis. The uniform percentage applicable to a breakpoint level is determined by dividing the amount of the aggregate of the average daily net assets of the three combined Portfolios that falls within that breakpoint level by the aggregate of the average daily net assets of the three combined Portfolios. The amount of the fee for a Portfolio at each breakpoint level is determined by multiplying the average daily net assets of that Portfolio by the uniform percentage applicable to that breakpoint level and multiplying the product by the advisory fee rate.
RATE OF ADVISORY FEE --------------------------------- LIMITED AGGREGATE OF AVERAGE DAILY NET ASSETS OF THE THREE COMBINED INSURED NATIONAL MATURITY PORTFOLIOS PORTFOLIO PORTFOLIO PORTFOLIO - ------------------------------------------------------------------- --------- --------- --------- Not exceeding $250 million......................................... 0.40% 0.50% 0.40% In excess of $250 million but not exceeding $400 million........... 0.375 0.475 0.375 In excess of $400 million but not exceeding $550 million........... 0.375 0.475 0.35 In excess of $550 million but not exceeding $1.5 billion........... 0.375 0.475 0.325 In excess of $1.5 billion.......................................... 0.35 0.475 0.325
For the fiscal year ended June 30, 1995, FAM received $9,408,013 from the Insured Portfolio, $7,415,203 from the National Portfolio and $2,712,662 from the Limited Maturity Portfolio as advisory fees. For the fiscal year ended June 30, 1996, FAM received $8,850,984 from the Insured Portfolio, $7,014,416 from the National Portfolio and $1,899,352 from the Limited Maturity Portfolio as advisory fees. For the fiscal year ended 9 June 30, 1997, FAM received $8,042,098 from the Insured Portfolio, $6,961,453 from the National Portfolio and $1,552,369 from the Limited Maturity Portfolio as advisory fees. Payment of Expenses. The Investment Advisory Agreement obligates FAM to provide investment advisory services and to pay all compensation of and furnish office space for officers and employees of the Fund connected with economic research, investment research, trading and investment management of the Fund, as well as the fees of all Directors of the Fund who are affiliated persons of ML & Co. or any of its subsidiaries. Each Portfolio pays all other expenses incurred in its operation and a portion of the Fund's general administrative expenses allocated on the basis of the asset size of the respective Portfolios. Expenses that will be borne directly by the Portfolios include redemption expenses, expenses of portfolio transactions, shareholder servicing costs, portfolio insurance maintained and paid by the Insured Portfolio, expenses of registering the shares under Federal and state securities laws, pricing costs (including the daily calculation of net asset value), interest, certain taxes, charges of the custodian and Transfer Agent and other expenses attributable to a particular Portfolio. Expenses that will be allocated on the basis of the size of the respective Portfolios include Directors' fees, legal expenses, state franchise taxes, auditing services, costs of printing proxies, stock certificates, shareholder reports and prospectuses (except to the extent paid by the Distributor), Commission fees, accounting costs and other expenses properly payable by the Fund and allocable on the basis of the size of the respective Portfolios. Accounting services are provided for the Fund by FAM, and the Fund reimburses FAM for its costs in connection with such services. During the fiscal year ended June 30, 1997, the Fund reimbursed FAM $433,527 for such services. Depending upon the nature of a lawsuit, litigation costs may be directly applicable to the Portfolios or allocated on the basis of the size of the respective Portfolios. The Board of Directors has determined that this is an appropriate method of allocation of expenses. As required by the Distribution Agreement, the Distributor will pay certain of the expenses of each Portfolio incurred in connection with the offering of shares of each Portfolio, including the expense of printing the prospectuses used in connection with the continuous offering of shares by each Portfolio. See "Purchase of Shares -- Distribution Plans" in the Prospectus. The Investment Adviser is a limited partnership, the partners of which are ML & Co. and Princeton Services. ML & Co. and Princeton Services are "controlling persons" of the Investment Adviser as defined under the Investment Company 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 Investment Advisory Agreement will continue in effect from year to year if approved annually (a) by the Board of Directors of the Fund or by a majority of the outstanding voting shares of each Portfolio and (b) by a majority of the Directors who are not parties to such contract or interested persons (as defined in the Investment Company Act) of any such party. Such contract terminates upon assignment and may be terminated without penalty on 60 days' written notice at the option of either party thereto or by the vote of the shareholders of the Fund. If the shareholders of any Portfolio fail to approve the continuance of the Investment Advisory Agreement, the Investment Advisory Agreement will continue in effect as to any other Portfolio if the shareholders of such Portfolio have approved the contract. 10 PURCHASE OF SHARES The Fund has entered into separate distribution agreements (the "Distribution Agreements") with the Distributor in connection with the offering of each class of shares of the three Portfolios. The Distribution Agreements obligate the Distributor to pay certain expenses in connection with the offering of the Fund's shares. 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 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 Investment Advisory Agreement described above. The Fund is a series fund comprised of three separate Portfolios. All three Portfolios are divided into four classes of shares under the Merrill Lynch Select Pricing(SM) System. Class A and Class D shares of the three Portfolios are sold to investors choosing the initial sales charge alternative and Class B and Class C shares are sold to investors choosing the deferred sales charge alternative. Each Class A, Class B, Class C and Class D share of a Portfolio represents an identical interest in the investment portfolio of the Portfolio, has the same rights and is identical in all respects to the other classes of shares, except that Class B, Class C and Class D shares of the Portfolio 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 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 the distribution fee is 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 "Exchange Privilege." The Merrill Lynch Select Pricing(SM) System is used by more than 50 registered investment companies advised by MLAM or FAM, an affiliate of MLAM. Funds advised by MLAM or FAM that utilize the Merrill Lynch Select Pricing(SM) System are referred to herein as "MLAM-advised mutual funds." INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES For the fiscal year ended June 30, 1997, Class A gross sales charges aggregated $371,198, of which the Distributor received $42,330 and Merrill Lynch received $328,868. During the fiscal year ended June 30, 1997, the Distributor received no CDSCs 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 June 30, 1996, Class A gross sales charges aggregated $531,864, of which the Distributor received $60,672, and Merrill Lynch received $471,192. During the fiscal year ended June 30, 1996, the Distributor received $7,073 with respect to redemptions within one year after purchase of Class A shares purchased subject to a front-end sales charge waiver. For the year ended June 30, 1995, Class A gross sales charges aggregated $664,935, of which the Distributor received $63,348, and Merrill Lynch received $601,587. During the fiscal year ended June 30, 1995, the Distributor received $13,802 with respect to redemptions within one year after purchase of Class A shares purchased subject to a front-end sales charge waiver. All of such sales charges were attributable to payments of initial sales charges in connection with purchases of Class A shares of the Portfolios. For the fiscal year ended June 30, 1997, Class D gross sales charges aggregated $209,269, of which the Distributor received $21,222 and Merrill Lynch received $188,047. During the fiscal year ended, June 30, 11 1997 the Distributor received $358,940 in CDSCs with respect to redemptions within one year after purchase of Class D shares purchased subject to a front-end sales charge waiver. For the fiscal year ended June 30, 1996, Class D gross sales charges aggregated $271,962 of which the Distributor received $29,110 and Merrill Lynch received $242,852. During the fiscal year ended June 30, 1996, the distributor received $10,531 in CDSCs with respect to redemptions within one year after purchase of Class D shares purchased subject to a front-end sales charge waiver. For the period October 21, 1994 (commencement of operations) to June 30, 1995, Class D sales charges aggregated $246,501 of which the Distributor received $17,470 and Merrill Lynch received $229,031. During the period October 21, 1994 to June 30, 1995, the distributor received $800 in CDSCs with respect to redemptions within one year after purchase of Class D shares purchased subject to a front-end sales charge waiver. All of such sales charges were attributable to payments of initial sales charges in connection with purchases of Class D shares of the Portfolios. Closed-End Fund Investment Option. Class A shares of the Fund and other MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset value to shareholders of certain closed-end funds advised by MLAM or the Investment Adviser who purchased such closed-end fund shares prior to October 21, 1994 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 the Fund and other MLAM-advised mutual funds ("Eligible Class D Shares"), if the following conditions are met. First, the sale of the closed-end fund shares must be made through Merrill Lynch, and the net proceeds therefrom must be immediately reinvested 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 continuously maintained 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 the Fund. Upon exercise of this investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. will receive Class D shares of the Fund, except that shareholders already owning Class A shares of the Fund will be eligible to purchase additional Class A shares pursuant to this option, if such additional Class A shares will be held in the same account as the existing Class A shares and the other requirements pertaining to the reinvestment privilege are met. In order to exercise this investment option, a shareholder of one of the above-referenced continuously offered closed-end funds (an "eligible fund") must sell his or her shares of common stock of the eligible fund (the "eligible shares") back to the 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 designed class of the Fund on such day. 12 REDUCED INITIAL SALES CHARGES -- CLASS A AND CLASS D SHARES As set forth in the Prospectus, a reduced sales charge is available for any purchase in excess of $25,000 (in the case of the Insured Portfolio and National Portfolio) and $100,000 for the Limited Maturity Portfolio of Class A or Class D shares of a Portfolio. The term "purchase" as used in the Prospectus and Statement of Additional Information in connection with investment in Class A and Class D shares of the 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 spouse and their children under the age of 21 years purchasing shares for his or their own account and to single purchases by a trustee or fiduciary purchasing shares for a single trust or 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 Investment Company Act, but does not include purchases by any such company that has not been in existence for at least six months or 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 will not include purchases by any group of individuals whose sole organizational nexus is that the participants therein are credit card holders of a company, policyholders of an insurance company, customers of either a bank or broker-dealer or clients of an investment adviser. Right of Accumulation. Reduced sales charges are applicable through a right of accumulation under which investors are permitted to purchase shares of any of the three Portfolios 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 the shares of all of the Portfolios and of other MLAM-advised mutual funds. For any such right of accumulation to be made available, the Distributor must be provided at the time of purchase, by the purchaser or the purchaser's securities dealer, with sufficient information to permit confirmation of qualification, and 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 benefits 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 of Class A and Class D shares of the Portfolios, or any other MLAM-advised mutual funds, where purchases of such shares aggregating $25,000 or more for the Insured Portfolio and National Portfolio or $100,000 or more for the Limited Maturity Portfolio are made through any dealer within a 13-month period starting with the first purchase pursuant to a Letter of Intention in the form provided by the Distributor. The Letter of Intention is not a binding obligation to purchase any amount of Class A or Class D shares, but its execution will result in the purchaser's paying a lower sales charge at the appropriate quantity purchase level. The Letter of Intention is available only to investors whose accounts are maintained at the Fund's Transfer Agent. A purchase not originally made pursuant to a Letter of Intention may be included under a subsequent letter 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 the Portfolios and of other MLAM-advised mutual funds (or eligible shares) 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 the Letter of Intention will be applied only to new purchases. If the total amount of shares purchased does not equal the amount stated in the Letter of Intention (minimum of $25,000 for the National and Insured Portfolio or $100,000 for the Limited Maturity Portfolio), the investor 13 will be notified and must pay, within 20 days of the expiration of such Letter, the difference between the sales charge on Class A or Class D shares purchased at the reduced rate and the sales charge applicable to the shares actually purchased through the Letter. Class A and Class D shares equal to five percent of the intended amount will be held in escrow during the 13-month period (while remaining registered in the name of the purchaser) for this purpose and will be involuntarily redeemed to pay the additional sales charge, if necessary. The first purchase under the Letter of Intention must be at least five percent of the dollar amount of such Letter. If during the term of such Letter a purchase brings the total amount invested to an amount equal to or in excess of the amount indicated in the Letter, the purchaser will be entitled on that purchase and subsequent purchases to the reduced percentage sales charge which would be applicable to a single purchase equal to the total dollar value of the shares then being purchased plus the total cost of all shares previously purchased under such Letter, but there will be no retroactive reduction of the sales charges on any previous purchase. The value of any shares redeemed or otherwise disposed of by the purchaser prior to termination or completion of the Letter of Intention will be deducted from the total purchases made under such Letter. An exchange from a MLAM-advised money market fund into any Portfolio that creates a sales charge will count toward completing a new or existing Letter of Intention in any Portfolio. Employee Access (SM) Accounts. Class A or Class D shares are offered at net asset value to Employee Access Accounts available through employers that provide employer sponsored retirement or savings plans that are eligible to purchase such shares at net asset value. 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. Merrill Lynch Blueprint (SM) Program. Class D shares of any of the three Portfolios are offered to participants in the Merrill Lynch Blueprint(SM) Program ("Blueprint"). In addition, participants in Blueprint who own Class A shares of a Portfolio may purchase additional Class A shares of the Portfolio through Blueprint. Blueprint is directed to small investors, group IRAs and participants in certain affinity groups such as credit unions and trade associations. Investors placing orders to purchase Class A or Class D shares of a Portfolio through Blueprint will acquire the shares at net asset value plus a sales charge calculated in accordance with Blueprint sales charge schedule (i.e., up to $5,000 at 0.80% for Limited Maturity Portfolio, up to $5,000 at 3.5% for the Insured Portfolio or National Portfolio, and $5,000.01 or more at the standard disclosed sales charge rate in the Prospectus). However, services, including the exchange privilege, available to Class A or Class D shareholders through Blueprint may differ from those available to other investors. Class A and Class D shares are offered at net asset value, to Blueprint participants through the Merrill Lynch Directed IRA Rollover Program ("IRA Rollover Program") available from Merrill Lynch Business Financial Services, a business unit of Merrill Lynch. Orders for purchases and redemptions of Class A or Class D shares of the Portfolios may be grouped for execution purposes which, in some circumstances, may involve the execution of such orders two business days following the day such orders are placed. The minimum initial purchase price is $100, with a $50 minimum for subsequent purchases through Blueprint. There are no minimum initial or subsequent purchase requirements for participants who are part of an automatic investment plan. Additional information concerning purchases through Blueprint, including any annual fees and transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441. 14 Purchase Privileges of Certain Persons. Directors of the Fund, 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, FAM and certain other entities directly or indirectly wholly owned and 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 the Fund at net asset value. Class D shares of the Fund will be offered at net asset value, without 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. 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 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 such fund was subject to a sales charge either at the time of purchase or on a deferred basis. Second, such purchase of Class D shares must be made within 90 days after such notice. Class D shares of the Fund will be offered at net asset value, without 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 such shares of other mutual fund and that such shares have been outstanding for a period of no less than six months. 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. A purchase of $1 million or more in a single transaction by an investor, or a purchase by a TMA(SM) Managed Trust, of Class A and Class D Shares of the Fund's Portfolios may not be subject to an initial sales charge. Such purchases may instead be subject to a contingent deferred sales charge if the shares are redeemed within one year after purchase at the following rates: 1.00% on purchases of $1,000,000 to $2,500,000; 0.60% on purchases of $2,500,000 to $3,500,000; 0.40% on purchases of $3,500,000 to $5,000,000; and 0.25% on purchases of more than $5,000,000 in lieu of paying an initial sales charge. Acquisition of Certain Investment Companies. The public offering price of Class D shares of the Portfolios may be reduced to the net asset value per share 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 in appropriate cases be adjusted to reduce possible adverse tax consequences to the Fund that might result from an acquisition of assets having 15 net unrealized appreciation that is disproportionately higher at the time of acquisition than the realized or unrealized appreciation of the 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 Fund; (ii) are acquired for investment and not for resale (subject to the understanding that the disposition of the Fund's portfolio securities shall at all times remain within its control); and (iii) are liquid securities, the value of which is readily ascertainable, which are not restricted as to transfer either by law or illiquidity of market (except that the Fund may acquire through such transactions restricted or illiquid securities to the extent the Fund does not exceed the applicable limits on acquisition of such securities set forth under "Investment Objective and Policies" herein). Purchases by Banks. Class A shares of the Fund's Insured Portfolio may be purchased at net asset value, without a sales charge, by banks that have invested a minimum of $25 million in such shares. Fee-Based Investment Programs. Certain Merrill Lynch fee-based investment 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. Termination of participation in a Program may result in the redemption of such shares or the automatic exchange thereof to another class at net asset value. In addition, upon termination of participation in a Program, shares that have been held for less than specified periods within such Program may be subject to a fee based upon the current value of such shares. These Programs also generally prohibit such shares from being transferred to another account at Merrill Lynch, to another broker-dealer or to the Transfer Agent. Except in limited circumstances (which may also involve an exchange as described above), such shares must be redeemed and another class of shares purchased (which may involve the imposition of initial or deferred sales charges and distribution and account maintenance fees) in order for the investment not to be subject to Program fees. Additional information regarding a specific Program (including charges and limitations on transferability applicable to shares that may be held in such Program) is available in the Program's client agreement and from the Transfer Agent at (800) MER-FUND or (800) 637-3863. DISTRIBUTION PLANS Distribution Plans. Reference is made to "Purchase of Shares -- Distribution Plans" in the Prospectus for certain information with respect to the distribution plans for Class B and Class C shares pursuant to Rule 12b-1 under the Investment Company Act (each, a "Distribution Plan") with respect to the account maintenance and/or distribution fees paid by the Fund 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 Investment Company Act. Among other things, each Distribution Plan provides that the Distributor shall provide and the Directors shall review quarterly reports of the disbursement of the account maintenance and/or distribution fees paid to the Distributor. In their consideration of each Distribution Plan, the Directors must consider all factors they deem relevant, including information as to the benefits of the Distribution Plan to the Fund and the related class of shareholders of the relevant Portfolio. Each Distribution Plan further provides that, so long as the Distribution Plan remains in effect, the selection and nomination of 16 Directors who are not "interested persons" of the Fund, as defined in the Investment Company Act (the "Independent Directors"), shall be committed to the discretion of the Independent Directors then in office. In approving each Distribution Plan in accordance with Rule 12b-1, the Independent Directors concluded that there is reasonable likelihood that such Distribution Plan will benefit the Fund and the related class of shareholders of the Portfolio. Each Distribution Plan can be terminated at any time, without penalty, by the vote of a majority of the Independent Directors or by the vote of the holders of a majority of the outstanding related voting securities of the relevant Portfolio. A Distribution Plan cannot be amended to increase materially the amount to be spent by any Portfolio without the approval of the related class of shareholders of such Portfolio and all material amendments are required to be approved by the vote of directors, including a majority of the Independent Directors who have no direct or indirect financial interest in such Distribution Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further requires that the Fund preserve copies of each class of Distribution Plan and any report made pursuant to such plan for a period of not less than six years from the date of such Distribution Plan or such report, the first two years in an easily accessible place. LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES The maximum sales charge rule in the Conduct Rules of the National Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain asset-based sales charges such as the distribution fee and the CDSC borne by the Class B and Class C shares but not the account maintenance fee. The maximum sales charge rule is applied separately to each class of each Portfolio. As applicable to the Fund, the maximum sales charge rule limits the aggregate of distribution fee payments and CDSCs payable by the Fund with respect to Class B or Class C shares of a Portfolio to (1) 6.25% of eligible gross sales of such shares, computed separately for each class of a Portfolio (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). 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 (referred to as the "voluntary maximum") in connection with the Class B shares of a Portfolio is 6.75% of eligible gross sales. The Distributor retains the right to stop waiving the interest charges at any time. To the extent payments would exceed the voluntary maximum, the Fund will not make further payments of the distribution fee with respect to Class B shares of the relevant Portfolio, and any CDSCs with respect to that class will be paid to the Fund rather than to the Distributor; however, the 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 tables set forth comparative information as of June 30, 1997 with respect to the Class B and Class C shares of the Fund indicating the maximum allowable payments that can be made under the NASD maximum sales charge rule and the Distributor's voluntary maximum for the period October 21, 1988 (commencement of operations) to June 30, 1997 for the Class B shares of the National and Insured Portfolios, for the period November 2, 1992 (commencement of operations) to June 30, 1997 for Class B shares of the Limited Maturity Portfolio, and for the period October 21, 1994 (commencement of operations) to June 30, 1997 for the Insured, National and Limited Maturity Portfolios. 17 DATA CALCULATED AS OF JUNE 30, 1997 INSURED PORTFOLIO
ANNUAL DISTRIBUTION ALLOWABLE ALLOWABLE AMOUNTS FEE AT ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4) ---------- --------- ---------- -------- -------------- --------- ------------ (IN THOUSANDS) CLASS B Under NASD Rule as Adopted............ $1,276,011 $79,750 $ 36,227 $115,977 $ 38,365 $77,612 $2,800 Under Distributor's Voluntary Waiver... $1,276,011 $79,750 $ 6,380 $ 86,130 $ 38,365 $47,765 $2,800 CLASS C Under NASD Rule as Adopted............ $ 23,404 $ 1,462 $ 210 $ 1,672 $ 197 $ 1,475 $ 65
NATIONAL PORTFOLIO
ANNUAL DISTRIBUTION ALLOWABLE ALLOWABLE AMOUNTS FEE AT ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4) -------- --------- ---------- ------- -------------- --------- ------------ (IN THOUSANDS) CLASS B Under NASD Rule as Adopted.............. $684,109 $42,756 $ 17,315 $60,071 $ 19,235 $40,836 $2,075 Under Distributor's Voluntary Waiver..... $684,109 $42,756 $ 3,421 $46,177 $ 19,235 $26,942 $2,075 CLASS C Under NASD Rule as Adopted.............. $ 2,705 $ 1,719 $ 198 $1,917 $ 190 $ 1,727 $ 154 (see footnotes on next page).
18 LIMITED MATURITY PORTFOLIO
ANNUAL DISTRIBUTION ALLOWABLE ALLOWABLE AMOUNTS FEE AT ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET SALES(5) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(6) BALANCE LEVEL(4) -------- --------- ---------- ------- -------------- --------- ------------ (IN THOUSANDS) CLASS B Under NASD Rule as Adopted.............. $176,436 $11,027 $3,727 $14,754 $1,811 $12,943 $108 Under Distributor's Voluntary Waiver..... $176,436 $11,027 $ 882 $11,909 $1,811 $10,098 $108 CLASS C Under NASD Rule as Adopted.............. $ 3,360 $ 210 $ 50 $ 260 $ 7 $ 253 $215
- --------------- (1) Purchase price of all eligible Class B shares sold since October 21, 1988 (commencement of Class B operations) other than shares acquired through dividend reinvestment and the exchange privilege. (2) Interest is computed on a monthly average Prime Rate 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. Of these distribution fee payments made prior to July 6, 1993 under the Prior Plan at the 0.75% rate, 0.50% of average daily net assets has been treated as a distribution fee and 0.25% of average daily net assets has been deemed to have been a service fee and not subject to the NASD maximum sales charge rule. 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 Funds Advisor ("MFA") program. The CDSC is booked as a contingent obligation that may be payable if the shareholder terminates participation in the MFA program. (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. (5) Purchase price of all eligible Class B shares sold since November 2, 1992 (commencement of Class B operations) other than shares acquired through dividend reinvestment and exchange privilege. (6) Consists of CDSC payments, distribution fee payments and accruals. Of these distribution fee payments made prior to July 6, 1993 under the Prior Plan at the 0.35% rate, 0.25% of average daily net assets has been treated as a distribution fee and 0.10% of average daily net assets has been deemed to have been a service fee and not subject to the NASD maximum sales charge rule. REDEMPTION OF SHARES The right to redeem shares or to receive payment with respect to any such redemption may be suspended for any period during which trading on the New York Stock Exchange (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 any Portfolio is not reasonably practicable, and for such other periods as the Commission may by order permit for the protection of shareholders of each Portfolio. Reference is made to "Redemption of Shares" in the Prospectus, for certain information as to the redemption and repurchase of Fund shares. 19 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 each Portfolio at such time. REINSTATEMENT PRIVILEGE Holders of Class A or Class D shares of any Portfolio who have redeemed their shares have a one-time privilege to reinstate their accounts by purchasing Class A or Class D shares, as the case may be, of the Portfolio in which they had invested at net asset value without a sales charge up to the dollar amount redeemed. The reinstatement privilege may be exercised as follows. A notice to exercise this privilege along with a check for the amount to be reinstated must be received by the Transfer Agent within 30 days after the date the request for redemption was executed 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. 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 Distributor. DEFERRED SALES CHARGE -- 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 under most circumstances, Class B shares of the Insured Portfolio and National Portfolio redeemed within four years of purchase and Class B shares of the Limited Maturity Portfolio redeemed within one year of purchase are subject to a CDSC, the charge is waived on redemptions of Class B shares in certain instances, including in connection with certain post-retirement withdrawals from an Individual Retirement Account ("IRA") or other retirement plan or following the death or disability of a Class B shareholder. Redemptions for which the waiver applies in the case of such withdrawal are: (a) any partial or complete redemption in connection with a tax-free distribution following retirement under a tax-deferred retirement plan or attaining age 59 1/2 in the case of an IRA or other retirement plan, or part of a series of equal periodic payments (not less frequently than annually) made for the life (or life expectancy) or any redemption resulting from the tax-free return of an excess contribution to an IRA; or, (b) any partial or complete redemption following the death or disability (as defined in the Code) of a Class B shareholder (including one who owns the Class B shares as joint tenant with his or her spouse), provided the redemption is requested within one year of the death or initial determination of disability. For the fiscal year ended June 30, 1997, the Distributor received CDSCs of $979,435 for the Insured Portfolio, $868,705 for the National Portfolio, and $58,475 for the Limited Maturity Portfolio, with regard 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 June 30, 1996, the Distributor received CDSCs of $1,033,602 for the Insured Portfolio, $771,851 for the National Portfolio, and $106,430 for the Limited Maturity Portfolio, with regard to redemptions of Class B shares, all of which were paid to Merrill Lynch. For the fiscal year ended June 30, 1995, the Distributor received CDSCs of $1,840,608 for the Insured Portfolio, $1,036,339 for the National Portfolio, and $387,044 for the Limited Maturity Portfolio, with regard to redemptions of Class B shares, all of which were paid to Merrill Lynch. For the fiscal year ended June 30, 1997, the Distributor received CDSCs of $6,915 for the Insured Portfolio, $10,273 for the National Portfolio, and $395 for the Limited Maturity Portfolio, with regard to 20 redemptions of Class C 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 June 30, 1996, the Distributor received CDSCs of $7,257 for the Insured Portfolio, $6,455 for the National Portfolio, and $2,130 for the Limited Maturity Portfolio, with regard to redemptions of Class C shares, all of which were paid to Merrill Lynch. For the period ended October 21, 1994 (commencement of Class C operations) to June 30, 1995, the Distributor received CDSCs of $5,361 for the Insured Portfolio, $3,219 for the National Portfolio, and $2,661 for the Limited Maturity Portfolio, with regard to redemptions of Class C shares, all of which were paid to Merrill Lynch. All of such contingent deferred sales charges were attributable to payments made in connection with redemptions of Class B and Class C shares of the Portfolios. Merrill Lynch Blueprint(SM) Program. Class B shares of all three Portfolios are offered to certain participants in the Merrill Lynch Blueprint(SM) Program ("Blueprint"). Blueprint is directed to small investors and participants in certain affinity groups such as trade associations and credit unions. Class B shares are offered through Blueprint only to members of certain affinity groups. The CDSC is waived for shareholders who are members of such affinity groups at the time of placing orders to purchase Class B shares through Blueprint. However, services, including the exchange privilege, available to Class B shareholders through Blueprint may differ from those available to other Class B investors. Orders for purchases and redemptions of Class B shares of any of the three Portfolios may be grouped for execution purposes which, in some circumstances, may involve the execution of such orders two business days following the day such orders are placed. The minimum initial purchase price is $100, with a $50 minimum for subsequent purchases throughout Blueprint. There is no minimum initial or subsequent purchase requirement for investors who are part of the Blueprint automatic investment plan. Additional information concerning Blueprint, including any annual fees or transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated. The Blueprint(SM) Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441. DETERMINATION OF NET ASSET VALUE The net asset value of the shares of each class of each Portfolio of the Fund is determined once daily, Monday through Friday, as of 15 minutes after the close of business on the NYSE (generally, 4:00 p.m., New York City time), on each day on 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. The net asset value per share is computed by dividing the sum of the value of the portfolio securities held by each Portfolio 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 investment advisory and any account maintenance and/or distribution fees, are accrued daily. The per share net asset value of the Class B, Class C and Class D shares of a Portfolio generally will be lower than the per share net asset value of the Class A shares of that Portfolio reflecting the daily expense accruals of the account maintenance distribution and higher transfer agency fees applicable with respect to the Class B, Class C and Class D shares and daily expense accruals of the account maintenance fees applicable with respect to the Class D shares. Moreover the per share net asset value of the Class B and Class C shares 21 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 and higher transfer agency fees applicable with respect to the Class B and Class C shares. It is expected, however, that the per share net asset value of the four classes of a Portfolio 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 differential among the classes. The Municipal Bonds and money market securities in which each Portfolio invests are traded primarily in the over-the-counter markets and are valued at the most recent bid price or yield equivalent as obtained from dealers that make markets in such securities. Positions in futures contracts are valued at closing prices for such contracts established by the exchange on which they are traded on each day during which trading is conducted thereon. Assets for which market quotations are not readily available are valued at fair value on a consistent basis using methods determined in good faith by the Board of Directors, including valuations furnished by a pricing service retained by the Fund, which may utilize a matrix system for valuations. It is the intention of FAM, subject to guidelines established by the Board of Directors of the Fund, to hold Insured Municipal Bonds in the Insured Portfolio that are in default, or in significant risk of default, in the payment of principal or interest until the default has been cured or the principal and interest are paid by the issuer or the insurer. In accordance with such guidelines, FAM will consider the following factors in determining the effective value of Insured Municipal Bonds in the Insured Portfolio that are in default, or in significant risk of default, in the payment of principal or interest: (1) the market value of the bonds; (2) the market value of securities of similar issuers whose securities carry similar interest rates; and (3) the value of the insurance guaranteeing interest and principal payments. Absent unusual or unforeseen circumstances, the value ascribed to the insurance feature of the bonds would be the difference between the market value of the bonds and the market value of securities of a similar nature which are not in default or significant risk of default. It is the position of the Board of Directors that this is a fair method of valuing the insurance feature and reflects a proper valuation method in accordance with the provisions of the Investment Company Act. This method of valuing securities will mean that shareholders of the Insured Portfolio, whether they decide to redeem or decide to retain their investment in the Insured Portfolio, will in normal circumstances receive the benefit of the insurance. Because of the unusual circumstances surrounding the bonds held in the Insured Portfolio that were in default at the end of the Fund's last fiscal year, the insurance feature was valued in an amount that, when combined with the market value of the bonds, resulted in the bonds' having an effective value of par. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS Under the Investment Company Act, persons affiliated with the Fund are prohibited from dealing with the Fund as a principal in the purchase and sale of securities unless an exemptive order allowing such transactions is obtained from the Commission. Since over-the-counter transactions are usually principal transactions, affiliated persons of the Fund, including Merrill Lynch, may not serve as a dealer in connection with transactions with the Fund. However, the Fund has obtained an exemptive order permitting it to engage in certain principal transactions involving high quality short-term Municipal Bonds. Affiliated persons of the Fund may serve as its broker in over-the-counter transactions conducted on an agency basis. Certain court decisions have raised questions as to the extent to which investment companies should seek exemptions under the Investment Company Act in order to seek to recapture underwriting and dealer spreads from affiliated entities. The Directors have considered the possibilities of seeking to recapture spreads for the benefit of the 22 Fund and, after considering factors deemed relevant, have made a determination not to seek such recapture at this time. The Board will reconsider this matter from time to time. Under the Investment Company Act, the Fund may not purchase Municipal Bonds from any underwriting syndicate of which Merrill Lynch is a member except pursuant to an exemptive order or rules adopted by the Commission. During the year ended June 30, 1995, the Fund purchased $79,188,750 of Municipal Bonds in 20 transactions pursuant to an exemptive order or such a rule. During the fiscal years ended June 30, 1996 and June 30, 1997, the Fund did not engage in any transactions pursuant to such order. For the fiscal years ended June 30, 1995, June 30, 1996 and June 30, 1997, the National Portfolio paid total brokerage commissions of $315,000, $20,250 and $29,400, respectively, none of which was paid to Merrill Lynch. For the same fiscal periods, the Insured Portfolio and the Limited Maturity Portfolio paid no brokerage commissions. The Fund does not expect to use any particular dealer in the execution of transactions for its Portfolios, but, subject to obtaining the best net results, dealers who provide supplemental investment research (such as economic data and market forecasts) to FAM may receive orders for transactions by any Portfolio. Information so received will be in addition to and not in lieu of the services required to be performed by FAM under its Investment Advisory Agreement and FAM's expenses will not necessarily be reduced as a result of the receipt of such supplemental information. FAM expects that the portfolio turnover rate for the Insured Portfolio and the National Portfolio should not generally exceed 100%. Because of the short-term nature of the Limited Maturity Portfolio, its turnover rate may be substantially higher. In any particular year, however, market conditions could result in portfolio activity of a Portfolio at a greater or lesser rate than anticipated. The portfolio turnover rates for the Insured Portfolio for the fiscal years ended June 30, 1997 and June 30, 1996 were 74.40% and 78.49%, respectively. The portfolio turnover rates for the National Portfolio for the fiscal years ended June 30, 1997 and June 30, 1996 were 99.52% and 95.09%, respectively. The portfolio turnover rates for the Limited Maturity Portfolio for the fiscal years ended June 30, 1997 and June 30, 1996 were 61.90% and 88.32%, respectively. DIVIDENDS, DISTRIBUTIONS AND TAXES Reference is made to "Additional Information -- Dividends and Distributions" and "Additional Information -- Federal Income Taxes" in the Prospectus. Each Portfolio intends to qualify to pay "exempt-interest" dividends as defined in Section 852(b)(5) of the Internal Revenue Code of 1986, as amended (the "Code"). Under that section if, at the close of each quarter of its taxable year, at least 50% of the value of its total assets consists of obligations exempt from federal income tax ("tax-exempt obligations"), pursuant to Section 103(a) of the Code (relating to obligations of a state, territory, or a possession of the United States, or any political sub-division of any of the foregoing, or of the District of Columbia), the Portfolio will be qualified to pay exempt-interest dividends to its shareholders. Exempt-interest dividends are dividends or any part thereof (other than any capital gain distributions) paid by the Portfolio which are attributable to interest on tax-exempt obligations and designated by the Portfolio as exempt-interest dividends in a written notice mailed to the Portfolio's shareholders within sixty days after the close of its taxable year. The percentage of the total dividends paid by the Portfolio during any taxable year which qualifies as exempt-interest dividends will be the same for all shareholders of each Portfolio receiving dividends during such year. Exempt-interest dividends may be treated by shareholders for all purposes as items of interest excludible from their gross income under Section 103(a) of the Code. However, a shareholder is advised to consult his or her tax adviser with respect to whether exempt-interest 23 dividends retain the exclusion under Section 103(a) if such shareholder would be treated as a "substantial user" under Section 147(a)(1) with respect to some or all of the tax-exempt obligations held by the Portfolio. Dividends paid by each Portfolio from its taxable income (i.e., interest on money market securities) and distributions of net realized short-term capital gains (whether from tax-exempt or taxable obligations) are taxable to shareholders as ordinary income. If a Portfolio acquires tax-exempt obligations having market discount (generally, obligations acquired for a price less than their principal amount) after April 30, 1993, gain on the disposition or retirement of such obligations will be treated as ordinary income to the extent of accrued market discount. To the extent the Portfolio has both taxable and tax-exempt income, expenses of the Fund will be allocated between the taxable and the tax-exempt income on a proportional basis. Since the Portfolio will not invest in the stock of domestic corporations, the dividends received deductions for corporations will not be available. The per share dividends on Class B and Class C shares of any Portfolio will be lower than the per share dividends on Class A and Class D shares of those Portfolios as a result of the account maintenance distribution and higher transfer agency fees applicable to Class B and Class C shares; similarly, the per share dividends and distributions on Class D shares will be lower than the per share dividends and distributions on Class A shares as a result of the account maintenance fees applicable with respect to the Class D shares. See "Net Asset Value." The Code provides that interest on indebtedness incurred or continued to purchase or carry shares of the Portfolio is not deductible to the extent attributable to exempt-interest dividends. As a result of trading in futures contracts, a Portfolio may realize net capital gains which, when distributed to shareholders, would be taxable in the hands of the shareholders. For example, if the Portfolios sold municipal bond index futures contracts in anticipation of a decline in the value of securities they own and that index in fact declines in value, the Portfolios would realize a capital gain upon the closing out of that futures contract. Furthermore, if a Portfolio holds such a futures contract on the last day of its taxable year, it would be deemed under the Code to have sold that futures contract at its fair market value on the last day of its taxable year and thus would realize a gain or loss. Such gain or loss is treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss (hereinafter "blended gain or loss"), notwithstanding the holding period of the futures contract. Since the futures transaction was entered into to hedge the anticipated decline in the portfolio securities of the Portfolio in question, it is likely that the gain on the futures transactions would be partly or completely offset by a corresponding decline in the value of the portfolio securities of such Portfolio. However, unless the Portfolios sell such securities so as to "realize" such losses in a manner to offset the blended gain for Federal income tax purposes, the Portfolio would have a blended gain. Such blended gain would result in taxable income to the shareholders of the Fund. A redemption resulting in a gain is a taxable event whether or not the reinstatement privilege is exercised. A redemption resulting in a loss will not be a taxable event to the extent the reinstatement privilege is exercised and an adjustment will be made to the shareholder's tax basis in shares acquired pursuant to the reinstatement. For shares of a Portfolio acquired after October 3, 1989, if a shareholder disposes of those shares and subsequently reacquires shares of the Portfolio pursuant to the reinstatement privilege, then the shareholder's tax basis in those shares will be reduced to the extent the sales charge paid to the Portfolio reduces any sales charge such shareholder would have been required to pay on the subsequent acquisition in the absence of the reinstatement privilege. Instead, such sales charge will be treated as an additional amount paid for the subsequently acquired shares and will be included in the shareholder's tax basis for such shares. No gain or loss will be recognized by Class B shareholders on the conversion of their Class B shares for Class D shares. A shareholder's basis in the Class D shares acquired will be the same as such shareholder's 24 basis in the Class B shares converted, and the holding period of the acquired Class D shares will include the holding period of the converted Class B shares. If a shareholder exercises his exchange privilege within 90 days after the date such shares were acquired to acquire shares in such fund or another fund ("New Fund"), then the loss, if any, recognized on the exchange will be reduced (or the gain, if any, increased) to the extent the load charge paid to the Fund reduces any load charge such shareholder would have been required to pay on the acquisition of the New Fund shares in the absence of the exchange privilege. Instead, such load charge will be treated as an amount paid for the New Fund shares and will be included in the shareholder's basis for such shares. A loss realized on a sale or exchange of shares of the 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. An exchange between funds pursuant to the Exchange Privilege (as described below on page 29) is treated as a sale of the exchanged shares and a purchase of the acquired shares for Federal income tax purposes and, depending upon the circumstances, a short-, mid- or long-term capital gain or loss may be realized. In addition, any shareholder of the Fund who exercises the Exchange Privilege and becomes a shareholder of another fund must certify to such other fund his or her Social Security Number or Taxpayer Identification Number and that he is not subject to the backup withholding tax if he or she wishes to avoid a 31% backup withholding tax on the gross proceeds paid by such other fund on redemption of shares and on dividend distributions made to him or to her by such other fund. Any dividend declared by a Portfolio in October, November or December of any year and made payable to shareholders of record in such a month will be deemed to be received on December 31 of such year if actually paid during the following January. Accordingly, those dividends, to the extent taxable, will be taxable to shareholders in the year declared, and not in the year in which shareholders actually receive the dividend. Not later than sixty days after the end of each fiscal year of the Fund, the Fund will send to its shareholders the written notice required by the Code designating the amount of its dividends that constitute exempt-interest dividends, the amount of the dividends and distributions which are ordinary taxable income and the amount of distributions which are taxable to shareholders as mid- or long-term capital gains. Every person required to file a tax return must disclose on that return the amount of exempt-interest dividends received from a Portfolio during the taxable year. The disclosure of this amount is for information purposes only. In addition, with respect to a shareholder who receives exempt-interest dividends on shares held for less than six months, any loss on the sale or exchange of such shares will, to the extent of the amount of such exempt-interest dividends, be disallowed. Interest income with respect to certain tax-exempt bonds, known as "private activity" bonds, is a preference item for purposes of the corporate and individual alternative minimum tax. To the extent that a Portfolio invests in private activity bonds, shareholders of the Portfolio will have preference items attributable to their proportionate shares of the interest income received by the Portfolio from such bonds, thereby increasing a shareholder's alternative minimum taxable income. In addition, a corporation must increase its alternative minimum taxable income by 75 percent of the amount by which adjusted current earnings exceed alternative minimum taxable income (without regard to this provision or the alternative net operating loss 25 deduction). Adjusted current earnings are computed by making certain adjustments, which generally follow the rules applicable to corporations in computing earnings and profits. All tax-exempt dividends received by the corporate shareholders of a Portfolio are included in their current earnings, thus, increasing a corporate shareholders' alternative minimum taxable income. The Code imposes a four percent nondeductible excise tax on a regulated investment company, such as a Portfolio of the Fund, if the company does not distribute to its shareholders during the calendar year an amount equal to 98 percent of the investment company's taxable income, with certain adjustments, for such calendar year, plus 98 percent of the company's capital gain net income for the one-year period ending on October 31 of such calendar year. In addition, an amount equal to any undistributed investment company taxable income or capital gain net income from the previous calendar year must also be distributed to avoid the excise tax. The excise tax is imposed on the amount by which a company does not meet the foregoing distribution requirements. The excise tax will not, however, generally apply to the tax-exempt income of a regulated investment company, such as a Portfolio of the Fund, that pays exempt-interest dividends. In addition, if a Portfolio has taxable income that would be subject to the excise tax, the Fund intends to distribute the income of such Portfolio so as to avoid payment of the excise tax. At June 30, 1997, the Fund had a net capital loss carryforward as follows: Approximately $4,620,000 in the Insured Portfolio, of which $1,981,000 expires in 2003 and $2,639,000 expires in 2004; approximately $48,141,000 in the National Portfolio, of which $19,665,000 expires in 2003 and $28,476,000 expires in 2004; and approximately $4,658,000 in the Limited Maturity Portfolio, of which $2,590,000 expires in 1998, $22,000 expires in 1999, $25,000 expires in 2002 and $2,021,000 expires in 2003. These amounts will be available to offset like amounts of any future taxable gains. 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 these Regulations are subject to change by legislative or administrative action. SHAREHOLDER SERVICES The Fund offers a number of shareholder services, described below, that are designed to facilitate investment in its shares. Full details as to each of such services and copies of the various plans described below can be obtained from the Fund, the Distributor or Merrill Lynch. Certain of these services are available only to United States investors. 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 income dividends and long-term capital gains distributions. The quarterly statements will also show any other activity in the account since the preceding statement. Shareholders will receive separate transaction confirmations for each purchase or sale transaction other than automatic investment purchases and the reinvestment of ordinary income dividends and long-term capital gains distributions. A shareholder may make additions to his Investment Account at any time by mailing a check directly to the Transfer Agent. 26 Share certificates are issued only for full shares and only upon the specific request of the shareholder. 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 Fund, a shareholder either must redeem the Class A or Class D shares so that the cash proceeds can be transferred to the account at the new firm or such shareholder must continue to maintain an Investment Account at the Transfer Agent for those Class A 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. 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 may make additions to the 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, Class C 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 dealer. Voluntary accumulation also can be made through a service known as the Automatic Investment Plan whereby the 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. For investors who buy shares of the Fund through Blueprint, no minimum charge to the investors' bank account is required. Investors who maintain CMA(R) or CBA(R) accounts may arrange to have periodic investments made in the Fund, in the CMA(R) or CBA(R) accounts or in certain related accounts in amounts of $100 or more ($1 for retirement accounts) through the CMA(R) or CBA(R) Automated Investment Program. The Automatic Investment Plan is not available for Class C shares of the Limited Maturity Portfolio. AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS Unless specific instructions are given as to the method of payment of dividends and capital gains distributions, dividends and distributions will be reinvested automatically in additional shares of the Fund. Such reinvestment will be at the net asset value of shares of the Fund, without sales charge, as of the close of business on the NYSE on the ex-dividend date of such dividend or distribution. 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 or direct deposited on or about the payment date. Shareholders may, at any time, notify the Transfer Agent in writing or by telephone ((800)-MER-FUND) that they no longer wish to have their dividends and/or distributions reinvested in shares of the Fund or vice versa and, commencing ten days after the receipt by the Transfer Agent of such notice, those instructions will be effected. 27 SYSTEMATIC WITHDRAWAL PLANS A shareholder of any of the three Portfolios may elect to make systematic withdrawals from an Investment Account of Class A, Class B, Class C or Class D shares in the form of payments by check or through automatic payment by direct deposit to such shareholder's bank account on either a monthly or calendar quarterly basis as provided below. Quarterly withdrawals are available for shareholders who have acquired shares of the 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 Class A or Class D shares are redeemed from those on deposit in the shareholder's account to provide the withdrawal payment specified by the shareholder. The shareholder may specify the dollar amount and class of shares to be redeemed. Redemptions will be made at net asset value as determined once daily by FAM immediately after the declaration of dividends as of 15 minutes after the close of business on the NYSE (generally 4:00 p.m. New York City 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 that day, 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 shares of the Fund. A shareholder's Systematic Withdrawal Plan may be terminated at any time, without a charge or penalty, by the shareholder, the Fund, the Transfer Agent or the Distributor. Withdrawal payments should not be considered as dividends, yield or income. Each withdrawal is a taxable event. If periodic withdrawals continuously exceed reinvested dividends, the shareholder's original investment may be reduced correspondingly. Purchases of additional shares concurrent with withdrawals are ordinarily disadvantageous to the shareholder because of sales charges and tax liabilities. The Fund will not knowingly accept purchase orders for shares of the 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. With respect to redemptions of Class B and 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 Charge -- Class B Shares" and "Contingent Deferred Sales Charges -- Class C Shares" in the Prospectus. Where the systematic withdrawal plan is applied to Class B Shares, upon conversion of the last Class B shares in an account to Class D shares, the systematic withdrawal plan will automatically be applied thereafter to Class D shares. See "Purchase of Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to Class D Shares" in the Prospectus; if an investor wishes to change the amount being withdrawn in a systematic withdrawal plan the investor should contact his or her Financial Consultant. Alternatively, a shareholder whose shares are held within a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R) Systematic Redemption Program. The minimum fixed dollar amount redeemable is $50. 28 The proceeds of systematic redemptions will be posted to the shareholder's account five 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 in which the shares are to be redeemed and may designate whether the redemption is to be made on the first, second, third or fourth Monday of the month. If the Monday selected is not a business day, the redemption will be processed at net asset value on the next business day. The 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 a Portfolio of the Fund have an exchange privilege (the "Exchange Privilege") with other Portfolios of the Fund and with certain other MLAM-advised mutual funds listed below. Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may exchange Class A shares of a Portfolio for Class A shares of another Portfolio or a second MLAM-advised mutual fund if the shareholder holds any Class A shares of the other Portfolio or 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 another Portfolio or a second MLAM-advised mutual fund, and the shareholder does not hold Class A shares of the other Portfolio or second fund in his account at the time of the exchange and is not otherwise eligible to acquire Class A shares of the other Portfolio or second fund, the shareholder will receive Class D shares of the other Portfolio or second fund as a result of the exchange. Class D shares also may be exchanged for Class A shares of another Portfolio or 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 other Portfolio or second fund in the account in which the exchange is made or is otherwise eligible to purchase Class A shares of the other Portfolio or second fund. Class B, Class C and Class D of a Portfolio shares will be exchangeable with shares of the same class of another Portfolio or other MLAM-advised mutual funds. For purposes of computing the CDSC that may be payable upon a disposition of the shares acquired in the exchange, the holding period for the previously owned shares of the Portfolio is "tacked" to the holding period of the newly acquired shares of the other Portfolio or other MLAM-advised mutual fund as more fully described below. Class A, Class B, Class C and Class D shares also will be exchangeable for shares of certain MLAM-advised money market funds specifically designated below as available for exchange by holders of Class A, Class B, Class C or Class D shares. Shares with a net asset value of at least $100 are required to qualify for the exchange privilege, except that there is no minimum value of shares that must be exchanged by shareholders of the Insured Portfolio who exchange their shares for shares of either the National Portfolio or the Limited Maturity Portfolio and any shares utilized in an exchange must have been held by the shareholder for at least 15 days. The Exchange Privilege available to participants in the Merrill Lynch Blueprint(SM) Program may be different from that available to other investors. Exchanges of Class A and Class D shares of a Portfolio outstanding ("outstanding Class A and Class D shares") for Class A or Class D shares of another Portfolio or another MLAM-advised mutual fund ("new Class A or Class D shares) are transacted on the basis of relative net asset value per Class A or Class D share 29 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' will 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, dividend reinvestment Class A or Class D shares will be exchanged into the Class A or Class D shares of the other funds or into shares of the Class A or Class D money market funds without a sales charge. In addition, the Fund offers to exchange Class B and Class C shares of a Portfolio outstanding ("outstanding Class B or Class C shares") for Class B or Class C shares respectively of another Portfolio or any of the other MLAM-advised mutual funds ("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 a Portfolio exercising the Exchange Privilege will continue to be subject to that Portfolio's CDSC schedule if such schedule is higher than the CDSC schedule relating to the new Class B shares acquired through the use of the Exchange Privilege. In addition, Class B shares of the Portfolio acquired through the use of the Exchange Privilege will be subject to that Portfolio's CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares of the fund or Portfolio from which the exchange has been made. For purposes of computing the sales charge that may be payable on a disposition of the new Class B or Class C shares, the holding period for the outstanding Class B or Class C shares is "tacked" to the holding period of the new Class B or Class C shares. For example, an investor may exchange Class B or Class C shares of the National Portfolio for those of the Merrill Lynch Basic Value Fund, Inc. after having held the National Portfolio Class B shares for two and a half years. The 2% contingent deferred sales charge that generally would apply to a redemption would not apply to the exchange. Two years later the investor may decide to redeem the Class B shares of Merrill Lynch Basic Value Fund, Inc. and receive cash. There will be no CDSC due on this redemption, since by "tacking" the two and a half year holding period of National Portfolio Class B shares to the two year holding period for the Merrill Lynch Basic Value Fund, Inc. Class B shares, the investor will be deemed to have held the new Class B shares for more than four years. Shareholders also may exchange shares of the Fund into shares of certain money market funds advised by the Investment Adviser or its affiliates, but the period of time that Class B or Class C shares are held in a Class B or Class C money market fund will not count towards satisfaction of the holding period requirement for purposes of reducing the CDSC or, with respect to the Class B shares, towards satisfaction of the conversion period. However, Class B shares of a money market fund that were acquired as a result of an exchange for Class B or Class C shares of a fund may, in turn, be exchanged back into Class B or Class C shares of any fund offering such shares, in which event the holding period for Class B or Class C shares of the newly acquired fund will be aggregated with previous holding periods for purposes of reducing the CDSC. Thus, for example, an investor may exchange Class B shares of the National Portfolio for shares of Merrill Lynch Institutional Fund ("Institutional Fund") after having held the Class B shares for two and a half years, and two years later decide to redeem the shares of Institutional Fund for cash. At the time of this redemption, the 2% CDSC that would have been due had the Class B shares of the National Portfolio been redeemed for cash rather than exchanged for shares of Institutional Fund will be payable. If, instead of such redemption the 30 shareholder exchanged such shares for Class B shares of a fund which the shareholder continued to hold for an additional one and a half years, any subsequent redemption will not incur a CDSC. Before effecting an exchange, shareholders of the Fund should obtain a currently effective prospectus of the fund into which the exchange is to be made. Exercise of the Exchange Privilege is treated as a sale for Federal income tax purposes and, depending on the circumstances, a short- or long-term capital gain or loss may be realized. In addition, a shareholder exchanging shares of any of the funds may be subject to a backup withholding tax unless such shareholder certifies under penalty of perjury that the taxpayer identification number on file with any such fund is correct and that such shareholder is not otherwise subject to backup withholding. See "Dividends, Distributions and Taxes" above. To exercise the Exchange Privilege, shareholders should contact their listed dealer, who will advise the Fund of the exchange, or the shareholder may write to the Transfer Agent requesting that the exchange be effected. Such letter must be signed exactly as the account is registered with signature(s) guaranteed by "eligible guarantor institution" (including, for example, Merrill Lynch branch offices and certain other financial institutions) as such is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, the existence and validity of which may be verified by the transfer agent through the use of industry publications. Shareholders of the Fund, and shareholders of the other funds described above with shares for which certificates have not been issued may exercise the Exchange Privilege by wire through their securities dealers. The Fund reserves the right to require a properly completed Exchange Application. These funds may suspend the continuous offering of their shares to the public at any time and may thereafter resume such offering from time to time. The Exchange Privilege may be modified or terminated at any time on 60 days' notice. The Fund reserves the right to limit the number of times an investor may exercise the Exchange Privilege. The exchange privilege is available only to U.S. shareholders in states where the exchange legally may be made. PERFORMANCE DATA From time to time the 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. Total return, yield, and tax equivalent yield figures are based on the 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, 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 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. 31 The Fund also may quote annual, average annual and annualized total return and aggregate total return performance data, both as a percentage and as a dollar amount based on a hypothetical $1,000 investment, for various periods other than those noted below. Such data will be computed as described above, except that, (1) as required by the periods of the quotations, actual annual, annualized or aggregate data, rather than average annual data, may be quoted (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 calculation of including or excluding the maximum applicable sales charges, actual annual or annualized total return data generally will be lower than average annual total return data since the average rates of return reflect compounding of return. Aggregate total return data generally will be higher than average annual total return data since the aggregate rates of return reflect compounding over a longer period of time. Set forth below is total return information for each class of shares of each Portfolio for the periods indicated. AVERAGE ANNUAL TOTAL RETURN (INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
EXPRESSED AS A PERCENTAGE BASED ON A REDEEMABLE VALUE OF A HYPOTHETICAL $1,000 INVESTMENT AT THE END OF THE HYPOTHETICAL $1,000 INVESTMENT PERIOD -------------------------------------- -------------------------------------- LIMITED LIMITED INSURED NATIONAL MATURITY INSURED NATIONAL MATURITY PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO ---------- ---------- ---------- ---------- ---------- ---------- One Year Ended June 30, 1997 Class A....................... 3.41% 4.49% 3.35% $ 1,034.10 $ 1,044.90 $ 1,033.50 Class B....................... 2.78 3.92 3.13 1,027.80 1,039.20 1,031.30 Class C....................... 5.86 6.97 3.11 1,058.60 1,069.70 1,031.10 Class D....................... 3.16 4.23 3.35 1,031.60 1,042.30 1,033.50 Five Years Ended June 30, 1997 Class A....................... 5.67% 6.13% 3.84% $ 1,317.80 $ 1,346.70 $ 1,207.10 Class B....................... 5.71 6.20 -- 1,320.30 -- -- Ten Years Ended June 30, 1997 Class A....................... 7.42% 7.57% 4.94% $ 2,045.30 $ 2,074.90 $ 1,620.10 Class B 10/21/88-6/30/97...... 6.86 7.08 -- 1,780.60 1,811.90 -- Class B 11/02/92-6/30/97...... -- -- 3.63 -- -- 1,180.50 Inception (October 21, 1994) to June 30, 1997 Class C....................... 7.57% 8.19% 3.95% $ 1,217.10 $ 1,235.80 $ 1,109.70 Class D....................... 6.55 7.19 3.96 1,186.10 1,205.30 1,110.10
32 ANNUAL TOTAL RETURN (EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
LIMITED LIMITED INSURED NATIONAL MATURITY INSURED NATIONAL MATURITY YEAR ENDED JUNE 30, PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO - -------------------------------- --------- --------- --------- --------- --------- --------- 1997 (Class A)..................... 7.72% 8.84% 4.40% $1,077.20 $1,088.50 $1,044.00 (Class B)..................... 6.78 7.92 4.13 1,067.80 1,079.20 1,041.30 (Class C)..................... 6.86 7.97 4.11 1,068.60 1,079.70 1,041.10 (Class D)..................... 7.46 8.57 4.40 1,074.60 1,085.70 1,044.00 1996 (Class A)..................... 5.51 6.98 3.75 1,055.10 1,069.80 1,037.50 (Class B)..................... 4.71 6.17 3.37 1,047.10 1,061.70 1,033.70 (Class C)..................... 4.65 6.01 2.97 1,046.50 1,060.10 1,029.70 (Class D)..................... 5.25 6.71 3.55 1,052.50 1,067.10 1,035.50 1995 (Class A)..................... 8.60 7.89 4.53 1,086.00 1,078.90 1,045.30 (Class B)..................... 7.91 7.28 4.14 1,079.10 1,072.80 1,041.40 (Class C)**................... 8.83 7.97 3.52 1,088.30 1,079.70 1,035.20 (Class D)**................... 9.24 8.37 3.73 1,092.40 1,083.70 1,037.30 1994 (Class A)..................... (1.08) (0.47) 2.30 989.20 995.30 1,023.00 (Class B)..................... (1.81) (1.39) 1.98 981.90 986.10 1,019.80 1993 (Class A)..................... 12.41 12.19 5.28 1,124.10 1,121.90 1,052.80 (Class B)*.................... 11.44 11.45 3.26 1,114.40 1,114.50 1,032.60 1992 (Class A)..................... 12.11 13.09 6.93 1,121.10 1,130.90 1,069.30 (Class B)..................... 11.27 12.25 -- 1,112.70 1,122.50 -- 1991 (Class A)..................... 8.84 7.94 6.45 1,088.40 1,079.40 1,064.50 (Class B) 8.02 7.14 -- 1,080.20 1,071.40 -- 1990 (Class A)..................... 5.76 5.53 6.16 1,057.60 1,055.30 1,061.60 (Class B) 4.98 4.74 -- 1,049.80 1,047.40 -- 1989 (Class A)..................... 11.62 11.89 5.96 1,116.20 1,118.90 1,059.60 (Class B)(10/21/88-6/30/89)... 6.88 6.48 -- 1,068.80 1,064.80 -- 1988............................ 7.75 6.89 4.83 1,077.50 1,068.90 1,048.30 1987............................ 6.94 7.99 4.99 1,069.40 1,079.90 1,049.90 1986............................ 15.62 17.09 6.50 1,156.20 1,170.90 1,065.00 1985............................ 22.21 22.36 8.72 1,222.10 1,223.60 1,087.20 1984............................ 3.00 4.44 5.58 1,030.00 1,044.40 1,055.80 1983............................ 31.60 32.66 8.59 1,316.00 1,326.60 1,085.90 1982............................ (.33) 2.73 7.96 996.70 1,027.30 1,079.60 1981............................ (10.27) (2.72) 4.55 897.30 972.80 1,045.50 1980............................ (5.88) 4.21 5.91 941.20 1,042.10 1,059.10
- --------------- * November 2, 1992 to June 30, 1993 for Limited Maturity Portfolio. ** October 21, 1994 (commencement of operations) to June 30, 1995 for Class C and Class D Shares. 33 AGGREGATE TOTAL RETURN (INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
LIMITED LIMITED INSURED NATIONAL MATURITY INSURED NATIONAL MATURITY YEAR ENDED JUNE 30, PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO - ------------------------- ------- -------- -------- --------- --------- --------- From Inception to June 30, 1997** Class A................ 260.63% 363.16% 169.91% $3,606.30 $4,631.60 $2,699.10 Class B................ 78.06 81.19 18.05 1,780.60 1,811.90 1,180.50 Class C................ 21.71 23.58 10.97 1,217.10 1,235.80 1,109.70 Class D................ 18.61 20.53 11.01 1,186.10 1,205.30 1,110.10
- --------------- ** Commencement of operations is November 2, 1979 for Class A shares of National Portfolio and shares of Limited Maturity Portfolio, October 21, 1977 for Class A shares of Insured Portfolio, and October 21, 1988 for Class B shares of National Portfolio and Insured Portfolio, and November 2, 1992 for Class B shares of Limited Maturity Portfolio. Commencement of operations is October 21, 1994 for Class C and Class D shares of each Portfolio. In order to reflect the reduced sales charges applicable to certain investors the performance data in advertisements distributed to investors whose purchases are subject to reduced sales load, in the case of Class A or Class D shares, or waiver of the contingent deferred sales charge in the case of the Class B and Class C shares, may take into account the reduced, and not the maximum, sales charge or may not take into account the contingent deferred sales charge and therefore may reflect greater total return since, due to the reduced sales charge, a lower amount of expenses is deducted. The 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 investment in the Fund at the beginning of each specified period. Yield quotations will be computed based on a 30-day period by dividing (a) the net income based on the yield of each security earned during the period by (b) the average daily number of shares outstanding during the period that were entitled to receive dividends multiplied by the maximum offering price per share on the last day of the period. Tax equivalent yield quotations will be computed by dividing (a) the part of the Fund's yield that is tax-exempt by (b) one minus a stated tax rate and adding the result to that part, if any, of the Fund's yield that is not tax-exempt. The following table sets forth the yield for the 30-day period ending June 30, 1997 for each class of each Portfolio.
FOR THE PERIOD ENDING JUNE 30, 1997 ----------------------------------------------------------------------- YIELD ----------------------------------------------------------------------- INSURED PORTFOLIO NATIONAL PORTFOLIO LIMITED MATURITY PORTFOLIO ----------------- ------------------ -------------------------- Class A............... 4.91% 4.92% 3.90% Class B............... 4.36% 4.37% 3.58% Class C............... 4.30% 4.32% 3.56% Class D............... 4.66% 4.68% 3.80%
34 The tax equivalent yield for the same period (based on a tax rate of 28%) was:
INSURED PORTFOLIO NATIONAL PORTFOLIO LIMITED MATURITY PORTFOLIO ----------------- ------------------ -------------------------- Class A............... 6.82% 6.83% 5.42% Class B............... 6.06% 6.07% 4.97% Class C............... 5.97% 6.00% 4.94% Class D............... 6.47% 6.50% 5.28%
Total return, yield and tax equivalent yield figures are based on each Portfolio's historical performance and are not intended to indicate future performance. Each Portfolio's total return, yield and tax equivalent yield will vary depending on market conditions, the securities comprising the Portfolio, the Portfolio's operating expenses and the amount of realized and unrealized net capital gains or losses during the period. The value of an investment in a Portfolio will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. ADDITIONAL INFORMATION ORGANIZATION OF THE FUND The Fund, a Maryland corporation, is a diversified, open-end management investment company that commenced operations on October 21, 1977. Prior to September 21, 1979, the Fund consisted solely of the Insured Portfolio. Currently, the Fund is comprised of three separate Portfolios: Insured Portfolio, National Portfolio and Limited Maturity Portfolio. The authorized capital stock of the Fund consists of 3,850,000,000 shares of Common Stock, divided into three series, each of which is divided into four classes, having a par value of $0.10 per share. The shares of Insured Portfolio Series Common Stock (500,000,000 Class A, 375,000,000 Class B shares, 375,000,000 Class C shares, 500,000,000 Class D shares authorized), National Portfolio Series Common Stock (375,000,000 Class A, 375,000,000 Class B shares, 375,000,000 Class C shares, 375,000,000 Class D shares authorized), which does business under the name "National Portfolio," and Limited Maturity Portfolio Series Common Stock (150,000,000 Class A, 150,000,000 Class B shares, 150,000,000 Class C shares, 150,000,000 Class D shares authorized) are divided into four classes, designated Class A, Class B, Class C and Class D Common Stock. Each Class A, Class B, Class C and Class D share of common stock of each of the Portfolios represents an interest in the same assets of such Portfolio and are identical in all respects to the shares of the other classes except that the Class B, Class C and Class D shares bear certain expenses related to the account maintenance associated with such shares, and Class B and Class C shares bear certain expenses related to the distribution of such shares. Each Class of shares of a Portfolio has exclusive voting rights with respect to matters relating to account maintenance services and distribution expenditures relative to that Portfolio, as applicable (except that Class B shareholders have certain voting rights with respect to the Class D Distribution Plan). Only shares of each respective Portfolio are entitled to vote on matters concerning only that Portfolio. Each issued and outstanding share is entitled to one vote and to participate equally in dividends and distributions declared by the respective Portfolios and in net assets of the respective Portfolios upon liquidation or dissolution remaining after satisfaction of outstanding liabilities, except, as noted above, the Class B, 35 Class C and Class D shares of the Portfolios bear certain expenses related to the distribution of such shares. The shares of each Portfolio, when issued, will be fully paid and nonassessable, have no preference, pre-emptive, conversion, exchange or similar rights. Shares have the conversion rights described in the Prospectus. Holders of shares of any Portfolio are entitled to redeem their shares as set forth under "Redemption of Shares." Shares do not have cumulative voting rights, and the holders of more than 50% of the shares of the Fund voting for the election of Directors can elect all of the Directors of the Fund if they choose to do so and in such event the holders of the remaining shares would not be able to elect any Directors. Stock certificates will be issued by the Transfer Agent only on specific request. Certificates for fractional shares are not issued in any case. Shareholders are entitled to redeem their shares as set forth under "Redemption of Shares." DESCRIPTION OF TEMPORARY INVESTMENTS The short-term money market securities in which the Portfolios may invest as temporary investments consist of U.S. Government securities, U.S. Government agency securities, domestic bank certificates of deposit and bankers' acceptances, short-term corporate debt securities such as commercial paper, and repurchase agreements. The money market securities must have a stated maturity not in excess of one year from the date of purchase. U.S. Government securities consist of various types of marketable securities issued by or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Government agency securities consist of debt securities issued by government sponsored enterprises, federal agencies and international institutions. Such securities are not direct obligations of the Treasury but involve government sponsorship or guarantees by government agencies or enterprises. The Fund has established the following standards with respect to money market securities in which the Portfolios invest. Commercial paper investments at the time of purchase must be rated "A" by Standard & Poor's Ratings Services ("S&P") or "Prime" by Moody's Investors Service, Inc. ("Moody's") or, if not rated, issued by companies having an outstanding debt issue rated at least "A" by S&P or Moody's. Investments in corporate bonds and debentures (which must have maturities at the date of purchase of one year or less) must be rated at the time of purchase at least "A" by S&P or by Moody's. The Portfolios may not invest in any securities issued by a commercial bank or a savings and loan association unless the bank or association 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. INSURANCE ON PORTFOLIO SECURITIES Set forth below is further information with respect to the Mutual Fund Insurance Policies (the "Policies") which the Fund has obtained from AMBAC Indemnity Corporation ("AMBAC"), Municipal Bond Investors Assurance Corporation ("MBIA") and Financial Security Assurance Inc. ("FSA"), with respect to Insured Municipal Bonds held by the Insured Portfolio (see "Investment Policies of the Portfolios -- Insured Portfolio" in the Prospectus). During the fiscal year ended June 30, 1997, the premium for the Policies aggregated $29,338 or approximately 0.001% of the average net assets of the Insured Portfolio. In determining eligibility for insurance, AMBAC, MBIA and FSA have applied their own standards, which correspond generally to the standards they normally use in establishing the insurability of new issues of Municipal Bonds and which are not necessarily the criteria which would be used in regard to the purchase of Municipal Bonds by the Insured Portfolio. The Policies do not insure (i) municipal securities ineligible for 36 insurance, or (ii) municipal securities that are no longer owned by the Insured Portfolio. In addition, the AMBAC policy does not insure municipal obligations which were insured as to the payment of principal and interest at the time of their issuance by AMBAC. The Policies do not guarantee the market value of the Insured Municipal Bonds or the value of the shares of the Insured Portfolio. In addition, if the provider of an original issuance insurance policy is unable to meet its obligations under such policy or if the rating assigned to the claims paying ability of any such insurer deteriorates, neither AMBAC, MBIA nor FSA has any obligation to insure any issue held by the Insured Portfolio which is adversely affected by either of the above described events. The AMBAC policy provides for an annual policy period, which is renewable by the Fund for successive annual periods for so long as the Fund is in compliance with the terms of the AMBAC policy. In addition to the payment of premiums, the Policies require that the Insured Portfolio notify AMBAC and MBIA as to all Municipal Bonds in the Insured Portfolio and permit AMBAC and MBIA to audit records. The insurance premiums are payable monthly by the Insured Portfolio in accordance with a premium schedule which was furnished by AMBAC, MBIA and FSA at the time the Policies were issued. Premiums are based upon the amounts covered and the composition of the portfolio. AMBAC has reserved the right to change the premium schedule for any renewal policy period as to any municipal securities purchased by the Insured Portfolio during such renewal period. The FSA policy and the MBIA policy both provide that the premium rate for subsequent purchases by the Insured Portfolio of the same obligations will be determined by FSA or MBIA as of the date of such purchases. AMBAC has received a letter ruling from the Internal Revenue Service, which holds in effect that insurance proceeds representing maturing interest on defaulted municipal obligations paid by AMBAC to municipal bond funds substantially similar to the Insured Portfolio, under policy provisions substantially identical to the policy described herein, will be excludable from federal gross income under Section 103(a) of the Internal Revenue Code. AMBAC insures the portfolio of the Insured Portfolio and the prompt payment of the interest and principal of new issues of Municipal Bonds and Municipal Bond portfolios of individuals, banks, trust companies, corporations, insurance companies and units trusts. As of June 30, 1997, the admitted assets of AMBAC were approximately $2,735.7 million (unaudited) with a qualified capital of approximately $1,547.7 million (unaudited). Qualified capital consists of the statutory contingency reserve and policyholders' surplus of the insurance company. FSA insures the prompt payment of interest and principal of new issues of Municipal Bonds and Municipal Bond portfolios of individuals, banks, trust companies, corporations, insurance companies and unit trusts. As of June 30, 1997, the total admitted assets (unaudited) of FSA were approximately $1,269.9 million with a total capital and surplus (unaudited) of approximately $711.2 million as reported to the Insurance Department of the State of New York. MBIA insures the prompt payment of interest and principal of new issues of Municipal Bonds and Municipal Bond portfolios of individuals, banks, trust companies, corporations, insurance companies and unit trusts. As of June 30, 1997, the total admitted assets of MBIA were approximately $4,823.7 million (unaudited) with total capital and surplus of approximately $2,552.6 million (unaudited). AMBAC has entered into reinsurance agreements with a number of unaffiliated reinsurers, relating to the municipal bond insurance programs of AMBAC including the insurance obtained by the Fund for the portfolio of the Insured Portfolio. 37 The contracts of insurance relating to the Insured Portfolio and the negotiations in respect thereof represent the only significant relationship between AMBAC, MBIA and FSA and the Fund. Otherwise neither AMBAC or any associate thereof, nor MBIA or any associate thereof, nor FSA or any associate thereof has any material business relationship, direct or indirect, with the Fund. AMBAC, MBIA and FSA are subject to regulation by the department of insurance in each state in which they are qualified to do business. Such regulation, however, is not a guarantee that any of AMBAC, MBIA or FSA will be able to perform on its contractual insurance in the event a claim should be made thereunder at some time in the future. The information relating to AMBAC, MBIA and FSA set forth above, including the financial information, has been furnished by such corporations. Financial information with respect to AMBAC, MBIA and FSA appears in reports filed by AMBAC, MBIA and FSA with state insurance regulatory authorities and is subject to audit and review by such authorities. No representation is made herein as to the accuracy or adequacy of such information with respect to AMBAC, MBIA or FSA or as to the absence of material adverse changes in such information subsequent to the date thereof. DESCRIPTION OF FINANCIAL FUTURES CONTRACTS Futures Contracts. 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 called for in the contract or, in some instances, to make a cash settlement based upon the value of an instrument or an index of values, at a specified future time for a specified price. Although the terms of a contract call for actual delivery of the underlying financial instrument, or for a cash settlement, in most cases the contracts are closed out before the delivery date without the delivery taking place. The Fund intends to close out its futures contracts prior to the delivery date of such contracts. The Portfolios may sell futures contracts in anticipation of a decline in value of their investments in Municipal Bonds. The loss associated with any such decline could be reduced without employing futures as a hedge by selling long-term securities 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 brokerage commissions and dealer spreads and will typically reduce the Portfolio's average yields as a result of the shortening of maturities. The purchase or sale of a futures contract differs from the purchase or sale of a security in that the total cash value reflected by the futures contract is not paid. Instead, an amount of cash or securities acceptable to the Fund's futures commission merchant ("FCM") and the relevant contract market, which varies but is generally about 5% or less of the contract amount, must be deposited with the FCM. This amount is known as "initial margin," and represents a "good faith" deposit assuring the performance of both the purchaser and the seller under the futures contract. Subsequent payments to and from the FCM, known as "maintenance" or "variation margin," are required to be made on a daily basis as the price of the futures contract fluctuates, making the long or short position in the futures contract more or less valuable, a process known as "marking to the market." Prior to the settlement date of the futures contract, the position may be closed out by taking an opposite position which will operate to terminate the position in the futures contract. A final determination of variation margin is then made, additional cash is required to be paid to or released by the FCM, and the 38 purchaser realizes a loss or gain. In addition, a commission is paid on each completed purchase and sale transaction. The sale of financial futures contracts provides an alternative means of hedging a Portfolio against declines in the value of its investments in Municipal Bonds. As such values decline, the value of the Portfolio's positions in the futures contracts are expected to increase, thus offsetting all or a portion of the depreciation in the market value of the Portfolios' fixed income investments which are being hedged. While the Portfolios will incur commission expenses in establishing and closing out futures positions, commissions on futures transactions may be significantly lower than transaction costs incurred in the purchase and sale of fixed income securities. In addition, the ability of the Portfolios to trade in the standardized contracts available in the futures market may offer a more effective hedging strategy than a program to reduce the average maturity of portfolio securities, due to the unique and varied credit and technical characteristics of the municipal debt instruments available to the Portfolios. Employing futures as a hedge may also permit the Portfolios to assume a hedging posture without reducing the yield on their investments beyond any amounts required to engage in futures trading. The Portfolios engage in the purchase and sale of future contracts on an index of municipal securities. These instruments provide for the purchase or sale of a hypothetical portfolio of municipal bonds at a fixed price in a stated delivery month. Unlike most other futures contracts, however, a municipal bond index futures contract does not require actual delivery of securities but results in a cash settlement based upon the difference in value of the index between the time the contract was entered into and the time it is liquidated. The municipal bond index underlying the futures contracts traded by the Portfolios is The Bond Buyer Municipal Bond Index, developed by The Bond Buyer and the Chicago Board of Trade ("CBT"), the contract market on which the futures contracts are traded. As currently structured, the index is comprised of 40 tax- exempt term municipal revenue and general obligation bonds. Each bond included in the index must be rated either A- or higher by S&P or A or higher by Moody's and must have a remaining maturity of 19 years or more. Twice a month new issues satisfying the eligibility requirements are added to, and an equal number of old issues will be deleted from, the index. The value of the index is computed daily according to a formula based upon the price of each bond in the Index, as evaluated by four dealer-to-dealers brokers. The Portfolios may also purchase and sell futures contracts on U.S. Treasury bills, notes and bonds for the same types of hedging purposes. Such futures contracts provide for delivery of the underlying security at a specified future time for a fixed price, and the value of the futures contract generally fluctuates with movements in interest rates. The municipal bond index futures contract, futures contracts on U.S. Treasury securities and options on such futures contracts are traded on the CBT and the Chicago Mercantile Exchange, which, like other contract markets, assures the performance of the parties to each futures contract through a clearing corporation, a nonprofit organization managed by the exchange membership, which is also responsible for handling daily accounting of deposits or withdrawals of margin. The Portfolios may also purchase financial futures contracts when they are not fully invested in municipal bonds in anticipation of an increase in the cost of securities they intend to purchase. As such securities are purchased, an equivalent amount of futures contracts will be closed out. In a substantial majority of these transactions, the Portfolios will purchase municipal bonds upon termination of the futures contracts. Due to changing market conditions and interest rate forecasts, however, a futures position may be terminated without 39 a corresponding purchase of securities. Nevertheless, all purchases of futures contracts by the Portfolios will be subject to certain restrictions, described below. Options on Futures Contracts. An option on a futures contract provides the purchaser with the right, but not the obligation, to enter into a long position in the underlying futures contract (i.e., purchase the futures contract), in the case of a "call" option, or to enter into a short position (i.e., sell the futures contract), in the case of a "put" option, for a fixed price (the "exercise" or "strike" price) up to a stated expiration date. The option is purchased for a nonrefundable fee, known as the "premium." Upon exercise of the option, the contract market clearing house assigns each party the appropriate position in the underlying futures contract. In the event of exercise, therefore, the parties are subject to all of the risks of futures trading, such as payment of initial and variation margin. In addition, the seller, or "writer," of the option is subject to margin requirements on the option position. Options on futures contracts are traded on the same contract markets as the underlying futures contracts. The Portfolios may purchase options on futures contracts for the same types of hedging purposes described above in connection with futures contracts. For example, in order to protect against an anticipated decline in the value of securities it holds, a Portfolio could purchase put options on futures contracts, instead of selling the underlying futures contracts. Conversely, in order to protect against the adverse effects of anticipated increases in the cost of securities to be acquired, a Portfolio could purchase call options on futures contracts, instead of purchasing the underlying futures contracts. The Portfolios generally will sell options on futures contracts only to close out an existing position. The Portfolios will not engage in transactions in such instruments unless and until the Investment Adviser determines that market conditions and the circumstances of the Portfolios warrant such trading. To the extent the Portfolios engage in the purchase and sale of futures contracts or options thereon, they will do so only at a level that reflects the Investment Adviser's view of the hedging needs of the Portfolios, the liquidity of the market for futures contracts and the anticipated correlation between movements in the value of the futures or option contract and the value of securities held by the Portfolios. Restrictions on the Use of Futures Contracts and Options on Futures Contracts. Under regulations of the Commodity Futures Trading Commission ("CFTC"), the futures trading activities described herein will not result in the Portfolios' being deemed to be "commodity pools," as defined under such regulations, provided that certain trading restrictions are adhered to. In particular, CFTC regulations require that a notice of eligibility be filed and that all futures and option positions entered into by the Portfolios qualify as bona fide hedge transactions, as defined under CFTC regulations, or that any nonqualifying positions be limited so that the sum of the amount of initial margin deposits and premiums paid on such positions would not exceed 5% of the market value of the respective Portfolio's net assets. When either Portfolio purchases a futures contract, it will maintain an amount of cash, cash equivalents or commercial paper or liquid securities in a segregated account with the Fund's custodian, so that the amount so segregated plus the amount of initial margin held in the account of its broker equals the market value of the futures contract, thereby ensuring that the use of such futures is unleveraged. Risk Factors in Transactions in Futures Contracts and Options Thereon. The particular municipal bonds comprising the index underlying the municipal bond index futures contract may vary from the bonds held by the Portfolios. In addition, the securities underlying futures contracts on U.S. Treasury securities will not be the same as securities held by the Portfolios. As a result, the Portfolios' ability effectively to hedge all or 40 a portion of the value of their municipal bonds through the use of futures contracts will depend in part on the degree to which price movements in the index underlying the municipal bond index futures contract, or the U.S. Treasury securities underlying other futures contracts traded, correlate with price movements of the Municipal Bonds held by the Portfolios. For example, where prices of securities in the Portfolios do not move in the same direction or to the same extent as the values of the securities or index underlying a futures contract, the trading of such futures contracts may not effectively hedge the Portfolios' investments and may result in trading losses. The correlation may be affected by disparities in the average maturity, ratings, geographical mix or structure of the Portfolios' investments as compared to those comprising the index, and general economic or political factors. In addition, the correlation between movements in the value of the index underlying a futures contract may be subject to change over time, as additions to and deletions from the index alter its structure. In the case of futures contracts on U.S. Treasury securities and options thereon, the anticipated correlation of price movements between the U.S. Treasury securities underlying the 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. In the event that the Investment Adviser determines to enter into transactions in financial futures contracts other than the municipal bond index futures contract or futures on U.S. Treasury securities, the risk of imperfect correlation between movements in the prices of such futures contracts and the prices of Municipal Bonds held by the Portfolios may be greater. The trading of futures contracts on an index also entails the risk of imperfect correlation between movements in the price of the futures contract and the value of the underlying index. The anticipated spread between the prices may be affected due to differences in the nature of the markets, such as margin requirements, liquidity and the participation of speculators in the futures markets. The risk of imperfect correlation, however, generally diminishes as the delivery month specified in the futures contract approaches. Prior to exercise or expiration, and absent delivery, a position in futures contracts or options thereon may be terminated only by entering into a closing purchase or sale transaction on the relevant contract market. A Portfolio will enter into a futures or option position only if there appears to be a liquid market therefor, although there can be no assurance that such a liquid market will exist for any particular contract at any specific time. Thus, it may not be economically practicable, or otherwise possible, to close out a position once it has been established. Under such circumstances, a portfolio could be required to make continuing daily cash payments of variation margin in the event of adverse price movements. In such situations, if the Portfolio 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. In addition, the Portfolio may be required to perform under the terms of the futures or option contracts it holds. The inability to close out futures or options positions also could have an adverse impact on the Portfolio's ability effectively to hedge its portfolio. When a Portfolio purchases an option on a futures contract, its risk is limited to the amount of the premium, plus related transaction costs, although this entire amount may be lost. In addition, in order to profit from the purchase of an option on a futures contract, a Portfolio may be required to exercise the option and liquidate the underlying futures contract, subject to the availability of a liquid market. The trading of options on futures contracts also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of the option, although the risk of imperfect correlation generally tends to diminish as the maturity date of the futures contract or expiration date of the option approaches. 41 "Position Limits" are generally imposed on the maximum number of contracts which any person may hold or control at a given time. A contract market may order the liquidation of positions found to be in violation of these limits and it may impose other sanctions or restrictions. The Investment Adviser does not believe that position limits will have any adverse impact on the portfolio strategies for hedging a Portfolio's investments. Further, the trading of futures contracts is subject to the risk of the insolvency of a brokerage firm or the relevant exchange or clearing corporation, which could make it difficult or impossible to liquidate existing positions or to recover margin or other payments due. In addition to the risks of imperfect correlation and lack of a liquid secondary market for such instruments, transactions in futures contracts involve risks related to leveraging such that a change in the price of a futures contract could result in substantial gains or losses. The potential for incorrect forecasts of the direction and extent of interest rate movements within a given time frame also involves the risk of loss in the event such forecasts are inaccurate. COMPUTATION OF OFFERING PRICE PER SHARE The offering price for Class A , Class B, Class C and Class D shares of the Insured, National and Limited Maturity, based on the value of each Portfolio's net asset and the number of shares outstanding as of June 30, 1997, is calculated as set forth below. INSURED PORTFOLIO:
CLASS A CLASS B CLASS C CLASS D -------------- -------------- -------------- -------------- Net Assets.................. $1,441,784,905 $ 560,105,263 $ 11,922,182 $ 38,421,750 ============== ============ =========== =========== Number of Shares Outstanding............... 178,876,402 69,537,481 1,479,783 4,767,006 ============== ============ =========== =========== Net Asset Value Per Share (net assets divided by number of shares outstanding) ............. $ 8.06 $ 8.05 $ 8.06 $ 8.06 Sales Charge (Class A and Class D shares: 4.00% of offering price (4.17% of net asset value per share))*.................. .34 ** ** .34 -------------- ------------ ----------- ----------- Offering Price.............. $ 8.40 $ 8.05 $ 8.06 $ 8.40 ============== ============ =========== =========== (See footnotes on next page)
42 NATIONAL PORTFOLIO:
CLASS A CLASS B CLASS C CLASS D -------------- -------------- -------------- -------------- Net Assets..................... $ 983,649,868 $ 415,103,109 $ 28,095,834 $ 51,038,145 ============== ============ =========== =========== Number of Shares Outstanding... 94,784,980 40,014,114 2,706,856 4,914,399 ============== ============ =========== =========== Net Asset Value Per Share (net assets divided by number of shares outstanding) ......... $ 10.38 $ 10.37 $ 10.38 $ 10.39 Sales Charge (Class A and Class D shares: 4.00% of offering price (4.17% of net asset value per share))*........... .43 ** ** .43 -------------- ------------ ----------- ----------- Offering Price................. $ 10.81 $ 10.37 $ 10.38 $ 10.82 ============== ============ =========== ===========
LIMITED MATURITY PORTFOLIO:
CLASS A CLASS B CLASS C CLASS D -------------- -------------- -------------- -------------- Net Assets..................... $ 343,640,605 $ 54,275,249 $ 107,551 $ 20,383,393 ============== ============ =========== =========== Number of Shares Outstanding... 34,594,470 5,462,680 10,849 2,050,790 ============== ============ =========== =========== Net Asset Value Per Share (net assets divided by number of shares outstanding) ......... $ 9.93 $ 9.94 $ 9.91 9.94 Sales Charge (Class A and Class D shares: 1.00% of offering price (1.01% of the net asset value per share))*........... .10 ** ** .10 -------------- ------------ ----------- ----------- Offering Price................. $ 10.03 $ 9.94 $ 9.91 $ 10.04 ============== ============ =========== ===========
- --------------- * 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 four years of purchase (for Class B shares of Insured Portfolio and National Portfolio) or within one year of purchase (for Class B shares of Limited Maturity Portfolio and Class C shares). See "Purchase of Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares" in the Prospectus and "Redemption of Shares -- Deferred Sales Charge -- Class B and Class C Shares" herein. 43 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, Merrill Lynch Municipal Bond Fund, Inc.: We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of the Insured, National and Limited Maturity Portfolios of Merrill Lynch Municipal Bond Fund, Inc. as of June 30, 1997, the related statements of operations for the year then ended and changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and the financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at June 30, 1997 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of the Insured, National and Limited Maturity Portfolios of Merrill Lynch Municipal Bond Fund, Inc. as of June 30, 1997, the results of their operations, the changes in their net assets, and the financial highlights for the respective stated periods in conformity with generally accepted accounting principles. Deloitte & Touche LLP Princeton, New Jersey August 15, 1997 44
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997 SCHEDULE OF INVESTMENTS (in Thousands) Municipal Bonds Insured Portfolio ------------------------------------------------------------------------------------------------------ S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Alabama--0.2% AAA Aaa $ 1,625 Alabama Water Pollution Control Authority, Revolving Fund Loan, Series A, 6.75% due 8/15/2017 (b) $ 1,789 AAA Aaa 1,250 Mobile, Alabama, GO, Refunding and Capital Improvement Bonds, 10.875% due 11/01/2007 (c) 1,697 Alaska--0.8% Kenai Peninsula Borough, Alaska, GO (b): AAA Aaa 6,450 8.40% due 1/01/2000 7,059 AAA Aaa 8,460 8.40% due 1/01/2001 9,526 Arizona--1.5% AAA Aaa 6,750 Arizona State Municipal Financing Program, COP, Series 34, 7.25% due 8/01/2009 (g) 8,091 AAA Aaa 3,800 Maricopa County, Arizona, IDA, Health Facilities Revenue Bonds (Saint Joseph's Care Center Project), Series A, 7.75% due 7/01/2020 (e) 4,170 AAA Aaa 4,000 Maricopa County, Arizona, IDA, Hospital Facility Revenue Refunding Bonds (Samaritan Health Services), Series A, 7% due 12/01/2013 (e) 4,336 AAA Aaa 7,000 Maricopa County, Arizona, Unified School District No.097 (Deer Valley Project), UT, 1986 Series E, 10% due 7/01/2000 (h) 8,109 AAA Aaa 6,000 Mesa, Arizona, Utility System Revenue Bonds, 5.375% due 7/01/2017 (h) 5,975 California--1.6% AAA Aaa 5,245 Los Angeles, California, Metropolitan Transportation Authority, Revenue Refunding Bonds (General Union Station), Series A, 5.25% due 7/01/2013 (i) 5,217 AAA Aaa 5,000 Los Angeles County, California, Public Works Finance Authority (Lease Revenue Multiple Capital Facility Project), Series V-B, 5.125% due 12/01/2017 (b) 4,754 AAA Aaa 8,800 Northern California Power Agency, Multiple Capital Facilities Revenue Bonds, RIB, 8.837% due 9/02/2025 (d) (e) 10,296 AAA Aaa 5,900 Oakland, California, Redevelopment Agency, Refunding Bonds, INFLOS, 7.966% due 9/01/2019 (d) (e) 6,114 AAA Aaa 5,000 University of California Revenue Bonds (Multiple Purpose Projects), Series D, 6.375% due 9/01/2024 (e) 5,399 Colorado--0.9% AAA Aaa 590 La Plata County, Colorado, School District Number 9, GO (R Durango), UT, 6.60% due 11/01/2017 (h) 643 A1+ VMIG1++ 2,000 Moffat County, Colorado, PCR, Refunding (Pacificorp Projects), VRDN, 5.50% due 5/01/2013 (b) (f) 2,000 Municipal Subdistrict Northern Colorado, Water Conservancy District, Revenue Refunding Bonds, Series F (b): Aaa Aaa 4,470 6.15% due 12/01/2005 4,893 Aaa Aaa 4,250 6.25% due 12/01/2006 4,706 Aaa Aaa 5,055 6.35% due 12/01/2007 5,660 Delaware--0.2% AAA Aaa 3,750 Delaware State Health Facilities Authority, Crossover Revenue Refunding Bonds (Medical Center of Delaware), 7% due 10/01/2015 (e) 4,004 Florida--3.9% Florida State Division, Board of Finance, Department of General Services Revenue Bonds, Series 2000-A (b): AAA Aaa 23,490 (Department of Enviromental Preservation), 5% due 7/01/2012 22,743 AAA Aaa 14,630 (Department of Enviromental Preservation), 5% due 7/01/2013 14,069 AAA Aaa 5,000 (Department of Natural Resource Preservation), 6.75% due 7/01/2013 5,423 AAA Aaa 1,000 Florida State Turnpike Authority, Turnpike Revenue Bonds, Series A, 7.125% due 7/01/2001 (a) (b) 1,118 AAA Aaa 500 Jacksonville, Florida, Health Facilities Authority, Hospital Revenue Refunding and Improvement Bonds (Baptist Medical Center Project), 11.50% due 10/01/2012 (c) 819 AAA Aaa 10,000 Lee County, Florida, Hospital Board of Directors, Hospital Revenue, INFLOS, 9.063% due 4/01/2020 (d) (e) 11,400 AAA Aaa 3,950 Orange County, Florida, HFA, Mortgage Revenue Refunding Bonds, Series A, 7.60% due 1/01/2024 (h) (j) 4,191 AAA Aaa 5,790 Orange County, Florida, Health Facilities Authority Revenue Bonds (Hospital--Orlando Regional Healthcare), Series A, 6.25% due 10/01/2006 (e) 6,379 AAA Aaa 2,000 Port Saint Lucie, Florida, Special Assessment Revenue Bonds, Assessment District No. 1, Phase II, 5.40% due 10/01/2016 (e) 1,979 AAA Aaa 4,900 Saint John's River, Florida, Water Management District, Revenue Refunding Bonds (Land Acquisition), 5.125% due 7/01/2016 (i) 4,685 AAA Aaa 2,850 South Broward Hospital District, Florida, Hospital Revenue Bonds, RIB, Series C, 9.034% due 5/01/2001 (a) (b) (d) 3,384
45 AAA Aaa 2,240 West Coast Regional Water Supply Authority, Florida, Capital Improvement Revenue Bonds (Hillsborough County Project), 10.40% due 10/01/2010 (a) (b) 3,185 Georgia--2.2% A1+ VMIG1++ 6,200 Burke County, Georgia, Development Authority, PCR (Oglethorpe Power Corporation), VRDN, Series A, 4.15% due 1/01/2016 (f) (h) 6,200 AAA Aaa 4,000 Chatam County, Georgia, School District, UT, 6.75% due 8/01/2003 (a) (e) 4,526 AAA Aaa 20,000 Georgia Municipal Electric Authority, Power Revenue Bonds, Series EE, 7% due 1/01/2025 (b) 24,293 AAA Aaa 9,000 Georgia Municipal Electric Authority, Special Obligation Bonds (Fifth Crossover Series, Project One), 6.40% due 1/01/2013 (b) 10,007 Hawaii--3.7% Hawaii State Airport System Revenue Bonds: AAA Aaa 21,795 AMT, 7.30% due 7/01/2020 (b) 23,591 AAA Aaa 23,200 AMT, Second Series, 7.50% due 7/01/2020 (h) 25,240 AAA Aaa 10,000 Refunding, Series 1993, 6.45% due 7/01/2013 (e) 10,909 AAA Aaa 5,000 Hawaii State Department of Budget and Finance, Special Purpose Mortgage Revenue Bonds (Hawaiian Electric Company, AMT, Series C, 7.375% due 12/01/2020 (e) 5,463 Hawaii State, GO (h): AAA Aaa 2,920 Series CH, UT, 6% due 11/01/2005 3,146 AAA Aaa 2,000 Series CN, 5.25% due 3/01/2017 1,938 AAA Aaa 4,500 Hawaii State Harbor Capital Improvement Revenue Bonds, AMT, 7% due 7/01/2017 (e) 4,833 Illinois--11.6% AAA Aaa 28,200 Chicago, Illinois, GO, Series A-1, 5.125% due 1/01/2025 (b) 26,257 AAA Aaa 48,835 Chicago, Illinois, Refunding, Series B, 5.125% due 1/01/2025 (h) 45,406 AAA Aaa 24,000 Chicago, Illinois, Wastewater Transmission Revenue Refunding Bonds, 5.125% due 1/01/2025 (h) 22,315 AAA Aaa 3,000 Chicago, Illinois, Water Revenue Bonds, 5% due 11/01/2015 (h) 2,818 AAA Aaa 7,000 Cleveland, Ohio, Public Power System, Revenue Refunding Bonds (First Mortgage, Series 1), 5.25% due 11/15/2016 (e) 6,825 Illinois Health Facilities Authority Revenue Bonds: AAA Aaa 3,250 (Elmhurst Memorial Hospital), 6.625% due 1/01/2022 (h) 3,498 AAA Aaa 2,000 (Methodist Health Project), RIB, 9.628% due 5/01/2021 (b) (d) 2,303 AAA Aaa 28,900 Refunding (Sinai Health System), 6% due 2/15/2024 (b) 29,397 AAA Aaa 10,000 (Rush Presbyterian-Saint Luke's Medical Center), INFLOS, 9.615% due 10/01/2024 (d) (e) 11,550 Illinois State, GO, Refunding Bonds, UT (h): AAA Aaa 5,000 5.125% due 12/01/2013 4,862 AAA Aaa 5,750 5.125% due 12/01/2016 5,461 AAA Aaa 4,520 Illinois State Sales Tax Revenue Bonds, Series W, 5% due 6/15/2016 (h) 4,266
Portfolio Abbreviations To simplify the listings of Merrill Lynch Municipal Bond Fund, Inc.'s portfolio holdings in the Schedule of Investments, we have abbreviated the names of many of the securities according to the list at right. AMT Alternative Minimum Tax (subject to) BAN Bond Anticipation Notes COP Certificates of Participation EDA Economic Development Authority GAN Grant Anticipation Notes GO General Obligation Bonds HDA Housing Development Authority HFA Housing Finance Agency IDA Industrial Development Authority IDR Industrial Development Revenue Bonds INFLOS Inverse Floating Rate Municipal Bonds IRS Inverse Rate Securities LEVRRS Leveraged Reverse Rate Securities M/F Multi-Family PCR Pollution Control Revenue Bonds RIB Residual Interest Bonds RITR Residual Interest Tax Receipts S/F Single-Family TAN Tax Anticipation Notes TRAN Tax Revenue Anticipation Notes UT Unlimited Tax VRDN Variable Rate Demand Notes 46
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997 SCHEDULE OF INVESTMENTS (continued) (in Thousands) Municipal Bonds Insured Portfolio ------------------------------------------------------------------------------------------------------ S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Illinois Metropolitan Pier and Exposition Authority, Illinois, (concluded) Dedicated State Tax Revenue Bonds (McCormick Place Expansion Project): AAA Aaa $ 6,070 Refunding, Series A, 6% due 12/15/2006 (b) $ 6,556 AAA Aaa 16,660 Refunding, Series A, 6.10% due 12/15/2015 (e) (k) 5,851 AAA Aaa 8,330 Refunding, Series A, 6.10% due 12/15/2016 (e) (k) 2,764 AAA Aaa 9,400 Refunding, Series A, 6.05% due 12/15/2018 (e) (k) 2,756 AAA Aaa 13,550 Refunding, Series A, 6.03% due 12/15/2022 (e) (k) 3,120 AAA Aaa 49,575 Refunding, Series A, 6.09% due 12/15/2023 (e) (k) 10,740 AAA Aaa 14,305 Refunding, Series A, 6.24% due 6/15/2024 (e) (k) 3,006 AAA Aaa 6,260 Refunding, Series A, 6.02% due 6/15/2025 (e) (k) 1,238 AAA Aaa 5,000 Refunding, Series B, 5.867% due 6/15/2018 (e) (k) 1,509 AAA Aaa 6,600 Series A, 6.50% due 6/15/2003 (a) (b) 7,366 AAA Aaa 3,000 Series A, 5.87% due 6/15/2020 (h) (k) 802 AAA Aaa 26,000 Regional Transportation Authority, Illinois, Series A, 6.25% due 6/01/2024 (b) 27,565 Indiana--1.6% AAA Aaa 2,470 Indiana State Employment Development Commission, Environmental Revenue Bonds (Public Service Company of Indiana, Inc.), AMT, 7.50% due 3/15/2015 (e) 2,671 AAA Aaa 4,040 Indianapolis, Indiana, Local Public Improvement Bond Bank, Series A, 7.90% due 2/01/2002 (a) (g) 4,607 AAA Aaa 4,340 Jasper County, Indiana, PCR, Refunding (Northern Indiana Public Service), 7.10% due 7/01/2017 (e) 4,758 AAA Aaa 4,510 Munster, Indiana, School Building Corp. (First Mortgage), 5.75% due 1/15/2021 (e) 4,516 AAA Aaa 5,000 Penn, Indiana, High School Building Corp. (First Mortgage), 6.125% due 1/15/2016 (e) 5,223 Rockport, Indiana, PCR, Refunding: A1 Aaa 4,200 (AEP Generating Co. Project), VRDN, Series A, 5.50% due 7/01/2025 (b) (f) 4,200 AAA Aaa 5,800 (Indiana--Michigan Power), Series B, 7.60% due 3/01/2016 (h) 6,421 Iowa--0.3% AAA Aaa 5,000 Des Moines, Iowa, Parking Facilities Revenue Refunding Bonds, Series A, 7.25% due 7/01/2015 (h) 5,361 Kentucky--0.6% AAA Aaa 11,470 Kentucky Development Finance Authority, Hospital Revenue Refunding and Improvement Bonds (Saint Elizabeth Medical Center), Series A, 9% due 11/01/2000 (h) 13,101 Louisiana--0.4% A1 VMIG1++ 10,000 Louisiana Public Facilities Authority, Hospital Revenue Bonds (Willis-Knighton Medical Center Project), VRDN, 4.15% due 9/01/2025 (b) (f) 10,000 Maryland--0.4% Maryland State Health and Higher Educational Facilities Authority Revenue Bonds (University of Maryland Medical Systems) (h): AAA Aaa 2,250 Series A, 7% due 7/01/2001 (a) 2,504 AAA Aaa 4,400 Series B, 7% due 7/01/2022 5,284 Massachusetts AAA Aaa 13,000 Massachusetts Bay Transportation Authority, COP, - --5.3% Series A, 7.65% due 8/01/2000 (a) (i) 14,477 Massachusetts Bay Transportation Authority (Massachusetts General Transportation), Series A (h): AAA Aaa 4,325 6% due 3/01/2006 4,670 AAA Aaa 4,610 6% due 3/01/2007 4,993 AAA Aaa 4,690 Massachusetts Educational Loan Authority, Education Loan Revenue Bonds, AMT, Issue D, Series A, 7.25% due 1/01/2009 (e) 5,027 Massachusetts State Consolidated Loan (b): AAA Aaa 5,110 Series A, 5% due 3/01/2010 5,002 AAA Aaa 5,420 Series D, 5% due 11/01/2016 5,093 Massachusetts State Health and Educational Facilities Authority Revenue Bonds: AAA Aaa 10,000 (Beth Israel), INFLOS, 8.319% due 7/01/2025 (b) (d) 10,400 A1+ VMIG1++ 500 (Capital Assets Program), VRDN, Series D, 5.35% due 1/01/2035 (e) (f) 500 AAA Aaa 3,100 (Saint Elizabeth's Hospital), LEVRRS, Series E, 9.37% due 8/12/2021 (d) (i) 3,565
47 AAA Aaa 19,755 Massachusetts State, HFA, Housing Revenue Refunding Bonds (Insured Rental), AMT, Series A, 6.75% due 7/01/2028 (b) 20,648 AAA Aaa 12,250 Massachusetts State, HFA, M/F Housing Refunding Bonds, Series A, 6.15% due 7/01/2018 (e) 12,591 AAA Aaa 4,020 Massachusetts State Insured Revenue Refunding Bonds, Series B, 5.40% due 11/01/2007 (e) 4,184 AAA Aaa 3,250 Massachusetts State Port Authority Revenue Bonds, 13% due 7/01/2013 (c) 5,448 Massachusetts State Water Resources Authority Revenue Bonds, Series B (e): AAA Aaa 2,730 5% due 12/01/2016 2,574 AAA Aaa 10,000 5% due 12/01/2025 9,112 Michigan--2.5% AAA Aaa 5,000 Michigan State Building Authority, Revenue Refunding Bonds, Series I, 6.25% due 10/01/2020 (e) 5,351 Aaa Aaa 6,915 Michigan State, HDA, Rental Housing Revenue Bonds, Series B, 6.15% due 10/01/2015 (e) 7,090 AAA Aaa 10,000 Michigan State Strategic Fund Limited Obligation, Revenue Refunding Bonds (Detroit Edison Co.) Series AA, 6.40% due 9/01/2025 (e) 10,757 Monroe County, Michigan, PCR (Detroit Edison Company Project), AMT: AAA Aaa 16,500 (Monroe and Fermi Plants), Series 1, 7.65% due 9/01/2020 (h) 18,078 AAA Aaa 9,745 Series I-B, 7.50% due 9/01/2019 (b) 10,556 Mississippi--0.1% AAA Aaa 1,320 Harrison County, Mississippi, Wastewater Management District, Revenue Refunding Bonds (Wastewater Treatment Facilities), Series A, 8.50% due 2/01/2013 (h) 1,751 Missouri--0.2% AAA Aaa 3,500 Sikeston, Missouri, Electric Revenue Refunding Bonds, 6.25% due 6/01/2002 (a) (e) 3,830 Nebraska--0.4% AAA Aaa 9,000 Nebraska Public Power District Revenue Refunding Bonds, 6.125% due 1/01/2015 (e) 9,387 Nevada--2.5% AAA Aaa 3,450 Clark County, Nevada, Airport Revenue Bonds, 6.90% due 6/01/2001 (a) (h) 3,757 AAA Aaa 45,000 Washoe County, Nevada, Water Facility Revenue Bonds (Sierra Pacific Power), AMT, 6.65% due 6/01/2017 (e) 48,527 New Jersey--7.1% AAA Aaa 3,350 Cape May County, New Jersey, Industrial Pollution Control Financing Authority, Revenue Refunding Bonds (Atlantic City Electric Company Project), Series A, 6.80% due 3/01/2021 (e) 3,957 Casino Reinvestment Development Authority, New Jersey, Parking Fee Revenue Bonds, Series A (i): AAA Aaa 3,730 6% due 10/01/2005 4,013 AAA Aaa 3,955 6% due 10/01/2006 4,263 AAA Aaa 4,190 6% due 10/01/2007 4,519 AAA Aaa 28,750 New Jersey EDA, Natural Gas Facilities, Revenue Refunding Bonds (NUI Corp.), Series A, 6.35% due 10/01/2022 (b) 31,029 A1+ VMIG1++ 1,100 New Jersey Sports and Exposition Authority Revenue Bonds (State Contract), VRDN, Series C, 3.95% due 9/01/2024 (e) (f) 1,100 New Jersey State Housing and Mortgage Finance Agency Revenue Bonds (Home Buyer), AMT (e): AAA Aaa 8,790 Series D, 7.70% due 10/01/2029 9,204 AAA Aaa 23,890 Series M, 7% due 10/01/2026 25,442 New Jersey State Transit Corp., Capital, GAN, Series A (i): AAA Aaa 15,000 5% due 9/01/2000 15,265 AAA Aaa 35,000 5.25% due 9/01/2001 36,008 New Jersey State Turnpike Authority, Turnpike Revenue Refunding Bonds: AAA Aaa 4,215 Series C, 6.50% due 1/01/2008 (b) 4,738 AAA VMIG1++ 6,100 VRDN, Series D, 3.80% due 1/01/2018 (f) (h) 6,100
48
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997 SCHEDULE OF INVESTMENTS (continued) (in Thousands) Municipal Bonds Insured Portfolio ------------------------------------------------------------------------------------------------------ S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) New York--10.7% Nassau County, New York, General Improvement, UT, Series V (b): AAA Aaa $ 5,305 5.25% due 3/01/2015 $ 5,197 AAA Aaa 2,845 5.25% due 3/01/2016 2,769 New York City, New York, GO, UT: AAA Aaa 15,000 Series B, 6.25% due 8/15/2008 (b) 16,376 AAA Aaa 8,175 Series E, 6% due 8/01/2007 (h) 8,809 AAA Aaa 13,770 Series G, 6% due 10/15/2007 (b) 14,855 AAA Aaa 31,000 Series I, 6% due 4/15/2012 (i) 32,509 AAA Aaa 2,500 Series L, 5.20% due 8/01/2008 (e) 2,515 AAA Aaa 10,095 Series M, 5.30% due 6/01/2012 (b) 10,006 AAA Aaa 15,000 Series M, 5.50% due 6/01/2017 (b) 14,874 New York City, New York, GO, UT, Series I (b): AAA Aaa 2,825 7.25% due 8/15/1999 (a) 3,043 AAA Aaa 7,150 7.25% due 8/15/2013 7,636 AAA Aaa 4,385 7.25% due 8/15/2016 4,693 New York City, New York, Municipal Water Finance Authority, Water and Sewer System Revenue Bonds: AAA Aaa 28,510 RITR, 6.945% due 6/15/2026 (d) (e) 29,294 AAA Aaa 5,010 Series C, 6.20% due 6/15/2021 (b) 5,282 A1+ VMIG1++ 1,000 Series C, VRDN, 5.50% due 6/15/2023 (f) (h) 1,000 AAA Aaa 1,500 New York City, New York, Refunding, UT, Series E, 6.20% due 8/01/2008 (e) 1,637 AAA Aaa 2,500 New York State Dormitory Authority Revenue Bonds (City University), Third Generation Reserves, Series 2, 6.25% due 7/01/2019 (e) 2,639 AAA Aaa 1,650 New York State Environmental Facilities Corporation, Special Obligation Revenue Refunding Bonds (Riverbank State Park), 5.50% due 4/01/2016 (b) 1,647 AAA Aaa 2,015 New York State Medical Care Facilities Finance Agency, Revenue Improvement Bonds (Mental Health Services), Series C, 7.375% due 8/15/2019 (e) 2,161 Aaa Aaa 9,125 New York State Medical Care Facilities Financial Agency Revenue Bonds (Mental Health Services), Series E, 6.25% due 8/15/2019 (h) 9,650 AAA VMIG1++ 13,700 New York State Thruway Authority, General Revenue Bonds, VRDN, 5.45% due 1/01/2024 (f) (h) 13,700 AAA Aaa 12,000 New York State Thruway Authority, Highway and Bridge Trust Fund, Series B, 5.125% due 4/01/2015 (e) 11,585 Niagara Falls, New York, Public Improvement Bonds, UT (e): AAA Aaa 2,975 6.90% due 3/01/2023 3,313 AAA Aaa 3,190 6.90% due 3/01/2024 3,553 AAA Aaa 11,940 Suffolk County, New York, Water Authority, Water Works Revenue Bonds, 5% due 6/01/2011 (e) 11,613 Ohio--1.1% AAA Aaa 2,710 Clermont County, Ohio, Hospital Facilities Revenue Refunding Bonds (Mercy Health Systems), Series A, 7.50% due 9/01/2001 (a) (b) 3,028 AAA Aaa 12,000 Cleveland, Ohio, Public Power System Revenue Bonds, First Mortgage, Series A, 7% due 11/15/2004 (a) (e) 13,930 AAA Aaa 1,550 Cleveland, Ohio, Water Works Revenue Bonds (First Mortgage), Series F-92 A, 6.50% due 1/01/2002 (a) (b) 1,704 AAA Aaa 3,500 Ohio State Building Authority, State Facilities (Adult Correctional), Series A, 6% due 4/01/2004 (b) 3,762 Oklahoma--1.3% AAA Aaa 10,500 Central Oklahoma, Transportation and Packaging Authority, Packaging Systems Revenue Refunding, 5.25% due 7/01/2016 (i) 10,169 AAA Aaa 9,280 Grand River Dam Authority, Oklahoma, Revenue Refunding Bonds, 5.50% due 6/01/2009 (b) 9,718 AAA Aaa 7,500 Oklahoma State Industrial Authority, Hospital Revenue Bonds (Baptist Medical Center), Series A, 7% due 8/15/2000 (a) (b) 8,212 Oregon--0.2% Port Portland, Oregon, International Airport Revenue Bonds (Portland International Airport), Series Seven-B, AMT (e): AAA Aaa 3,865 7.10% due 1/01/2012 (a) 4,511 AAA Aaa 135 7.10% due 7/01/2021 146
49 Pennsylvania AAA Aaa 2,000 Allegheny County, Pennsylvania, Higher Education Building - --5.4% Authority Revenue Bonds (Duquesne University Project), 5% due 3/01/2016 (b) 1,882 AAA Aaa 1,750 Allegheny County, Pennsylvania, Hospital Development Authority Revenue Bonds (Mercy Hospital of Pittsburgh), 6.75% due 4/01/2001 (a) (b) 1,922 AAA Aaa 6,900 Beaver County, Pennsylvania, Hospital Authority Revenue Bonds (Medical Center of Beaver, Pennsylvania Inc.), Series A, 6.25% due 7/01/2022 (b) 7,218 AAA Aaa 3,365 Beaver County, Pennsylvania, IDA, PCR, Refunding (Ohio Edison Company/Mansfield), Series A, 7% due 6/01/2021 (h) 3,675 AAA Aaa 7,590 Erie County, Pennsylvania, Prison Authority, Lease Revenue Bonds, 6.25% due 11/01/2001 (a) (e) 8,144 AAA Aaa 1,155 Exeter Township Pennsylvania School District, UT, 6.65% due 5/15/2002 (a) (h) 1,265 Pennsylvania State Higher Educational Assistance Agency, Student Loan Revenue Bonds, AMT, RIB (d): AAA Aaa 15,000 9.317% due 9/03/2026 (b) 16,856 AAA Aaa 8,000 Series B, 10.749% due 3/01/2020 (e) 9,160 AAA Aaa 18,600 Series B, 7.955% due 3/01/2022 (b) 19,321 Pennsylvania State Higher Educational Facilities Authority, College and University Revenue Bonds: AAA Aaa 1,500 (Bryn Mawr College), 6.50% due 12/01/1999 (a) (h) 1,607 AAA Aaa 4,250 (Temple University), First Series, 6.50% due 4/01/2021 (e) 4,566 AAA Aaa 10,000 Pennsylvania State Higher Educational Facilities Authority, Health Services Revenue Refunding (Allegheny Delaware Valley), Series A, 5.875% due 11/15/2016 (e) 10,228 Pennsylvania State Second Series, GO, UT (b): AAA Aaa 8,875 5% due 11/15/2014 8,468 AAA Aaa 1,000 5% due 11/15/2015 950 AAA Aaa 6,000 Philadelphia, Pennsylvania, Gas Works Revenue Bonds, 12th Series B, 7% due 5/15/2020 (c) (e) 7,013 AAA Aaa 5,000 Philadelphia, Pennsylvania, School District, Series B, 5.50% due 9/01/2015 (b) 4,977 AAA Aaa 4,020 Philadelphia, Pennsylvania, Water and Sewer Authority, Water and Wastewater Revenue Bonds, 5.60% due 8/01/2018 (e) 3,976 Rhode Island AAA Aaa 6,100 Rhode Island Depositors Economic Protection Corporation, - --1.4% Special Obligation Bonds, Series A, 6.625% due 8/01/2002 (a) (i) 6,792 AAA Aaa 3,775 Rhode Island State Consolidated Capital Development Loan, Series A, 6% due 8/01/2007 (e) 4,096 Rhode Island State Health and Educational Building Corporation Revenue Bonds: AAA Aaa 1,500 Higher Education Facility, Refunding (Rhode Island School Design), 5.625% due 6/01/2026 (e) 1,472 AAA Aaa 12,800 (Rhode Island Hospital), INFLOS, 9.487% due 8/15/2021 (d) (h) 15,568 South AAA Aaa 5,000 Florence County, South Carolina, Hospital Revenue Carolina--1.6% Bonds (McLeod Regional Medical Center Project), 6.75% due 11/01/2020 (h) 5,374 AAA Aaa 4,000 Piedmont, South Carolina, Municipal Power Agency, Electric Revenue Refunding Bonds, 6.30% due 1/01/2022 (e) 4,263 South Carolina State Public Service Authority, Revenue Refunding Bonds, Series A (b): AAA Aaa 17,090 6.375% due 7/01/2021 18,425 AAA Aaa 4,200 6.25% due 1/01/2022 4,452 Texas--14.3% Austin, Texas, Utility System, Combined Revenue Bonds, Prior Lien (e): AAA Aaa 11,190 9.25% due 5/15/2004 (a) 14,160 AAA Aaa 5,000 6.25% due 11/15/2019 5,273 AAA Aaa 20,000 Austin, Texas, Utility System, Combined Revenue Refunding Bonds, Series A, 5.25% due 5/15/2016 (i) 19,348 Brazos River Authority, Texas, PCR (Texas Utilities Electric Company Project), AMT: AAA Aaa 6,000 Refunding, 6.50% due 12/01/2027 (b) 6,422 AAA Aaa 12,000 Series B, 6.625% due 6/01/2022 (h) 12,882 AAA Aaa 12,400 Brazos River Authority, Texas, Revenue Refunding Bonds (Houston Light and Power Co.), Series B, 7.20% due 12/01/2018 (h) 13,387 Brownsville, Texas, Utility System, Revenue Refunding Bonds: AAA Aaa 20,000 6.25% due 9/01/2014 (e) 21,862 AAA Aaa 2,000 5.25% due 9/01/2015 (b) 1,952
50
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997 SCHEDULE OF INVESTMENTS (concluded) (in Thousands) Municipal Bonds Insured Portfolio ------------------------------------------------------------------------------------------------------ S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Texas AAA Aaa $ 5,000 Harris County, Texas, Hospital District Mortgage, (concluded) Revenue Refunding Bonds, 7.40% due 2/15/2010 (b) $ 5,974 Harris County, Texas, Toll Road Revenue Bonds, Senior Lien: AAA Aaa 11,455 Senior Lien, Refunding, 5% due 8/15/2016 (h) 10,756 AAA Aaa 20,430 Senior Lien, Refunding, Series A, 6.50% due 8/15/2002 (a) (b) 22,645 AAA Aaa 10,305 Senior Lien, Refunding, Series A, 6.50% due 8/15/2002 (a) (h) 11,422 AAA Aaa 1,000 Senior Lien, Series A, 6.25% due 8/15/2015 (e) 1,069 AAA Aaa 2,750 Senior Lien, Series A, 6.50% due 8/15/2017 (b) 2,994 AAA Aaa 11,100 Senior Lien, Series A, 6.375% due 8/15/2024 (e) 11,953 AAA Aaa 1,695 Series A, 6.50% due 8/15/2011 (h) 1,845 Houston, Texas, Water and Sewer System Revenue Bonds, Junior Lien, Series A (e): AAA Aaa 7,615 6.375% due 12/01/2022 8,242 AAA Aaa 19,770 Refunding, 6.125% due 12/01/2015 20,708 AAA Aaa 8,000 Refunding, 6.20% due 12/01/2023 8,400 AAA Aaa 3,500 Houston, Texas, Water Conveyance System Contract, COP, Series J, 6.25% due 12/15/2013 (b) 3,854 AAA Aaa 5,000 Matagorda County, Texas, Navigation District No. 1, PCR (Central Power and Light Company Project), AMT, 7.50% due 3/01/2020 (b) 5,404 AAA Aaa 11,800 Matagorda County, Texas, Navigation District No. 1, Revenue Refunding Bonds (Houston Light and Power Co.), Series A, 6.70% due 3/01/2027 (b) 12,838 A1 Aaa 15,400 North Central, Texas, Health Facility Development Corp. Revenue Bonds (Methodist Hospital, Dallas), VRDN, Series B, 5.50% due 10/01/2015 (f) (g) 15,400 Nueces River Authority, Texas, Water Supply Facilities Revenue (Corpus Christi Lake Project) (i): AAA Aaa 3,705 5.25% due 7/15/2013 3,642 AAA Aaa 3,900 5.25% due 7/15/2014 3,814 A1 VMIG1++ 16,500 Sabine River Authority, Texas, PCR, Refunding (Texas Utilities Project), VRDN, Series A, 5.50% due 3/01/2026 (b) (f) 16,500 AAA Aaa 3,000 San Antonio, Texas, Electric and Gas Revenue Bonds, Series 95, 5.375% due 2/01/2016 (e) 2,943 AAA Aaa 15,000 Southwest Higher Education Authority Incorporated, Texas, Revenue Refunding Bonds (Southern Methodist University), Series B, 6.25% due 10/01/2022 (h) 15,931 Texas State Municipal Power Agency, Revenue Refunding Bonds: AAA Aaa 3,520 5.25% due 9/01/2007 (e) 3,643 AAA Aaa 3,150 Series A, 6.75% due 9/01/2012 (b) 3,424 AAA Aaa 5,095 Texas State Public Finance Authority, Building Revenue Bonds, Series A, 5% due 8/01/2016 (b) 4,790 Utah--1.7% AAA Aaa 12,855 Intermountain Power Agency, Utah, Power Supply Revenue Refunding Bonds, Series B, 6% due 7/01/2006 (e) 13,836 AAA Aaa 14,000 Salt Lake City, Utah, Hospital Revenue Refunding Bonds (IHC Hospitals, Inc.), INFLOS, 9.491% due 5/15/2020 (b) (d) 16,327 AA- Aaa 1,000 Uintah County, Utah, PCR (Desert Generation and Transmission Cooperative--National Rural Utilities Company), Series 1984 F-2, 10.50% due 6/15/2001 (a) 1,218 AAA Aaa 2,650 Utah State Board of Regents, Student Loan Revenue Bonds, AMT, Series F, 7.45% due 11/01/2008 (b) 2,773 Vermont--1.0% AAA Aaa 18,950 Vermont, HFA, Home Mortgage Purchase Bonds, AMT, Series B, 7.60% due 12/01/2024 (e) 19,986 Virginia--3.1% AAA Aaa 5,000 Danville, Virginia, IDA, Hospital Revenue Refunding Bonds (Danville Regional Medical Center), 6.50% due 10/01/2019 (h) 5,394 AAA Aaa 4,000 Loudoun County, Virginia, Sanitation Authority, Water and Sewer Revenue Refunding Bonds, 5.125% due 1/01/2026 (h) 3,769 AAA Aaa 20,000 Upper Occoquan, Virginia, Sewer Authority Regional, Revenue Bonds, Series A, 4.75% due 7/01/2029 (e) 17,429 Virginia State, HDA, Commonwealth Mortgage, AMT, Series A, Sub-Series A-4 (e): AAA Aaa 5,000 6.30% due 7/01/2014 5,195 AAA Aaa 11,215 6.35% due 7/01/2018 11,535 AAA Aaa 19,000 6.45% due 7/01/2028 19,584
51 Washington--2.9% Seattle, Washington, Metropolitan Seattle Municipality, Sewer Revenue Bonds, Series W (e): AAA Aaa 3,730 6.25% due 1/01/2020 3,949 AAA Aaa 2,465 6.25% due 1/01/2022 2,610 AAA Aaa 4,485 6.25% due 1/01/2023 4,749 AAA Aaa 33,535 Seattle, Washington, Municipal Light and Power Revenue Bonds, 6.625% due 7/01/2020 (h) 36,944 University of Washington, University Revenue Bonds (Housing and Dining) (e): AAA Aaa 2,785 7% due 12/01/2001 (a) 3,121 AAA Aaa 465 7% due 12/01/2021 512 AAA Aaa 7,000 Washington State Health Care Facilities Authority Revenue Bonds (Southwest Washington Hospital--Vancouver), 7.125% due 10/01/2019 (g) 7,492 West AAA Aaa 23,150 Marshall County, West Virginia, PCR, Refunding Virginia--2.4% (Ohio Power Company--Kammer Plant Project), Series B, 5.45% due 7/01/2014 (e) 23,197 AAA Aaa 11,465 Mason County, West Virginia, PCR, Refunding (Appalachian Power Co.), Series I, 6.85% due 6/01/2022 (e) 12,570 AAA Aaa 12,250 Pleasants County, West Virginia, PCR (Potomac Pleasants), Series 95-C, 6.15% due 5/01/2015 (b) 12,930 Wisconsin--3.5% Milwaukee County, Wisconsin, GO, UT, Series A (e): AAA Aaa 2,975 5.25% due 10/01/2011 2,969 AAA Aaa 2,975 5.25% due 10/01/2012 2,956 AAA Aaa 9,000 Superior, Wisconsin, Limited Obligation Revenue Refunding Bonds (Midwest Energy Resources), Series E, 6.90% due 8/01/2021 (h) 10,630 AAA Aaa 6,500 Wisconsin Public Power System Inc., Power Supply System Revenue Bonds, Series A, 6.875% due 7/01/2001 (a) (b) 7,199 Wisconsin State Health and Educational Facilities Authority Revenue Bonds: AAA Aaa 6,520 Refunding (Sister's Sorrowful Mother), Series A, 6.125% due 8/15/2022 (e) 6,657 AAA Aaa 8,545 Refunding (Waukesha Memorial Horpital), Series A, 5.50% due 8/15/2015 (b) 8,448 AAA Aaa 1,500 (Saint Luke's Medical Center Project), 7.10% due 8/15/2019 (e) 1,638 AAA Aaa 5,655 (Waukesha Memorial Hospital), Series B, 7.25% due 8/15/2000 (a) (b) 6,233 Wisconsin State Veteran's Housing Loans, AMT, Series B (e): AAA Aaa 7,920 6.50% due 5/01/2020 8,330 AAA Aaa 17,130 6.50% due 5/01/2025 17,908 Wyoming--0.0% A1 VMIG1++ 400 Sweetwater County, Wyoming, PCR, Refunding (PacificCorp. Projects), VRDN, 5.50% due 11/01/2024 (b) (f) 400 Total Investments (Cost--$1,910,410)--98.6% 2,023,013 Other Assets Less Liabilities--1.4% 29,221 ----------- Net Assets--100.0% $ 2,052,234 ===========
FN: (A)PREREFUNDED. (B)AMBAC INSURED. (C)ESCROWED TO MATURITY. (D)THE INTEREST RATE IS SUBJECT TO CHANGE PERIODICALLY AND INVERSELY BASED UPON PREVAILING MARKET RATES. THE INTEREST RATE SHOWN IS THE RATE IN EFFECT AT JUNE 30, 1997. (E)MBIA INSURED. (F)THE INTEREST RATE IS SUBJECT TO CHANGE PERIODICALLY BASED UPON PREVAILING MARKET RATES. THE INTEREST RATE SHOWN IS THE RATE IN EFFECT AT JUNE 30, 1997. (G)BIG INSURED. (H)FGIC INSURED. (I)FSA INSURED. (J)GNMA COLLATERALIZED. (K)REPRESENTS A ZERO COUPON BOND; THE INTEREST RATE SHOWN IS THE EFFECTIVE YIELD AT THE TIME OF PURCHASE BY THE PORTFOLIO. ++HIGHEST SHORT-TERM RATING ISSUED BY MOODY'S INVESTORS SERVICE, INC. RATINGS OF ISSUES SHOWN HAVE NOT BEEN AUDITED BY DELOITTE & TOUCHE LLP.
See Notes to Financial Statements. 52 SCHEDULE OF INVESTMENTS
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997 (in Thousands) Municipal Bonds National Portfolio ------------------------------------------------------------------------------------------------------ S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Alaska--2.5% Valdez, Alaska, Marine Terminal Revenue Refunding Bonds: AA Aa2 $ 6,000 (British Petroleum Pipeline), Series B, 7% due 12/01/2025 $ 6,584 AA Aa3 27,150 (Sohio Pipeline--British Petroleum Oil), 7.125% due 12/01/2025 30,123 California--3.7% NR* NR* 6,000 Antioch, California, Improvement Bond Act of 1915 (Assessment District No.27--Lone Tree), Series E, 7.125% due 9/02/2016 6,189 A Aaa 10,350 California State Public Works Board, Lease Revenue Bonds (Department of Corrections--Monterey County, Soledad II), Series A, 7% due 11/01/2004 (j) 12,143 NR* NR* 4,000 Long Beach, California, Special Tax Community Facilities (District No.3--Pine Avenue), 6.375% due 9/01/2023 4,001 A NR* 8,975 Palmdale, California, Civic Authority, Revenue Refunding Bonds (Merged Redevelopment Project), Series A, 6.60% due 9/01/2034 9,800 AAA Aaa 18,755 Riverside County, California, Asset Leasing Corp., Leasehold Revenue Bonds (Riverside County Hospital Project), 6%** due 6/01/2023 (f) 4,151 AAA Aaa 20,000 San Diego, California, Public Facilities Financing Authority, Sewer Revenue Bonds, 5% due 5/15/2020 (e) 18,510 Colorado--2.8% Denver, Colorado, City and County Airport Revenue Bonds, AMT: BBB Baa1 3,000 Series A, 7.50% due 11/15/2023 3,410 BBB Baa1 8,570 Series A, 8% due 11/15/2025 9,507 BBB Baa1 13,000 Series B, 7.25% due 11/15/2023 14,335 BBB Baa1 13,150 Series D, 7.75% due 11/15/2021 14,678 Connecticut--0.3% AA- Baa1 4,550 Connecticut State Resource Recovery Authority, Resource Recovery Revenue Bonds (American Refunding Fuel), AMT, Series A, 8% due 11/15/2015 4,875 Delaware--0.6% AAA NR* 7,500 Delaware State Health Facilities Authority, Revenue Refunding Bonds (Beebe Medical Center Project), 8.50% due 6/01/2000 (j) 8,481 District of District of Columbia General Fund Recovery Bonds, VRDN, UT (a): Columbia--1.3% A1+ VMIG1++ 6,300 Series B-1, 5.25% due 6/01/2003 6,300 A1+ VMIG1++ 8,200 Series B-3, 5.25% due 6/01/2003 8,200 A+ A1 3,750 District of Columbia Revenue Bonds (Georgetown University), RIB, 8.683% due 4/25/2022 (k) 4,186 Florida--4.3% AAA Aaa 16,070 Dade County, Florida, Refunding, Seaport, UT, 5.125% due 10/01/2026 (f) 15,130 AAA Aaa 8,140 Dade County, Florida, Special Obligation Refunding Bonds, Series B, 5% due 10/01/2035 (c) 7,432 AAA Aaa 6,330 Florida HFA (Antigua Club Apartments), AMT, Series A-1, 7% due 2/01/2035 (c) 6,791 NR* Aaa 8,860 Florida HFA, Home Ownership Revenue Bonds, AMT, Series G1, 7.90% due 3/01/2022 (i) 9,333 NR* NR* 5,000 Grand Haven Community Development District, Florida, Special Assessment, Series A, 6.30% due 5/01/2002 4,995 AA Aa3 5,000 Hillsborough County, Florida, IDA, PCR, Refunding (Tampa Electric Company Project), Series 91, 7.875% due 8/01/2021 5,703 A- NR* 2,700 Leesburg, Florida, Hospital Revenue Capital Improvement Bonds (Leesburg Regional Medical Center Project), Series 91-A, 7.50% due 7/01/2002 (j) 3,109 AAA NR* 4,345 Orange County, Florida, HFA, Mortgage Revenue Bonds, AMT, Series A, 8.375% due 3/01/2021 (i) 4,587 AAA Aaa 5,850 South Broward, Florida, Hospital District, RIB, Series C, 9.034% due 5/01/2001 (c) (j) (k) 6,947 Georgia--1.8% A1 VMIG1++ 3,580 Floyd County, Georgia, Development Authority, PCR, Georgia Power Co. (Plt Hammond Project), VRDN, 5.60% due 9/01/2026 (a) 3,580 AAA Aaa 20,000 Metropolitan Atlanta, Georgia, Rapid Transit Authority, Sales Tax Revenue Bonds, Second Indenture, Series A, 6.90% due 7/01/2004 (f) (j) 22,966 Idaho--0.1% AA NR* 1,675 Idaho Housing Agency, S/F Mortgage, AMT, Series E, 7.875% due 7/01/2024 (b) 1,803 Illinois--5.1% AA- Aa3 8,000 Chicago, Illinois, Gas Supply Revenue Bonds (Peoples Gas, Light & Coke Company Project), AMT, Series A, 8.10% due 5/01/2020 8,785
53 Chicago, Illinois, O'Hare International Airport, Special Facilities Revenue Bonds (United Airlines, Inc.): BB+ Baa2 4,675 AMT, Series B, 8.95% due 5/01/2018 5,295 BB+ Baa2 13,565 Series 1984-B, 8.85% due 5/01/2018 15,346 AAA Aaa 16,000 Chicago, Illinois, Water Revenue Bonds, 5% due 11/01/2025 (e) 14,580 BBB NR* 3,500 Illinois Development Finance Authority, Revenue Refunding Bonds (Community Rehabilitation Providers), Series A, 6% due 7/01/2015 3,477 A+ Aa2 5,100 Illinois HDA, Residential Mortgage Revenue Bonds, RIB, AMT, Series C-2, 9.471% due 2/01/2018 (k) 5,514 Illinois Health Facilities Authority Revenue Bonds: AAA Aaa 1,500 (Methodist Health Project), RIB, 9.628% due 5/01/2021 (c) (k) 1,727 BBB NR* 2,625 Refunding (Saint Elizabeth's Hospital--Chicago), 7.75% due 7/01/2016 2,907 AAA Aaa 11,000 (Rush Presbyterian--Saint Luke's Medical Center), INFLOS, 9.615% due 10/01/2024 (f) (k) 12,705 NR* A1 4,400 Southwestern Illinois Development Authority, Sewer Facilities Revenue Bonds (Monsanto Company Project), AMT, 7.30% due 7/15/2015 4,871 Indiana--1.8% NR* Aaa 9,500 Indiana State Educational Facilities Authority Revenue Bonds (University of Notre Dame Project), 6.70% due 3/01/2025 10,519 A+ NR* 9,100 Indianapolis, Indiana, Local Public Improvement Bond Bank, Refunding, Series D, 6.75% due 2/01/2020 9,931 AA- Aa2 5,700 Petersburg, Indiana, PCR, Refunding (Indianapolis Power & Light Company Project), 6.625% due 12/01/2024 6,144 Iowa--0.7% NR* NR* 9,000 Iowa Finance Authority, Health Care Facilities, Revenue Refunding Bonds (Care Initiatives Project), 9.25% due 7/01/2025 10,652 Kansas--1.7% Wichita, Kansas, Hospital Revenue Bonds, RIB (f) (k): AAA Aaa 12,000 Series III-A, 8.702% due 10/01/2017 13,740 AAA Aaa 10,000 Series III-B, 8.691% due 10/21/2022 11,450 Kentucky--2.0% AAA Aaa 18,500 Louisville and Jefferson County, Kentucky, Metropolitan Sewer District, Sewer and Drain System Revenue Refunding Bonds, Series A, 5.25% due 5/15/2027 (f) 17,642 NR* NR* 4,500 Perry County, Kentucky, Solid Waste Disposal Revenue Bonds (TJ International Project), AMT, 7% due 6/01/2024 4,725 AA- Aa2 6,345 Trimble County, Kentucky, PCR (Louisville Gas and Electric Company), AMT, Series A, 7.625% due 11/01/2020 6,949 Louisiana--4.1% NR* Baa2 37,850 Lake Charles, Louisiana, Harbor and Terminal District Port Facilities, Revenue Refunding Bonds (Trunkline LNG Company Project), 7.75% due 8/15/2022 43,018 Port New Orleans, Louisiana, IDR, Refunding (Continental Grain Company Project): BB NR* 10,000 7.50% due 7/01/2013 10,785 BB NR* 5,000 6.50% due 1/01/2017 5,101 BBB Baa2 1,100 Saint Charles Parish, Louisiana, PCR (Union Carbide Project), AMT, 7.35% due 11/01/2022 1,183 Maine--0.3% NR* Aa2 3,815 Maine State Housing Authority, Mortgage Purchase, AMT, Series B-4, 6.90% due 11/15/2026 3,990 Maryland--0.5% AA- Aa 7,000 Maryland State Stadium Authority, Sports Facilities Lease Revenue Bonds, AMT, Series D, 7.60% due 12/15/2019 7,618 Massachusetts AAA Aaa 6,000 Massachusetts Bay Transportation Authority, - --5.0% Series B, 7.875% due 3/01/2001 (j) 6,811 AAA Aaa 7,500 Massachusetts State, HFA, Revenue Bonds (Residential Development) Series C, 6.90% due 11/15/2021 (d) 8,015 Massachusetts State Health and Educational Facilities Authority Revenue Bonds: AAA NR* 6,900 (North Adams Regional Hospital), Series A, 9.625% due 7/01/1999 (j) 7,736 NR* B2 12,350 Refunding (New England Memorial Hospital), Series B, 6.25% due 7/01/2023 9,880 Massachusetts State Water Resources Authority: AAA Aaa 12,500 Series A, 6.50% due 12/01/2001 (j) 13,766 AAA Aaa 30,000 Series B, 5% due 12/01/2025 (f) 27,335
54 SCHEDULE OF INVESTMENTS (continued)
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997 (in Thousands) Municipal Bonds National Portfolio ------------------------------------------------------------------------------------------------------ S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Michigan--2.1% A A $ 3,500 Michigan State Hospital Finance Authority, Hospital Revenue Bonds (Detroit Medical Center), Series A, 7.50% due 8/15/2011 $ 3,848 AAA Aaa 15,000 Michigan State Hospital Finance Authority (Sisters of Mercy), INFLOS, 8.514% due 2/15/2022 (h) (k) 16,275 BBB Baa1 9,350 Monroe County, Michigan, PCR (Detroit Edison Company Project), AMT, Series A, 7.75% due 12/01/2019 10,100 Minnesota--1.5% Minnesota State, HFA, S/F Mortgage: AA+ Aa 6,080 AMT, Series A, 7.45% due 7/01/2022 (b) 6,402 AA+ Aa2 4,250 Series F, 6.30% due 7/01/2025 4,397 AA+ NR* 3,000 Rochester, Minnesota, Health Care Facilities Revenue Bonds (Mayo Foundation), IRS, Series H, 7.875% due 11/15/2015 (k) 3,229 AAA NR* 8,070 Saint Paul, Minnesota, Housing and Redevelopment Authority, S/F Mortgage Revenue Refunding Bonds, Series C, 6.95% due 12/01/2031 8,403 Mississippi--0.7% BBB Baa 5,950 Lowndes County, Mississippi, Hospital Revenue Refunding Bonds (Golden Triangle Medical Center), 8.50% due 2/01/2010 6,552 NR* Aaa 4,195 Mississippi Home Corporation, S/F Mortgage Revenue Bonds (Access Program), AMT, Final Tranche, Series A, 6.90% due 6/01/2024 (i) 4,423 Missouri & BBB NR* 11,400 Bi-State Development Agency, Missouri and Illinois, Illinois-- Metropolitan No. 5, Refunding (American Commonwealth 0.8% Lines, Inc.), 7.75% due 6/01/2010 12,457 Nebraska--0.3% AAA Aaa 3,400 Nebraska Investment Finance Authority, S/F Mortgage Revenue Bonds, AMT, Series 2, RIB, 11.177% due 9/10/2030 (i) (k) 3,787 New Hampshire-- A+ Aa 2,685 New Hampshire State, HFA, S/F Residential Mortgage, 0.2% AMT, 7.90% due 7/01/2022 2,840 New Jersey--1.2% NR* NR* 6,495 New Jersey Health Care Facilities Financing Authority Revenue Bonds (Riverwood Center), Series A, 9.90% due 7/01/2001 (j) 7,852 AA- A3 9,500 University of Medicine and Dentistry of New Jersey, Series C, 7.20% due 12/01/1999 (j) 10,332 New York--14.6% Metropolitan Transportation Authority, New York, Service Contract Refunding Bonds (Commuter Facilities), Series 5: BBB Baa1 2,145 6.90% due 7/01/2006 2,330 BBB Baa1 5,000 7% due 7/01/2012 5,399 New York City, New York, GO, UT: AAA Aaa 7,240 Series A, 7.75% due 8/15/2001 (j) 8,254 BBB+ Aaa 9,385 Series A, 7.75% due 8/15/2001 (j) 10,699 BBB+ Baa1 280 Series A, 7.75% due 8/15/2017 311 BBB+ Baa1 4,000 Series B, 8.25% due 6/01/2006 4,803 BBB+ Baa1 10,000 Series B, Fiscal 92, 7.75% due 2/01/2011 11,177 BBB+ Baa1 4,500 Series B, Fiscal 92, 7.75% due 2/01/2012 5,030 BBB+ Baa1 2,875 Series B, Fiscal 92, 7.75% due 2/01/2013 3,213 BBB+ Baa1 1,650 Series B, Fiscal 92, 7.75% due 2/01/2014 1,844 AAA Aaa 1,865 Series D, 7.70% due 2/01/2002 (j) 2,140 BBB+ Aaa 3,495 Series D, Group C, 8% due 8/01/2001 (j) 4,009 AAA Aaa 5,495 Series F, 8.25% due 11/15/2001 (j) 6,402 New York City, New York, Municipal Water Finance Authority, Water and Sewer System Revenue Bonds: A- Aaa 11,685 Series 93-B, 6.50% due 6/15/2002 (j) 12,856 A- Aaa 10,000 Series A, 6.75% due 6/15/2001 (j) 10,952 AAA Aaa 10,000 Series B, 5.875% due 6/15/2026 (h) 10,185 A1 VMIG1++ 3,000 Series RI-2, RITR, 7.025% due 6/15/2025 (k) 3,150
55 New York State Dormitory Authority Revenue Bonds (State University Educational Facilities): BBB+ Baa1 6,735 Refunding, Series B, 7.375% due 5/15/2014 7,318 BBB+ Baa1 2,000 Refunding, Series B, 7% due 5/15/2016 2,135 BBB+ Baa1 5,000 Series A, 7.50% due 5/15/2013 5,978 New York State Local Government Assistance Corporation: A Aaa 6,000 Series A, 7% due 4/01/2002 (j) 6,757 A Aaa 10,000 Series B, 7.25% due 4/01/2001 (j) 11,182 A A3 10,000 Series C, 6.25% due 4/01/2018 10,475 A A3 18,810 Series D, 5% due 4/01/2023 17,065 New York State Medical Care Facilities, Finance Agency Revenue Bonds (New York Hospital Mortgage), Series A (b) (c): AAA Aaa 8,400 6.75% due 8/15/2014 9,223 AAA Aaa 9,100 6.80% due 8/15/2024 10,020 BBB Aaa 10,000 New York State Urban Development Corporation Revenue Bonds (State Facilities), 7.50% due 4/01/2001 (j) 11,268 AAA Aaa 4,000 Niagara Falls, New York, Commission Toll Bridge, Revenue Refunding Bonds, Series B, 5.25% due 10/01/2021 (e) 3,775 AAA Aaa 6,800 Port Authority of New York and New Jersey, Consolidated Revenue Bonds, 104th Series, 3rd Installment, 4.75% due 1/15/2026 6,007 A+ Aa 12,750 Triborough Bridge and Tunnel Authority, New York, General Purpose Revenue Bonds, Series B, 5.20% due 1/01/2027 12,035 North A1+ NR* 5,000 Raleigh-Durham, North Carolina, Airport Authority, Carolina--0.3% Special Facilities Revenue Refunding Bonds (American Airlines), VRDN, Series B, 5.50% due 11/01/2015 (a) 5,000 Ohio--2.7% AAA Aaa 20,300 Cleveland, Ohio, Public Power System Revenue Bonds (First Mortgage), Series A, 7% due 11/15/2004 (f) (j) 23,565 Ohio, HFA, S/F Mortgage Revenue Bonds, AMT (i): AAA Aaa 9,100 RIB, Series B-4, 9.578% due 3/31/2031 (k) 9,942 AAA NR* 1,895 Series B, 8.25% due 12/15/2019 2,003 AAA NR* 4,295 Series C, 7.85% due 9/01/2021 4,565 Pennsylvania BBB Baa 10,000 Pennsylvania Convention Center Authority, Revenue - --3.8% Refunding Bonds, Series A, 6.75% due 9/01/2019 10,787 Pennsylvania HFA, Refunding: AA Aa2 8,800 RIB, AMT, Series 1991-31C, 9.68% due 10/01/2023 (k) 9,647 AAA Aaa 7,850 (Rental Housing), 6.50% due 7/01/2023 (d) 8,122 AAA A1 5,000 Pennsylvania State, 3rd Series A, UT, 6.50% due 11/15/2001 (j) 5,473 AAA Aaa 10,000 Pennsylvania State Higher Educational Assistance Agency, Student Loan Revenue Bonds, RIB, AMT, 9.317% due 9/03/2026 (c) (k) 11,238 NR* NR* 2,000 Pennsylvania State Higher Educational Facilities Authority, College and University Revenue Bonds (Eastern College), Series B, 8% due 10/15/2025 2,139 AAA Aaa 4,800 Pittsburgh, Pennsylvania, Water and Sewer Authority, Water and Sewer System, Revenue Refunding Bonds, Series A, 6.75% due 9/01/2001 (e) (j) 5,309 AAA Aaa 2,500 York County, Pennsylvania, Hospital Authority Revenue Bonds (York Hospital), 7% due 1/01/2001 (c) (j) 2,754 Rhode AAA Aaa 5,250 Rhode Island Depositors Economic Protection Corporation, Island--0.4% Special Obligation Bonds, Series A, 6.95% due 8/01/2002 (j) 5,923 South AAA Aaa 2,500 Spartanburg County, South Carolina, Hospital Revenue Carolina--0.2% Bonds (Health Services District Inc.), Series A, 5.50% due 4/15/2027 (f) 2,439
56 SCHEDULE OF INVESTMENTS (concluded)
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997 (in Thousands) Municipal Bonds National Portfolio --------------------------------------------------------------------------------------------------------- S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) South AAA Aa1 $ 9,085 South Dakota HDA, Homeownership Mortgage, Series A, Dakota--0.7% 7.15% due 5/01/2027 $ 9,551 Tennessee--1.9% NR* Aaa 10,000 Knox County, Tennessee, Health, Educational and Housing Facilities Board, Hospital Facilities Revenue Bonds (Baptist Health System of East Tennessee), 8.60% due 4/15/1999 (j) 10,916 AAA Aaa 14,750 Metropolitan Government, Nashville and Davidson County, Tennessee (Meharry Medical College Project), 6.875% due 12/01/2004 (j) 16,999 Texas--16.8% AAA Aaa 10,000 Bexar County, Texas, Health Facilities Development Corporation, Revenue Refunding Bonds (Baptist Health Systems), Series A, 5.25% due 11/15/2027 (f) 9,326 Brazos River Authority, Texas, PCR (Texas Utilities Electric Company Project), AMT, Series A: BBB+ Baa1 2,095 8.25% due 1/01/2019 2,230 BBB+ Baa1 18,150 7.875% due 3/01/2021 19,958 A- A2 12,350 Brazos River Authority, Texas, Revenue Refunding Bonds (Houston Light and Power), Series 1989-A, 7.625% due 5/01/2019 13,175 BBB Baa1 7,250 Gulf Coast Waste Disposal Authority, Texas, Revenue Bonds (Champion International Corporation), AMT, 7.45% due 5/01/2026 7,890 AA Aa3 19,000 Harris County, Texas, Health Facilities Development Corporation, Health Care System Revenue Bonds (Sisters of Charity), 7.10% due 7/01/2001 (j) 21,183 Harris County, Texas, Health Facilities Development Corporation, Hospital Revenue Bonds: A1+ NR* 200 (Methodist Hospital), 5.50% due 12/01/2025 (a) 200 AAA Aaa 10,150 RITR, Series 12, 8.07% due 10/01/2024 (k) 11,317 AAA Aaa 10,000 Refunding (Memorial Hospital System Project), Series A, 5.50% due 6/01/2024 (f) 9,766 AAA Aa3 12,470 (Saint Luke's Episcopal Hospital Project), Series A, 6.75% due 2/15/2001 (j) 13,667 AAA Aaa 11,100 Harris County, Texas, Toll Road Revenue Bonds, Senior Lien, Series A, 6.375% due 8/15/2024 (f) 11,953 Houston, Texas, Water and Sewer System, Revenue Refunding Bonds, Junior Lien, Series A: AAA Aaa 10,000 6.20% due 12/01/2023 (f) 10,501 AAA Aaa 10,000 5.25% due 12/01/2025 (e) 9,518 BB Ba1 8,095 Jefferson County, Texas, Health Facilities Development Corporation, Hospital Revenue Bonds (Baptist Healthcare System Project), 8.875% due 6/01/2021 8,523 AA Aa 12,000 North Central Texas, Health Facilities Development Corporation Revenue Bonds (Baylor University Medical Center), INFLOS, Series A, 9.715% due 5/15/2001 (j) (k) 14,415 BB Ba 3,000 Odessa, Texas, Junior College District, Revenue Refunding Bonds, Series A, 8.125% due 12/01/2018 3,258 A+ Aa 5,195 Texas Housing Agency, Residential Development Mortgage Revenue Bonds, Series A, 7.50% due 7/01/2015 (i) 5,538 Texas State Turnpike Authority, Dallas North Thruway Revenue Bonds (President George Bush Turnpike) (e): AAA Aaa 15,000 5.25% due 1/01/2023 14,311 AAA Aaa 30,000 5% due 1/01/2025 27,608 AA Aa 4,440 Texas State Veteran's Housing Assistance (Fund II), AMT, UT, Series A, 7% due 12/01/2025 4,713 AA Aa 16,000 Texas State Water Development, Series A, B, and C, 5.25% due 8/01/2028 15,338 AAA Aa1 15,000 Texas Water Development Revenue Board, State Revolving Fund, Senior-Lien, Series B, 5.125% due 7/15/2018 14,321 Utah--3.6% A1+ VMIG1++ 10,300 Emery County, Utah, PCR, Refunding (Pacificorp Projects), VRDN, 4.10% due 11/01/2024 (a) (c) 10,300 A+ A1 20,000 Intermountain Power Agency, Utah, Power Supply Revenue Refunding Bonds, Series D, 5% due 7/01/2021 18,254 AAA Aaa 5,000 Murray City, Utah, Hospital Revenue Bonds (IHC Health Services Inc.), 4.75% due 5/15/2020 (f) 4,351 AAA Aaa 5,500 Utah County, Utah, Hospital Revenue Bonds (IHC Health Services, Inc.), 5.25% due 8/15/2026 5,120 AAA Aaa 13,250 Weber County, Utah, Municipal Building Authority, Lease Revenue Bonds, 7.50% due 12/15/2004 (j) 15,795 Virginia--1.5% AAA Aaa 20,000 Prince William County, Virginia, Service Authority, Water and Sewer System, Revenue Refunding Bonds, 5% due 7/01/2021 (e) 18,328 AA+ Aa1 4,000 Virginia State, HDA, Commonwealth Mortgage, Series A, 7.15% due 1/01/2033 4,183 Washington--3.3% AA Aaa 10,000 Washington State, GO, Series B, UT, 6.75% due 6/01/2001 (j) 10,845 AAA Aaa 13,860 Washington State, GO, Series C, 5% due 1/01/2022 (e) 12,863
57 AAA NR* 18,070 Washington State Housing Finance Commission, S/F Mortgage Revenue Refunding Bonds, AMT, Series E, 7.10% due 7/01/2022 (g) 18,878 AA- Aaa 5,000 Washington State Public Power Supply System, Revenue Refunding Bonds (Nuclear Project No. 1), Series A, 6.875% due 7/01/2001 (j) 5,538 West NR* NR* 4,000 Upshur County, West Virginia, Solid Waste Disposal Virginia--0.9% Revenue Bonds (TJ International Project), AMT, 7% due 7/15/2025 4,218 AAA Aaa 8,400 West Virginia State, Housing Development Fund, Housing Finance, Series D, 7.05% due 11/01/2024 8,854 Wisconsin--1.9% AA Aa 4,925 Wisconsin Housing and EDA, Home Ownership Revenue Bonds, Series A, 7.10% due 3/01/2023 5,186 Wisconsin Housing and EDA, Housing Revenue Bonds: A A1 5,400 Series B, 7.05% due 11/01/2022 5,716 A A1 5,105 Series C, 7% due 5/01/2015 5,405 AAA Aaa 11,400 Wisconsin State Health and Educational Facilities Authority Revenue Bonds (Wausau Hospitals Inc.), Series B, 6.70% due 8/15/2020 (c) 12,205 Total Investments (Cost--$1,357,588)--98.0% 1,448,055 Other Assets Less Liabilities--2.0% 29,832 ---------- Net Assets--100.0% $1,477,887 ==========
FN: (A)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at June 30, 1997. (B)FHA Insured. (C)AMBAC Insured. (D)FNMA Collateralized. (E)FGIC Insured. (F)MBIA Insured. (G)GNMA/FNMA Collateralized. (H)FSA Insured. (I)GNMA Collateralized. (J)Prerefunded. (K)The interest rate is subject to change periodically and inversely based upon prevailing market rates. The interest rate shown is the rate in effect at June 30, 1997. *Not Rated. **Represents a zero coupon bond; the interest rate shown is the effective yield at the time of purchase by the Portfolio. ++Highest short-term rating issued by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements. 58 SCHEDULE OF INVESTMENTS
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997 (in Thousands) Municipal Bonds Limited Maturity Portfolio ---------------------------------------------------------------------------------------------------- S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Alabama--1.0% A1+ NR* $ 4,100 Birmingham, Alabama, Medical Clinic Board Revenue Bonds (U.A.H.S.F.), VRDN, 5.50% due 12/01/2026 (b) $ 4,100 Arizona--1.2% AAA Aaa 5,000 Phoenix, Arizona, Airport Revenue Refunding Bonds, Series A, 5.55% due 7/01/2000 (d) 5,174 Arkansas--0.1% NR* Aa 460 Arkansas State Student Loan Authority Revenue Bonds, AMT, Senior Series A-1, 5.50% due 12/01/1998 467 California--2.4% SP1+ VMIG1++ 5,000 Los Angeles County, California, Local Educational Agencies, COP, TRAN, Series B, 4.50% due 9/30/1998 (e) 5,026 SP1+ NR* 5,000 Santa Barbara County, California, TRAN, Series A, 4.50% due 10/01/1998 5,029 Connecticut--2.7% AAA Aaa 2,160 Bridgeport, Connecticut, Refunding, GO, UT, Series A, 4.40% due 9/01/1998 (c) 2,171 AAA Aaa 8,900 Connecticut State Special Assessment (Unemployment Compensation Advance Fund), Revenue Refunding Bonds, Series A, 5.50% due 5/15/2001 (c) 9,255 District of A1+ VMIG1++ 10,000 District of Columbia, General Fund Recovery Columbia-- Bonds, VRDN, UT, Series B-2, 5.25% due 6/01/2003 (b) 10,000 2.4% Florida--1.4% AAA Aaa 4,000 Florida School Boards Association Incorporated, Lease Revenue Bonds (Orange County School Board Project), 6.80% due 7/01/1998 (c) 4,116 A1+ VMIG1++ 1,500 Hillsborough County, Florida, IDA, PCR, Refunding (Tampa Electric Company Project), VRDN, 4% due 5/15/2018 (b) 1,500 Georgia--2.5% A NR* 6,410 Burke County, Georgia, Development Authority, PCR, Refunding (Oglethorpe Power Corporation) (Plant Vogtle Project), Series B, 3.95% due 1/01/1999 6,375 AAA Aaa 4,000 Georgia Municipal Electric Authority, General Power Revenue Refunding Bonds, Series D, 6% due 1/01/2000 (c) 4,157 Hawaii--2.1% AAA Aaa 3,200 Hawaii State, GO, Refunding, Series CO, 6% due 3/01/2001 (f) 3,366 A+ Aa3 5,250 Hawaii State, GO, UT, Series CH, 4.75% due 11/01/1999 5,311 Illinois--7.8% AA- NR* 10,000 Chicago, Illinois, Board of Education, COP (School Reform Equipment Acquisition), 4.60% due 12/01/1999 10,038 AA- Baa1 5,000 Chicago, Illinois, School Finance Authority, 7.25% due 6/01/1998 5,116 AAA Aaa 3,000 Cook County, Illinois, High School District No. 205, Revenue Refunding Bonds (Thorton Township), UT, 5.60% due 6/01/1998 (f) (g) 3,048 AA Aa1 6,425 Cook County, Illinois, Township High School District No. 211 (Palatine and Schaumb), 4.25% due 12/01/1998 6,444 Illinois State Refunding, GO, UT: AA- Aa3 4,600 3.90% due 12/01/1998 4,587 AAA Aaa 3,500 5.125% due 12/01/1999 (f) 3,576 Kentucky--2.2% Kentucky State Property and Buildings Commission, Revenue Refunding Bonds: A+ A 5,000 (Project No. 55), 4.10% due 9/01/1998 5,004 A+ A 4,000 (Project No. 59), 5% due 11/01/1998 4,048 Louisiana--5.9% A1+ VMIG1++ 5,000 Louisiana State Recovery District, Sales Tax Revenue Bonds, 4.25% due 7/01/1998 (d) (g) 5,021 AAA Aaa 19,230 Louisiana State Refunding, GO, Series A, 5.50% due 8/01/1998 (f) 19,546 Massachusetts AAA Aaa 2,005 Massachusetts State Health and Educational - --2.9% Facilities Authority Revenue Bonds (New England Medical Center Hospitals), Series G, 3.80% due 7/01/1997 (d) 2,005 A- A1 10,160 New England Education Loan Marketing Corporation Refunding Bonds (Massachusetts Student Loan), Series D, 4.75% due 7/01/1998 10,231 Michigan--3.8% AAA Aaa 8,000 Detroit, Michigan, Distributable State Aid, 7.20% due 5/01/1999 (a) (c) 8,576 AA- A1 6,000 Michigan State Building Authority, Revenue Refunding Bonds, Series I, 5.80% due 10/01/1998 6,127
59 NR* VMIG1++ 800 Michigan State Strategic Fund, Solid Waste Disposal Revenue Bonds (Grayling Generating Project), VRDN, AMT, 4.25% due 1/01/2014 (b) 800 Minnesota--1.3% AAA Aaa 2,385 Metropolitan Council, Minnesota, St. Paul Metropolitan Area Transit, UT, Series C, 4.75% due 2/01/2000 2,414 AAA Aaa 2,965 Minnesota State, HFA (Rental Housing), Refunding, Series D, 4.50% due 8/01/1999 (d) 2,983 Mississippi--2.4% NR* Aaa 10,000 Mississippi Higher Education Assistance Corporation, Student Loan Revenue Bonds, AMT, Series B, 4.80% due 9/01/1998 10,061 Nebraska--1.5% A+ A1 6,250 Nebraska Public Power District Revenue Bonds (Consumer Public Power District), 4.90% due 7/01/1998 6,309 New Jersey--3.6% A A1 2,000 Camden County, New Jersey, Improvement Authority, Solid Waste Disposal, Revenue Refunding Bonds (Landfill Project), 4% due 7/01/1997 2,000 NR* NR* 3,000 New Jersey State, EDA, Economic Growth Revenue Bonds (Greater Mercer County), VRDN, Series C, 4.25% due 11/01/2011 (b) 3,000 AAA Aaa 5,715 New Jersey State Educational Facilities Authority Revenue Bonds (Higher Education Facilities Trust Fund), Series A, 5.125% due 9/01/1999 (c) 5,829 AA+ Aa1 4,250 New Jersey State Refunding, UT, Series O, 5.10% due 2/15/2000 4,341 New York--10.4% AA- Aa2 4,550 Municipal Assistance Corporation, Refunding, Series E, 5.50% due 7/01/2000 4,700 A1+ VMIG1++ 100 New York City, New York, Municipal Water Finance Authority, Water and Sewer System Revenue Bonds, VRDN, Series G, 5.50% due 6/15/2024 (b) (f) 100 New York State Dormitory Authority Revenue Bonds (Consolidated City University System), Series A: BBB Baa1 6,675 4.50% due 7/01/1998 6,711 BBB Baa1 10,885 4.75% due 7/01/1999 10,945 AAA Aaa 3,000 New York State Dormitory Authority Revenue Bonds (State University Educational), Series A, 7.125% due 5/15/1999 (a) 3,218 A- A2 11,820 New York State GO, Refunding, 7.80% due 11/15/1998 12,397 BBB Aaa 5,000 New York State Urban Development Corporation Revenue Bonds (State Facilities), 7.50% due 4/01/2001 (a) 5,634 Ohio--12.4% AAA Aaa 2,000 Cincinnati, Ohio, City School District, TAN, Series B, 5% due 12/01/1998 (c) 2,026 NR* Aa1 6,000 Franklin County, Ohio, Hospital Revenue Refunding Bonds (US Health Corp.), Series B, 4.50% due 6/01/2000 6,005 Ohio State Air Quality Development Authority, Revenue Refunding Bonds (Ohio Edison Project), Series A: A1+ VMIG1++ 7,500 3.95% due 2/01/1998 7,502 A1+ VMIG1++ 7,000 4.35% due 8/01/1998 7,003 NR* Aaa 6,700 Ohio State Buillding Authority, Correctional Facilities, Series A, 7.35% due 8/01/1999 (a) 7,251 AAA Aa1 12,400 Ohio State Highway, GO, Series V, 4.70% due 5/15/2000 12,556 AAA Aaa 3,500 Ohio State Public Facilities Commission, Higher Education Capital Facilities, Series II-A, 4.375% due 11/01/1999 (d) 3,516 NR* Aaa 6,000 Student Loan Funding Corporation, Cincinnati, Ohio, Student Loan Revenue Refunding Bonds, AMT, Series C, 5.70% due 7/01/1999 6,123 Oklahoma--0.6% AA Aa 2,400 Tulsa, Oklahoma, GO, UT, 5.125% due 5/01/1999 2,443
60 SCHEDULE OF INVESTMENTS (concluded)
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997 (in Thousands) Municipal Bonds Limited Maturity Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Oregon--0.7% A1+ VMIG1++ $ 3,000 Port Saint Helens, Oregon, PCR (Portland General Electric Company Project), VRDN, Series A, 5.40% due 4/01/2010 (b) $ 3,000 Pennsylvania A1+ P1 4,000 Beaver County, Pennsylvania, IDA, PCR, Refunding - --4.1% (Ohio Edison Co.), Series A, 4.30% due 10/01/1997 4,006 AAA Aaa 8,675 Pennsylvania State Refunding Bonds, GO, UT, 5.25% due 11/15/1998 (f) 8,818 AAA Aaa 4,145 Pittsburgh, Pennsylvania, Refunding, UT, Series A, 5% due 3/01/2000 (d) 4,214 South Carolina-- AA- A1 8,250 Greenville County, South Carolina, School District, 2.0% UT, 4% due 3/01/1999 8,235 Tennessee--2.9% AA NR* 11,885 Clarksville, Tennessee, Public Building Authority, Revenue Refunding Bonds (Pooled Loan Program), 4.40% due 12/01/1998 11,926 Texas--6.6% Brazos, Texas, Higher Education Authority Incorporated, Student Loan Revenue Refunding Bonds, AMT: NR* Aaa 2,200 Senior Lien, Series A-2, 5.45% due 6/01/1998 2,228 NR* Aa 5,135 Series C-1, 5.60% due 11/01/1997 5,163 Harris County, Texas, Health Facilities Development Corporation, Hospital Revenue Bonds, VRDN (b): A1+ NR* 5,900 (Methodist Hospital), 5.50% due 12/01/2025 5,900 AAA NR* 1,000 (Saint Luke's Episcopal Hospital), Series B, 5.50% due 9/15/1997 (a) 1,000 AAA NR* 100 (Saint Luke's Episcopal Hospital), Series D, 5.50% due 9/15/1997 (a) 100 AA+ Aa3 6,700 Houston, Texas, Independent School District, Public Property Financial Contractual Obligation, 5% due 7/15/1999 6,816 AAA Aaa 2,600 Houston, Texas, Water and Sewer Systems, Revenue Refunding Bonds, Junior Lien, Series C, 5.90% due 12/01/1999 (c) 2,701 NR* Aaa 2,455 Panhandle-Plains, Texas, Higher Education Authority Incorporated, Student Loan Revenue Refunding Bonds, Series C, 4.15% due 9/01/1997 2,456 A+ A2 2,000 Texas Municipal Power Agency, Revenue Refunding Bonds, GO, Series A, 4.25% due 9/01/1997 2,001 Utah--1.1% AAA Aaa 4,700 Utah State Building and Highway, GO, UT, 4.40% due 7/01/1999 4,730 Virginia--0.6% AA Aa 2,555 Virginia State Transportation Board, Transportation Contract Revenue Bonds (US Route 58 Corridor), Series B, 5% due 5/15/2000 2,604 Washington--4.7% AAA Aaa 5,000 Seattle, Washington, Municipality Metropolitan Seattle Sewer Revenue Bonds, Series U, 6.60% due 1/01/2001 (a) (f) 5,448 AA- Aa1 4,890 Washington State Public Power Supply System, Revenue Refunding Bonds (Nuclear Project No. 2), Series A, 3.75% due 7/01/1997 4,890 AA Aa1 4,655 Washington State Refunding Bonds, GO, Series R-96B, 5% due 7/01/1998 4,705 Washington State Refunding Bonds, Motor Vehicle Fuel Tax: AA Aa1 2,000 Series R-94B, 4.20% due 9/01/1998 2,005 AA Aa1 2,285 Series R-96A, 5% due 7/01/1998 2,310 Wisconsin--8.0% NR* NR* 4,500 Ashland County, Wisconsin, Promissary Notes, GO, 4.25% due 9/01/1997 4,502 NR* VMIG1++ 4,000 Mequon, Wisconsin, BAN, 4.10% due 11/01/1998 3,999 A A1 2,795 Wisconsin Housing and Economic Development Authority, Housing Revenue Refunding Bonds, Series C, 4.30% due 11/01/1997 2,801 AA Aa2 11,000 Wisconsin State, GO, Refunding, UT, Series 3, 4.25% due 11/01/1999 11,026 AA Aa2 4,385 Wisconsin State, GO, Series C, 5.50% due 5/01/2000 4,527 AAA NR* 5,720 Wisconsin State Health and Educational Facilities Authority Revenue Bonds (Medical College of Wisconsin), Series D, 7.35% due 12/01/2000 (a) 6,339 Wyoming--0.1% NR* P1 500 Uinta County, Wyoming, PCR, Refunding (Chevron USA Inc. Project), VRDN, 5.50% due 8/15/2020 (b) 500
61 Total Investments (Cost--$422,830)--101.4% 424,231 Liabilities in Excess of Other Assets--(1.4%) (5,824) ---------- Net Assets--100.0% $ 418,407 ==========
FN: (A)Prerefunded. (B)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at June 30, 1997. (C)AMBAC Insured. (D)MBIA Insured. (E)FSA Insured. (F)FGIC Insured. (G)Escrowed to maturity. *Not Rated. ++Highest short-term rating issued by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements. 62
STATEMENTS OF ASSETS AND LIABILITIES Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997 Limited Insured National Maturity Portfolio Portfolio Portfolio Assets: Investments, at value* (Note 1a).......... $2,023,013,288 $1,448,054,588 $ 424,230,840 Cash...................................... 341,447 27,022 8,214 Receivables: Interest................................ 33,075,339 24,381,071 5,787,339 Securities sold......................... 790,557 32,781,265 -- Capital shares sold..................... 495,726 2,646,269 150,322 Prepaid registration fees and other assets (Note 1e).................... 62,244 45,650 35,641 -------------- -------------- -------------- Total assets.............................. 2,057,778,601 1,507,935,865 430,212,356 -------------- -------------- -------------- Liabilities: Payables: Securities purchased.................... -- 25,674,754 10,052,250 Capital shares redeemed................. 2,061,664 1,683,390 1,193,090 Dividends to shareholders (Note 1f)..... 2,087,176 1,569,055 319,585 Investment adviser (Note 2)............. 594,019 563,269 113,098 Distributor (Note 2).................... 352,997 276,962 17,801 Accrued expenses and other liabilities.... 448,645 281,479 109,734 -------------- -------------- -------------- Total liabilities......................... 5,544,501 30,048,909 11,805,558 -------------- -------------- -------------- Net Assets: Net assets................................ $2,052,234,100 $1,477,886,956 $ 418,406,798 ============== ============== ============== Net Assets Class A Common Stock, $0.10 Consist of: par value++............................... $ 17,887,640 $ 9,478,498 $ 3,459,447 Class B Common Stock, $0.10 par value++++............................. 6,953,748 4,001,411 546,268 Class C Common Stock, $0.10 par value++++++........................... 147,978 270,686 1,085 Class D Common Stock, $0.10 par value++++++++......................... 476,701 491,440 205,079 Paid-in capital in excess of par.......... 1,918,211,598 1,431,757,690 417,358,735 Accumulated realized capital losses on investments--net (Note 5).............. (4,046,911) (58,579,321) (4,564,588) Unrealized appreciation on investments--net.......................... 112,603,346 90,466,552 1,400,772 -------------- -------------- -------------- Net assets................................ $2,052,234,100 $1,477,886,956 $ 418,406,798 ============== ============== ============== Net Asset Class A: Value: Net assets.............................. $1,441,784,905 $ 983,649,868 $ 343,640,605 ============== ============== ============== Shares outstanding...................... 178,876,402 94,784,980 34,594,470 ============== ============== ============== Net asset value and redemption price per share......................... $ 8.06 $ 10.38 $ 9.93 ============== ============== ============== Class B: Net assets.............................. $ 560,105,263 $ 415,103,109 $ 54,275,249 ============== ============== ============== Shares outstanding...................... 69,537,481 40,014,114 5,462,680 ============== ============== ============== Net asset value and redemption price per share......................... $ 8.05 $ 10.37 $ 9.94 ============== ============== ============== Class C: Net assets.............................. $ 11,922,182 $ 28,095,834 $ 107,551 ============== ============== ============== Shares outstanding...................... 1,479,783 2,706,856 10,849 ============== ============== ============== Net asset value and redemption price per share......................... $ 8.06 $ 10.38 $ 9.91 ============== ============== ============== Class D: Net assets.............................. $ 38,421,750 $ 51,038,145 $ 20,383,393 ============== ============== ============== Shares outstanding...................... 4,767,006 4,914,399 2,050,790 ============== ============== ============== Net asset value and redemption price per share......................... $ 8.06 $ 10.39 $ 9.94 ============== ============== ==============
63 FN: *IDENTIFIED COST......................... $1,910,409,942 $1,357,588,036 $ 422,830,068 ============== ============== ============== ++AUTHORIZED SHARES--CLASS A.............. 500,000,000 375,000,000 150,000,000 ============== ============== ============== ++++AUTHORIZED SHARES--CLASS B.............. 375,000,000 375,000,000 150,000,000 ============== ============== ============== ++++++AUTHORIZED SHARES--CLASS C.............. 375,000,000 375,000,000 150,000,000 ============== ============== ============== ++++++++AUTHORIZED SHARES--CLASS D.............. 500,000,000 375,000,000 150,000,000 ============== ============== ==============
See Notes to Financial Statements. STATEMENTS OF OPERATIONS
Limited Insured National Maturity For the Year Ended June 30, 1997 Portfolio Portfolio Portfolio Investment Interest and amortization of premium Income (Note 1d): and discount earned....................... $ 134,133,814 $ 93,607,495 $ 20,199,235 -------------- -------------- -------------- Expenses: Investment advisory fees (Note 2)......... 8,042,098 6,961,453 1,552,369 Account maintenance and distribution fees--Class B (Note 2)....... 4,901,030 3,073,016 222,614 Transfer agent fees--Class A (Note 2)..... 497,705 353,478 82,086 Transfer agent fees--Class B (Note 2)..... 275,141 186,850 18,726 Accounting services (Note 2).............. 249,511 142,298 41,718 Custodian fees............................ 186,028 130,167 43,968 Account maintenance and distribution fees--Class C (Note 2).................... 134,437 162,696 634 Registration fees (Note 1e)............... 184,229 94,978 1,102 Account maintenance fees--Class D (Note 2) 116,523 126,564 17,810 Printing and shareholder reports.......... 115,250 66,878 28,907 Professional fees......................... 93,805 67,598 21,232 Pricing services.......................... 30,251 27,987 11,936 Directors' fees and expenses.............. 25,803 21,508 5,615 Transfer agent fees--Class D (Note 2)..... 15,283 18,048 3,561 Transfer agent fees--Class C (Note 2)..... 7,771 9,161 69 Other..................................... 51,012 22,915 5,612 -------------- -------------- -------------- Total expenses............................ 14,925,877 11,465,595 2,057,959 -------------- -------------- -------------- Investment income--net.................... 119,207,937 82,141,900 18,141,276 -------------- -------------- -------------- Realized & Realized gain on investments--net......... 37,935,579 18,687,317 1,870,059 Unrealized Gain on Change in unrealized appreciation on Investments--Net investments--net.......................... 5,465,463 18,217,116 104,267 (Notes 1b, 1d -------------- -------------- -------------- & 3): Net Increase in Net Assets Resulting from Operations........................... $ 162,608,979 $ 119,046,333 $ 20,115,602 ============== ============== ==============
See Notes to Financial Statements. 64 STATEMENTS OF CHANGES IN NET ASSETS
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997 Insured Portfolio National Portfolio --------------------------- ----------------------------- For the Year For the Year Ended June 30, Ended June 30, --------------------------- ----------------------------- INCREASE (DECREASE) IN NET ASSETS: 1997 1996 1997 1996 Operations: Investment income--net............ $ 119,207,937 $ 131,085,773 $ 82,141,900 $ 83,697,410 Realized gain (loss) on investments--net............... 37,935,579 (3,897,219) 18,687,317 3,774,748 Change in unrealized appreciation/depreciation on investments--net............... 5,465,463 3,149,618 18,217,116 10,373,235 -------------- -------------- -------------- -------------- Net increase in net assets resulting from operations......... 162,608,979 130,338,172 119,046,333 97,845,393 -------------- -------------- -------------- -------------- Dividends & Investment income--net: Distributions to Class A......................... (84,438,105) (92,116,281) (57,401,862) (60,489,070) Shareholders Class B......................... (31,486,251) (36,347,050) (20,879,493) (20,995,504) (Note 1f): Class C......................... (800,743) (626,972) (1,024,766) (462,078) Class D......................... (2,482,838) (1,995,470) (2,835,779) (1,750,758) Realized gain on investments--net: Class A......................... -- -- -- -- Class B......................... -- -- -- -- Class C......................... -- -- -- -- Class D......................... -- -- -- -- -------------- -------------- -------------- -------------- Net decrease in net assets resulting from dividends and distributions to shareholders................... (119,207,937) (131,085,773) (82,141,900) (83,697,410) -------------- -------------- -------------- -------------- Capital Share Net increase (decrease) in net Transactions assets derived from capital (Note 4): share transactions................ (357,799,862) (155,203,186) 916,838 (78,305,357) -------------- -------------- -------------- -------------- Net Assets: Total increase (decrease) in net assets..................... (314,398,820) (155,950,787) 37,821,271 (64,157,374) Beginning of year................. 2,366,632,920 2,522,583,707 1,440,065,685 1,504,223,059 -------------- -------------- -------------- -------------- End of year....................... $2,052,234,100 $2,366,632,920 $1,477,886,956 $1,440,065,685 ============== ============== ============== ==============
See Notes to Financial Statements. STATEMENTS OF CHANGES IN NET ASSETS
Limited Maturity Portfolio -------------------------------- For the Year Ended June 30, -------------------------------- Increase (Decrease) in Net Assets: 1997 1996 Operations: Investment income--net............ $ 18,141,276 $ 21,711,132 Realized gain (loss) on investments--net............... 1,870,059 1,322,566 Change in unrealized appreciation/depreciation on investments--net............... 104,267 (1,526,762) -------------- -------------- Net increase in net assets resulting from operations......... 20,115,602 21,506,936 -------------- -------------- Dividends & Investment income--net: Distributions to Class A......................... (15,176,552) (18,019,083) Shareholders Class B......................... (2,274,531) (3,055,609) (Note 1f): Class C......................... (6,456) (25,939) Class D......................... (683,737) (610,501) Realized gain on investments--net: Class A......................... (666,000) -- Class B......................... (108,061) -- Class C......................... (293) -- Class D......................... (28,170) -- -------------- -------------- Net decrease in net assets resulting from dividends and distributions to shareholders................... (18,943,800) (21,711,132) -------------- -------------- Capital Share Net increase (decrease) in net Transactions assets derived from capital (Note 4): share transactions................ (86,916,618) (176,922,554) -------------- -------------- Net Assets: Total increase (decrease) in net assets..................... (85,744,816) (177,126,750) Beginning of year................. 504,151,614 681,278,364 -------------- -------------- End of year....................... $ 418,406,798 $ 504,151,614 ============== ==============
See Notes to Financial Statements. FINANCIAL HIGHLIGHTS
Insured Portfolio The following per share data and ratios --------------------------- have been derived from information Class A provided in the financial statements. --------------------------- For the Year Ended June 30, -------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSET VALUE: 1997 1996 1995 1994 1993 Per Share Net asset value, Operating beginning of year...... $ 7.91 $ 7.92 $ 7.88 $ 8.64 $ 8.26 Performance: ------------ ------------ ------------ ------------ ------------ Investment income--net.. .45 .44 .46 .47 .50 Realized and unrealized gain (loss) on investments--net....... .15 (.01) .18 (.53) .49 ------------ ------------ ------------ ------------ ------------
65 Total from investment operations.............. .60 .43 .64 (.06) .99 ------------ ------------ ------------ ------------ ------------ Less dividends and distributions: Investment income--net (.45) (.44) (.46) (.47) (.50) Realized gain on investments--net...... -- -- (.14) (.23) (.11) ------------ ------------ ------------ ------------ ------------ Total dividends and distributions........... (.45) (.44) (.60) (.70) (.61) ------------ ------------ ------------ ------------ ------------ Net asset value, end of year............. $ 8.06 $ 7.91 $ 7.92 $ 7.88 $ 8.64 ============ ============ ============ ============ ============ Total Investment Based on net asset Return:* value per share......... 7.72% 5.51% 8.60% (1.08%) 12.41% ============ ============ ============ ============ ============ Ratios to Average Expenses................ .44% .43% .43% .42% .42% Net Assets: ============ ============ ============ ============ ============ Investment income--net.. 5.58% 5.55% 5.78% 5.53% 5.94% ============ ============ ============ ============ ============ Supplemental Net assets, end of Data: year (in thousands)..... $ 1,441,785 $ 1,572,835 $ 1,706,064 $ 1,941,741 $ 2,225,188 ============ ============ ============ ============ ============ Portfolio turnover...... 74.40% 78.49% 35.61% 28.34% 43.86% ============ ============ ============ ============ ============
Insured Portfolio THE FOLLOWING PER SHARE DATA AND RATIOS ----------------- HAVE BEEN DERIVED FROM INFORMATION Class B PROVIDED IN THE FINANCIAL STATEMENTS. ----------------- For the Year Ended June 30, --------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSET VALUE: 1997 1996 1995 1994 1993 Per Share Net asset value, Operating beginning of year....... $ 7.91 $ 7.92 $ 7.87 $ 8.63 $ 8.26 Performance: ------------ ------------ ------------ ------------ ------------ Investment income--net.. .39 .38 .40 .40 .44 Realized and unrealized gain (loss) on investments--net........ .14 (.01) .19 (.53) .48 ------------ ------------ ------------ ------------ ------------ Total from investment operations.............. .53 .37 .59 (.13) .92 ------------ ------------ ------------ ------------ ------------ Less dividends and distributions: Investment income--net (.39) (.38) (.40) (.40) (.44) Realized gain on investments--net...... -- -- (.14) (.23) (.11) ------------ ------------ ------------ ------------ ------------ Total dividends and distributions........... (.39) (.38) (.54) (.63) (.55) ------------ ------------ ------------ ------------ ------------ Net asset value, end of year............. $ 8.05 $ 7.91 $ 7.92 $ 7.87 $ 8.63 ============ ============ ============ ============ ============ Total Investment Based on net asset Return:* value per share......... 6.78% 4.71% 7.91% (1.81%) 11.44% ============ ============ ============ ============ ============ Ratios to Average Expenses................ 1.19% 1.19% 1.19% 1.17% 1.18% Net Assets: ============ ============ ============ ============ ============ Investment income--net.. 4.82% 4.80% 5.03% 4.78% 5.17% ============ ============ ============ ============ ============ Supplemental Net assets, end of Data: year (in thousands)..... $ 560,105 $ 723,090 $ 782,748 $ 866,193 $ 911,307 ============ ============ ============ ============ ============ Portfolio turnover...... 74.40% 78.49% 35.61% 28.34% 43.86% ============ ============ ============ ============ ============
FN: *TOTAL INVESTMENT RETURNS EXCLUDE THE EFFECTS OF SALES LOADS. See Notes to Financial Statements. 66 FINANCIAL HIGHLIGHTS (continued)
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997 Insured Portfolio The following per share --------------------------------------------------------------------- data and ratios have been Class C Class D derived from information ------------------------------- -------------------------------- provided in the financial For the Period For the Period statements. For the Year Oct 21, 1994++ For the Year Oct 21, 1994++ Ended June 30, to June 30, Ended June 30, to June 30, INCREASE (DECREASE) IN -------------- --------------- --------------- --------------- NET ASSET VALUE: 1997 1996 1995 1997 1996 1995 Per Share Net asset value, Operating beginning of period.......$ 7.91 $ 7.92 $ 7.68 $ 7.91 $ 7.92 $ 7.68 Performance: ---------- ---------- ---------- ---------- ---------- ---------- Investment income--net.. .38 .38 .27 .43 .42 .29 Realized and unrealized gain (loss) on investments--net.......... .15 (.01) .38 .15 (.01) .38 ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations................ .53 .37 .65 .58 .41 .67 ---------- ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net.. (.38) (.38) (.27) (.43) (.42) (.29) Realized gain on investments--net........ -- -- (.14) -- -- (.14) ---------- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions............. (.38) (.38) (.41) (.43) (.42) (.43) ---------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period............. 8.06 $ 7.91 $ 7.92 $ 8.06 $ 7.91 $ 7.92 ========== ========== ========== ========== ========== ========== Total Investment Based on net asset Return:** value per share........... 6.86% 4.65% 8.83%+++ 7.46% 5.25% 9.24%+++ ========== ========== ========== ========== ========== ========== Ratios to Average Expenses.................. 1.25% 1.24% 1.23%* .69% .68% .68%* Net Assets: ========== ========== ========== ========== ========== ========== Investment income--net.... 4.77% 4.75% 4.93%* 5.33% 5.31% 5.50%* ========== ========== ========== ========== ========== ========== Supplemental Net assets, end of Data: period (in thousands).....$ 11,922 $ 18,936 $ 7,756 $ 38,422 $ 51,772 $ 26,015 ========== ========== ========== ========== ========== ========== Portfolio turnover........ 74.40% 78.49% 35.61% 74.40% 78.49% 35.61% ========== ========== ========== ========== ========== ========== National Portfolio The following per share -------------------------------------------------------------------------- data and ratios have been Class A derived from information -------------------------------------------------------------------------- provided in the financial For the Yeear Ended June 30, statements. -------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSET VALUE: 1997 1996 1995 1994 1993 Per Share Net asset value, Operating beginning of year.........$ 10.11 $ 10.02 $ 10.08 $ 11.02 $ 10.64 Performance: ------------ ------------ ------------ ------------ ------------ Investment income--net .60 .60 .60 .62 .67 Realized and unrealized gain (loss) on investments--net.......... .27 .09 .15 (.64) .57 ------------ ------------ ------------ ------------ ------------ Total from investment operations................ .87 .69 .75 (.02) 1.24 ------------ ------------ ------------ ------------ ------------ Less dividends and distributions: Investment income--net.. (.60) (.60) (.60) (.62) (.67) Realized gain on investments--net........ -- -- (.19) (.30) (.19) In excess of realized gain on investments--net.. -- -- (.02) -- -- ------------ ------------ ------------ ------------ ------------ Total dividends and distributions............. (.60) (.60) (.81) (.92) (.86) ------------ ------------ ------------ ------------ ------------ Net asset value, end of year...............$ 10.38 $ 10.11 $ 10.02 $ 10.08 $ 11.02 ============ ============ ============ ============ ============ Total Investment Based on net asset Return:** value per share........... 8.84% 6.98% 7.89% (.47%) 12.19% ============ ============ ============ ============ ============ Ratios to Average Expenses.................. .55% .56% .56% .55% .55% Net Assets: ============ ============ ============ ============ ============ Investment income--net.... 5.86% 5.89% 6.01% 5.72% 6.23% ============ ============ ============ ============ ============ Supplemental Net assets, end of Data: year (in thousands).......$ 983,650 $ 983,550 $ 1,059,440 $ 1,203,181 $ 1,353,805 ============ ============ ============ ============ ============ Portfolio turnover........ 99.52% 95.09% 103.65% 73.33% 65.43% ============ ============ ============ ============ ============
67
The following per share data and ratios have been derived from information National Portfolio provided in the financial statements. --------------------------- Class B --------------------------- For the Year Ended June 30, --------------------------- INCREASE (DECREASE) IN NET ASSET VALUE: 1997 1996 1995 1994 1993 Per Share Net asset value, Operating beginning of year.........$ 10.11 $ 10.02 $ 10.07 $ 11.02 $ 10.63 Performance: ------------ ------------ ------------ ------------ ------------ Investment income--net.... .52 .52 .52 .54 .59 Realized and unrealized gain (loss) on investments--net.......... .26 .09 .16 (.65) .58 ------------ ------------ ------------ ------------ ------------ Total from investment operations................ .78 .61 .68 (.11) 1.17 ------------ ------------ ------------ ------------ ------------ Less dividends and distributions: Investment income--net.. (.52) (.52) (.52) (.54) (.59) Realized gain on investments--net........ -- -- (.19) (.30) (.19) In excess of realized gain on investments--net.. -- -- (.02) -- -- ------------ ------------ ------------ ------------ ------------ Total dividends and distributions............. (.52) (.52) (.73) (.84) (.78) ------------ ------------ ------------ ------------ ------------ Net asset value, end of year...............$ 10.37 $ 0.11 $ 10.02 $ 10.07 $ 11.02 ============ ============ ============ ============ ============ Total Investment Based on net asset Return:** value per share........... 7.92% 6.17% 7.28% (1.39%) 11.45% ============ ============ ============ ============ ============ Ratios to Average Expenses.................. 1.31% 1.32% 1.32% 1.30% 1.31% Net Assets: ============ ============ ============ ============ ============ Investment income--net.... 5.10% 5.13% 5.25% 4.97% 5.46% ============ ============ ============ ============ ============ Supplemental Net assets, end of Data: year (in thousands).......$ 415,103 $ 399,341 $ 419,933 $ 459,169 $ 424,071 ============ ============ ============ ============ ============ Portfolio turnover........ 99.52% 95.09% 103.65% 73.33% 65.43% ============ ============ ============ ============ ============ The following per share National Portfolio data and ratios have been ----------------------------------------------------------------------- derived from information Class C Class D provided in the financial --------------------------------- ------------------------------- statements. For the Period For the Period For the Year Oct 21, 1994++ For the Year Oct 21, 1994++ Ended June 30, to June 30, Ended June 30, to June 30, INCREASE (DECREASE) IN -------------------- -------------------- NET ASSET VALUE: 1997 1996 1995 1997 1996 1995 Per Share Net asset value, Operating beginning of period.......$ 10.11 $ 10.03 $ 9.85 $ 10.12 $ 10.03 $ 9.85 Performance: ---------- ---------- ---------- ---------- ---------- ---------- Investment income--net .52 .52 .36 .58 .57 .40 Realized and unrealized gain on investments--net.. .27 .08 .39 .27 .09 .39 ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations................ .79 .60 .75 .85 .66 .79 ---------- ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net............. (.52) (.52) (.36) (.58) (.57) (.40) Realized gain on investments--net........ -- -- (.19) -- -- (.19) In excess of realized gain on investments--net........ -- -- (.02) -- -- (.02) ---------- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions............. (.52) (.52) (.57) (.58) (.57) (.61) ---------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period.............$ 10.38 $ 10.11 $ 10.03 $ 10.39 $ 10.12 $ 10.03 ========== ========== ========== ========== ========== ========== Total Investment Based on net asset Return:** value per share........... 7.97% 6.01% 7.97%+++ 8.57% 6.71% 8.37%+++ ========== ========== ========== ========== ========== ========== Ratios to Average Expenses.................. 1.36% 1.37% 1.37%* .80% .81% .81%* Net Assets: ========== ========== ========== ========== ========== ========== Investment income--net.... 5.04% 5.08% 5.21%* 5.60% 5.64% 5.78%* ========== ========== ========== ========== ========== ========== Supplemental Net assets, end of Data: period (in thousands).....$ 28,096 $ 13,291 $ 5,195 $ 51,038 $ 43,884 $ 19,656 ========== ========== ========== ========== ========== ========== Portfolio turnover........ 99.52% 95.09% 103.65% 99.52% 95.09% 103.65% ========== ========== ========== ========== ========== ==========
FN: *ANNUALIZED. **TOTAL INVESTMENT RETURNS EXCLUDE THE EFFECTS OF SALES LOADS. ++COMMENCEMENT OF OPERATIONS +++AGGREGATE TOTAL INVESTMENT RETURN. See Notes to Financial Statements. 68
Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997 FINANCIAL HIGHLIGHTS (concluded) The following per share data and ratios have Limited Maturity Portfolio been derived from ---------------------------------------------------------------------------- information provided Class A in the financial ---------------------------------------------------------------------------- statements. For the Year Ended June 30, ---------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSET VALUE: 1997 1996 1995 1994 1993 Per Share Net asset value, Operating beginning of year $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.91 Performance: ------------ ----------- ------------ ------------ ------------ Investment income--net .39 .38 .38 .37 .41 Realized and unrealized gain (loss) on investments--net .04 (.01) .05 (.14) .10 ------------ ----------- ------------ ------------ ------------ Total from investment operations .43 .37 .43 .23 .51 ------------ ----------- ------------ ------------ ------------ Less dividends and distributions: Investment income--net (.39) (.38) (.38) (.37) (.41) Realized gain on investments--net (.02) -- -- -- -- ------------ ----------- ------------ ------------ ------------ Total dividends and distributions (.41) (.38) (.38) (.37) (.41) ------------ ----------- ------------ ------------ ------------ Net asset value, end of year $ 9.93 $ 9.91 $ 9.92 $ 9.87 $ 10.01 ============ =========== ============ ============ ============ Total Investment Based on net asset Return:** value per share 4.40% 3.75% 4.53% 2.30% 5.28% ============ =========== ============ ============ ============ Ratios to Average Expenses .39% .44% .41% .40% .41% Net Assets: ============ =========== ============ ============ ============ Investment income--net 3.93% 3.83% 3.86% 3.68% 4.13% ============ =========== ============ ============ ============ Supplemental Net assets, end of Data: year (in thousands) $ 343,641 $ 417,097 $ 536,474 $ 790,142 $ 846,736 ============ =========== ============ ============ ============ Portfolio turnover 61.90% 88.32% 37.33% 45.67% 65.43% ============ =========== ============ ============ ============ The following per share Limited Maturity Portfolio data and ratios have ---------------------------------------------------------------------------- been derived from Class B For the Period information provided in ----------------------------------------------------------- Nov. 2, 1992 to the financial statements. For the Year Ended June 30, June 30, 1993 ----------------------------------------------------------- --------------- INCREASE (DECREASE) IN NET ASSET VALUE: 1997 1996 1995 1994 Per Share Net asset value, Operating beginning of period $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.93 Performance: ------------ ----------- ------------ ------------- ------------ Investment income--net .36 .35 .35 .33 .24 Realized and unrealized gain (loss) on investments--net .05 (.01) .05 (.14) .08 ------------ ----------- ------------ ------------- ------------ Total from investment operations .41 .34 .40 .19 .32 ------------ ----------- ------------ ------------- ------------ Less dividends and distributions: Investment income--net (.36) (.35) (.35) (.33) (.24) Realized gain on investments--net (.02) -- -- -- -- ------------ ----------- ------------ ------------- ------------ Total dividends and distributions (.38) (.35) (.35) (.33) (.24) ------------ ----------- ------------ ------------- ------------ Net asset value, end of period $ 9.94 $ 9.91 $ 9.92 $ 9.87 $ 10.01 ============ =========== ============ ============ ============ Total Investment Based on net asset Return:** value per share 4.13% 3.37% 4.14% 1.98% 3.26%+++ ============ =========== ============ ============ ============ Ratios to Average Expenses .75% .80% .78% .76% .76%* Net Assets: ============ =========== ============ ============ ============ Investment income--net 3.58% 3.46% 3.50% 3.33% 3.60%* ============ =========== ============ ============ ============ Supplemental Net assets, end of Data: period (in thousands) $ 54,275 $ 71,075 $ 129,581 $ 145,534 $ 95,179 ============ =========== ============ ============ ============ Portfolio turnover 61.90% 88.32% 37.33% 45.67% 65.43% ============ =========== ============ ============ ============
69
Limited Maturity Portfolio The following per share ---------------------------------------------------------------------- data and ratios have been Class C Class D derived from information --------------------------------- --------------------------------- provided in the financial For the Period For the Period statements. For the Year Oct 21, 1994++ For the Year Oct 21, 1994++ Ended June 30, to June 30, Ended June 30, to June 30, INCREASE (DECREASE) IN -------------------------------- --------------------------------- NET ASSET VALUE: 1997 1996 1995 1997 1996 1995 Per Share Net asset value, Operating beginning of period..... $ 9.88 $ 9.92 $ 9.83 $ 9.91 $ 9.93 $ 9.83 Performance: ---------- ---------- ---------- ---------- ---------- ---------- Investment income--net.. .35 .34 .25 .38 .37 .26 Realized and unrealized gain (loss) on investments--net........ .05 (.04) .09 .05 (.02) .10 ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations.............. .40 .30 .34 .43 .35 .36 ---------- ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net (.35) (.34) (.25) (.38) (.37) (.26) Realized gain on investments--net...... (.02) -- -- (.02) -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions........... (.37) (.34) (.25) (.40) (.37) (.26) ---------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period........... $ 9.91 $ 9.88 $ 9.92 $ 9.94 $ 9.91 $ 9.93 ========== ========== ========== ========== ========== ========== Total Investment Based on net asset Return:** value per share......... 4.11% 2.97% 3.52%+++ 4.40% 3.55% 3.73%+++ ========== ========== ========== ========== ========== ========== Ratios to Average Expenses................ .75% .80% .70%* .48% .54% .53%* Net Assets: ========== ========== ========== ========== ========== ========== Investment income--net.. 3.57% 3.41% 3.61%* 3.84% 3.71% 3.78%* ========== ========== ========== ========== ========== ========== Supplemental Net assets, end of Data: period (in thousands)... $ 108 $ 94 $ 3,965 $ 20,383 $ 15,886 $ 11,258 ========== ========== ========== ========== ========== ========== Portfolio turnover...... 61.90% 88.32% 37.33% 61.90% 88.32% 37.33% ========== ========== ========== ========== ========== ==========
FN: *ANNUALIZED. **TOTAL INVESTMENT RETURNS EXCLUDE THE EFFECTS OF SALES LOADS. ++COMMENCEMENT OF OPERATIONS. +++AGGREGATE TOTAL INVESTMENT RETURN. See Notes to Financial Statements. 70 Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997 NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES: Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. The Fund's Portfolios offer four classes of shares under the Merrill Lynch Select Pricing SM System. Shares of Class A and Class D are sold with a front-end sales charge. Shares of Class B and Class C may be subject to a contingent deferred sales charge. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class B, Class C and Class D Shares bear certain expenses related to the account maintenance of such shares, and Class B and Class C Shares also bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to its account maintenance and distribution expenditures. The following is a summary of significant accounting policies followed by the Fund. (a) VALUATION OF INVESTMENTS--Insured Portfolio: Where bonds in the Portfolio have not been insured pursuant to policies obtained by the issuer, the Fund has obtained insurance with respect to the payment of interest and principal of each bond. Such insurance is valid as long as the bonds are held by the Fund. ALL PORTFOLIOS: Municipal bonds and money market securities are traded primarily in the over-the-counter markets and are valued at the most recent bid price or yield equivalent as obtained from dealers that make markets in such securities. Positions in futures contracts and options thereon, which are traded on exchanges, are valued at closing prices as of the close of such exchanges. Assets for which market quotations are not readily available are valued at fair value on a consistent basis using methods determined in good faith by the Fund's Board of Directors, including valuations furnished by a pricing service retained by the Fund, which may utilize a matrix system for valuations. The procedures of the pricing service and its valuations are reviewed by the officers of the Fund under the general supervision of the Board of Directors. (b) DERIVATIVE FINANCIAL INSTRUMENTS--The Fund may engage in various portfolio strategies to seek to increase its return by hedging its portfolio against adverse movements in the debt markets. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. * FINANCIAL FUTURES CONTRACTS--The National and Limited Maturity Portfolios (the "Portfolios") may purchase or sell interest rate futures contracts and options on such futures contracts for the purpose of hedging the market risk on existing securities or the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Portfolios deposit and maintain as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Portfolios agree to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Portfolios as unrealized gains or losses. When the contract is closed, the Portfolios record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. (c) INCOME TAXES--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. (d) SECURITY TRANSACTIONS AND INVESTMENT INCOME--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Interest income is recognized on the accrual basis. Discounts and market premiums are amortized into interest income. Realized gains and losses on security transactions are determined on the identified cost basis. (e) PREPAID REGISTRATION FEES--Prepaid registration fees are charged to expenses as the related shares are issued. (f) DIVIDENDS AND DISTRIBUTIONS--Dividends from net investment income are declared daily and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. 2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES: The Fund has entered into an Investment Advisory Agreement with Fund Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also entered into a Distribution Agreement and Distribution Plans with Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of Merrill Lynch Group, Inc. FAM is responsible for the management of the Fund's portfolios and provides the necessary personnel, facilities, equipment and certain other services necessary to the operation of the Fund. For such services, FAM receives at the end of each month a fee with respect 71 to each Portfolio at the annual rates set forth below which are based upon the average daily value of the Fund's net assets. Rate of Advisory Fee -------------------------------- AGGREGATE OF AVERAGE DAILY LIMITED NET ASSETS OF THE THREE INSURED NATIONAL MATURITY COMBINED PORTFOLIOS PORTFOLIO PORTFOLIO PORTFOLIO - -------------------------- --------- --------- --------- Not exceeding $250 million .40 % .50 % .40 % In excess of $250 million but not exceeding $400 million .375 .475 .375 In excess of $400 million but not exceeding $550 million .375 .475 .35 In excess of $550 million but not exceeding $1.5 billion .375 .475 .325 In excess of $1.5 billion .35 .475 .325 Pursuant to the distribution plans (the "Distribution Plans") adopted by the Fund in accordance with Rule 12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor ongoing account maintenance and distribution fees. The fees are accrued daily and paid monthly at annual rates based upon the average daily net assets of the shares as follows: ACCOUNT MAINTENANCE FEES DISTRIBUTION FEES ----------------------------------- --------------------------------- LIMITED LIMITED INSURED NATIONAL MATURITY INSURED NATIONAL MATURITY PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO --------- --------- --------- --------- --------- --------- Class B .25% .25% .15% .50% .50% .20% Class C .25% .25% .15% .55% .55% .20% Class D .25% .25% .10% -- -- -- ---- ---- ---- ---- ---- --- Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account maintenance and distribution services to the Fund. The ongoing account maintenance fee compensates the Distributor and MLPF&S for providing account maintenance services to Class B, Class C and Class D shareholders. The ongoing distribution fee compensates the Distributor and MLPF&S for providing shareholder and distribution-related services to Class B and Class C shareholders. For the year ended June 30, 1997, MLFD earned underwriting discounts and direct commissions and MLPF&S earned dealer concessions on sales of the Fund's Class A and Class D Shares follows: LIMITED INSURED NATIONAL MATURITY PORTFOLIO PORTFOLIO PORTFOLIO --------- --------- --------- CLASS A SHARES: MLFD $ 24,532 $ 16,659 $ 1,139 MLPF&S 168,171 149,402 11,295 -------- -------- ------- CLASS D SHARES: MLFD 7,722 11,866 1,634 MLPF&S 69,053 98,975 20,019 -------- -------- ------- For the year ended June 30, 1997, MLPF&S received contingent deferred sales charges of $1,906,615 relating to transactions in Class B Shares, amounting to $979,435, $868,705 and $58,475 in the Insured, National and Limited Maturity Portfolios, respectively, and $17,583, relating to transactions in Class C Shares, amounting to $6,915, $10,273 and $395 in the Insured, National and Limited Maturity Portfolios, respectively, and $358,940 relating to transactions in Class D Shares, amounting to $180,983 and $177,957 in the Insured and National Portfolios, respectively. Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly- owned subsidiary of ML & Co., is the Fund's transfer agent. Accounting services are provided to the Fund by FAM at cost. Certain officers and/or directors of the Fund are officers and/or directors of FAM, PSI, MLFD, MLFDS, and/or ML & Co. 3. INVESTMENTS: Purchases and sales of investments, excluding short-term securities, for the year ended June 30, 1997 were as follows: PURCHASES SALES --------- ----- Insured Portfolio $1,539,869,960 $1,795,948,640 National Portfolio 1,385,982,904 1,395,027,690 Limited Maturity Portfolio 259,616,429 327,912,199 -------------- -------------- Net realized and unrealized gains (losses) as of June 30, 1997 were as follows: REALIZED UNREALIZED INSURED PORTFOLIO GAINS GAINS - ----------------- -------- ---------- Long-term investments $ 37,935,579 $ 112,603,346 -------------- -------------- Total $ 37,935,579 $ 112,603,346 ============== ============== REALIZED UNREALIZED NATIONAL PORTFOLIO GAINS (LOSSES) GAINS - ------------------ -------------- ---------- Long-term investments $ 22,647,030 $ 90,466,552 Financial futures contracts (3,959,713) -- -------------- -------------- Total $ 18,687,317 $ 90,466,552 ============== ============== 72 Merrill Lynch Municipal Bond Fund Inc., June 30, 1997 NOTES TO FINANCIAL STATEMENTS (continued) - -------------------------------------------------------------- REALIZED UNREALIZED LIMITED MATURITY PORTFOLIO GAINS GAINS - -------------------------- -------- ---------- Long-term investments $ 1,870,059 $ 1,388,965 Short-term investments -- 11,807 -------------- -------------- Total $ 1,870,059 $ 1,400,772 ============== ============== - -------------------------------------------------------------- As of June 30, 1997 net unrealized appreciation/depreciation for Federal income tax purposes were as follows: - --------------------------------------------------------------------- GROSS GROSS NET UNREALIZED UNREALIZED UNREALIZED APPRECIATION DEPRECIATION APPRECIATION ------------ ------------ ------------ Insured Portfolio $114,126,818 $ (1,772,618) $112,354,200 National Portfolio 92,758,314 (2,333,380) 90,424,934 Limited Maturity Portfolio 1,811,320 (410,548) 1,400,772 - --------------------------------------------------------------------- The aggregate cost of investments at June 30, 1997 for Federal income tax purposes was $1,910,659,088 for the Insured Portfolio, $1,357,629,654 for the National Portfolio, and $422,830,068 for the Limited Maturity Portfolio. 4. CAPITAL SHARE TRANSACTIONS: Net increase (decrease) on net assets derived from capital share transactions for years ended June 30, 1997 and June 30, 1996 were $(357,799,862) and $(155,203,186), respectively, for the Insured Portfolio; $916,838 and $(78,305,357), respectively for the National Portfolio and $(86,916,618) and $(176,922,554), respectively, for the Limited Maturity Portfolio. Transactions in capital shares for each class were as follows: - -------------------------------------------------------------- INSURED PORTFOLIO - -------------------------------------------------------------- CLASS A SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1997 SHARES AMOUNT - --------------------------- ------ ------ Shares sold 4,575,281 $ 36,693,201 Shares issued to shareholders in reinvestment of dividends 4,476,285 35,809,346 -------------- -------------- Total issued 9,051,566 72,502,547 Shares redeemed (28,976,583) (232,180,607) -------------- -------------- Net decrease (19,925,017) $ (159,678,060) ============== ============== - -------------------------------------------------------------- INSURED PORTFOLIO - -------------------------------------------------------------- CLASS A SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1996 SHARES AMOUNT - --------------------------- ------ ------ Shares sold 5,469,354 $ 44,001,252 Shares issued to shareholders in reinvestment of dividends 4,986,858 40,042,330 -------------- -------------- Total issued 10,456,212 84,043,582 Shares redeemed (27,028,706) (217,178,396) -------------- -------------- Net decrease (16,572,494) $ (133,134,814) ============== ============== - -------------------------------------------------------------- INSURED PORTFOLIO - -------------------------------------------------------------- CLASS B SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1997 SHARES AMOUNT - --------------------------- ------ ------ Shares sold 5,729,555 $ 45,791,612 Shares issued to shareholders in reinvestment of dividends 2,004,591 16,028,058 -------------- -------------- Total issued 7,734,146 61,819,670 Automatic conversion of shares (654,971) (5,237,060) Shares redeemed (29,004,786) (232,763,104) -------------- -------------- Net decrease (21,925,611) $ (176,180,494) ============== ============== - -------------------------------------------------------------- INSURED PORTFOLIO - -------------------------------------------------------------- CLASS B SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1996 SHARES AMOUNT - --------------------------- ------ ------ Shares sold 13,419,351 $ 107,963,983 Shares issued to shareholders in reinvestment of dividends 2,346,122 18,823,418 -------------- -------------- Total issued 15,765,473 126,787,401 Automatic conversion of shares (355,991) (2,835,885) Shares redeemed (22,831,309) (183,110,029) -------------- -------------- Net decrease (7,421,827) $ (59,158,513) ============== ============== - -------------------------------------------------------------- INSURED PORTFOLIO - -------------------------------------------------------------- CLASS C SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1997 SHARES AMOUNT - --------------------------- ------ ------ Shares sold 742,610 $ 5,954,624 Shares issued to shareholders in reinvestment of dividends 65,517 524,081 -------------- -------------- Total issued 808,127 6,478,705 Shares redeemed (1,722,393) (13,923,454) -------------- -------------- Net decrease (914,266) $ (7,444,749) ============== ============== - -------------------------------------------------------------- 73 - -------------------------------------------------------------- INSURED PORTFOLIO - -------------------------------------------------------------- CLASS C SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1996 SHARES AMOUNT - -------------------------------------------------------------- Shares sold 1,893,607 $ 15,225,385 Shares issued to shareholders in reinvestment of dividends 53,775 431,720 -------------- -------------- Total issued 1,947,382 15,657,105 Shares redeemed (532,614) (4,266,135) -------------- -------------- Net increase 1,414,768 $ 11,390,970 ============== ============== - -------------------------------------------------------------- INSURED PORTFOLIO - -------------------------------------------------------------- CLASS D SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1997 SHARES AMOUNT - -------------------------------------------------------------- Shares sold 12,779,520 $ 101,973,172 Automatic conversion of shares 654,971 5,237,060 Shares issued to shareholders in reinvestment of dividends 147,570 1,180,790 -------------- -------------- Total issued 13,582,061 108,391,022 Shares redeemed (15,359,300) (122,887,581) -------------- -------------- Net decrease (1,777,239) $ (14,496,559) ============== ============== - -------------------------------------------------------------- INSURED PORTFOLIO - -------------------------------------------------------------- CLASS D SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1996 SHARES AMOUNT - -------------------------------------------------------------- Shares sold 14,968,451 $ 120,849,832 Automatic conversion of shares 355,872 2,835,885 Shares issued to shareholders in reinvestment of dividends 118,797 953,911 -------------- -------------- Total issued 15,443,120 124,639,628 Shares redeemed (12,181,923) (98,940,457) -------------- -------------- Net increase 3,261,197 $ 25,699,171 ============== ============== - -------------------------------------------------------------- NATIONAL PORTFOLIO - -------------------------------------------------------------- CLASS A SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1997 SHARES AMOUNT - -------------------------------------------------------------- Shares sold 7,233,788 $ 74,396,433 Shares issued to shareholders in reinvestment of dividends 2,685,525 27,558,310 -------------- -------------- Total issued 9,919,313 101,954,743 Shares redeemed (12,395,672) (127,128,438) -------------- -------------- Net decrease (2,476,359) $ (25,173,695) ============== ============== - -------------------------------------------------------------- NATIONAL PORTFOLIO - -------------------------------------------------------------- CLASS A SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1996 SHARES AMOUNT - -------------------------------------------------------------- Shares sold 1,874,548 $ 19,100,358 Shares issued to shareholders in reinvestment of dividends 2,851,242 29,021,298 -------------- -------------- Total issued 4,725,790 48,121,656 Shares redeemed (13,151,450) (133,904,005) -------------- -------------- Net decrease (8,425,660) $ (85,782,349) ============== ============== - -------------------------------------------------------------- NATIONAL PORTFOLIO - -------------------------------------------------------------- CLASS B SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1997 SHARES AMOUNT - -------------------------------------------------------------- Shares sold 11,777,487 $ 121,489,230 Shares issued to shareholders in reinvestment of dividends 975,743 10,006,225 -------------- -------------- Total issued 12,753,230 131,495,455 Automatic conversion of shares (495,542) (5,075,762) Shares redeemed (11,745,518) (120,476,972) -------------- -------------- Net increase 512,170 $ 5,942,721 ============== ============== - -------------------------------------------------------------- NATIONAL PORTFOLIO - -------------------------------------------------------------- CLASS B SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1996 SHARES AMOUNT - -------------------------------------------------------------- Shares sold 6,798,097 $ 69,266,670 Shares issued to shareholders in reinvestment of dividends 964,834 9,817,408 -------------- -------------- Total issued 7,762,931 79,084,078 Automatic conversion of shares (175,462) (1,776,371) Shares redeemed (9,989,397) (101,634,492) -------------- -------------- Net decrease (2,401,928) $ (24,326,785) ============== ============== - -------------------------------------------------------------- NATIONAL PORTFOLIO - -------------------------------------------------------------- CLASS C SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1997 SHARES AMOUNT - -------------------------------------------------------------- Shares sold 2,182,254 $ 22,508,694 Shares issued to shareholders in reinvestment of dividends 56,394 579,121 -------------- -------------- Total issued 2,238,648 23,087,815 Shares redeemed (845,937) (8,691,227) -------------- -------------- Net increase 1,392,711 $ 14,396,588 ============== ============== - -------------------------------------------------------------- NATIONAL PORTFOLIO - -------------------------------------------------------------- CLASS C SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1996 SHARES AMOUNT - -------------------------------------------------------------- Shares sold 1,026,234 $ 10,483,940 Shares issued to shareholders in reinvestment of dividends 22,712 231,247 -------------- -------------- Total issued 1,048,946 10,715,187 Shares redeemed (252,941) (2,580,645) -------------- -------------- Net increase 796,005 $ 8,134,542 ============== ============== - -------------------------------------------------------------- NATIONAL PORTFOLIO - -------------------------------------------------------------- CLASS D SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1997 SHARES AMOUNT - -------------------------------------------------------------- Shares sold 10,536,060 $ 108,053,333 Automatic conversion of shares 495,032 5,075,762 Shares issued to shareholders in reinvestment of dividends 114,893 1,179,969 -------------- -------------- Total issued 11,145,985 114,309,064 Shares redeemed (10,568,675) (108,557,840) -------------- -------------- Net increase 577,310 $ 5,751,224 ============== ============== 74 Merrill Lynch Municipal Bond Fund, Inc., June 30, 1997 NOTES TO FINANCIAL STATEMENTS (concluded) - -------------------------------------------------------------- NATIONAL PORTFOLIO - -------------------------------------------------------------- CLASS D SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1996 SHARES AMOUNT - -------------------------------------------------------------- Shares sold 13,624,624 $ 139,439,739 Automatic conversion of shares 175,315 1,776,371 Shares issued to shareholders in reinvestment of dividends 74,448 759,889 -------------- -------------- Total issued 13,874,387 141,975,999 Shares redeemed (11,497,765) (118,306,764) -------------- -------------- Net increase 2,376,622 $ 23,669,235 ============== ============== - -------------------------------------------------------------- LIMITED MATURITY PORTFOLIO - -------------------------------------------------------------- CLASS A SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1997 SHARES AMOUNT - -------------------------------------------------------------- Shares sold 2,507,909 $ 24,924,435 Shares issued to shareholders in reinvestment of dividends and distributions 920,017 9,134,741 -------------- -------------- Total issued 3,427,926 34,059,176 Shares redeemed (10,923,304) (108,467,108) -------------- -------------- Net decrease (7,495,378) $ (74,407,932) ============== ============== - -------------------------------------------------------------- LIMITED MATURITY PORTFOLIO - -------------------------------------------------------------- CLASS A SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1996 SHARES AMOUNT - -------------------------------------------------------------- Shares sold 2,286,543 $ 22,746,544 Shares issued to shareholders in reinvestment of dividends 1,098,806 10,929,822 -------------- -------------- Total issued 3,385,349 33,676,366 Shares redeemed (15,364,211) (152,811,221) -------------- -------------- Net decrease (11,978,862) $ (119,134,855) ============== ============== - -------------------------------------------------------------- LIMITED MATURITY PORTFOLIO - -------------------------------------------------------------- CLASS B SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1997 SHARES AMOUNT - -------------------------------------------------------------- Shares sold 1,746,766 $ 17,337,114 Shares issued to shareholders in reinvestment of dividends and distributions 156,709 1,556,287 -------------- -------------- Total issued 1,903,475 18,893,401 Automatic conversion of shares (11,559) (114,986) Shares redeemed (3,599,880) (35,740,926) -------------- -------------- Net decrease (1,707,964) $ (16,962,511) ============== ============== - -------------------------------------------------------------- LIMITED MATURITY PORTFOLIO - -------------------------------------------------------------- CLASS B SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1996 SHARES AMOUNT - -------------------------------------------------------------- Shares sold 1,855,378 $ 18,448,441 Shares issued to shareholders in reinvestment of dividends 196,945 1,959,129 -------------- -------------- Total issued 2,052,323 20,407,570 Automatic conversion of shares (1,991) (19,792) Shares redeemed (7,937,046) (78,947,865) -------------- -------------- Net decrease (5,886,714) $ (58,560,087) ============== ============== - -------------------------------------------------------------- LIMITED MATURITY PORTFOLIO - -------------------------------------------------------------- CLASS C SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1997 SHARES AMOUNT - -------------------------------------------------------------- Shares sold 125,730 $ 1,243,007 Shares issued to shareholders in reinvestment of dividends and distributions 526 5,211 -------------- -------------- Total issued 126,256 1,248,218 Shares redeemed (124,926) (1,236,530) -------------- -------------- Net increase 1,330 $ 11,688 ============== ============== 75 - -------------------------------------------------------------- LIMITED MATURITY PORTFOLIO - -------------------------------------------------------------- CLASS C SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1996 SHARES AMOUNT - -------------------------------------------------------------- Shares sold 1,035,202 $ 10,296,541 Shares issued to shareholders in reinvestment of dividends 1,535 15,247 -------------- -------------- Total issued 1,036,737 10,311,788 Shares redeemed (1,426,909) (14,189,010) -------------- -------------- Net decrease (390,172) $ (3,877,222) ============== ============== - -------------------------------------------------------------- LIMITED MATURITY PORTFOLIO - -------------------------------------------------------------- CLASS D SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1997 SHARES AMOUNT - -------------------------------------------------------------- Shares sold 3,468,693 $ 34,441,741 Automatic conversion of shares 11,555 114,986 Shares issued to shareholders in reinvestment of dividends and distributions 40,524 402,564 -------------- -------------- Total issued 3,520,772 34,959,291 Shares redeemed (3,072,180) (30,517,154) -------------- -------------- Net increase 448,592 $ 4,442,137 ============== ============== - -------------------------------------------------------------- LIMITED MATURITY PORTFOLIO - -------------------------------------------------------------- CLASS D SHARES FOR THE YEAR DOLLAR ENDED JUNE 30, 1996 SHARES AMOUNT - -------------------------------------------------------------- Shares sold 5,319,786 $ 52,931,793 Automatic conversion of shares 1,989 19,792 Shares issued to shareholders in reinvestment of dividends 32,445 322,874 -------------- -------------- Total issued 5,354,220 53,274,459 Shares redeemed (4,886,241) (48,624,849) -------------- -------------- Net increase 467,979 $ 4,649,610 ============== ============== 5. CAPITAL LOSS CARRYFORWARD: At June 30, 1997, the Fund had a net capital loss carryforward as follows: Approximately $4,620,000 in the Insured Portfolio, of which $1,981,000 expires in 2003 and $2,639,000 expires in 2004; approximately $48,141,000 in the National Portfolio, of which $19,665,000 expires in 2003 and $28,476,000 expires in 2004; and approximately $4,658,000 in the Limited Maturity Portfolio, of which $2,590,000 expires in 1998, $22,000 expires in 1999, $25,000 expires in 2002, and $2,021,000 expires in 2003. These amounts will be available to offset like amounts of any future taxable gains. 76 - ------ TABLE OF CONTENTS PAGE Investment Objective and Policies....... 2 Insurance on Portfolio Securities..... 2 Risk Factors In Transactions In Junk Bonds............................... 2 Transactions In Futures Contracts..... 3 Investment Restrictions................. 4 Management of the Fund.................. 6 Directors and Officers................ 6 Compensation of Directors............. 8 Management and Advisory Arrangements........................ 8 Purchase of Shares...................... 11 Initial Sales Charge Alternatives -- Class A and Class D Shares.......... 11 Reduced Initial Sales Charges -- Class A and Class D Shares................ 13 Distribution Plans.................... 16 Limitations on the Payment of Deferred Sales Charges....................... 17 Redemption of Shares.................... 19 Reinstatement Privilege............... 20 Deferred Sales Charge -- Class B and Class C Shares.......... 20 Determination of Net Asset Value........ 21 Portfolio Transactions and Brokerage Commissions........................... 22 Dividends, Distributions and Taxes...... 23 Shareholder Services.................... 26 Investment Account.................... 26 Automatic Investment Plans............ 27 Automatic Reinvestment of Dividends and Capital Gains Distributions..... 27 Systematic Withdrawal Plans........... 28 Exchange Privilege.................... 29 Performance Data........................ 31 Additional Information.................. 35 Organization of the Fund.............. 35 Description of Temporary Investments......................... 36 Insurance on Portfolio Securities..... 36 Description of Financial Futures Contracts........................... 38 Computation of Offering Price Per Share............................... 42 Independent Auditors' Report............ 44 Financial Statements.................... 45 Code # 10130-1097 Merrill Lynch Logo MERRILL LYNCH MUNICIPAL BOND FUND, INC. [MLYNCH COMPASS GRAPH] STATEMENT OF ADDITIONAL INFORMATION October 7, 1997 Distributor: Merrill Lynch Funds Distributor, Inc. 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. EX-17.(C) 6 M/L MULTI-STATE LTD MATURITY MUNI TRUST SERIES EXHIBIT 17(c) PROSPECTUS - ---------- November 27, 1996 MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST MERRILL LYNCH ARIZONA LIMITED MATURITY MERRILL LYNCH MICHIGAN LIMITED MATURITY MUNICIPAL BOND FUND MUNICIPAL BOND FUND MERRILL LYNCH CALIFORNIA LIMITED MATURITY MERRILL LYNCH NEW JERSEY LIMITED MATURITY MUNICIPAL BOND FUND MUNICIPAL BOND FUND MERRILL LYNCH FLORIDA LIMITED MATURITY MERRILL LYNCH NEW YORK LIMITED MATURITY MUNICIPAL BOND FUND MUNICIPAL BOND FUND MERRILL LYNCH MASSACHUSETTS LIMITED MATURITY MERRILL LYNCH PENNSYLVANIA LIMITED MATURITY MUNICIPAL BOND FUND MUNICIPAL BOND FUND
P.O. Box 9011, Princeton, New Jersey 08543-9011 o Phone No. (609) 282-2800 Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the "Trust") consists of eight separate series: Merrill Lynch Arizona Limited Maturity Municipal Bond Fund (the "Arizona Fund"), Merrill Lynch California Limited Maturity Municipal Bond Fund (the "California Fund"), Merrill Lynch Florida Limited Maturity Municipal Bond Fund (the "Florida Fund"), Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund (the "Massachusetts Fund"), Merrill Lynch Michigan Limited Maturity Municipal Bond Fund (the "Michigan Fund"), Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund (the "New Jersey Fund"), Merrill Lynch New York Limited Maturity Municipal Bond Fund (the "New York Fund") and Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund (the "Pennsylvania Fund"). Each series of the Trust is referred to herein as a "Fund". Each Fund seeks to provide shareholders with as high a level of income exempt from Federal income taxes and personal income taxes imposed by the designated state (and, in certain instances, state intangible personal property taxes and local personal income taxes) as is consistent with prudent investment management. Under normal market conditions, each Fund invests primarily in a portfolio of intermediate-term investment grade obligations of the designated state or its political subdivisions, agencies or instrumentalities, or certain other jurisdictions, that pay interest exempt, in the opinion of bond counsel to the issuer, from Federal income taxes and personal income taxes of the designated state and, where applicable, local personal income taxes in the designated state. The obligations in which the Funds invest have remaining maturities of between one and ten years, and it is anticipated that, depending on market conditions, the dollar weighted average maturity of each Fund's portfolio will not exceed five years. The Funds may invest in certain tax-exempt securities classified as "private activity bonds" that may subject certain investors in the Funds to an alternative minimum tax. At times, a Fund may seek to hedge its portfolio through the use of futures and options transactions. There can be no assurance that the investment objective of any Fund will be realized. For more information on each Fund's investment objectives and policies, please see "Investment Objectives and Policies" on page 19. (continued on following page) ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ This Prospectus is a concise statement of information about the Trust and each Fund that is relevant to making an investment in a Fund. This Prospectus should be retained for future reference. A statement containing additional information about the Trust and each Fund, dated November 27, 1996 (the "Statement of Additional Information"), has been filed with the Securities and Exchange Commission (the "Commission") and is available, without charge, by calling or by writing the Trust at the above telephone number or address. The Statement of Additional Information is hereby incorporated by reference into this Prospectus. ------------------------ Fund Asset Management -- Manager Merrill Lynch Funds Distributor, Inc. -- Distributor 1 (continued from prior page) 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. See "Merrill Lynch Select Pricing(SM) System" on page 7. Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc. (the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609) 282-2800], or from securities dealers which have entered into selected dealer agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000 and the minimum subsequent purchase is $50. Merrill Lynch may charge its customers a processing fee (presently $4.85) for confirming purchases and repurchases. Purchases and redemptions directly through the Trust's Transfer Agent are not subject to the processing fee. See "Purchase of Shares" and "Redemption of Shares". Unless otherwise indicated, the information set forth in this Prospectus is applicable to each Fund. Management of the Trust has considered the possibility that the use of a combined prospectus may subject a Fund or Funds to liability for an alleged misstatement relating to another Fund or Funds. Management believes this possibility is remote. Each Fund has qualified its shares for sale under the securities laws of certain states, and shares of a Fund may be purchased only in jurisdictions in which such shares are qualified for purchase. This Prospectus does not constitute an offering of shares of any Fund in any state or jurisdiction in which such offering may not lawfully be made. An investor considering purchasing shares of a Fund should consult his or her Merrill Lynch Financial Consultant to determine whether shares of such Fund are available for purchase in his or her state. 2 FEE TABLE A general comparison of the sales arrangements and other nonrecurring and recurring expenses applicable to shares of the Funds follows:
All Funds ---------------------------------------------------------------------- Class A(a) Class B(b) Class C Class D ---------- ----------------------- ----------------------- -------- Shareholder Transaction Expenses: Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)..... 1.0%(c) None None 1.0%(c) Sales Charge Imposed on Dividend Reinvestments........................... None None None None Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, whichever is lower)........... None(d) 1.0% during the first 1.0% during the first None(d) year, year, decreasing to 0.0% decreasing to 0.0% after after the first year(e) the first year(f) Exchange Fee.............................. None None None None
- ------------ (a) Class A shares are sold to a limited group of investors including existing Class A shareholders and certain participants in fee-based programs. See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D Shares"--page 36 and "Shareholder Services--Fee-Based Programs"--page 48. (b) Class B shares convert to Class D shares automatically approximately ten years after initial purchase. See "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares"--page 38. (c) Reduced for purchases of $100,000 and over and waived for purchases of Class A shares in connection with certain fee-based programs. Class A or Class D purchases of $1,000,000 or more may not be subject to an initial sales charge. See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D Shares"--page 36. (d) Class A and Class D shares are not subject to a contingent deferred sales charge ("CDSC"), except that certain purchases of $1,000,000 or more which are not subject to an initial sales charge may instead be subject to a CDSC of 0.20% of amounts redeemed within the first year after purchase. Such CDSC may be waived in connection with redemptions to fund participation in certain fee-based programs. See "Shareholder Services--Fee-Based Programs"--page 48. (e) The CDSC may be modified in connection with redemptions to fund participation in certain fee-based programs. See "Shareholder Services--Fee-Based Programs"--page 48. (f) The CDSC may be waived in connection with redemptions to fund participation in certain fee-based programs. See "Shareholder Services--Fee-Based Programs"--page 48. (continued on next page) 3
Arizona Fund California Fund ------------------------------------------- ------------------------------------------- Class A Class B Class C Class D Class A Class B Class C Class D ------- ------- ------- ------- ------- ------- ------- ------- Annual Fund Operating Expenses (as a percentage of average net assets): Management Fees(g).... 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% Rule 12b-1 Fees(h) Account Mainte- nance Fees........ None 0.15% 0.15% 0.10% None 0.15% 0.15% 0.10% Distribution Fees(i)........... None 0.20%* 0.20% None None 0.20%* 0.20% None Other Expenses........ 1.92% 1.91% 2.10% 1.97% 0.95% 0.96% 0.80% 0.95% ------ ------ ------ ------ ------ ------ ------ ------ Total Fund Operating Expenses**.......... 2.27% 2.61% 2.80% 2.42% 1.30% 1.66% 1.50% 1.40% ====== ====== ====== ====== ====== ====== ====== ======
Florida Fund Massachusetts Fund --------------------------------------------- ------------------------------------------- Class A Class B Class C Class D Class A Class B Class C Class D ---------- ------- ------- ------- ------- ------- ------- ------- Annual Fund Operating Expenses (as a percentage of average net assets): Management Fees(g).... 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% Rule 12b-1 Fees(h) Account Mainte- nance Fees........ None 0.15% 0.15% 0.10% None 0.15% 0.15% 0.10% Distribution Fees(i)........... None 0.20%* 0.20% None None 0.20%* 0.20% None Other Expenses........ 0.62% 0.62% 0.53% 0.62% 1.80% 1.91% 1.67% 1.97% ---- ---- ---- ---- ---- ---- ---- ---- Total Fund Operating Expenses**.......... 0.97% 1.32% 1.23% 1.07% 2.15% 2.61% 2.37% 2.42% ==== ==== ==== ==== ==== ==== ==== ====
- ------------ (g) See "Management of the Trust--Management and Advisory Arrangements"--page 32. (h) See "Purchase of Shares--Distribution Plans"--page 41. (i) Distribution Fees reflect the maximum amount a Fund would be subject to pay under its Distribution Plans. See "Purchase of Shares--Distribution Plans"--page 41. Such amount, however, is subject to certain limitations. See "Purchase of Shares--Limitations on the Payment of Deferred Sales Charges"--page 44. * Class B shares convert to Class D shares automatically after approximately ten years and cease being subject to distribution fees. ** For the fiscal year ended July 31, 1996, Fund Asset Management, L.P. (the "Manager") voluntarily waived all of the management fees due from each of the Funds and voluntarily reimbursed each of the Funds for a portion of other expenses (excluding Rule 12b-1 fees), except for the Florida Fund, for which the Manager voluntarily waived $24,123 of the management fees due from such Fund and did not reimburse any portion of other expenses (excluding Rule 12b-1 fees). The Total Fund Operating Expenses in the fee table above have been restated to assume the absence of any such waiver or reimbursement because the Manager may discontinue or reduce such waiver of fees and/or assumption of expenses at any time without notice. The actual Total Fund Operating Expenses, net of the waiver, is provided below for the fiscal year ended July 31, 1996.
Management Fees Total Operating Waived and Expenses After Expenses Waiver and Reimbursed Reimbursement ---------------------------------------- ---------------------------------------- Class A Class B Class C Class D Class A Class B Class C Class D ------- ------- ------- ------- ------- ------- ------- ------- Arizona Fund........................... 1.53% 1.52% 1.77% 1.52% 0.74% 1.09% 1.03% 0.90% California Fund........................ 0.36% 0.36% 0.36% 0.34% 0.94% 1.30% 1.14% 1.06% Florida Fund........................... 0.08% 0.08% 0.02% 0.08% 0.89% 1.24% 1.21% 0.99% Massachusetts Fund..................... 1.38% 1.45% 1.43% 1.49% 0.77% 1.16% 0.94% 0.93% Michigan Fund.......................... 2.04% 2.04% 2.07% 2.19% 0.74% 1.10% 1.24% 0.87% New Jersey Fund........................ 1.02% 1.02% 1.04% 1.02% 0.76% 1.10% 1.00% 0.84% New York Fund.......................... 0.88% 0.88% 0.88% 0.87% 0.50% 0.87% 0.71% 0.62% Pennsylvania Fund...................... 0.83% 0.84% 0.86% 0.75% 0.80% 1.15% 0.97% 0.96%
4
Michigan Fund New Jersey Fund - ------------------------------------------- ------------------------------------------- Class A Class B Class C Class D Class A Class B Class C Class D - ------- ------- ------- ------- ------- ------- ------- ------- 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% None 0.15% 0.15% 0.10% None 0.15% 0.15% 0.10% None 0.20%* 0.20% None None 0.20%* 0.20% None 2.43% 2.44% 2.61% 2.61% 1.43% 1.42% 1.34% 1.41% ---- ---- ---- ---- ---- ---- ---- ---- 2.78 3.14% 3.31% 3.06% 1.78% 2.12% 2.04% 1.86% ==== ==== ==== ==== ==== ==== ==== ====
New York Fund Pennsylvania Fund --------------------------------------------- ------------------------------------------- Class A Class A Class B Class C Class D Class A Class B Class C Class D - ------- ---------- ------- ------- ------- ------- ------- ------- ------- 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35% None None 0.15% 0.15% 0.10% None 0.15% 0.15% 0.10% None None 0.20%* 0.20% None None 0.20%* 0.20% None 2.43% 1.03% 1.05% 0.89% 1.04% 1.28% 1.29% 1.13% 1.26% ---- ---- ---- ---- ---- ---- ---- ---- ---- 2.78 1.38% 1.75% 1.59% 1.49% 1.63% 1.99% 1.83% 1.71% ==== ==== ==== ==== ==== ==== ==== ==== ====
5 Example:
Cumulative Expenses Paid for the Period Indicated ------------------------------------------------------------------------------ Arizona Fund California Fund ------------------------------------- -------------------------------------- 1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years ------ ------- ------- -------- ------- ------- ------- -------- An investor in each Fund would pay the following expenses on a $1,000 investment including the maximum $10.00 initial sales charge (Class A and Class D shares only) and assuming (1) the Total Fund Operating Expenses for each class set forth on pages 4 and 5, (2) a 5% annual return throughout the period, and (3) redemption at the end of the period: Class A.......................... $ 33 $ 80 $ 130 $268 $ 23 $ 51 $ 81 $165 Class B.......................... $ 36 $ 81 $ 139 $294 $ 27 $ 52 $ 90 $197 Class C.......................... $ 38 $ 87 $ 148 $313 $ 25 $ 47 $ 82 $179 Class D.......................... $ 34 $ 85 $ 138 $283 $ 24 $ 54 $ 86 $176 An investor would pay the following expenses on the same $1,000 investment assuming no redemption at the end of the period: Class A.......................... $ 33 $ 80 $ 130 $268 $ 23 $ 51 $ 81 $165 Class B.......................... $ 26 $ 81 $ 139 $294 $ 17 $ 52 $ 90 $197 Class C.......................... $ 28 $ 87 $ 148 $313 $ 15 $ 47 $ 82 $179 Class D.......................... $ 34 $ 85 $ 138 $283 $ 24 $ 54 $ 86 $176
Florida Fund Massachusetts Fund ---------------------------------------- -------------------------------------- 1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years ---------- ------- ------- -------- ------- ------- ------- -------- An investor in each Fund would pay the following expenses on a $1,000 investment including the maximum $10.00 initial sales charge (Class A and Class D shares only) and assuming (1) the Total Fund Operating Expenses for each class set forth on pages 4 and 5, (2) a 5% annual return throughout the period, and (3) redemption at the end of the period: Class A.......................... $ 20 $41 $63 $128 $232 $77 $ 124 $256 Class B.......................... $ 23 $42 $72 $159 $36 $81 $ 139 $294 Class C.......................... $ 23 $39 $68 $149 $34 $74 $ 127 $271 Class D.......................... $ 21 $44 $68 $139 $34 $85 $ 138 $283 An investor would pay the following expenses on the same $1,000 investment assuming no redemption at the end of the period: Class A.......................... $ 20 $41 $63 $128 $32 $77 $ 124 $256 Class B.......................... $ 13 $42 $72 $159 $26 $81 $ 139 $294 Class C.......................... $ 13 $39 $68 $149 $24 $74 $ 127 $271 Class D.......................... $ 21 $44 $68 $139 $34 $85 $ 138 $283
Michigan Fund New Jersey Fund ------------------------------------- -------------------------------------- 1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years ------ ------- ------- -------- ------- ------- ------- -------- An investor in each Fund would pay the following expenses on a $1,000 investment including the maximum $10.00 initial sales charge (Class A and Class D shares only) and assuming (1) the Total Fund Operating Expenses for each class set forth on pages 4 and 5, (2) a 5% annual return throughout the period, and (3) redemption at the end of the period: Class A.......................... $ 38 $ 95 $ 155 $318 $ 28 $ 65 $ 105 $217 Class B.......................... $ 42 $ 97 $ 164 $345 $ 32 $ 66 $ 114 $245 Class C.......................... $ 43 $ 102 $ 173 $360 $ 31 $ 64 $ 110 $237 Class D.......................... $ 41 $ 104 $ 169 $344 $ 29 $ 68 $ 110 $226 An investor would pay the following expenses on the same $1,000 investment assuming no redemption at the end of the period: Class A.......................... $ 38 $ 95 $ 155 $318 $ 28 $ 65 $ 105 $217 Class B.......................... $ 32 $ 97 $ 164 $345 $ 22 $ 66 $ 114 $245 Class C.......................... $ 33 $ 102 $ 173 $360 $ 21 $ 64 $ 110 $237 Class D.......................... $ 41 $ 104 $ 169 $344 $ 29 $ 68 $ 110 $226
New York Fund Pennsylvania Fund ---------------------------------------- -------------------------------------- 1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years ---------- ------- ------- -------- ------- ------- ------- -------- An investor in each Fund would pay the following expenses on a $1,000 investment including the maximum $10.00 initial sales charge (Class A and Class D shares only) and assuming (1) the Total Fund Operating Expenses for each class set forth on pages 4 and 5, (2) a 5% annual return throughout the period, and (3) redemption at the end of the period: Class A.......................... $ 24 $53 $85 $174 $26 $61 $ 98 $201 Class B.......................... $ 28 $55 $95 $206 $30 $62 $ 107 $232 Class C.......................... $ 26 $50 $87 $189 $29 $58 $ 99 $215 Class D.......................... $ 25 $57 $91 $186 $27 $63 $ 102 $210 An investor would pay the following expenses on the same $1,000 investment assuming no redemption at the end of the period: Class A.......................... $ 24 $53 $85 $174 $26 $61 $ 98 $201 Class B.......................... $ 18 $55 $95 $206 $20 $62 $ 107 $232 Class C.......................... $ 16 $50 $87 $189 $19 $58 $ 99 $215 Class D.......................... $ 25 $57 $91 $186 $27 $63 $ 102 $210
6 The foregoing Fee Table is intended to assist investors in understanding the costs and expenses that shareholders in the Funds will bear directly or indirectly. The example set forth above assumes reinvestment of all dividends and distributions and utilizes a 5% annual rate of return as mandated by Commission regulations. The example should not be considered a representation of past or future expenses or annual rates of return, and actual expenses or annual rates of return may be more or less than those assumed for purposes of the example. Class B and Class C shareholders of any Fund who hold their shares for an extended period of time may pay more in Rule 12b-1 distribution fees than the economic equivalent of the maximum front-end sales charges permitted under the Conduct Rules of the National Association of Securities Dealers, Inc. (the "NASD"). Merrill Lynch may charge its customers a processing fee (presently $4.85) for confirming purchases and repurchases. Purchases and redemptions directly through the Trust's Transfer Agent are not subject to the processing fee. See "Purchase of Shares" and "Redemption of Shares". MERRILL LYNCH SELECT PRICING(SM) SYSTEM Each of the Funds 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 for 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 which utilize the Merrill Lynch Select Pricing(SM) System are referred to herein as "MLAM-advised mutual funds". Each Class A, Class B, Class C or Class D share of each of the Funds represents an identical interest in the investment portfolio of that Fund and has the same rights, except that Class B, Class C and Class D shares bear the expenses of the ongoing account maintenance fees and Class B and Class C shares bear the expenses of the ongoing distribution fees and the additional incremental transfer agency costs resulting from the deferred sales charge arrangements. The CDSCs and distribution and account maintenance fees that are imposed on Class B and Class C shares, as well as the account maintenance fees that are imposed on Class D shares, are imposed directly against those classes and not against all assets of the Fund issuing the shares and, accordingly, such charges will not affect the net asset value of any other class or have any impact on investors choosing another sales charge option. Dividends paid by a Fund for each class of shares will be calculated in the same manner at the same time and will differ only to the extent that account maintenance and distribution fees and any incremental transfer agency costs relating to a particular class are borne exclusively by that class. Each class has different exchange privileges. See "Shareholder Services--Exchange Privilege". Investors should understand that the purpose and function of the initial sales charges with respect to the Class A and Class D shares are the same as those of the deferred sales charges with respect to the Class B and Class C shares in that the sales charges applicable to each class provide for the financing of the distribution of the shares of that Fund. The distribution-related revenues paid with respect to a class will not be used to finance the distribution expenditures of another class. Sales personnel may receive different compensation for selling different classes of shares. 7 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 and 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 particular circumstances. More detailed information as to each class of shares is set forth under "Purchase of Shares". - --------------------------------------------------------------------------------------------------------------------- Account Maintenance Distribution Class Sales Charge(1) Fee Fee Conversion Feature - --------------------------------------------------------------------------------------------------------------------- A Maximum 1.0% initial sales No No No charge(2)(3) - -------------------------------------------------------------------------------------------------------------------- B 1.0% CDSC for one year(4) 0.15% 0.20% B shares convert to D shares automatically after approximately ten years(5) - -------------------------------------------------------------------------------------------------------------------- C(7) 1.0% CDSC for one year(6) 0.15% 0.20% No - -------------------------------------------------------------------------------------------------------------------- D Maximum 1.0% initial sales 0.10% No No charge(3) - --------------------------------------------------------------------------------------------------------------------
- ------------ (1) Initial sales charges are imposed at the time of purchase as a percentage of the offering price. CDSCs are imposed if the redemption occurs within the applicable CDSC time period. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. (2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D Shares--Eligible Class A Investors". (3) Reduced for purchases of $100,000 or more and waived for purchases of Class A shares in connection with certain fee-based programs. Class A and Class D share purchases of $1,000,000 or more may not be subject to an initial sales charge but instead may be subject to a 0.20% CDSC for one year. Such CDSC may be waived in connection with redemptions to fund participation in certain fee-based programs. See "Class A" and "Class D" below. (4) The CDSC may be modified in connection with redemptions to fund participation in certain fee-based programs. (5) The conversion period for dividend reinvestment shares and certain fee-based programs may be modified. Also, Class B shares of certain other MLAM-advised mutual funds into which exchanges may be made have an eight year conversion period. If Class B shares of a Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the conversion period applicable to the Class B shares acquired in the exchange will apply, and the holding period for the shares exchanged will be tacked onto the holding period for the shares acquired. (6) The CDSC may be waived in connection with redemptions to fund participation in certain fee-based programs. (7) Class C shares will be issued only upon exchange for Class C shares of another MLAM-advised mutual fund. See "Shareholder Services--Exchange Privilege". Class A: Class A shares incur an initial sales charge when they are purchased and bear no ongoing distribution or account maintenance fees. Class A shares are offered to a limited group of investors and also will be issued upon reinvestment of dividends on outstanding Class A shares. Investors that currently own Class A shares of a Fund in a shareholder account are entitled to purchase additional Class A shares of such Fund in that account. Other eligible investors include participants in certain fee-based programs. In addition, Class A shares will be offered at net asset value to Merrill Lynch & Co., Inc. ("ML&Co.") and its subsidiaries (the term "subsidiaries" when used herein with respect to ML&Co. includes MLAM, FAM and certain other entities directly or indirectly wholly owned and controlled by ML&Co.) and their directors and employees, and to members of the Boards of MLAM-advised mutual funds. The maximum initial sales charge is 1.00%, which is reduced for purchases of $100,000 and over and waived for purchases of Class A shares in connection with certain fee-based programs. 8 Purchases of $1,000,000 or more may not be subject to an initial sales charge but if the initial sales charge is waived, such purchases may be subject to a 0.20% CDSC if the shares are redeemed within one year after purchase. Such CDSC may be waived in connection with redemptions to fund participation in certain fee-based programs. Sales charges also are reduced under a right of accumulation which takes into account the investor's holdings of all classes of all MLAM-advised mutual funds. See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D Shares". Class B: Class B shares do not incur a sales charge when they are purchased, but they are subject to an ongoing account maintenance fee of 0.15% and an ongoing distribution fee of 0.20%, of the Fund's average net assets attributable to the Class B shares, as well as a CDSC if they are redeemed within one year of purchase. Such CDSC may be modified in connection with redemptions to fund participation in certain fee-based programs. Approximately ten years after issuance, Class B shares of a Fund will convert automatically into Class D shares of that Fund, which are subject to a lower account maintenance fee than Class B shares and no distribution fee; Class B shares of certain other MLAM-advised mutual funds into which exchanges may be made convert into Class D shares automatically after approximately eight years. If Class B shares of a Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the conversion period applicable to the Class B shares acquired in the exchange will apply, and the holding period for the shares exchanged will be tacked onto the holding period for the shares acquired. Automatic conversion of Class B shares into Class D shares will occur at least once each month on the basis of the relative net asset values of the shares of the two classes on the conversion date, without the imposition of any sales load, fee or other charge. Conversion of Class B shares to Class D shares will not be deemed a purchase or sale of the shares for Federal income tax purposes. Shares purchased through reinvestment of dividends on Class B shares also will convert automatically to Class D shares. The conversion period for dividend reinvestment shares is modified as described under "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class D Shares". Class C: Class C shares of the Funds are not available for purchase but will be issued only pursuant to the exchange privilege to holders of Class C shares of other MLAM-advised mutual funds who elect to exchange Class C shares of such other MLAM-advised mutual fund for Class C shares of one of the Funds. Class C shares are subject to an ongoing account maintenance fee of 0.15% and an ongoing distribution fee of 0.20% of the Fund's average net assets attributable to Class C shares. Although, like Class B shares, Class C shares are subject to a 1.0% CDSC for one year, Class C shares have no conversion feature and, accordingly, an investor that acquires Class C shares will be subject to distribution fees and higher account maintenance fees that will be imposed on Class C shares for an indefinite period subject to annual approval by the Trust's Board of Trustees and regulatory limitations. Such CDSC may be waived in connection with redemptions to fund participation in certain fee-based programs. Class D: Class D shares incur an initial sales charge when they are purchased and are subject to an ongoing account maintenance fee of 0.10% of the Fund's average net assets attributable to Class D shares. Class D shares are not subject to an ongoing distribution fee or any CDSC when they are redeemed. Purchases of $1,000,000 or more may not be subject to an initial sales charge but if the initial sales charge is waived, such purchase may be subject to a CDSC of 0.20% if the shares are redeemed within one year after purchase. Such CDSC may be waived in connection with redemptions to fund participation in certain fee-based programs. The schedule of initial sales charges and reductions for 9 Class D shares is the same as the schedule for Class A shares, except that there is no waiver for purchases of Class D shares in connection with certain fee-based programs. Class D shares also will be issued upon conversion of Class B shares as described above under "Class B". See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D Shares". The following is a discussion of the factors that investors should consider in determining the method of purchasing shares under the Merrill Lynch Select Pricing(SM) System that the investor believes is most beneficial under his particular circumstances. Initial Sales Charge Alternatives. Investors who prefer an initial sales charge alternative may elect to purchase Class D shares or, if an eligible investor, Class A shares. Investors choosing the initial sales charge alternative who are eligible to purchase Class A shares should purchase Class A shares rather than Class D shares because there is an account maintenance fee imposed on Class D shares. Investors qualifying for significantly reduced initial sales charges may find the initial sales charge alternative particularly attractive because similar sales charge reductions are not available with respect to the CDSCs imposed in connection with purchases of Class B shares. Investors not qualifying for reduced initial sales charges who expect to maintain their investment for an extended period of time also may elect to purchase Class A or Class D shares, because over time the accumulated ongoing account maintenance and distribution fees on Class B or Class C shares may exceed the initial sales charge and, in the case of Class D shares, the account maintenance fee. Although some investors that previously purchased Class A shares may no longer be eligible to purchase Class A shares of other MLAM- advised mutual funds, those previously purchased Class A shares, together with Class B, Class C and Class D share holdings, will count toward a right of accumulation which may qualify the investor for reduced initial sales charges on new initial sales charge purchases. In addition, the ongoing Class B and Class C account maintenance and distribution fees will cause Class B and Class C shares to have higher expense ratios, pay lower dividends and have lower total returns than the initial sales charge shares. The ongoing Class D account maintenance fees will cause Class D shares to have a higher expense ratio, pay lower dividends and have a lower total return than Class A shares. Deferred Sales Charge Alternative. Because no initial sales charges are deducted at the time of purchase, Class B shares provide the benefit of putting all of the investor's dollars to work from the time the investment is made. The deferred sales charge alternative may be particularly appealing to investors who do not qualify for a reduction in initial sales charges. Both Class B and Class C shares are subject to ongoing account maintenance fees and distribution fees; however, the ongoing account maintenance and distribution fees potentially may be offset to the extent any return is realized on the additional funds initially invested in Class B or Class C shares. In addition, Class B shares of a Fund will be converted into Class D shares of that Fund after a conversion period of approximately ten years, and thereafter investors will be subject to lower ongoing fees. Certain investors may elect to purchase Class B shares if they determine it to be most advantageous to have all their funds invested initially and intend to hold their shares for an extended period of time. Investors in Class B shares should take into account whether they intend to redeem their shares within the CDSC period and, if not, whether they intend to remain invested until the end of the conversion period and thereby take advantage of the reduction in ongoing fees resulting from the conversion into Class D shares. Although Class C shareholders are subject to the same CDSC period and rate as Class B shareholders, Class C shares have no conversion feature, and therefore are subject to account maintenance and distribution fees for an indefinite period of time. In addition, while both Class B and Class C distribution fees are subject to the limitations on asset-based sales charges imposed by the NASD, the Class B distribution fees are further limited under a voluntary waiver of asset-based sales charges. See "Purchase of Shares--Limitations on the Payment of Deferred Sales Charges". 10 FINANCIAL HIGHLIGHTS The financial information in the tables below has been audited in connection with the annual audits of the financial statements of the Trust by Deloitte & Touche LLP, independent auditors. Financial statements for the year ended July 31, 1996 and the independent auditors' report thereon are included in the Statement of Additional Information. The following per share data and ratios have been derived from information provided in such audited financial statements. Further information about the performance of the Funds is contained in the Trust's most recent annual report to shareholders which may be obtained, without charge, by calling or writing the Trust at the telephone number or address on the front cover of this Prospectus.
Arizona Fund -------------------------------------------------------------------------------------- Class A Class B Class C ------------------------------- ------------------------------- -------------------- For the For the For the period period For the period For the year ended Nov. 26, For the year ended Nov. 26, year Oct. 21, July 31, 1993+ to July 31, 1993+ to ended 1994+ to -------------------- July 31, -------------------- July 31, July 31, July 31, 1996 1995 1994 1996 1995 1994 1996 1995 --------- --------- --------- --------- --------- --------- --------- --------- Increase (Decrease) in Net Asset Value: Per Share Operating Performance: Net asset value, beginning of period.... $ 10.17 $ 9.97 $ 10.00 $ 10.16 $ 9.97 $ 10.00 $ 10.17 $ 9.89 --------- --------- --------- --------- --------- --------- --------- --------- Investment income--net................. .41 .43 .23 .37 .39 .20 .37 .29 Realized and unrealized gain (loss) on investments--net..................... (.09) .20 (.03) (.08) .19 (.03) (.09) .28 --------- --------- --------- --------- --------- --------- --------- --------- Total from investment operations........ .32 .63 .20 .29 .58 .17 .28 .57 --------- --------- --------- --------- --------- --------- --------- --------- Less dividends from investment income--net............................ (.41) (.43) (.23) (.37) (.39) (.20) (.37) (.29) --------- --------- --------- --------- --------- --------- --------- --------- Net asset value, end of period.......... $ 10.08 $ 10.17 $ 9.97 $ 10.08 $ 10.16 $ 9.97 $ 10.08 $ 10.17 ========= ========= ========= ========= ========= ========= ========= ========= Total Investment Return:** Based on net asset value per share...... 3.16% 6.47% 2.02%# 2.88% 5.99% 1.78%# 2.78% 5.90%# ========= ========= ========= ========= ========= ========= ========= ========= Ratios to Average Net Assets: Expenses, net of reimbursement.......... .74% .35% .02%* 1.09% .72% .38%* 1.03% 1.05%* ========= ========= ========= ========= ========= ========= ========= ========= Expenses................................ 2.27% 2.05% 1.82%* 2.61% 2.44% 2.18%* 2.80% 2.79%* ========= ========= ========= ========= ========= ========= ========= ========= Investment income--net.................. 4.01% 4.31% 3.37%* 3.65% 3.95% 3.02%* 3.86% 3.80%* ========= ========= ========= ========= ========= ========= ========= ========= Supplemental Data: Net assets, end of period (in thousands)............................. $ 813 $ 1,054 $ 2,103 $ 2,885 $ 5,191 $ 5,575 $ 135 $ 1 ========= ========= ========= ========= ========= ========= ========= ========= Portfolio turnover...................... 43.53% 182.58% 142.37% 43.53% 182.58% 142.37% 43.53% 182.58% ========= ========= ========= ========= ========= ========= ========= =========
Class D -------------------- For the For the period year Oct. 21, ended 1994+ to July 31, July 31, 1996 1995 --------- --------- Increase (Decrease) in Net Asset Value: Per Share Operating Performance: Net asset value, beginning of period.... $ 10.17 $ 9.89 --------- --------- Investment income--net................. .40 .33 Realized and unrealized gain (loss) on investments--net..................... (.09) .28 --------- --------- Total from investment operations........ .31 .61 --------- --------- Less dividends from investment income--net............................ (.40) (.33) --------- --------- Net asset value, end of period.......... $ 10.08 $ 10.17 ========= ========= Total Investment Return:** Based on net asset value per share...... 3.05% 6.34%# ========= ========= Ratios to Average Net Assets: Expenses, net of reimbursement.......... .90% .55%* ========= ========= Expenses................................ 2.42% 2.39%* ========= ========= Investment income--net.................. 3.88% 4.31%* ========= ========= Supplemental Data: Net assets, end of period (in thousands)............................. $ 619 $ 19 ========= ========= Portfolio turnover...................... 43.53% 182.58% ========= =========
- ------------ * Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of operations. # Aggregate total investment return. 11
California Fund -------------------------------------------------------------------------------------- Class A Class B Class C ------------------------------- ------------------------------- -------------------- For the For the For the period period For the period For the year ended Nov. 26, For the year ended Nov. 26, year Oct. 21, July 31, 1993+ to July 31, 1993+ to ended 1994+ to -------------------- July 31, -------------------- July 31, July 31, July 31, 1996 1995 1994 1996 1995 1994 1996 1995 --------- --------- --------- --------- --------- --------- --------- --------- Increase (Decrease) in Net Asset Value: Per Share Operating Performance: Net asset value, beginning of period.... $ 9.99 $ 9.88 $ 10.00 $ 9.99 $ 9.88 $ 10.00 $ 9.99 $ 9.76 --------- --------- --------- --------- --------- --------- --------- --------- Investment income--net................. .39 .42 .24 .36 .39 .21 .37 .31 Realized and unrealized gain (loss) on investments--net..................... .06 .11 (.12) .05 .11 (.12) .06 .23 --------- --------- --------- --------- --------- --------- --------- --------- Total from investment operations........ .45 .53 .12 .41 .50 .09 .43 .54 --------- --------- --------- --------- --------- --------- --------- --------- Less dividends from investment income--net............................. (.39) (.42) (.24) (.36) (.39) (.21) (.37) (.31) --------- --------- --------- --------- --------- --------- --------- --------- Net asset value, end of period.......... $ 10.05 $ 9.99 $ 9.88 $ 10.04 $ 9.99 $ 9.88 $ 10.05 $ 9.99 ========= ========= ========= ========= ========= ========= ========= ========= Total Investment Return:** Based on net asset value per share...... 4.56% 5.60% 1.23%# 4.08% 5.23% .99%# 4.35% 5.60%# ========= ========= ========= ========= ========= ========= ========= ========= Ratios to Average Net Assets: Expenses, net of reimbursement.......... .94% .40% .02%* 1.30% .76% .38%* 1.14% .82%* ========= ========= ========= ========= ========= ========= ========= ========= Expenses................................ 1.30% 1.44% 1.16%* 1.66% 1.80% 1.52%* 1.50% 1.98%* ========= ========= ========= ========= ========= ========= ========= ========= Investment income--net.................. 3.89% 4.36% 3.54%* 3.53% 4.00% 3.19%* 3.69% 4.04%* ========= ========= ========= ========= ========= ========= ========= ========= Supplemental Data: Net assets, end of period (in thousands).............................. $ 3,162 $ 3,527 $ 3,804 $ 9,919 $ 10,363 $ 11,430 $ 55 $ 64 ========= ========= ========= ========= ========= ========= ========= ========= Portfolio turnover...................... 11.09% 124.72% 130.10% 11.09% 124.72% 130.10% 11.09% 124.72% ========= ========= ========= ========= ========= ========= ========= =========
Class D -------------------- For the For the period year Oct. 21, ended 1994+ to July 31, July 31, 1996 1995 --------- --------- Increase (Decrease) in Net Asset Value: Per Share Operating Performance: Net asset value, beginning of period.... $ 9.99 $ 9.76 --------- --------- Investment income--net................. .38 .33 Realized and unrealized gain (loss) on investments--net..................... .06 .23 --------- --------- Total from investment operations........ .44 .56 --------- --------- Less dividends from investment income--net............................. (.38) (.33) --------- --------- Net asset value, end of period.......... $ 10.05 $ 9.99 ========= ========= Total Investment Return:** Based on net asset value per share...... 4.46% 5.85%# ========= ========= Ratios to Average Net Assets: Expenses, net of reimbursement.......... 1.06% .66%* ========= ========= Expenses................................ 1.40% 1.81%* ========= ========= Investment income--net.................. 3.77% 4.28%* ========= ========= Supplemental Data: Net assets, end of period (in thousands).............................. $ 2,185 $ 1,771 ========= ========= Portfolio turnover...................... 11.09% 124.72% ========= ========= - ------------ * Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of operations. # Aggregate total investment return. 12
Florida Fund -------------------------------------------------------------------------------------- Class A Class B Class C ------------------------------- ------------------------------- -------------------- For the For the For the period period For the period For the year ended Nov. 26, For the year ended Nov. 26, year Oct. 21, July 31, 1993+ to July 31, 1993+ to ended 1994+ to -------------------- July 31, -------------------- July 31, July 31, July 31, 1996 1995 1994 1996 1995 1994 1996 1995 --------- --------- --------- --------- --------- --------- --------- --------- Increase (Decrease) in Net Asset Value: Per Share Operating Performance: Net asset value, beginning of period.... $ 10.02 $ 9.87 $ 10.00 $ 10.02 $ 9.88 $ 10.00 $ 10.01 $ 9.76 --------- --------- --------- --------- --------- --------- --------- --------- Investment income--net................. .40 .43 .24 .37 .40 .21 .36 .29 Realized and unrealized gain (loss) on investments--net..................... (.06) .15 (.13) (.06) .14 (.12) (.11) .25 --------- --------- --------- --------- --------- --------- --------- --------- Total from investment operations........ .34 .58 .11 .31 .54 .09 .25 .54 --------- --------- --------- --------- --------- --------- --------- --------- Less dividends from investment income--net............................ (.40) (.43) (.24) (.37) (.40) (.21) (.36) (.29) --------- --------- --------- --------- --------- --------- --------- --------- Net asset value, end of period.......... $ 9.96 $ 10.02 $ 9.87 $ 9.96 $ 10.02 $ 9.88 $ 9.90 $ 10.01 ========= ========= ========= ========= ========= ========= ========= ========= Total Investment Return:** Based on net asset value per share...... 3.45% 6.05% 1.12%# 3.08% 5.57% .99%# 2.48% 5.65%# ========= ========= ========= ========= ========= ========= ========= ========= Ratios to Average Net Assets: Expenses, net of reimbursement.......... .89% .39% .02%* 1.24% .75% .38%* 1.21% 1.09%* ========= ========= ========= ========= ========= ========= ========= ========= Expenses................................ .97% 1.03% .86%* 1.32% 1.38% 1.23%* 1.23% 1.67%* ========= ========= ========= ========= ========= ========= ========= ========= Investment income--net.................. 4.01% 4.39% 3.54%* 3.66% 4.05% 3.19%* 3.75% 3.83%* ========= ========= ========= ========= ========= ========= ========= ========= Supplemental Data: Net assets, end of period (in thousands)............................. $ 7,874 $ 9,849 $ 14,868 $ 13,690 $ 16,213 $ 18,179 $ 52 $ 1 ========= ========= ========= ========= ========= ========= ========= ========= Portfolio turnover...................... 39.90% 138.97% 136.71% 39.90% 138.97% 136.71% 39.90% 138.97% ========= ========= ========= ========= ========= ========= ========= =========
Class D -------------------- For the For the period year Oct. 21, ended 1994+ to July 31, July 31, 1996 1995 --------- --------- Increase (Decrease) in Net Asset Value: Per Share Operating Performance: Net asset value, beginning of period.... $ 10.01 $ 9.76 --------- --------- Investment income--net................. .39 .33 Realized and unrealized gain (loss) on investments--net..................... (.06) .25 --------- --------- Total from investment operations........ .33 .58 --------- --------- Less dividends from investment income--net............................ (.39) (.33) --------- --------- Net asset value, end of period.......... $ 9.95 $ 10.01 ========= ========= Total Investment Return:** Based on net asset value per share...... 3.35% 6.07%# ========= ========= Ratios to Average Net Assets: Expenses, net of reimbursement.......... .99% .67%* ========= ========= Expenses................................ 1.07% 1.19%* ========= ========= Investment income--net.................. 3.91% 4.23%* ========= ========= Supplemental Data: Net assets, end of period (in thousands)............................. $ 6,406 $ 7,210 ========= ========= Portfolio turnover...................... 39.90% 138.97% ========= ========= - ------------ * Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of operations. # Aggregate total investment return. 13
Massachusetts Fund -------------------------------------------------------------------------------------- Class A Class B Class C ------------------------------- ------------------------------- -------------------- For the For the For the period period For the period For the year ended Nov. 26, For the year ended Nov. 26, year Oct. 21, July 31, 1993+ to July 31, 1993+ to ended 1994+ to -------------------- July 31, -------------------- July 31, July 31, July 31, 1996 1995 1994 1996 1995 1994 1996 1995 --------- --------- --------- --------- --------- --------- --------- --------- Increase (Decrease) in Net Asset Value: Per Share Operating Performance: Net asset value, beginning of period.... $ 9.96 $ 9.95 $ 10.00 $ 9.96 $ 9.95 $ 10.00 $ 9.96 $ 9.82 --------- --------- --------- --------- --------- --------- --------- --------- Investment income--net................. .40 .44 .25 .37 .40 .22 .39 .33 Realized and unrealized gain (loss) on investments--net..................... -- .02 (.05) -- .02 (.05) (.01) .15 --------- --------- --------- --------- --------- --------- --------- --------- Total from investment operations........ .40 .46 .20 .37 .42 .17 .38 .48 --------- --------- --------- --------- --------- --------- --------- --------- Less dividends and distributions: Investment income--net................. (.40) (.44) (.25) (.37) (.40) (.22) (.39) (.33) Realized gain on investments--net...... -- (.01) -- -- (.01) -- -- (.01) --------- --------- --------- --------- --------- --------- --------- --------- Total dividends and distributions....... (.40) (.45) (.25) (.37) (.41) (.22) (.39) (.34) --------- --------- --------- --------- --------- --------- --------- --------- Net asset value, end of period.......... $ 9.96 $ 9.96 $ 9.95 $ 9.96 $ 9.96 $ 9.95 $ 9.95 $ 9.96 ========= ========= ========= ========= ========= ========= ========= ========= Total Investment Return:** Based on net asset value per share...... 4.08% 4.79% 2.01%# 3.70% 4.41% 1.77%# 3.81% 5.00%# ========= ========= ========= ========= ========= ========= ========= ========= Ratios to Average Net Assets: Expenses, net of reimbursement.......... .77% .37% .03%* 1.16% .74% .38%* .94% .67%* ========= ========= ========= ========= ========= ========= ========= ========= Expenses................................ 2.15% 1.71% 1.17%* 2.61% 2.08% 1.54%* 2.37% 2.23%* ========= ========= ========= ========= ========= ========= ========= ========= Investment income--net.................. 4.04% 4.45% 3.69%* 3.66% 4.08% 3.28%* 3.88% 4.32%* ========= ========= ========= ========= ========= ========= ========= ========= Supplemental Data: Net assets, end of period (in thousands).............................. $ 1,719 $ 4,453 $ 8,097 $ 4,577 $ 4,800 $ 8,046 $ 210 $ 413 ========= ========= ========= ========= ========= ========= ========= ========= Portfolio turnover...................... 22.71% 89.96% 57.80% 22.71% 89.96% 57.80% 22.71% 89.96% ========= ========= ========= ========= ========= ========= ========= =========
Class D -------------------- For the For the period year Oct. 21, ended 1994+ to July 31, July 31, 1996 1995 --------- --------- Increase (Decrease) in Net Asset Value: Per Share Operating Performance: Net asset value, beginning of period.... $ 9.96 $ 9.82 --------- --------- Investment income--net................. .39 .34 Realized and unrealized gain (loss) on investments--net..................... -- .15 --------- --------- Total from investment operations........ .39 .49 --------- --------- Less dividends and distributions: Investment income--net................. (.39) (.34) Realized gain on investments--net...... -- (.01) --------- --------- Total dividends and distributions....... (.39) (.35) --------- --------- Net asset value, end of period.......... $ 9.96 $ 9.96 ========= ========= Total Investment Return:** Based on net asset value per share...... 3.97% 5.09%# ========= ========= Ratios to Average Net Assets: Expenses, net of reimbursement.......... .93% .70%* ======== ======== Expenses................................ 2.42% 2.31%* ======== ======== Investment income--net.................. 3.89% 4.21%* ======== ======== Supplemental Data: Net assets, end of period (in thousands).............................. $ 890 $ 253 ======== ======== Portfolio turnover...................... 22.71% 89.96% ======== ======== - ------------ * Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of operations. # Aggregate total investment return. 14
Michigan Fund -------------------------------------------------------------------------------------- Class A Class B Class C ------------------------------- ------------------------------- -------------------- For the For the For the period period For the period For the year ended Nov. 26, For the year ended Nov. 26, year Oct. 21, July 31, 1993+ to July 31, 1993+ to ended 1994+ to -------------------- July 31, -------------------- July 31, July 31, July 31, 1996 1995 1994 1996 1995 1994 1996 1995 --------- --------- --------- --------- --------- --------- --------- --------- Increase (Decrease) in Net Asset Value: Per Share Operating Performance: Net asset value, beginning of period.... $ 9.98 $ 9.92 $ 10.00 $ 9.98 $ 9.92 $ 10.00 $ 9.98 $ 9.76 --------- --------- --------- --------- --------- --------- --------- --------- Investment income--net................. .41 .44 .24 .37 .40 .22 .36 .30 Realized and unrealized gain (loss) on investments--net..................... (.04) .06 (.08) (.04) .06 (.08) (.04) .22 --------- --------- --------- --------- --------- --------- --------- --------- Total from investment operations........ .37 .50 .16 .33 .46 .14 .32 .52 --------- --------- --------- --------- --------- --------- --------- --------- Less dividends from investment income--net............................ (.41) (.44) (.24) (.37) (.40) (.22) (.36) (.30) --------- --------- --------- --------- --------- --------- --------- --------- Net asset value, end of period.......... $ 9.94 $ 9.98 $ 9.92 $ 9.94 $ 9.98 $ 9.92 $ 9.94 $ 9.98 ========= ========= ========= ========= ========= ========= ========= ========= Total Investment Return:** Based on net asset value per share...... 3.71% 5.16% 1.66%# 3.32% 4.78% 1.42%# 3.20% 5.40%# ========= ========= ========= ========= ========= ========= ========= ========= Ratios to Average Net Assets: Expenses, net of reimbursement.......... .74% .27% .02%* 1.10% .65% .38%* 1.24% .96%* ========= ========= ========= ========= ========= ========= ========= ========= Expenses................................ 2.78% 2.18% 2.01%* 3.14% 2.56% 2.38%* 3.31% 2.90%* ========= ========= ========= ========= ========= ========= ========= ========= Investment income--net.................. 4.06% 4.42% 3.59%* 3.70% 4.09% 3.21%* 3.57% 3.80%* ========= ========= ========= ========= ========= ========= ========= ========= Supplemental Data: Net assets, end of period (in thousands)............................. $ 1,641 $ 2,302 $ 3,435 $ 1,842 $ 2,494 $ 2,411 $ 1 $ 1 ========= ========= ========= ========= ========= ========= ========= ========= Portfolio turnover...................... 32.92% 93.08% 204.15% 32.92% 93.08% 204.15% 32.92% 93.08% ========= ========= ========= ========= ========= ========= ========= =========
Class D -------------------- For the For the period year Oct. 21, ended 1994+ to July 31, July 31, 1996 1995 --------- --------- Increase (Decrease) in Net Asset Value: Per Share Operating Performance: Net asset value, beginning of period.... $ 9.97 $ 9.76 --------- --------- Investment income--net................. .40 .34 Realized and unrealized gain (loss) on investments--net..................... (.03) .21 --------- --------- Total from investment operations........ .37 .55 --------- --------- Less dividends from investment income--net............................ (.40) (.34) --------- --------- Net asset value, end of period.......... $ 9.94 $ 9.97 ========= ========= Total Investment Return:** Based on net asset value per share...... 3.71% 5.72%# ========= ========= Ratios to Average Net Assets: Expenses, net of reimbursement.......... .87% .44%* ========= ========= Expenses................................ 3.06% 2.38%* ========= ========= Investment income--net.................. 3.94% 4.47%* ========= ========= Supplemental Data: Net assets, end of period (in thousands)............................. $ 541 $ 254 ========= ========= Portfolio turnover...................... 32.92% 93.08% ========= ========= - ------------ * Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of operations. # Aggregate total investment return. 15
New Jersey Fund -------------------------------------------------------------------------------------- Class A Class B Class C ------------------------------- ------------------------------- -------------------- For the For the For the period period For the period For the year ended Nov. 26, For the year ended Nov. 26, year Oct. 21, July 31, 1993+ to July 31, 1993+ to ended 1994+ to -------------------- July 31, -------------------- July 31, July 31, July 31, 1996 1995 1994 1996 1995 1994 1996 1995 --------- --------- --------- --------- --------- --------- --------- --------- Increase (Decrease) in Net Asset Value: Per Share Operating Performance: Net asset value, beginning of period.... $ 10.15 $ 9.94 $ 10.00 $ 10.16 $ 9.95 $ 10.00 $ 9.20 $ 9.86 --------- --------- --------- --------- --------- --------- --------- --------- Investment income--net................. .41 .42 .23 .37 .38 .20 .34 .26 Realized and unrealized gain (loss) on investments--net..................... (.04) .21 (.06) (.05) .21 (.05) (.04) (.66) --------- --------- --------- --------- --------- --------- --------- --------- Total from investment operations........ .37 .63 .17 .32 .59 .15 .30 (.40) --------- --------- --------- --------- --------- --------- --------- --------- Less dividends from investment income--net............................. (.41) (.42) (.23) (.37) (.38) (.20) (.34) (.26) --------- --------- --------- --------- --------- --------- --------- --------- Net asset value, end of period.......... $ 10.11 $ 10.15 $ 9.94 $ 10.11 $ 10.16 $ 9.95 $ 9.16 $ 9.20 ========= ========= ========= ========= ========= ========= ========= ========= Total Investment Return:** Based on net asset value per share...... 3.68% 6.45% 1.73%# 3.21% 6.07% 1.59%# 3.24% (4.01)%# ========= ========= ========= ========= ========= ========= ========= ========= Ratios to Average Net Assets: Expenses, net of reimbursement.......... .76% .34% .03%* 1.10% .73% .38%* 1.00% .55%* ========= ========= ========= ========= ========= ========= ========= ========= Expenses................................ 1.78% 1.69% 1.14%* 2.12% 2.15% 1.52%* 2.04% 2.22%* ========= ========= ========= ========= ========= ========= ========= ========= Investment income--net.................. 4.02% 4.10% 3.45%* 3.67% 3.80% 3.04%* 3.82% 4.06%* ========= ========= ========= ========= ========= ========= ========= ========= Supplemental Data: Net assets, end of period (in thousands).............................. $ 2,663 $ 2,401 $ 5,933 $ 5,152 $ 7,593 $ 7,885 $ 272 $ 1 ========= ========= ========= ========= ========= ========= ========= ========= Portfolio turnover...................... 6.57% 131.56% 205.04% 6.57% 131.56% 205.04% 6.57% 131.56% ========= ========= ========= ========= ========= ========= ========= =========
Class D -------------------- For the For the period year Oct. 21, ended 1994+ to July 31, July 31, 1996 1995 --------- --------- Increase (Decrease) in Net Asset Value: Per Share Operating Performance: Net asset value, beginning of period.... $ 10.16 $ 9.85 --------- --------- Investment income--net................. .40 .32 Realized and unrealized gain (loss) on investments--net..................... (.05) .31 --------- --------- Total from investment operations........ .35 .63 --------- --------- Less dividends from investment income--net............................. (.40) (.32) --------- --------- Net asset value, end of period.......... $ 10.11 $ 10.16 ========= ========= Total Investment Return:** Based on net asset value per share...... 3.48% 6.51%# ========= ========= Ratios to Average Net Assets: Expenses, net of reimbursement.......... .84% .62%* ========= ========= Expenses................................ 1.86% 2.07%* ========= ========= Investment income--net.................. 3.93% 4.17%* ========= ========= Supplemental Data: Net assets, end of period (in thousands).............................. $ 540 $ 437 ========= ========= Portfolio turnover...................... 6.57% 131.56% ========= ========= - ------------ * Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of operations. # Aggregate total investment return. 16
New York Fund -------------------------------------------------------------------------------------- Class A Class B Class C ------------------------------- ------------------------------- -------------------- For the For the For the period period For the period For the year ended Nov. 26, For the year ended Nov. 26, year Oct. 21, July 31, 1993+ to July 31, 1993+ to ended 1994+ to -------------------- July 31, -------------------- July 31, July 31, July 31, 1996 1995 1994 1996 1995 1994 1996 1995 --------- --------- --------- --------- --------- --------- --------- --------- Increase (Decrease) in Net Asset Value: Per Share Operating Performance: Net asset value, beginning of period.... $ 10.05 $ 9.91 $ 10.00 $ 10.05 $ 9.91 $ 10.00 $ 10.05 $ 9.78 --------- --------- --------- --------- --------- --------- --------- --------- Investment income--net................. .43 .44 .25 .40 .41 .22 .42 .30 Realized and unrealized gain (loss) on investments--net..................... .01 .14 (.09) .01 .14 (.09) .01 .27 --------- --------- --------- --------- --------- --------- --------- --------- Total from investment operations........ .44 .58 .16 .41 .55 .13 .43 .57 --------- --------- --------- --------- --------- --------- --------- --------- Less dividends from investment income--net............................ (.43) (.44) (.25) (.40) (.41) (.22) (.42) (.30) --------- --------- --------- --------- --------- --------- --------- --------- Net asset value, end of period.......... $ 10.06 $ 10.05 $ 9.91 $ 10.06 $ 10.05 $ 9.91 $ 10.06 $ 10.05 ========= ========= ========= ========= ========= ========= ========= ========= Total Investment Return:** Based on net asset value per share...... 4.46% 6.03% 1.61%# 4.08% 5.66% 1.37%# 4.28% 5.97%# ========= ========= ========= ========= ========= ========= ========= ========= Ratios to Average Net Assets: Expenses, net of reimbursement.......... .50% .33% .03%* .87% .69% .38%* .71% .63%* ========= ========= ========= ========= ========= ========= ========= ========= Expenses................................ 1.38% 1.30% 1.24%* 1.75% 1.65% 1.60%* 1.59% 1.63%* ========= ========= ========= ========= ========= ========= ========= ========= Investment income--net.................. 4.28% 4.49% 3.68%* 3.91% 4.11% 3.31%* 4.06% 4.21%* ========= ========= ========= ========= ========= ========= ========= ========= Supplemental Data: Net assets, end of period (in thousands)............................. $ 3,723 $ 4,811 $ 5,290 $ 10,071 $ 8,822 $ 9,743 $ 214 $ 38 ========= ========= ========= ========= ========= ========= ========= ========= Portfolio turnover...................... 51.47% 139.16% 152.73% 51.47% 139.16% 152.73% 51.47% 139.16% ========= ========= ========= ========= ========= ========= ========= =========
Class D -------------------- For the For the period year Oct. 21, ended 1994+ to July 31, July 31, 1996 1995 --------- --------- Increase (Decrease) in Net Asset Value: Per Share Operating Performance: Net asset value, beginning of period.... $ 10.05 $ 9.78 --------- --------- Investment income--net................. .42 .34 Realized and unrealized gain (loss) on investments--net..................... .01 .27 --------- --------- Total from investment operations........ .43 .61 --------- --------- Less dividends from investment income--net............................ (.42) (.34) --------- --------- Net asset value, end of period.......... $ 10.06 $ 10.05 ========= ========= Total Investment Return:** Based on net asset value per share...... 4.35% 6.37%# ========= ========= Ratios to Average Net Assets: Expenses, net of reimbursement.......... .62% .48%* ========= ========= Expenses................................ 1.49% 1.48%* ========= ========= Investment income--net.................. 4.16% 4.47%* ========= ========= Supplemental Data: Net assets, end of period (in thousands)............................. $ 3,912 $ 2,306 ========= ========= Portfolio turnover...................... 51.47% 139.16% ========= ========= - ------------ * Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of operations. # Aggregate total investment return. 17
Pennsylvania Fund -------------------------------------------------------------------------------------- Class A Class B Class C ------------------------------- ------------------------------- -------------------- For the For the For the period period For the period For the year ended Nov. 26, For the year ended Nov. 26, year Oct. 21, July 31, 1993+ to July 31, 1993+ to ended 1994+ to -------------------- July 31, -------------------- July 31, July 31, July 31, 1996 1995 1994 1996 1995 1994 1996 1995 --------- --------- --------- --------- --------- --------- --------- --------- Increase (Decrease) in Net Asset Value: Per Share Operating Performance: Net asset value, beginning of period.... $ 10.10 $ 9.95 $ 10.00 $ 10.10 $ 9.95 $ 10.00 $ 10.10 $ 9.84 --------- --------- --------- --------- --------- --------- --------- --------- Investment income--net................. .41 .42 .23 .37 .39 .21 .38 .29 Realized and unrealized gain (loss) on investments--net..................... .01 .15 (.05) .01 .15 (.05) .05 .26 --------- --------- --------- --------- --------- --------- --------- --------- Total from investment operations........ .42 .57 .18 .38 .54 .16 .43 .55 --------- --------- --------- --------- --------- --------- --------- --------- Less dividends from investment income--net............................. (.41) (.42) (.23) (.37) (.39) (.21) (.38) (.29) --------- --------- --------- --------- --------- --------- --------- --------- Net asset value, end of period.......... $ 10.11 $ 10.10 $ 9.95 $ 10.11 $ 10.10 $ 9.95 $ 10.15 $ 10.10 ========= ========= ========= ========= ========= ========= ========= ========= Total Investment Return:** Based on net asset value per share...... 4.18% 5.89% 1.85%# 3.80% 5.51% 1.61%# 4.28% 5.68%# ========= ========= ========= ========= ========= ========= ========= ========= Ratios to Average Net Assets: Expenses, net of reimbursement.......... .80% .38% .02%* 1.15% .73% .38%* .97% 1.05%* ========= ========= ========= ========= ========= ========= ========= ========= Expenses................................ 1.63% 1.90% 1.48%* 1.99% 2.25% 1.83%* 1.83% 2.55%* ========= ========= ========= ========= ========= ========= ========= ========= Investment income--net.................. 4.01% 4.25% 3.46%* 3.65% 3.87% 3.05%* 3.84% 3.77%* ========= ========= ========= ========= ========= ========= ========= ========= Supplemental Data: Net assets, end of period (in thousands).............................. $ 833 $ 943 $ 990 $ 6,264 $ 7,414 $ 9,532 $ 1 $ 1 ========= ========= ========= ========= ========= ========= ========= ========= Portfolio turnover...................... 30.90% 141.52% 237.47% 30.90% 141.52% 237.47% 30.90% 141.52% ========= ========= ========= ========= ========= ========= ========= =========
Class D -------------------- For the For the period year Oct. 21, ended 1994+ to July 31, July 31, 1996 1995 --------- --------- Increase (Decrease) in Net Asset Value: Per Share Operating Performance: Net asset value, beginning of period.... $ 10.10 $ 9.84 --------- --------- Investment income--net................. .40 .33 Realized and unrealized gain (loss) on investments--net..................... .01 .26 --------- --------- Total from investment operations........ .41 .59 --------- --------- Less dividends from investment income--net............................. (.40) (.33) --------- --------- Net asset value, end of period.......... $ 10.11 $ 10.10 ========= ========= Total Investment Return:** Based on net asset value per share...... 4.07% 6.10%# ========= ========= Ratios to Average Net Assets: Expenses, net of reimbursement.......... .96% .57%* ========= ========= Expenses................................ 1.71% 2.08%* ========= ========= Investment income--net.................. 3.84% 4.30%* ========= ========= Supplemental Data: Net assets, end of period (in thousands).............................. $ 1,807 $ 382 ========= ========= Portfolio turnover...................... 30.90% 141.52% ========= ========= - ------------ * Annualized. ** Total investment returns exclude the effects of sales loads. + Commencement of operations. # Aggregate total investment return. 18 INVESTMENT OBJECTIVES AND POLICIES The investment objective of each Fund is to provide shareholders with as high a level of income exempt from Federal income taxes, the designated state's personal income taxes and, where applicable, local personal income taxes, as is consistent with prudent investment management. Each Fund seeks to achieve its objective while providing investors with the opportunity to invest in a portfolio of securities consisting primarily of intermediate-term investment grade obligations issued by or on behalf of the designated state or its political subdivisions, agencies or instrumentalities, and obligations of other qualifying issuers, such as issuers located in Puerto Rico, the Virgin Islands and Guam. Such obligations pay interest exempt, in the opinion of bond counsel to the issuer, from Federal income taxes, the designated state's personal income taxes and, in certain instances, local personal income taxes. Obligations that pay interest exempt from Federal income taxes are referred to herein as "Municipal Bonds". Obligations that pay interest exempt from Federal income taxes, the designated state's personal income taxes and, where applicable, local personal income taxes, and obligations that would not subject shareholders to intangible personal property taxes in the designated state are referred to herein as "State Municipal Bonds". Unless otherwise indicated, references to Municipal Bonds shall be deemed to include State Municipal Bonds. Each Fund will maintain at all times, except during temporary defensive periods, at least 65% of its total assets invested in its respective State Municipal Bonds; the New Jersey Fund will maintain at least 80% of its total assets invested in New Jersey State Municipal Bonds. The investment objective of each Fund as set forth in this paragraph is a fundamental policy of that Fund and may not be changed without shareholder approval. At times, a Fund may seek to hedge its portfolio through the use of futures transactions to reduce volatility in the net asset value of Fund shares. Each Fund will invest primarily in Municipal Bonds with remaining maturities of between one and ten years, and may not invest in Municipal Bonds with remaining maturities of greater than ten years. For cash management and temporary defensive purposes, each Fund may invest in Municipal Bonds with remaining maturities of less than one year. It is anticipated that, depending on market conditions, the dollar weighted average maturity of each Fund's portfolio will not exceed five years. For purposes of these investment policies, a bond will be treated as having a maturity earlier than its stated maturity date if such bond has technical features which, in the judgment of the Manager will result in the bond being valued in the market as though it has such earlier maturity. Interest rates on shorter-term Municipal Bonds may fluctuate more widely from time to time than interest rates on longer-term Municipal Bonds. However, because of their limited maturities, the market value of the Municipal Bonds held by each Fund can be expected to fluctuate less as a result of changes in interest rates. Municipal Bonds may include several types of bonds. The interest on Municipal Bonds may bear a fixed rate or be payable at a variable or floating rate. The Funds also may invest in variable rate demand obligations ("VRDOs") and participations therein, described below, and short-term tax-exempt municipal obligations such as tax anticipation notes. The Municipal Bonds purchased by the Funds primarily will be what are commonly referred to as "investment grade" securities, which are obligations rated at the time of purchase within the four highest quality ratings as determined by either Moody's Investors Service, Inc. ("Moody's") (currently Aaa, Aa, A and Baa), Standard & Poor's Ratings Services ("Standard & Poor's") (currently AAA, AA, A and BBB) or Fitch Investors Service, Inc. ("Fitch") (currently AAA, AA, A and BBB). If Municipal Bonds are unrated, such securities will possess creditworthiness comparable, in the opinion of the Manager, to investment grade obligations. Municipal Bonds rated in the fourth highest rating category, while considered investment grade, have certain speculative characteristics and are more likely to be downgraded to non-investment grade than obligations rated in one of the top three rating categories. See Appendix I--"Ratings of Municipal Bonds" in the Statement of Additional Information for more information regarding ratings of debt securities. An issue of rated Municipal 19 Bonds may cease to be rated or its rating may be reduced below investment grade subsequent to its purchase by a Fund. If an obligation is downgraded below investment grade, the Manager will consider factors such as price, credit risk, market conditions, financial condition of the issuer, interest rates and any state or local tax limitations to determine whether to continue to hold the obligation in a Fund's portfolio. Each Fund may invest up to 20% of its total assets in Municipal Bonds that are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch. Such securities, sometimes referred to as "high yield" or "junk" bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. The market prices of high-yielding, lower-rated securities may fluctuate more than higher-rated securities and may decline significantly in periods of general economic difficulty, which may follow periods of rising interest rates. In purchasing such securities, a Fund will rely on the Manager's judgment, analysis and experience in evaluating the creditworthiness of the issuer of such securities. The Manager will take into consideration, among other things, the issuer's financial resources, its sensitivity to economic conditions and trends, its operating history, the quality of its management and regulatory matters. See "Investment Objectives and Policies" in the Statement of Additional Information for a more detailed discussion of the pertinent risk factors involved in investing in "high yield" or "junk" bonds and Appendix I--"Ratings of Municipal Bonds" in the Statement of Additional Information for additional information regarding ratings of debt securities. None of the Funds intends to purchase debt securities that are in default or which the Manager believes will be in default. Certain Municipal Bonds may be entitled to the benefits of letters of credit or similar credit enhancements issued by financial institutions. In such instances, the Trustees and the Manager will take into account in assessing the quality of such bonds not only the creditworthiness of the issuer of such bonds but also the creditworthiness of the financial institution. Each Fund's investments also may include VRDOs and VRDOs in the form of participation interests ("Participating VRDOs") in variable rate tax-exempt obligations held by a financial institution. The VRDOs in which the Funds will invest are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand on the part of the holder thereof to receive payment of the unpaid principal balance plus accrued interest on a short notice period not to exceed seven days. Participating VRDOs provide the Funds with a specified undivided interest (up to 100%) of the underlying obligation and the right to demand payment of the unpaid principal balance plus accrued interest on the Participating VRDOs from the financial institution on a specified number of days' notice, not to exceed seven days. There is, however, the possibility that because of a default or insolvency, the demand feature of VRDOs or Participating VRDOs may not be honored. The Trust has been advised by its counsel that the Funds should be entitled to treat the income received on Participating VRDOs as interest from tax-exempt obligations. VRDOs that contain an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest on a notice period exceeding seven days may be deemed illiquid securities. A VRDO with a demand notice period exceeding seven days therefore will be subject to each Fund's restriction on illiquid investments unless, in the judgment of the Trustees, such VRDO is liquid. The Trustees may adopt guidelines and delegate to the Manager the daily function of determining and monitoring liquidity of such VRDOs. The Trustees, however, will retain sufficient oversight and be ultimately responsible for such determinations. The Funds ordinarily do not intend to realize investment income not exempt from Federal income taxes, state personal income taxes and, where applicable, local personal income taxes, or to hold investments that would subject shareholders to intangible personal property taxes in the designated state. However, to the extent that 20 suitable Municipal Bonds of a designated state are not available for investment by the Fund in that state, the Fund may purchase Municipal Bonds issued by other states or their agencies or instrumentalities, the interest on which is exempt, in the opinion of bond counsel to the issuer, from Federal, but not state, taxation. The Funds also may invest in securities not issued by or on behalf of a state or territory or by an agency or instrumentality thereof, if the Manager nevertheless believes such securities to be exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities"). Non-Municipal Tax-Exempt Securities may include securities issued by other investment companies that invest in municipal bonds, to the extent such investments are permitted by the Investment Company Act of 1940, as amended (the "1940 Act"). Other Non-Municipal Tax-Exempt Securities could include trust certificates or other derivative instruments evidencing interests in one or more intermediate-term municipal securities. Under normal circumstances, except when acceptable securities are unavailable as determined by the Manager, each Fund will invest at least 65% of its total assets in State Municipal Bonds; except that under normal circumstances the New Jersey Fund will invest at least 80% of its total assets in New Jersey State Municipal Bonds. For temporary defensive purposes or to provide liquidity, each Fund has the authority to invest in taxable or tax-exempt money market obligations with maturities of one year or less (such short-term obligations being referred to herein as "Temporary Investments"), except that taxable Temporary Investments shall not exceed 20% of a Fund's net assets. The Temporary Investments, VRDOs and Participating VRDOs in which the Funds may invest also will be in the following rating categories at the time of purchase: MIG-1/VMIG-1 through MIG-4/VMIG-4 for notes and VRDOs and Prime-1 through Prime-3 for commercial paper (as determined by Moody's), SP-1+ through SP-2 for notes and A-1+ through A-3 for VRDOs and commercial paper (as determined by Standard & Poor's), or F-1 through F-3 for notes, VRDOs and commercial paper (as determined by Fitch) or, if unrated, of comparable quality in the opinion of the Manager. Each Fund at all times will have at least 80% of its net assets invested in securities the interest on which is exempt from Federal taxation. However, interest received on certain otherwise tax-exempt securities which are classified as "private activity bonds" (in general, bonds that benefit non-governmental entities), may be subject to a Federal alternative minimum tax. See "Distributions and Taxes". The percentage of each Fund's net assets invested in "private activity bonds" will vary during the year. In addition, each Fund reserves the right to invest temporarily a greater portion of its assets in Temporary Investments for defensive purposes when, in the judgment of the Manager, market conditions warrant. The investment objective of each Fund is a fundamental policy of that Fund which may not be changed without a vote of a majority of the outstanding shares of the Fund, as defined in the 1940 Act. Each Fund's hedging strategies, which are described in more detail under "Financial Futures Contracts and Options Thereon", are not fundamental policies and may be modified by the Trustees of the Trust without the approval of the Fund's shareholders. Potential Benefits Investment in shares of a Fund offers several benefits. Each Fund offers investors the opportunity to receive income exempt from Federal income taxes, the designated state's personal income taxes and, where applicable, local personal income taxes, by investing in a professionally managed portfolio consisting primarily of intermediate-term State Municipal Bonds. Shares of certain Funds also may be exempt from intangible personal property taxes in the designated state. Each Fund also provides liquidity because of its redemption features and relieves the investor of the burdensome administrative details involved in managing a portfolio of tax-exempt securities. The benefits of investing in each Fund are at least partially offset by the expenses involved in operating an investment company. Such expenses primarily consist of the management fee and operational costs, and in the case of Class B, Class C and Class D shares of a Fund, the account maintenance costs for that Fund 21 relating to that class of shares and in the case of Class B and Class C shares, the distribution costs of that Fund relating to that class of shares. Risk Factors and Special Considerations The risks and special considerations involved in investments in Municipal Bonds vary with the types of instruments being acquired. Investments in Non-Municipal Tax-Exempt Securities, as defined herein, may present similar risks, depending on the particular product. See "Description of Municipal Bonds". Certain instruments in which the Funds may invest may be characterized as derivative instruments. See "Indexed and Inverse Floating Obligations", "Synthetic Short-Term Municipal Bonds" and "Financial Futures Contracts and Options Thereon". Moreover, each Fund ordinarily will invest at least 65% (80% in the case of the New Jersey Fund) of its total assets in its respective State Municipal Bonds and, therefore, it is more susceptible to factors adversely affecting issuers of Municipal Bonds in such state than is a tax-exempt mutual fund that is not concentrated in issuers of State Municipal Bonds to this degree. Because each Fund's portfolio will be comprised primarily of intermediate-term, investment grade securities, each Fund is expected to be less subject to market and credit risks than a fund that invests in longer-term or lower quality State Municipal Bonds. Set forth below are special considerations and risk factors specific to each Fund. The Manager does not believe that the current economic conditions described below for each state will have a significant adverse effect on the related Fund's ability to invest in investment grade State Municipal Bonds. The Arizona Fund. Over the past several decades, the State's economy has grown faster than most other regions of the country, as measured by nearly every major indicator of economic growth, including population, employment and aggregate personal income. Although the rate of growth slowed considerably during the late 1980s and early 1990s, the State's efforts to diversify its economy have enabled it to realize, and then sustain, increasing growth rates in more recent years. The State continues to search for a new method to finance its public school system following the Arizona Supreme Court's 1994 ruling that the current system is unconstitutional. Because the Fund's portfolio will consist primarily of investment grade securities, the Fund is expected to be less subject to market and credit risks than a fund that invests in lower quality Municipal Bonds. See Appendix A, "Economic and Financial Conditions in Arizona", in the Statement of Additional Information. The California Fund. Since the start of the 1990-91 fiscal year, the State of California has faced the worst economic, fiscal and budget conditions since the 1930's. On July 5, 1994, all three of the rating agencies rating the State of California's long-term debt lowered their ratings of the State of California's general obligation bonds. Moody's lowered its rating from "Aa" to "A1". Standard & Poor's lowered its rating from "A+" to "A" and termed its outlook as "stable", and Fitch lowered its rating from "AA" to "A". No assurance can be given that such ratings will not be lowered in the future. Although a steady upturn has been underway since 1994, pre-recession job levels are not expected to be reached until later in the decade. See Appendix B, "Economic and Financial Conditions in California", in the Statement of Additional Information. The Florida Fund. Many different social, environmental and economic factors may affect the financial condition of Florida and its political subdivisions. From time to time Florida and its political subdivisions have encountered financial difficulties. Florida is highly dependent upon sales and use taxes which account for the majority of its General Fund revenues. The Florida Constitution does not permit a state or local personal income tax. The structure of personal income in Florida is also different from the rest of the nation in that it has a proportionally greater retirement age population which is dependent upon transfer payments (social security, pension benefits, etc.). Such transfer payments can be affected by Federal legislation. Florida's economic growth 22 is also highly dependent upon other factors such as changes in population growth, tourism, interest rates and hurricane activity. Finally, two recent amendments to the Florida Constitution may limit the State's ability to raise revenues. In combination, the two amendments may have an adverse effect on the finances of Florida and its political subdivisions. See "Distributions and Taxes--State" herein and Appendix C, "Economic and Financial Conditions in Florida", in the Statement of Additional Information for important information regarding the State of Florida. The Massachusetts Fund. The Commonwealth of Massachusetts is experiencing a moderate economic recovery. The budgeted operating funds of the Commonwealth ended fiscal 1993 with a surplus of revenues and other sources over expenditures and other uses, and with aggregate ending fund balances of approximately $562.5 million. Massachusetts ended fiscal 1994 and fiscal 1995 with positive closing fund balances of $589.3 million and $726.0 million, respectively. According to the Comptroller's preliminary financial report for fiscal year 1996, fiscal year 1996 ended with positive budgetary fund balances of approximately $1.152 billion. Currently, Massachusetts" general obligation bonds are rated by Standard & Poor's, Fitch and Moody's as A+, A+ and A1, respectively. From time to time, the rating agencies may further change their ratings in response to budgetary matters or other economic indicators. See Appendix D, "Economic and Financial Conditions in Massachusetts", in the Statement of Additional Information. The Michigan Fund. In recent years, the State of Michigan has reported its financial results in accordance with generally accepted accounting principles. For the fiscal years ended September 30, 1990 and 1991, the State reported negative year-end General Fund balances of $310.3 million and $169.4 million, respectively, but ended the 1992, 1993, 1994 and 1995 fiscal years with its General Fund in balance after transfers in 1993, 1994 and 1995 from the General Fund to the Budget Stabilization Fund of $283 million, $464 million and $67.4 million, respectively. Those and certain other transfers into and out of the Budget Stabilization Fund raised the balance in the Budget Stabilization Fund to $987.9 million as of September 30, 1995. A positive cash balance in the combined General Fund/School Aid Fund was recorded at September 30, 1990. In each of the three prior fiscal years, the State had undertaken mid-year actions to address projected year-end budget deficits, including expenditure cuts and deferrals and one time expenditures or revenue recognition adjustments. From 1991 to 1993, the State experienced deteriorating cash balances which necessitated short-term borrowings and the deferral of certain scheduled cash payments to local units of government. The State borrowed between $500 and $900 million for cash flow purposes in the 1992 and 1993 fiscal years, $500 million in the 1995 fiscal year and $900 million in the 1996 fiscal year. The State did not have to borrow for short-term cash flow purposes in the 1993-94 fiscal year due to improved cash balances. Currently, the State's general obligation bonds are rated Aa by Moody's, AA by Standard & Poor's and Aa by Fitch. The State's economy could continue to be affected by changes in the auto industry, notably consolidations and plant closings resulting from competitive pressures and overcapacity. See Appendix E, "Economic and Financial Conditions in Michigan", in the Statement of Additional Information. The New Jersey Fund. New Jersey has benefited from the national economic recovery. The State is in its fifth year of economic recovery. New Jersey is reliant on Federal assistance and ranks high among the states in the amount of Federal aid received. Currently, the State's general obligation bonds are rated AA+ by Standard & Poor's, Aa1 by Moody's and AA+ by Fitch. See Appendix F, "Economic and Financial Conditions in New Jersey", in the Statement of Additional Information. The New York Fund. In recent years, New York State, some of its agencies, instrumentalities and public authorities and certain of its municipalities have faced serious financial difficulties that could have an adverse effect on the sources of payment for, or the market value of, New York State municipal securities in which the New York Fund invests. Currently, Moody's, Standard & Poor's and Fitch rate New York City's general 23 obligation bonds Baa1, BBB+ and A-, respectively, and Moody's, Standard & Poor's and Fitch rate New York State's general obligation bonds A, A- and A+, respectively. See Appendix G, "Economic and Financial Conditions in New York", in the Statement of Additional Information. The Pennsylvania Fund. Many different social, environmental and economic factors may affect the financial condition of Pennsylvania and its political subdivisions. From time to time Pennsylvania and certain of its political subdivisions have encountered financial difficulties which have adversely affected their respective credit standings. For example, the financial condition of the City of Philadelphia had impaired its ability to borrow and resulted in its obligations generally being downgraded by the major rating services to below investment grade. Other factors which may negatively affect economic conditions in Pennsylvania include adverse changes in employment rates, Federal revenue sharing or laws with respect to tax-exempt financing. For the 1995 fiscal year, the Commonwealth of Pennsylvania General Fund recorded a $49.8 million deficit (determined on a "GAAP" basis). Some of the deficit was attributable to changes in the methodology used to compute certain liabilities. Financial results for fiscal 1996, determined on a budgetary basis, reflected an ending unappropriated surplus (prior to transfers) of $183.8 million, $65.5 million above estimate. For the fiscal year, net expenditures and encumbrances from Commonwealth revenues (including supplemental appropriations but excluding pooled financing expenditures), totalled $16,162.9 million. Expenditures exceeded available revenues and lapses by $253.2 million. The difference was funded from a planned partial drawdown of the $437.0 million fiscal year adjusted beginning unappropriated surplus. Commonwealth revenues (prior to tax refunds) increased by $113.9 million over the prior fiscal year to $16,338.5 million. Currently, Pennsylvania's general obligation bonds are rated AA- by Standard & Poor's and Fitch and A1 by Moody's. See Appendix H, "Economic and Financial Conditions in Pennsylvania", in the Statement of Additional Information. Description of Municipal Bonds Municipal Bonds include debt obligations issued by or on behalf of a state or its agencies, instrumentalities, municipalities or political subdivisions to obtain funds for various public purposes, including construction and equipping of a wide range of public facilities (including water, sewer, gas, electricity, solid waste disposal, health care, transportation, education and housing facilities), refunding of outstanding obligations and obtaining of funds for general operating expenses and loans to other public institutions and facilities. In addition, certain types of industrial development bonds or private activity bonds are issued by or on behalf of public authorities to finance or refinance various privately operated facilities, including certain facilities for the local furnishing of electric energy or gas, sewage facilities, solid waste disposal facilities and other specialized facilities. For purposes of this Prospectus, such obligations are referred to as Municipal Bonds if the interest paid thereon is, in the opinion of bond counsel to the issuer, excluded from gross income for Federal income tax purposes ("exempt from Federal income tax"). Such obligations are referred to herein as State Municipal Bonds if such obligations pay interest exempt, in the opinion of bond counsel to the issuer, from Federal income taxes, the designated state's personal income taxes and, where applicable, local personal income taxes, and would not subject shareholders to intangible personal property taxes in the designated state. Such bonds may be "private activity bonds" as discussed below. The two principal classifications of Municipal Bonds are "general obligation" bonds and "revenue" bonds, which latter category includes industrial development bonds ("IDBs") and, for bonds issued after August 15, 1986, private activity bonds. General obligation bonds are secured by the issuer's pledge of its faith, credit and taxing power for the repayment of principal and the payment of interest. The taxing power of any governmental entity may be limited, however, by provisions of its state constitution or laws. An entity's creditworthiness and its capacity to make timely payment of interest and repayment of principal on a general obligation bond when 24 due will depend on many factors, including potential erosion of the tax base due to population declines, natural disasters, declines in the state's industrial base or inability to attract new industries, economic limits on the ability to tax without eroding the tax base, state legislative proposals or voter initiatives to limit ad valorem real property taxes and the extent to which the entity relies on Federal or state aid, access to capital markets or other factors beyond the state or entity's control. Revenue bonds are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue source such as payments from the user of the facility being financed; accordingly, the timely payment of interest and the repayment of principal in accordance with the terms of the revenue or special obligation bond is a function of the economic viability of such facility or such revenue source. A Fund will not invest in revenue bonds where the entity supplying the revenues from which the issuer is paid, including predecessors, has a record of less than three years of continuous business operations if such investments, together with investments in other unseasoned issuers, would exceed 5% of its total assets (taken at market value at the time of each investment). Investments involving entities with less than three years of continuous business operations may pose somewhat greater risks due to the lack of a substantial operating history for such entities. The Manager believes, however, that such investments will not adversely affect the Funds, particularly given each Fund's limitations on such investments. The Funds may purchase IDBs or private activity bonds. IDBs or private activity bonds are, in most cases, tax-exempt securities issued by states, municipalities or public authorities to provide funds, usually through a loan or lease arrangement, to a private entity for the purpose of financing construction or improvement of a facility to be used by the entity. Such bonds are secured primarily by revenues derived from loan repayments or lease payments due from the entity which may or may not be guaranteed by a parent company or otherwise secured. IDBs and private activity bonds are generally not secured by a pledge of the taxing power of the issuer of such bonds. Therefore, an investor should be aware that repayment of such bonds generally depends on the revenues of a private entity and should be aware of the risks that such an investment may entail. Continued ability of an entity to generate sufficient revenues for the repayment of principal and the payment of interest on such bonds will be affected by many factors including the size of the entity, its capital structure, demand for its products or services, competition, general economic conditions, governmental regulation and the entity's dependence on revenues for the operation of the particular facility being financed. Each Fund also may invest in so-called "moral obligation" bonds, which are normally issued by special purpose authorities. If an issuer of moral obligation bonds is unable to meet its obligations, repayment of such bonds becomes a moral commitment, but not a legal obligation, of the state or municipality in question. Each Fund may purchase obligations of state and local housing authorities the proceeds of which are used to purchase single-family mortgage loans or to finance the construction of multi-family housing projects. Economic developments, including fluctuations in interest rates, increasing construction and operating costs, and reductions in Federal housing subsidy programs may adversely affect the revenues of housing authorities. Furthermore, adverse economic conditions may result in an increasing rate of default of mortgagors on the underlying mortgage loans. Single-family mortgage revenue bonds also are subject to extraordinary mandatory redemption at par at any time, in whole or in part, from the proceeds derived from prepayments of underlying mortgage loans and from the unused proceeds of the issue within a stated period which may be within one year of the date of issue. Municipal Lease Obligations. Also included within the general category of Municipal Bonds are participation certificates issued by government authorities or entities to finance the acquisition or construction of equipment, land and/or facilities. The certificates represent participations in a lease, an installment purchase contract or a conditional sales contract (hereinafter collectively called "lease obligations") relating to such equipment, land or facilities. Although lease obligations do not constitute general obligations of the issuer for 25 which the issuer's unlimited taxing power is pledged, a lease obligation frequently is backed by the issuer's covenant to budget for, appropriate and make the payments due under the lease obligation. However, certain lease obligations contain "non-appropriation" clauses which provide that the issuer has no obligation to make lease or installment purchase payments in future years unless money is appropriated for such purpose on a yearly basis. Although "non-appropriation" lease obligations are secured by the leased property, disposition of the property in the event of repossession might prove difficult. These securities represent a type of financing that has not yet developed the depth of marketability associated with more conventional securities. Certain investments in lease obligations may be illiquid. A Fund may not invest in illiquid lease obligations if such investments, together with other illiquid investments, would exceed 15% of the Fund's total assets. A Fund, however, may invest without regard to such limitation in lease obligations which the Manager, pursuant to guidelines which have been adopted by the Board of Trustees and subject to the supervision of the Board, determines to be liquid. The Manager will deem lease obligations liquid if they are publicly offered and have received an investment grade rating of Baa or better by Moody's, or BBB or better by Standard & Poor's or Fitch. Unrated lease obligations, or those rated below investment grade, will be considered liquid if the obligations come to the market through an underwritten public offering and at least two dealers are willing to give competitive bids. In reference to obligations rated below investment grade, the Manager, among other things, also must review the creditworthiness of the municipality obligated to make payment under the lease obligation and make certain specified determinations based on such factors as the existence of a rating or credit enhancement such as insurance, the frequency of trades or quotes for the obligation and the willingness of dealers to make a market in the obligation. Federal tax legislation has limited the types and volume of bonds the interest on which qualifies for a Federal income tax exemption. As a result, this legislation and legislation which may be enacted in the future may affect the availability of Municipal Bonds for investment by the Funds. When-Issued Securities and Delayed Delivery Transactions The Funds may purchase or sell Municipal Bonds on a delayed delivery basis or on a when-issued basis at fixed purchase terms. These transactions arise when securities are purchased or sold by a Fund with payment and delivery taking place in the future. The purchase will be recorded on the date a Fund enters into the commitment and the value of the obligation thereafter will be reflected in the calculation of the Fund's net asset value. The value of the obligation on the delivery date may be more or less than its purchase price. A separate account of each Fund will be established with its respective custodian consisting of cash, cash equivalents or liquid securities having a market value at all times at least equal to the amount of the forward commitment. Indexed and Inverse Floating Obligations The Funds may invest in Municipal Bonds the return on which is based on a particular index of value or interest rates. For example, a Fund may invest in Municipal Bonds that pay interest based on an index of Municipal Bond interest rates or based on the value of gold or some other product. The principal amount payable upon maturity of certain Municipal Bonds also may be based on the value of an index. To the extent a Fund invests in these types of Municipal Bonds, the Fund's return on such Municipal Bonds will be subject to risk with respect to the value of the particular index. Interest and principal payable on the Municipal Bonds may also be based on relative changes among particular indices. Also, a Fund may invest in so-called "inverse floating obligations" or "residual interest bonds" on which the interest rates typically vary inversely with a short-term floating rate (which may be reset periodically by a dutch auction, a remarketing agent, or by reference to a short-term tax-exempt interest rate index). The Funds may purchase original issue inverse floating rate bonds in both 26 the primary and secondary markets and also may purchase in the secondary market synthetically-created inverse floating rate bonds evidenced by custodial or trust receipts. Generally, interest rates on inverse floating rate bonds will decrease when short-term rates increase, and will increase when short-term rates decrease. Such securities have the effect of providing a degree of investment leverage, since they may increase or decrease in value in response to changes, as an illustration, in market interest rates at a rate which is a multiple (typically two) of the rate at which fixed-rate, long-term, tax-exempt securities increase or decrease in response to such changes. As a result, the market values of such securities generally will be more volatile than the market values of fixed-rate, tax-exempt securities. To seek to limit the volatility of these securities, a Fund may purchase inverse floating obligations with shorter-term maturities or which contain limitations on the extent to which the interest rate may vary. The Manager believes that indexed and inverse floating obligations represent a flexible portfolio management instrument for a Fund which allows the Manager to vary the degree of investment leverage relatively efficiently under different market conditions. Certain investments in such obligations may be illiquid. A Fund may not invest in such illiquid obligations if such investments, together with other illiquid investments, would exceed 15% of that Fund's total assets. Synthetic Short-Term Municipal Bonds Each Fund may invest in a variety of synthetic short-term municipal bonds ("Synthetic Bonds"). Synthetic Bonds are typically structured by a bank, broker-dealer or other financial institution, and generally consist of a trust or partnership through which the Fund holds an interest in one or more long-term municipal bonds which are assets of the applicable entity ("Underlying Bonds") coupled with a conditional right to sell ("put") the Fund's interest in the Underlying Bonds at par plus accrued interest to a financial institution (a "Liquidity Provider"). Typically, a Synthetic Bond is structured as a trust or partnership which provides for pass-through tax-exempt income. There are currently three principal types of Synthetic Bond structures: (1) "Tender Option Bonds", which are instruments that grant the holder thereof the right to put an Underlying Bond at par plus accrued interest at specified intervals to a Liquidity Provider; (2) "Swap Products", in which the trust or partnership swaps the payments due on an Underlying Bond with a swap counterparty who agrees to pay a floating municipal money market interest rate; and (3) "Partnerships", which allocate to the partners income, expenses, capital gains and losses in accordance with a governing partnership agreement. Each of the Funds may also invest in other forms of Synthetic Bonds. Investments in Synthetic Bonds raise certain tax, legal, regulatory and accounting issues which may not be presented by investments in other Municipal Bonds. There is some risk that certain issues could be resolved in a manner which could adversely impact the performance of the Funds. For example, the tax-exempt treatment of the interest paid to holders of Synthetic Bonds is premised on the legal conclusion that the holders of such Synthetic Bonds have an ownership interest in the Underlying Bonds. While the Fund receives an opinion of legal counsel to the effect that the income from each Synthetic Bond is tax-exempt to the same extent as the Underlying Bond, the Internal Revenue Service (the "IRS") has not issued a ruling on this subject. Were the IRS to issue an adverse ruling, there is a risk that the interest paid on such Synthetic Bonds would be deemed taxable. A Synthetic Bond with a put notice period exceeding seven days will be subject to each Fund's restriction on illiquid investments unless, in the judgment of the Trustees, such Synthetic Bond is liquid. Call Rights Each Fund may purchase, either directly from the issuer or from a third party, a Municipal Bond issuer's contractual right to call all or a portion of such Municipal Bond for mandatory tender for purchase (a "Call Right"). A Fund purchasing a Call Right may or may not own the related Municipal Bond. A holder of a Call 27 Right may exercise such right to require a mandatory tender for the purchase of related Municipal Bonds, subject to certain conditions. A Call Right that is not exercised prior to the maturity of the related Municipal Bond will expire without value. The economic effect of holding both the Call Right and the related Municipal Bond is identical to that of holding a Municipal Bond as a non-callable security. Certain investments in such obligations may be illiquid. A Fund may not invest in such illiquid obligations if such investments, together with other illiquid investments, would exceed 15% of that Fund's total assets. Financial Futures Contracts and Options Thereon Each Fund is authorized to purchase and sell certain exchange-traded financial futures contracts ("financial futures contracts") and options thereon. The purchase or sale of an option on a financial futures contract is analogous to the purchase or sale of an option on an individual security. Financial futures contracts and options thereon are used solely for the purposes of hedging a Fund's investments in Municipal Bonds against declines in value and hedging against increases in the cost of securities it intends to purchase. However, a Fund's transactions involving financial futures contracts or options thereon (which options may include both puts and calls) will be in accordance with its investment policies and limitations. A financial futures contract obligates the seller of a contract to deliver and the purchaser of a contract to take delivery of the type of financial instrument covered by the contract, or in the case of index-based financial futures contracts, to make and accept a cash settlement at a specific future time for a specified price. A sale of financial futures contracts or options thereon may provide a hedge against a decline in the value of portfolio securities because such depreciation may be offset, in whole or in part, by an increase in the value of the position in the financial futures contracts. A purchase of financial futures contracts or options thereon may provide a hedge against an increase in the cost of securities intended to be purchased, because such appreciation may be offset, in whole or in part, by an increase in the value of the position in the financial futures contracts or options thereon. Distributions, if any, of net long-term capital gains from certain transactions in futures or options are taxable at long-term capital gains rates for Federal income tax purposes, regardless of the length of time the shareholder has owned Fund shares. See "Distributions and Taxes--Taxes". Each Fund may deal in financial futures contracts traded on the Chicago Board of Trade based on The Bond Buyer Municipal Bond Index, a price-weighted measure of the market value of 40 large, recently issued tax-exempt bonds. There can be no assurance, however, that a liquid secondary market will exist to terminate any particular financial futures contract or option thereon at any specific time. If it is not possible to close a financial futures position or the related option entered into by a Fund, the Fund would continue to be required to make daily cash payments of variation margin in the event of adverse price movements. In such a situation, if the Fund has insufficient cash, it may have to sell portfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so. The inability to close financial futures contracts or related option positions also could have an adverse impact on a Fund's ability to hedge effectively. There is also the risk of loss by a Fund of margin deposits in the event of bankruptcy of a broker with whom the Fund has an open position in a financial futures contract or option thereon. Each Fund may purchase and sell financial futures contracts on U.S. Government securities and write and purchase put and call options on such financial futures contracts as a hedge against adverse changes in interest rates as described more fully in the Statement of Additional Information. With respect to U.S. Government securities, currently there are financial futures contracts based on long-term U.S. Treasury bonds, U.S. Treasury notes, Government National Mortgage Association ("GNMA") Certificates and three-month U.S. Treasury bills. Subject to policies adopted by the Trustees, the Funds also may enter into other financial futures transactions, such as financial futures contracts or options on other municipal bond indices which may become 28 available, if the Manager of the Funds and the Trustees of the Trust should determine that there is normally a sufficient correlation between the prices of such financial futures contracts or options thereon and the Municipal Bonds in which a Fund invests to make such hedging appropriate. Utilization of financial futures contracts and options thereon involves the risk of imperfect correlation in movements in the price of financial futures contracts or options thereon and movements in the price of the security which is the subject of the hedge. If the price of the financial futures contract or option thereon moves more or less than the price of the security that is the subject of the hedge, a Fund will experience a gain or loss which will not be completely offset by movements in the price of such security. There is a risk of imperfect correlation where the securities underlying financial futures contracts or options thereon have different maturities, ratings or geographic mixes than the security being hedged. In addition, the correlation may be affected by additions to or deletions from the index which serves as a basis for a financial futures contract or option thereon. Finally, in the case of financial futures contracts on U.S. Government securities and options on such financial futures contracts, the anticipated correlation of price movements between the U.S. Government securities underlying the financial futures or options, and Municipal Bonds may be adversely affected by economic, political, legislative or other developments which have a disparate impact on the respective markets for such securities. Under regulations of the Commodity Futures Trading Commission, the futures trading activities described herein will not result in a Fund being deemed to be a "commodity pool", as defined under such regulations, provided that the Fund adheres to certain restrictions. In particular, a Fund may purchase and sell financial futures contracts and options thereon (i) for bona fide hedging purposes, and (ii) for non-hedging purposes, if the aggregate initial margin and premiums required to establish positions in such contracts and options does not exceed 5% of the liquidation value of the Fund's portfolio assets after taking into account unrealized profits and unrealized losses on any such contracts and options. As stated above, each Fund intends to engage in options and futures transactions only for hedging purposes. Margin deposits may consist of cash or securities acceptable to the broker and the relevant contract market. When a Fund purchases a financial futures contract, or writes a put option or purchases a call option thereon, it will maintain an amount of cash, cash equivalents (e.g., high grade commercial paper and daily tender adjustable notes) or liquid securities in a segregated account with the Fund's custodian, so that the amount so segregated plus the amount of initial and variation margin held in the account of its broker equals the market value of the financial futures contract or option thereon, thereby ensuring that the use of such financial futures contract or option is unleveraged. It is not anticipated that transactions in financial futures contracts or options thereon will have the effect of increasing portfolio turnover. Although certain risks are involved in options and futures transactions, the Manager believes that, because the Funds will engage in financial futures transactions only for hedging purposes, the futures portfolio strategies of the Funds will not subject the Funds to certain risks frequently associated with speculation in futures transactions. The Funds must meet certain Federal income tax requirements under the Internal Revenue Code of 1986, as amended (the "Code"), in order to qualify for the special tax treatment afforded regulated investment companies, including a requirement that less than 30% of its gross income be derived from the sale or other disposition of securities held for less than three months. Additionally, each Fund is required to meet certain diversification requirements under the Code. The liquidity of a secondary market in a financial futures contract or related option may be adversely affected by "daily price fluctuation limits" established by commodity exchanges which limit the amount of fluctuation in a financial futures contract price during a single trading day. Once the daily limit has been reached 29 in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open futures positions. Prices in the past have reached or exceeded the daily limit on a number of consecutive trading days. The successful use of financial futures contracts and options thereon also depends on the ability of the Manager to forecast correctly the direction and extent of interest rate movements within a given time frame. To the extent these rates remain stable during the period in which a financial futures contract or related option is held by a Fund or move in a direction opposite to that anticipated, the Fund may realize a loss on the hedging transaction which is not fully or partially offset by an increase in the value of portfolio securities. As a result, a Fund's total return for such period may be less than if it had not engaged in the hedging transaction. Furthermore, each Fund only will engage in hedging transactions from time to time and may not necessarily be engaging in hedging transactions when movements in interest rates occur. Reference is made to the Statement of Additional Information for further information on financial futures contracts and certain options thereon. Repurchase Agreements As Temporary Investments, the Funds may invest in securities pursuant to repurchase agreements. Repurchase agreements may be entered into only with a member bank of the Federal Reserve System or a primary dealer in U.S. Government securities or an affiliate thereof. Under such agreements, the seller agrees, upon entering into the contract, to repurchase the security from the Fund at a mutually agreed upon time and price, thereby determining the yield during the term of the agreement. This results in a fixed rate of return insulated from market fluctuations during such period. A Fund may not invest in repurchase agreements maturing in more than seven days if such investments, together with the Fund's other illiquid investments, would exceed 15% of that Fund's total assets. In the event of a default by the seller under a repurchase agreement, a Fund may suffer time delays and incur costs or possible losses in connection with the disposition of the underlying securities. Certain Funds may be subject to state and local restrictions which prohibit certain types of investments and investment strategies, including some of the investments and investment strategies discussed herein. Investment Restrictions Each Fund has adopted a number of restrictions and policies relating to the investment of the Fund's assets and its activities, which are fundamental policies of the Fund and may not be changed without the approval of the holders of a majority of the Fund's outstanding voting securities, as defined in the 1940 Act, which means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares. As a fundamental policy, no Fund may invest more than 25% of its total assets (taken at market value at the time of each investment) in securities of issuers in any particular industry (other than U.S. Government securities or Government agency securities, Municipal Bonds and Non-Municipal Tax-Exempt Securities). Investment restrictions and policies that are non-fundamental policies may be changed by the Board of Trustees without shareholder approval. As a non-fundamental policy, no Fund may borrow amounts in excess of 20% of its total assets taken at market value (including the amount borrowed), and then only from banks as a temporary measure for extraordinary or emergency purposes. In addition, no Fund will purchase securities while borrowings are outstanding. As a non-fundamental policy, no Fund will invest in securities which cannot be readily resold because of legal or contractual restrictions or which are not readily marketable, including individually negotiated loans that 30 constitute illiquid investments and illiquid lease obligations, and in repurchase agreements maturing in more than seven days, if, regarding all such securities taken together, more than 15% of its total assets (taken at market value at the time of each investment) would be invested in such securities. In addition, no Fund may invest more than 10% of its total assets (taken at market value at the time of each investment) in revenue bonds where the entity supplying the revenues from which the issue is to be paid, and the guarantor of the obligation, including predecessors, each has a record of less than three years" continuous business operation. Each Fund is classified as non-diversified within the meaning of the 1940 Act, which means that the Fund is not limited by the 1940 Act in the proportion of its assets that it may invest in obligations of a single issuer. However, each Fund's investments will be limited so as to qualify as a "regulated investment company" for purposes of the Code. See "Distributions and Taxes--Taxes". To qualify, among other requirements, the Trust will limit each Fund's investments so that, at the close of each quarter of the taxable year, (i) not more than 25% of the market value of the Fund's total assets will be invested in the securities of a single issuer, and (ii) with respect to 50% of the market value of its total assets, not more than 5% of the market value of its total assets will be invested in the securities of a single issuer and the Fund will not own more than 10% of the outstanding voting securities of a single issuer. For purposes of this restriction, each Fund will regard each state and each political subdivision, agency or instrumentality of such state and each multi-state agency of which such state is a member and each public authority which issues securities on behalf of a private entity, as a separate issuer, except that if the security is backed only by the assets and revenues of a non-government entity then the entity with the ultimate responsibility for the payment of interest and principal may be regarded as the sole issuer. These tax- related limitations may be changed by the Trustees of the Trust to the extent necessary to comply with changes to the Federal tax requirements. A Fund which elects to be classified as "diversified" under the 1940 Act must satisfy the foregoing 5% and 10% requirements with respect to 75% of its total assets. To the extent that a Fund assumes large positions in the obligations of a small number of issuers, that Fund's total return may fluctuate to a greater extent than that of a diversified company as a result of changes in the financial condition or in the market's assessment of the issuers. Investors are referred to the Statement of Additional Information for a complete description of each Fund's investment restrictions. 31 MANAGEMENT OF THE TRUST Trustees The Trustees of the Trust consist of six individuals, five of whom are not "interested persons" of the Trust as defined in the 1940 Act. The Trustees are responsible for the overall supervision of the operations of the Trust and the Funds and perform the various duties imposed on the directors or trustees of investment companies by the 1940 Act. The Trustees are: ARTHUR ZEIKEL*--President of the Manager and its affiliate, MLAM; President and Director of Princeton Services, Inc. ("Princeton Services"); Executive Vice President of ML&Co.; and Director of the Distributor. JAMES H. BODURTHA--Director and Executive Vice President, The China Business Group, Inc. HERBERT I. LONDON--John M. Olin Professor of Humanities, New York University. ROBERT R. MARTIN--Former Chairman, Kinnard Investments, Inc. JOSEPH L. MAY--Attorney in private practice. ANDRE F. PEROLD--Professor, Harvard Business School. - ------------ * Interested person, as defined in the 1940 Act, of the Trust. Management and Advisory Arrangements The Manager, which is an affiliate of MLAM and is owned and controlled by ML&Co., a financial services holding company and the parent of Merrill Lynch, acts as the manager for the Trust and provides each Fund with management services. The Manager or MLAM acts as the investment adviser for over 130 registered investment companies. MLAM also offers portfolio management and portfolio analysis services to individuals and institutions. As of October 31, 1996, the Manager and MLAM had a total of approximately $217.6 billion in investment company and other portfolio assets under management, including accounts of certain affiliates of the Manager. Subject to the direction of the Trustees, the Manager is responsible for the actual management of each Fund's portfolio and constantly reviews each Fund's holdings in light of its own research analysis and that from other relevant sources. The responsibility for making decisions to buy, sell or hold a particular security rests with the Manager. The Manager performs certain of the other administrative services and provides all the office space, facilities, equipment and necessary personnel for management of the Funds. Edward J. Andrews, Peter J. Hayes and Helen M. Sheehan are the Portfolio Managers for each Fund and are responsible for the day-to-day management of each Fund's investment portfolio. Edward J. Andrews has been a Portfolio Manager and Vice President of the Manager and of MLAM since 1991. Peter J. Hayes has been a Portfolio Manager and Vice President of the Manager and of MLAM since 1989. Helen M. Sheehan has been a Portfolio Manager and Vice President of the Manager and of MLAM since 1991. Pursuant to separate management agreements between the Manager and the Trust on behalf of each Fund (each a "Management Agreement"), the Manager is entitled to receive from each Fund a monthly fee based upon the average daily net assets of that Fund at the annual rate of 0.35% of the average daily net assets of that Fund. Information about fees paid by each Fund is contained in the table below. 32 Each Management Agreement obligates the related Fund to pay certain expenses incurred in that Fund's operations, including, among other things, the management fee, legal and audit fees, unaffiliated Trustees' fees and expenses, registration fees, custodian and transfer agency fees, accounting and pricing costs, and certain of the costs of printing proxies, shareholder reports, prospectuses and statements of additional information. Accounting services are provided to the Trust by the Manager, and each Fund reimburses the Manager for its proportionate costs in connection with such services. The Manager may waive all or a portion of its management fee for any Fund and may assume voluntarily all or a portion of each Fund's expenses. Information about the amounts reimbursed by each Fund is contained in the table below. Set forth in the table below is information for each Fund pertaining to the Fund's investment advisory arrangements for the fiscal year ended July 31, 1996:
Reimbursement Based on of Manager Ratio of Total Expenses Management Average Net for to Average Net Assets Fee Voluntary Assets of Accounting ---------------------------------------- Fund ($) Waiver($) Approx. ($) Services ($) Class A Class B Class C Class D - --------------------- ---------- --------- ------------ ------------- ------- ------- ------- ------- Arizona Fund......... 21,459 21,459 6.1 million 30,172 2.27% 2.61% 2.80% 2.42% California Fund...... 54,033 54,033 15.4 million 38,245 1.30% 1.66% 1.50% 1.40% Florida Fund......... 108,720 24,123 31.1 million 34,053 0.97% 1.32% 1.23% 1.07% Massachusetts Fund... 30,736 30,736 8.8 million 53,983 2.15% 2.61% 2.37% 2.42% Michigan Fund........ 16,413 16,413 4.7 million 47,178 2.78% 3.14% 3.31% 3.06% New Jersey Fund...... 33,770 33,770 9.6 million 43,508 1.78% 2.12% 2.04% 1.86% New York Fund........ 57,995 57,995 16.6 million 62,140 1.38% 1.75% 1.59% 1.49% Pennsylvania Fund.... 30,196 30,196 8.6 million 43,426 1.63% 1.99% 1.83% 1.71%
Code of Ethics The Board of Trustees of the Trust has adopted a Code of Ethics under Rule 17j-1 of the Act which incorporates the Code of Ethics of the Manager (together, the "Codes"). The Codes significantly restrict the personal investing activities of all employees of the Manager and, as described below, impose additional, more onerous, restrictions on fund investment personnel. The Codes require that all employees of the Manager preclear any personal securities investment (with limited exceptions, such as government securities). The preclearance requirement and associated procedures are designed to identify any substantive prohibition or limitation applicable to the proposed investment. The substantive restrictions applicable to all employees of the Manager include a ban on acquiring any securities in a "hot" initial public offering and a prohibition from profiting on short-term trading in securities. In addition, no employee may purchase or sell any security which at the time is being purchased or sold (as the case may be), or to the knowledge of the employee is being considered for purchase or sale, by any fund advised by the Manager. Furthermore, the Codes provide for trading "blackout periods" which prohibit trading by investment personnel of the Funds within periods of trading by the Funds in the same (or equivalent) security (15 or 30 days depending upon the transaction). Transfer Agency Services Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which is a wholly-owned subsidiary of ML&Co., acts as the Trust's transfer agent pursuant to a transfer agency, dividend disbursing agency and shareholder servicing agency agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency 33 Agreement, the Transfer Agent is responsible for the issuance, transfer and redemption of shares of each Fund and the opening and maintenance of shareholder accounts. Pursuant to the Transfer Agency Agreement, each Fund pays the Transfer Agent an annual fee of $11.00 per Class A or Class D shareholder account, and $14.00 per Class B or Class C shareholder account, and the Transfer Agent is entitled to reimbursement from the Fund for out-of-pocket expenses incurred by the Transfer Agent on behalf of such Fund under the Transfer Agency Agreement. The table below sets forth information about the fees paid by each Fund for transfer agency services for the fiscal year ended July 31, 1996 and the transfer agency fees which would be payable based on the number of shareholder accounts at October 31, 1996.
At October 31, 1996 ------------------------------------------------------ Number of Shareholder Transfer Accounts Transfer Agency Fee ---------------------------------------- Agency Fee Fund Paid Class A Class B Class C Class D Payable - -------------------------------------------------- ---------- ------- ------- ------- ------- ---------- Arizona Fund...................................... $ 3,271 24 87 5 13 $1,695 California Fund................................... $ 4,477 40 181 4 26 $3,316 Florida Fund...................................... $ 7,997 65 271 4 29 $4,884 Massachusetts Fund................................ $ 4,426 26 148 6 13 $2,585 Michigan Fund..................................... $ 3,510 32 81 3 13 $1,671 New Jersey Fund................................... $ 4,054 46 129 5 13 $2,525 New York Fund..................................... $ 6,172 53 253 11 29 $4,598 Pennsylvania Fund................................. $ 4,261 26 187 3 18 $3,144
PURCHASE OF SHARES The Distributor, an affiliate of both the Manager and Merrill Lynch, acts as the Distributor of the shares of each Fund. Shares of each Fund are offered continuously for sale by the Distributor and other eligible securities dealers (including Merrill Lynch). Class A, Class B and Class D shares of the Funds may be purchased from securities dealers or by mailing a purchase order directly to the Transfer Agent. Class C shares of the Funds are not available for purchase but will be issued only pursuant to the exchange privilege to holders of Class C shares of other MLAM-advised mutual funds who elect to exchange Class C shares of such other MLAM-advised mutual fund for Class C shares of one of the Funds. The minimum initial purchase for shares of each Fund is $1,000 and the minimum subsequent purchase is $50. Each Fund offers its Class A, Class B, Class C and Class D shares at a public offering price equal to the next determined net asset value per share plus sales charges imposed either at the time of purchase or on a deferred basis depending upon the class of shares selected by the investor under the Merrill Lynch Select Pricing(SM) System, as described below. The applicable offering price for purchase orders is based upon the net asset value of the respective Fund next determined after receipt of the purchase orders by the Distributor. As to purchase orders received by securities dealers prior to the close of business on the New York Stock Exchange (the "NYSE") (generally, 4:00 p.m., New York time) which includes orders received after the close of business on the previous day, the applicable offering price will be based on the net asset value determined as of 15 minutes after the close of business on the NYSE on that day, provided the Distributor in turn receives the order from the securities dealer prior to 30 minutes after the close of business on the NYSE on that day. If the purchase orders are not received by the Distributor prior to 30 minutes after the close of business on the NYSE, such orders shall be deemed received on the next business day. The Trust or the Distributor may suspend the continuous offering of a Fund's shares of any class at any time in response to conditions in the securities markets or otherwise and may thereafter resume such offering from time to time. Any order may be rejected by the Distributor or the Trust. Neither the 34 Distributor nor the dealers are permitted to withhold placing orders to benefit themselves by a price change. Merrill Lynch may charge its customers a processing fee (presently $4.85) to confirm a sale of shares to such customers. Purchases directly through the Trust's Transfer Agent are not subject to the processing fee. Each of the Funds issues four classes of shares under the Merrill Lynch Select Pricing(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 7. Each Class A, Class B, Class C and Class D share of each of the Funds represents identical interests in the investment portfolio of that Fund and has the same rights, except that Class B, Class C and Class D shares bear the expenses of the ongoing account maintenance fees, and Class B and Class C shares bear the expenses of the ongoing distribution fees and the additional incremental transfer agency costs resulting from the deferred sales charge arrangements. The CDSCs and distribution and account maintenance fees that are imposed on Class B and Class C shares, as well as the account maintenance fees that are imposed on Class D shares, will be imposed directly against those classes and not against all assets of the Fund and, accordingly, such charges will not affect the net asset value of any other class or have any impact on investors choosing another sales charge option. Dividends paid by the Funds for each class of shares will be calculated in the same manner at the same time and will differ only to the extent that account maintenance and distribution fees and any incremental transfer agency costs relating to a particular class are borne exclusively by that class. Class B, Class C and Class D shares each have exclusive voting rights with respect to the Rule 12b-1 distribution plan adopted with respect to such class pursuant to which account maintenance and/or distribution fees are paid. See "Distribution Plans" below. Each class has different exchange privileges. See "Shareholder Services--Exchange Privilege". Investors should understand that the purpose and function of the initial sales charges with respect to Class A and Class D shares are the same as those of the deferred sales charges with respect to Class B and Class C shares in that the sales charges applicable to each class provide for the financing of the distribution of the shares of the Funds. The distribution-related revenues paid with respect to a class will not be used to finance the distribution expenditures of another class. Sales personnel may receive different compensation for selling different classes of shares. Investors are advised that only Class A and Class D shares may be available for purchase through securities dealers, other than Merrill Lynch, which are eligible to sell shares. 35 The following table sets forth a summary of the distribution arrangements for each class of shares under the Merrill Lynch Select Pricing(SM) System.
Account Maintenance Distribution Class Sales Charge(1) Fee Fee Conversion Feature A Maximum 1.0% initial sales No No No charge(2)(3) B 1.0% CDSC for one year(4) 0.15% 0.20% B shares convert to D shares automatically after approximately ten years(5) C(7) 1.0% CDSC for one year(6) 0.15% 0.20% No D Maximum 1.0% initial sales 0.10% No No charge(3)
- ------------ (1) Initial sales charges are imposed at the time of purchase as a percentage of the offering price. CDSCs are imposed if the redemption occurs within the applicable CDSC time period. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. (2) Offered only to eligible investors. See "Initial Sales Charge Alternatives--Class A and Class D Shares--Eligible Class A Investors". (3) Reduced for purchases of $100,000 or more and waived for purchases of Class A shares in connection with certain fee-based programs. Class A and Class D share purchases of $1,000,000 or more may not be subject to an initial sales charge but instead may be subject to a 0.20% CDSC if redeemed within one year. Such CDSC may be waived in connection with redemptions to fund participation in certain fee-based programs. (4) The CDSC may be modified in connection with redemptions to fund participation in certain fee-based programs. (5) The conversion period for dividend reinvestment shares and certain fee-based programs may be modified. Also, Class B shares of certain other MLAM-advised mutual funds into which exchanges may be made have an eight year conversion period. If Class B shares of a Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the conversion period applicable to the Class B shares acquired in the exchange will apply, and the holding period for the shares exchanged will be tacked onto the holding period for the shares acquired. (6) The CDSC may be waived in connection with redemptions to fund participation in certain fee-based programs. (7) Class C shares will be issued only upon exchange for Class C shares of another MLAM-advised mutual fund. See "Shareholder Services--Exchange Privilege". Initial Sales Charge Alternatives--Class A and Class D Shares Investors choosing the initial sales charge alternatives who are eligible to purchase Class A shares should purchase Class A shares rather than Class D shares because there is an account maintenance fee imposed on Class D shares. 36 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.
Sales Load Sales Load Discount to Selected as Percentage* as Percentage* Dealers as of Offering of the Net Percentage* of the Amount of Purchase Price Amount Invested Offering Price - ------------------------------------------------------------ -------------- --------------- -------------------- 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
- ------------ * Rounded to the nearest one-hundredth percent. ** Class A and Class D purchases of $1 million or more may be subject to a CDSC of 0.20% if the shares are redeemed within one year after purchase. Such CDSC may be waived in connection with redemptions to fund participation in certain fee-based programs. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. The Distributor may reallow discounts to selected dealers and retain the balance over such discounts. At times the Distributor may reallow the entire sales charge to such dealers. Since securities dealers selling Class A and Class D shares of a Fund will receive a concession equal to most of the sales charge, they may be deemed to be underwriters under the Securities Act of 1933, as amended. The following table sets forth information about the number of Class A shares and Class D shares sold by each Fund for the fiscal year ended July 31, 1996, the aggregate net proceeds from such sales, the gross sales charges and the amounts of such charges received by the Distributor and Merrill Lynch for Class A shares and Class D shares. No CDSCs were received by the Distributor with respect to redemptions within one year after purchase of Class A or Class D shares purchased subject to a front-end sales charge waiver.
No. of Aggregate Shares Net Gross Sales Paid to Sold Proceeds ($) Charges ($) Distributor ($) ----------------- --------------------- ----------------- ----------------- Class A Class D Class A Class D Class A Class D Class A Class D ------- ------- --------- --------- ------- ------- ------- ------- Arizona Fund.............................. 5,200 104,371 52,303 1,066,013 463 241 17 14 California Fund........................... 8,087 105,834 80,919 1,060,270 580 3,148 67 299 Florida Fund.............................. 91,796 316,584 926,979 3,192,506 497 2,943 22 373 Massachusetts Fund........................ 22,851 101,394 226,189 1,009,332 964 3,387 93 298 Michigan Fund............................. 40,664 29,731 405,188 298,909 102 479 4 59 New Jersey Fund........................... 102,101 47,184 1,042,636 477,087 239 1,128 2 31 New York Fund............................. 44,189 162,557 446,602 1,636,956 34 4,790 1 476 Pennsylvania Fund......................... 5,556 155,680 56,865 1,569,272 5 533 -- 14
Paid to Merrill Lynch ($) ----------------- Class A Class D ------- ------- Arizona Fund.............................. 446 227 California Fund........................... 513 2,849 Florida Fund.............................. 475 2,570 Massachusetts Fund........................ 871 3,089 Michigan Fund............................. 98 420 New Jersey Fund........................... 237 1,097 New York Fund............................. 33 4,314 Pennsylvania Fund......................... 5 519 Eligible Class A Investors. Class A shares are offered to a limited group of investors and also will be issued upon reinvestment of dividends on outstanding Class A shares. Investors that currently own Class A shares of a Fund in a shareholder account are entitled to purchase additional Class A shares of that Fund in that account. Class A shares are available at net asset value to corporate warranty insurance reserve fund programs provided that the program has $3 million or more initially invested in MLAM-advised mutual funds. Also eligible to purchase Class A shares at net asset value are participants in certain investment programs including TMA(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 37 subsidiaries and their directors and employees and to members of the Boards of MLAM-advised investment companies, including the Trust. Certain persons who acquired shares of certain MLAM-advised closed-end funds in their initial offerings who wish to reinvest the net proceeds from a sale of their closed-end fund shares of common stock in shares of the Funds also may purchase Class A shares of the Funds if certain conditions set forth in the Statement of Additional Information are met. In addition, Class A shares of the Funds and certain other MLAM-advised mutual funds are offered at net asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain conditions set forth in the Statement of Additional Information are met, to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of certain of their shares of common stock pursuant to a tender offer conducted by such funds in shares of any of the Funds and certain other MLAM-advised mutual funds. Reduced Initial Sales Charges. No initial sales charges are imposed upon Class A and Class D shares issued as a result of the automatic reinvestment of dividends or capital gains distributions. Class A and Class D sales charges also may be reduced under a Right of Accumulation and a Letter of Intention. Class A shares are offered at net asset value to certain eligible Class A investors as set forth above under "Eligible Class A Investors". See "Shareholder Services--Fee-Based Programs". Class A and Class D shares are offered at net asset value to Employee Access Accounts(SM) available through qualified employers which provide employer-sponsored retirement and savings plans that are eligible to purchase such shares at net asset value. Class A and Class D shares of each of the Funds are offered at net asset value to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest in shares of any of the Funds the net proceeds from a sale of certain of their shares of common stock pursuant to tender offers conducted by those funds. Class D shares are offered at net asset value, without sales charge, to an investor who has a business relationship with a Merrill Lynch Financial Consultant, if certain conditions set forth in the Statement of Additional Information are met. Class D shares may be offered at net asset value in connection with the acquisition of assets of other investment companies. Additional information concerning these reduced initial sales charges is set forth in the Statement of Additional Information. Deferred Sales Charge Alternatives--Class B and Class C Shares The public offering price of Class B shares for investors choosing the deferred sales charge alternative is the next determined net asset value per share without the imposition of a sales charge at the time of purchase. Class C shares of the Funds are not available for purchase but will be issued only pursuant to the exchange privilege to holders of Class C shares of other MLAM-advised mutual funds who elect to exchange Class C shares of such other MLAM-advised mutual funds for Class C shares of one of the Funds. See "Shareholder Services-- Exchange Privilege". As discussed below, Class B and Class C shares are subject to a one-year 1.0% CDSC. Approximately ten years after Class B shares of a Fund are issued, such Class B shares, together with shares issued upon dividend reinvestment with respect to those shares, are automatically converted into Class D shares of that Fund and thereafter will be subject to lower continuing fees. See "Conversion of Class B Shares to Class D Shares" below. Both Class B and Class C shares are subject to an account maintenance fee of 0.15% of net assets and a distribution fee of 0.20% of net assets as discussed below under "Distribution Plans". The proceeds from the ongoing account maintenance fees are used to compensate Merrill Lynch for providing continuing account maintenance activities. 38 Class B and Class C shares are not subject to an initial sales charge; therefore, Merrill Lynch compensates its financial consultants for selling Class B and Class C shares of MLAM-advised mutual funds at the time of purchase from its own funds. See "Distribution Plans". Proceeds from the CDSCs and the distribution fee of a Fund are paid to the Distributor and are used in whole or in part by the Distributor to defray the expenses of dealers (including Merrill Lynch) related to providing distribution-related services to that Fund in connection with the sale of its Class B shares, such as the payment of compensation to financial consultants for selling Class B shares of that Fund from its own funds. The combination of the CDSC and the ongoing distribution fee facilitates the ability of a Fund to sell its Class B shares without a sales charge being deducted at the time of purchase. Approximately ten years after issuance, Class B shares of each of the Funds will convert automatically into Class D shares of the same Fund, which are subject to a lower account maintenance fee and no distribution fee; Class B shares of certain other MLAM-advised mutual funds into which exchanges may be made convert into Class D shares automatically after approximately eight years. If Class B shares of one of the Funds are exchanged for Class B shares of another MLAM-advised mutual fund, the conversion period applicable to the Class B shares acquired in the exchange will apply, and the holding period for the shares exchanged will be tacked on to the holding period for the shares acquired. Imposition of the CDSC and the distribution fee on Class B shares is limited by the NASD asset-based sales charge rule. See "Limitations on the Payment of Deferred Sales Charges" below. Class B shareholders of a Fund exercising the exchange privilege described under "Shareholder Services--Exchange Privilege" will continue to be subject to that Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares acquired as a result of the exchange. Contingent Deferred Sales Charges--Class B and Class C Shares. Class B and Class C shares of a Fund which are redeemed within one year after acquisition may be subject to a CDSC at the rates set forth below charged as a percentage of the dollar amount subject thereto. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no CDSC will be assessed on shares derived from reinvestment of dividends or capital gains distributions. The following table sets forth the rates of the Class B and Class C CDSCs for all Funds:
CDSC as Percentage of Dollar Amount Subject to Years Since Purchase Payment Made Charge - ---------------------------------------------------------------------------------------- ------------- 0-1..................................................................................... 1.0% 1 and thereafter........................................................................ None
39 For the fiscal year ended July 31, 1996, the Distributor received CDSCs from the Funds with respect to redemptions of Class B shares, all of which were paid to Merrill Lynch, as follows:
CDSCs Received Fund by Distributor - --------------------------------------------------------------------------------------- -------------- Arizona Fund........................................................................... $ 10,222 California Fund........................................................................ $ 3,456 Florida Fund........................................................................... $ 18,456 Massachusetts Fund..................................................................... $ 4,849 Michigan Fund.......................................................................... $ 6,724 New Jersey Fund........................................................................ $ 8,141 New York Fund.......................................................................... $ 6,475 Pennsylvania Fund...................................................................... $ 3,775
For the fiscal year ended July 31, 1996, the Distributor received no CDSCs with respect to redemptions of Class C shares. No Class C CDSC will be assessed in connection with redemptions to fund participation in certain fee-based programs. See "Shareholder Services--Fee-Based Programs". In determining whether a CDSC is applicable to a redemption of Class B or Class C shares, the calculation will be made in the manner that results in the lowest applicable rate being charged. Therefore, it will be assumed that the redemption is first of shares held for over one year or shares acquired pursuant to reinvestment of dividends or distributions and then of shares held longest during the one-year period. The charge will not be applied to dollar amounts representing an increase in the net asset value since the time of purchase. A transfer of shares from a shareholder's account to another account will be assumed to be made in the same order as a redemption. The Class B CDSC is waived on redemptions of shares following the death or disability (as defined in the Code) of a shareholder. Additional information concerning the waiver of the Class B CDSC is set forth in the Statement of Additional Information. The terms of the CDSC may be modified in connection with redemptions to fund participation in certain fee-based programs. See "Shareholder Services--Fee-Based Programs". Conversion of Class B Shares to Class D Shares. After approximately ten years (the "Conversion Period"), Class B shares of a Fund will be converted automatically into Class D shares of the same Fund. Class D shares are subject to an ongoing account maintenance fee of 0.10% of net assets which is lower than the account maintenance fee borne by the Class B shares, and Class D shares are not subject to the distribution fee that is borne by Class B shares. Automatic conversion of Class B shares into Class D shares will occur at least once each month (on the "Conversion Date") on the basis of the relative net asset values of the shares of the two classes on the Conversion Date, without the imposition of any sales load, fee or other charge. Conversion of Class B shares to Class D shares will not be deemed a purchase or sale of the shares for Federal income tax purposes. In addition, shares purchased through reinvestment of dividends on Class B shares also will convert automatically to Class D shares. The Conversion Date for dividend reinvestment shares will be calculated taking into account the length of time the shares underlying such dividend reinvestment shares were outstanding. If at a Conversion Date the conversion of Class B shares to Class D shares of a Fund in a single account will result in less than $50 worth of Class B shares being left in the account, all of the Class B shares of that Fund held in the account on the Conversion Date will be converted to Class D shares of that Fund. 40 Share certificates for Class B shares of the Fund to be converted must be delivered to the Transfer Agent at least one week prior to the Conversion Date applicable to those shares. In the event such certificates are not received by the Transfer Agent at least one week prior to the Conversion Date, the related Class B shares will convert to Class D shares on the next scheduled Conversion Date after such certificates are delivered. In general, Class B shares of equity MLAM-advised mutual funds will convert approximately eight years after initial purchase, and Class B shares of taxable and tax-exempt fixed income MLAM-advised mutual funds will convert approximately ten years after initial purchase. If, during the Conversion Period, a shareholder exchanges Class B shares with an eight-year Conversion Period for Class B shares with a ten-year Conversion Period, or vice versa, the Conversion Period applicable to the Class B shares acquired in the exchange will apply, and the holding period for the shares exchanged will be tacked on to the holding period for the shares acquired. The Conversion Period may be modified for certain fee-based programs. See "Shareholder Services--Fee-Based Programs". Distribution Plans The Trust has adopted a separate distribution plan on behalf of each of the Funds for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the 1940 Act (each a "Distribution Plan") with respect to the account maintenance and/or distribution fees paid by the Funds to the Distributor with respect to such classes. The Class B and Class C Distribution Plans provide for the payment of account maintenance fees and distribution fees, and the Class D Distribution Plan provides for the payment of account maintenance fees. The Distribution Plans for Class B, Class C and Class D shares each provide that the Fund pays the Distributor an account maintenance fee relating to the shares of the relevant class, accrued daily and paid monthly, at the annual rate of 0.15% (in the case of Class B and Class C shares) or 0.10% (in the case of Class D shares) of the average daily net assets of the Fund attributable to shares of the relevant class in order to compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) in connection with account maintenance activities. The Distribution Plans for Class B and Class C shares each provide that the Fund also pays the Distributor a distribution fee relating to the shares of the relevant class, accrued daily and paid monthly, at the annual rate of 0.20% of the average daily net assets of the Fund attributable to the shares of the relevant class in order to compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing shareholder and distribution services, and bearing certain distribution-related expenses of the Fund, including payments to financial consultants for selling Class B and Class C shares of the Fund. The Distribution Plans relating to Class B and Class C shares are designed to permit an investor to purchase Class B and Class C shares through dealers without the assessment of an initial sales charge and at the same time permit the dealer to compensate its financial consultants in connection with the sale of the Class B and Class C shares. In this regard, the purpose and function of the ongoing distribution fees and the CDSC are the same as those of the initial sales charge with respect to the Class A and Class D shares of the Funds in that the deferred sales charges provide for the financing of the distribution of the Funds' Class B and Class C shares. 41 Set forth in the table below is information for each Fund pertaining to the Fund's Distribution Plans for Class B, Class C and Class D shares for the fiscal year ended July 31, 1996 and information with respect to the annual fee payable pursuant to such Distribution Plans based on the net assets of each Fund as of October 31, 1996.
Payment to the Distributor, all of which Based on Average Net Net Assets was paid to Merrill Lynch ($) Assets as of July 31, 1996($) as of October 31, 1996($) ----------------------------- -------------------------------- --------------------------------- Class B Class C Class D Class B Class C Class D Class B Class C Class D ------- ------- ------- -------- ------- -------- -------- -------- -------- Arizona ....... 15,724 68 655 4.5 45,456 655,171 2.8 136,461 412,372 Fund million million California .... 35,889 103 1,776 10.3 58,005 1.8 9.2 55,254 2.1 Fund million million million million Florida ....... 53,229 20 6,850 15.2 13,882 6.8 12.8 51,595 5.9 Fund million million million million Massachusetts .... 17,257 558 565 4.9 372,041 564,924 4.5 267,506 739,074 Fund million million Michigan ...... 7,629 1 415 2.2 1,153 414,649 1.7 1,183 485,048 Fund million million New Jersey .... 22,973 174 310 6.6 115,966 310,391 4.7 272,937 558,023 Fund million million New York ...... 34,048 206 2,638 9.7 137,248 2.6 9.7 206,236 4.9 Fund million million million million Pennsylvania .... 24,307 41 725 6.9 27,261 725,614 6.1 1,207 1.8 Fund million million million
Fee Payable to the Distributor($) ---------------------------------- Class B Class C Class D -------- -------- -------- Arizona ....... 9,762 478 412 Fund California .... 32,098 193 2,146 Fund Florida ....... 44,649 181 5,873 Fund Massachusetts . 15,872 936 739 Fund Michigan ...... 6,058 4 485 Fund New Jersey .... 16,350 955 558 Fund New York ...... 34,022 722 4,937 Fund Pennsylvania .. 21,265 4 1,828 Fund The payments under each of the Distribution Plans are based on a percentage of average daily net assets attributable to the shares of the related Fund regardless of the amount of expenses incurred, and, accordingly, distribution-related revenues from the Distribution Plans may be more or less than distribution-related expenses. Information with respect to the distribution-related revenues and expenses of each Fund is presented to the Trustees for their consideration in connection with their deliberations as to the continuance of each of the Class B and Class C Distribution Plans. This information is presented separately for each Fund annually as of December 31 of each year on a "fully allocated accrual" basis and quarterly on a "direct expense and revenue/cash" basis. On the fully allocated accrual basis, a Fund's revenues consist of the account maintenance fees, distribution fees, the CDSCs and certain other related revenues of that Fund, and expenses consist of financial consultant compensation, branch office and regional operation center selling and transaction processing expenses, advertising, sales promotion and market expenses, corporate overhead and interest expense of that Fund. On the direct expense and revenue/cash basis, revenues consist of the account maintenance fees, distribution fees and CDSCs of that Fund, and the expenses consist of financial consultant compensation of that Fund. 42 The table below sets forth information with respect to Class B shares of the Funds concerning direct cash revenues and expenses for the period November 26, 1993 (commencement of operations) to July 31, 1996 and fully allocated accrual revenues and expenses incurred by the Distributor and Merrill Lynch for the period November 26, 1993 (commencement of operations) to December 31, 1995.
Amount by which Approximate Amount by Direct Cash Revenues % of Class B which Fully Allocated Accrual % of Class B Exceeded Direct Cash Net Assets Expenses Exceeded Fully Net Assets Expenses as of at Allocated Accrual Revenues as of at Fund 7/31/96($) 7/31/96 12/31/95($) 12/31/95 - -------------------------- ------------------------- ------------ -------------------------------- ------------ Arizona Fund.............. 29,410 1.02% 35,000 0.69% California Fund........... 18,581 0.19% 97,000 0.94% Florida Fund.............. 253,004 1.85% (53,000)* 0.33% Massachusetts Fund........ 5,507 0.12% 73,000 1.49% Michigan Fund............. 14,792 0.80% 12,000 0.55% New Jersey Fund........... 20,242 0.39% 69,000 1.02% New York Fund............. 22,736 2.26% 84,000 0.86% Pennsylvania Fund......... 21,161 0.34% 74,000 1.07%
- ------------ * Accrual revenues exceeded accrual expenses. The table below sets forth information with respect to Class C shares of the Funds concerning direct cash revenues and expenses for the period October 21, 1994 (commencement of operations) to July 31, 1996. Fully allocated accrual data for Class C shares for the period October 21, 1994 (commencement of operations) to December 31, 1995 is not presented because such revenues and expenses are de minimis. Amount by Which Direct Cash Revenues Exceeded % of Class Direct Cash C Net Expenses as of Assets at Fund 7/31/96($) 7/31/96 - -------------------------------- ----------------- ---------- Arizona Fund.................... 68 0.05% California Fund................. 118 0.21% Florida Fund.................... 21 0.04% Massachusetts Fund.............. 763 0.36% Michigan Fund................... 2 0.17% New Jersey Fund................. 198 0.07% New York Fund................... 214 0.10% Pennsylvania Fund............... 31 2.60% The Funds have no obligation with respect to distribution and/or account maintenance-related expenses incurred by the Distributor and Merrill Lynch in connection with Class B, Class C and Class D shares, and there is no assurance that the Trustees of the Trust will approve the continuance of the Distribution Plans from year to year. However, the Distributor intends to seek annual continuation of the Distribution Plans. In their review of the Distribution Plans, the Trustees will be asked to take into consideration expenses incurred in connection with the account maintenance and/or distribution of each class of shares separately. The initial sales charges, the account maintenance fee, the distribution fee and/or the CDSCs received with respect to one class will not be used to subsidize the sale of shares of another class. Payments of the distribution fee on Class B shares will 43 terminate upon conversion of those Class B shares into Class D shares as set forth under "Purchase of Shares-- Deferred Sales Charge Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class D Shares". Limitations on the Payment of Deferred Sales Charges The maximum sales charge rule in the Conduct Rules of the NASD imposes a limitation on certain asset-based sales charges such as the distribution fee and the CDSC borne by the Class B shares of each of the Funds, but not the account maintenance fee. The maximum sales charge rule is applied separately to each class. As applicable to each Fund, the maximum sales charge rule limits the aggregate of distribution fee payments and CDSCs payable by each Fund to (1) 6.25% of eligible gross sales of Class B shares of that Fund (defined to exclude shares issued pursuant to dividend reinvestments and exchanges) plus (2) interest on the unpaid balance for the respective class, computed separately, at the prime rate plus 1% (the unpaid balance being the maximum amount payable minus amounts received from the payment of the distribution fee and the CDSC of that Fund). In connection with the Class B shares, the Distributor has voluntarily agreed to waive interest charges on the unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the maximum amount payable to the Distributor in connection with each Fund (referred to as the "voluntary maximum") in connection with the Class B shares is 6.75% of eligible gross sales of that Fund. The Distributor retains the right to stop waiving the interest charges at any time. To the extent a Fund's payments would exceed the voluntary maximum, such Fund will not make further payments of the distribution fee with respect to Class B shares and any CDSCs will be paid to the Fund rather than to the Distributor; however, such Fund will continue to make payments of the account maintenance fee. In certain circumstances the amount payable pursuant to the voluntary maximum may exceed the amount payable under the NASD formula. In such circumstances payments in excess of the amount payable under the NASD formula will not be made. REDEMPTION OF SHARES The Trust is required to redeem for cash all shares of the Funds upon receipt of a written request in proper form. The redemption price is the net asset value per share next determined after the initial receipt of proper notice of redemption. Except for any CDSC which may be applicable, there will be no charge for redemption if the redemption request is sent directly to the Transfer Agent. Shareholders liquidating their holdings will receive upon redemption all dividends reinvested through the date of redemption. The value of shares at the time of redemption may be more or less than the shareholder's cost, depending on the market value of the securities held by a Fund at such time. Redemption A shareholder wishing to redeem shares of a Fund may do so by tendering the shares directly to the Transfer Agent, Merrill Lynch Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered other than by mail should be delivered to Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice of redemption in the case of shares deposited with the Transfer Agent may be accomplished by a written letter requesting redemption. Proper notice of redemption in the case of shares of a Fund for which certificates have been issued may be accomplished by a written letter as noted above accompanied by certificates for the shares to be redeemed. Redemption requests should not be sent to the Trust or any Fund. The notice in either event requires the signature(s) of all persons in whose name(s) the shares are registered, signed exactly as such name(s) appear(s) on the Transfer Agent's register. The signature(s) on the redemption request must be guaranteed by an "eligible guarantor institution" as 44 such term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, the existence and validity of which may be verified by the Transfer Agent through the use of industry publications. Notarized signatures are not sufficient. In certain instances, the Transfer Agent may require additional documents such as, but not limited to, trust instruments, death certificates, appointments as executor or administrator, or certificates of corporate authority. For shareholders redeeming directly with the Transfer Agent, payments will be mailed within seven days of receipt of a proper notice of redemption. At various times the Trust may be requested to redeem shares of a Fund for which it has not yet received good payment (e.g., cash, Federal funds or certified check drawn on a United States bank). The Trust may delay or cause to be delayed the mailing of a redemption check until such time as it has assured itself that good payment has been collected for the purchase of such Fund shares, which may take up to 10 days. Repurchase The Trust also will repurchase shares of a Fund through a shareholder's listed securities dealer. The Trust normally will accept orders to repurchase Fund shares by wire or telephone from dealers for their customers at the net asset value next computed after receipt of the order by the dealer, provided that the request for repurchase is received by the dealer prior to the close of business on the NYSE (generally, 4:00 p.m., New York time) on the day received and is received by a Fund from such dealer not later than 30 minutes after the close of business on the NYSE on the same day. Dealers have the responsibility of submitting such repurchase requests to the Trust not later than 30 minutes after the close of business on the NYSE in order to obtain that day's closing price. The foregoing repurchase arrangements are for the convenience of shareholders and do not involve a charge by the Trust (other than any applicable CDSC); securities firms which do not have selected dealer agreements with the Distributor, however, may impose a charge on the shareholder for transmitting the notice of repurchase to the Trust. Merrill Lynch may charge its customers a processing fee (presently $4.85) to confirm a repurchase of shares of such customers. Repurchases directly through a Fund's Transfer Agent are not subject to the processing fee. The Trust reserves the right to reject any order for repurchase, which right of rejection might adversely affect shareholders seeking redemption through the repurchase procedure. However, a shareholder whose order for repurchase is rejected by the Trust may redeem Fund shares as set forth above. Redemption payments will be made within seven days of the proper tender of the certificates, if any, and stock power or letter requesting redemption, in each instance with signatures guaranteed as noted above. Reinstatement Privilege--Class A and Class D Shares Shareholders who have redeemed their Class A or Class D shares of a Fund have a privilege to reinstate their accounts by purchasing Class A or Class D shares of that Fund at net asset value without a sales charge up to the dollar amount redeemed. The reinstatement privilege may be exercised by sending a notice of exercise along with a check for the amount to be reinstated to the Transfer Agent within 30 days after the date the request for redemption was accepted by the Transfer Agent or the Distributor. Alternatively, the reinstatement privilege may be exercised through the investor's Merrill Lynch Financial Consultant within 30 days after the date the request for redemption was accepted by the Transfer Agent or the Distributor. The reinstatement will be made at the net asset value per share next determined after the notice of reinstatement is received and cannot exceed the amount of the redemption proceeds. 45 SHAREHOLDER SERVICES The Trust offers a number of shareholder services and investment plans designed to facilitate investment in shares of the Funds. Full details as to each of such services, copies of the various plans described below, and instructions as to how to participate in the various services or plans, or to change options with respect thereto can be obtained from the Trust by calling the telephone number on the cover page hereof or from the Distributor or Merrill Lynch. Included in such services are the following: Investment Account Each shareholder whose account is maintained at the Transfer Agent has an Investment Account and will receive statements, at least quarterly, from the Transfer Agent. These statements will serve as transaction confirmations for automatic investment purchases and the reinvestment of ordinary income dividends, and long-term capital gains distributions. The statements will also show any other activity in the account since the preceding statement. Shareholders will receive separate transaction confirmations for each purchase or sale transaction other than automatic investment purchases and the reinvestment of ordinary income dividends and long-term capital gains distributions. A shareholder may make additions to his or her Investment Account at any time by mailing a check directly to the Transfer Agent. Shareholders also may maintain their accounts through Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch brokerage account, an Investment Account in the transferring shareholder's name will be opened automatically at the Transfer Agent. Shareholders considering transferring their Class A or Class D shares of a Fund from Merrill Lynch to another brokerage firm or financial institution should be aware that, if the firm to which the Class A or Class D shares are to be transferred will not take delivery of shares of the Fund, a shareholder either must redeem the Class A or Class D shares (paying any applicable CDSC) so that the cash proceeds can be transferred to the account at the new firm or such shareholder must continue to maintain an Investment Account at the Transfer Agent for those Class A or Class D shares. Shareholders interested in transferring their Class B or Class C shares of a Fund from Merrill Lynch and who do not wish to have an Investment Account maintained for such shares at the Transfer Agent may request their new brokerage firm to maintain such shares in an account registered in the name of the brokerage firm for the benefit of the shareholder at the Transfer Agent. Exchange Privilege U.S. shareholders of each class of shares of each of the Funds have an exchange privilege with certain other MLAM-advised mutual funds. There is currently no limitation on the number of times a shareholder may exercise the exchange privilege. The exchange privilege may be modified or terminated in accordance with the rules of the Commission. Under the Merrill Lynch Select Pricing(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 his or her account in which the exchange is made at the time of the exchange or is otherwise eligible to purchase Class A shares of the second fund. If the Class A shareholder wants to exchange Class A shares for shares of a second MLAM-advised mutual fund, and the shareholder does not hold Class A shares of the second fund in his or her account at the time of the exchange and is not otherwise eligible to acquire Class A shares of the second fund, the shareholder will receive Class D shares of the second fund as a result of the exchange. Class D shares also may be exchanged for Class A shares of a second MLAM-advised mutual fund at any time as long as, at the time of the exchange, the shareholder holds Class A shares of the second fund in the account in which the exchange is made or is otherwise eligible to purchase Class A shares of the second fund. 46 Exchanges of Class A and Class D shares are made on the basis of the relative net asset values per Class A or Class D share, respectively, plus an amount equal to the difference, if any, between the sales charge previously paid on the Class A or Class D shares being exchanged and the sales charge payable at the time of the exchange on the shares being acquired. Class B, Class C and Class D shares are exchangeable with shares of the same class of other MLAM-advised mutual funds. Shares of the Funds which are subject to a CDSC are exchangeable on the basis of relative net asset value per share without the payment of any CDSC that might otherwise be due upon redemption of the shares of that Fund. For purposes of computing the CDSC that may be payable upon a disposition of the shares acquired in the exchange, the holding period for the previously owned shares of the Fund is tacked onto the holding period for the newly acquired shares of the other fund. Class A, Class B, Class C and Class D shares also are exchangeable for shares of certain MLAM-advised money market funds specifically designated as available for exchange by holders of Class A, Class B, Class C or Class D shares. The period of time that Class A, Class B, Class C or Class D shares are held in a money market fund, however, will not count toward satisfaction of the holding period requirement for reduction of any CDSC imposed on such shares, if any, and, with respect to Class B shares, toward satisfaction of the Conversion Period. Class B shareholders of a Fund exercising the exchange privilege will continue to be subject to that Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the new Class B shares. In addition, Class B shares of a Fund acquired through use of the exchange privilege will be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares of the MLAM-advised mutual fund from which the exchange has been made. Exercise of the exchange privilege is treated as a sale for Federal income tax purposes. For further information, see "Shareholder Services--Exchange Privilege" in the Statement of Additional Information. Automatic Reinvestment of Dividends and Capital Gains Distributions All dividends and capital gains distributions are reinvested automatically in full and fractional shares of a Fund, without a sales charge, at the net asset value per share of that Fund at the close of business on the monthly payment date for such dividends and distributions. A shareholder, at any time, by written notification or by telephone (1-800-MER-FUND) to the Transfer Agent, may elect to have subsequent dividends or both dividends and capital gains distributions paid in cash, rather than reinvested, in which event payment will be mailed on or about the payment date. Cash payments also can be directly deposited to the shareholder's bank account. No CDSC will be imposed upon redemption of shares issued as a result of the automatic reinvestment of dividends or capital gains distributions. Systematic Withdrawal Plans A Class A or Class D shareholder of a Fund may elect to receive systematic withdrawal payments from his or her Investment Account through automatic payment by check or through automatic payment by direct deposit to his or her bank account on either a monthly or quarterly basis. Alternatively, a Class A or Class D shareholder whose shares are held within a CMA(Registered) or CBA(Registered) Account may elect to have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through the CMA(Registered)/CBA(Registered) Systematic Redemption Program, subject to certain conditions. 47 Automatic Investment Plans Regular additions of Class A, Class B, Class C and Class D shares may be made to an investor's Investment Account by prearranged charges of $50 or more to his or her regular bank account. Alternatively, an investor who maintains a CMA(Registered) or CBA(Registered) account may arrange to have periodic investments made in a Fund in that CMA(Registered) or CBA(Registered) account or in certain related accounts in amounts of $100 or more through the CMA(Registered) or CBA(Registered) Automated Investment Program. Fee-Based Programs Certain Merrill Lynch fee-based programs, including pricing alternatives for securities transactions, (each referred to in this paragraph as a "Program") may permit the purchase of Class A shares at net asset value. Under specified circumstances, participants in certain Programs may deposit other classes of shares which will be exchanged for Class A shares. Initial or deferred sales charges otherwise due in connection with such exchanges may be waived or modifed, as may the Conversion Period applicable to the deposited shares. Termination of participation in a Program may result in the redemption of shares held therein or the automatic exchange thereof to another class at net asset value, which may be shares of a money market fund. In addition, upon termination of participation in a Program, shares that have been held for less than specified periods within such Program may be subject to a fee based upon the current value of such shares. These Programs also generally prohibit such shares from being transferred to another account at Merrill Lynch, to another broker-dealer or to the Transfer Agent. Except in limited circumstances (which may also involve an exchange as described above), such shares must be redeemed and another class of shares purchased (which may involve the imposition of initial or deferred sales charges and distribution and account maintenance fees) in order for the investment not to be subject to Program fees. Additional information regarding a specific Program (including charges and limitations on transferability applicable to shares that may be held in such Program) is available in such Program's client agreement and from Merrill Lynch Investor Services at (800) MER-FUND (637-3863). PORTFOLIO TRANSACTIONS Subject to the policies established by the Trustees of the Trust, the Manager is primarily responsible for the execution of the Fund's portfolio transactions. Municipal Bonds and other securities in which the Funds invest are traded primarily in the over-the-counter market. Where possible, the Trust deals directly with the dealers who make a market in the securities involved except in those circumstances where better prices and execution are available elsewhere. It is the policy of the Trust to obtain the best net results in conducting portfolio transactions for the Funds, taking into account such factors as price (including the applicable dealer spread), the size, type and difficulty of the transactions involved, the firm's general execution and operations facilities, and the firm's risk in positioning the securities involved and the provision of supplemental investment research by the firm. While reasonably competitive spreads or commissions are sought, the Funds will not necessarily be paying the lowest spread or commission available. The sale of shares of the Funds may be taken into consideration as a factor in the selection of brokers or dealers to execute portfolio transactions for the Funds. The portfolio securities of the Funds generally are traded on a principal basis and normally do not involve either brokerage commissions or transfer taxes. The cost of portfolio securities transactions of the Funds primarily consists of dealer or underwriter spreads. Under the 1940 Act, persons affiliated with the Trust, including Merrill Lynch, are prohibited from dealing with the Trust or any Fund as principals in the purchase and sale of securities unless such trading is permitted by an exemptive order issued by the Commission. The Trust has obtained an exemptive order permitting it and each Fund to engage in certain principal transactions with Merrill Lynch involving high quality short-term municipal securities, subject to certain conditions. In addition, the Trust may not purchase securities, 48 including Municipal Bonds, for the Funds during the existence of any underwriting syndicate of which Merrill Lynch is a member except pursuant to procedures approved by the Trustees of the Trust which comply with rules adopted by the Commission. The Trust has applied for an exemptive order permitting it to, among other things, (i) purchase high quality tax-exempt securities from Merrill Lynch when Merrill Lynch is a member of an underwriting syndicate and (ii) purchase tax-exempt securities from and sell tax-exempt securities to Merrill Lynch in secondary market transactions. An affiliated person of the Trust may serve as its broker in over-the-counter transactions conducted for the Funds on an agency basis only. Portfolio Turnover. Generally, the Funds do not purchase securities for short-term trading profits. However, a Fund may dispose of securities without regard to the time they have been held when such action, for defensive or other reasons, appears advisable to the Manager. As a result of the investment policies of the Funds, each Fund's portfolio turnover may be higher than that of other investment companies; however, it is extremely difficult to predict portfolio turnover rates with any degree of accuracy. Higher portfolio turnover may contribute to higher transactional costs and negative tax consequences, such as an increase in capital gain dividends or in ordinary income dividends of accrued market discount, as well as greater difficulty meeting the requirement for qualification as a regulated investment company that less than 30% of its gross income be derived from the sale or other disposition of securities held for less than three months. See "Distributions and Taxes." (The portfolio turnover rate for a Fund is calculated by dividing the lesser of purchases or sales of portfolio securities for the particular fiscal year by the monthly average of the value of the portfolio securities owned by the Fund during the particular fiscal year. For purposes of determining this rate, all securities whose maturities at the time of acquisition are one year or less are excluded.) For the fiscal years ended July 31, 1996 and 1995, the portfolio turnover rates for each of the Funds were as follows:
For the Year Ended July 31, ---------------------------------------- Fund 1996 1995 - ----------------------------------------------------------------------- ------------------ ------------------ Arizona Fund........................................................... 43.53% 182.58% California Fund........................................................ 11.09 124.72 Florida Fund........................................................... 39.90 138.97 Massachusetts Fund..................................................... 22.71 89.96 Michigan Fund.......................................................... 32.92 93.08 New Jersey Fund........................................................ 6.57 131.56 New York Fund.......................................................... 51.47 139.16 Pennsylvania Fund...................................................... 30.90 141.52
For each of the Funds, the yield volatility exhibited by the municipal bond market during the fiscal year ended July 31, 1995 contributed to recent portfolio turnover. Each Fund's shift to a more defensive posture necessitated a significant portfolio restructuring which led to increased trading activity for the fiscal year ended July 31, 1995. 49 DISTRIBUTIONS AND TAXES Distributions The net investment income of each Fund is declared as dividends, prior to the determination of the net asset value which is calculated 15 minutes after the close of business on the NYSE (generally 4:00 p.m., New York time) on that day. The net investment income of each Fund for dividend purposes consists of interest earned on portfolio securities, less expenses, in each case computed since the most recent determination of the net asset value. Expenses of each Fund, including the management fees and account maintenance fees and distribution fees with respect to Class B and Class C shares of that Fund and account maintenance fees with respect to Class D shares of that Fund, are accrued daily. Dividends of net investment income of a Fund are declared daily and reinvested monthly in the form of additional full and fractional shares of that Fund at net asset value unless the shareholder elects to receive such dividends in cash. Shares will accrue dividends as long as they are issued and outstanding. Shares are issued and outstanding from the settlement date of a purchase order to the day prior to the settlement date of a redemption order. All net realized long- or short-term capital gains of a Fund, if any, are declared and distributed to that Fund's shareholders at least annually. Capital gains distributions will be reinvested automatically in shares of a Fund unless the shareholder elects to receive such distributions in cash. The per share dividends and distributions on each class of shares of a Fund will be reduced as a result of any account maintenance, distribution and transfer agency fees applicable to that class. See "Additional Information--Determination of Net Asset Value". See "Shareholder Services" for information as to how to elect either dividend reinvestment or cash payments. Portions of dividends and distributions which are taxable to shareholders as described below are subject to income tax whether they are reinvested in shares of a Fund or received in cash. Taxes Federal. The Trust intends to continue to qualify each Fund for the special tax treatment afforded regulated investment companies ("RICs") under the Code. If a Fund so qualifies, the Fund (but not its shareholders) will not be subject to Federal income tax to the extent that it distributes its net investment income and net realized capital gains. The Trust intends to cause each Fund to distribute substantially all of such income. To the extent that the dividends distributed to a Fund's Class A, Class B, Class C and Class D shareholders (together, the "shareholders") are derived from interest income exempt from Federal income tax under Code Section 103(a) and are properly designated as "exempt-interest dividends" by the Trust, they will be excludable from a shareholder's gross income for Federal income tax purposes. Exempt-interest dividends are included, however, in determining the portion, if any, of a person's social security benefits and railroad retirement benefits subject to Federal income taxes. The Trust will inform shareholders annually as to the portion of each Fund's distributions which constitutes exempt-interest dividends and which is exempt from Federal income tax. Interest on indebtedness incurred or continued to purchase or carry Fund shares is not deductible for Federal income tax purposes to the extent attributable to exempt-interest dividends. Persons who may be "substantial users" (or "related persons" of substantial users) of facilities financed by industrial development bonds or private activity bonds held by a Fund should consult their tax advisors before purchasing Fund shares. To the extent that a Fund's distributions are derived from interest on its taxable investments or from an excess of net short-term capital gains over net long-term capital losses ("ordinary income dividends"), such 50 distributions are considered ordinary income for Federal income tax purposes. Distributions, if any, from an excess of net long-term capital gains over net short-term capital losses derived from the sale of securities or from certain transactions in futures or options ("capital gain dividends") are taxable as long-term capital gains for Federal income tax purposes, regardless of the length of time the shareholder has owned Fund shares. Distributions by the Fund, whether from exempt-interest income, ordinary income or capital gains, will not be eligible for the dividends received deduction allowed to corporations under the Code. All or a portion of each Fund's gain from the sale or redemption of tax-exempt obligations purchased at a market discount will be treated as ordinary income rather than capital gain. This rule may increase the amount of ordinary income dividends received by shareholders. Distributions in excess of the Fund's earnings and profits will first reduce the adjusted tax basis of a holder's shares and, after such adjusted tax basis is reduced to zero, will constitute capital gains to such holder (assuming the shares are held as a capital asset). Any loss upon the sale or exchange of shares held for six months or less will be disallowed to the extent of any exempt-interest dividends received by the shareholder. In addition, any such loss that is not disallowed under the rule stated above will be treated as long-term capital loss to the extent of any capital gain dividends received by the shareholder. If a Fund pays a dividend in January which was declared in the previous October, November or December to shareholders of record on a specified date in one of such months, then such dividend will be treated for tax purposes as being paid by the Fund and received by its shareholders on December 31 of the year in which such dividend was declared. The Code subjects interest received on certain otherwise tax-exempt securities to an alternative minimum tax. The alternative minimum tax applies to interest received on certain "private activity bonds" issued after August 7, 1986. Private activity bonds are bonds which, although tax-exempt, are used for purposes other than those generally performed by governmental units and which benefit non-governmental entities (e.g., bonds used for industrial development or housing purposes). Income received on such bonds is classified as an item of "tax preference", which could subject certain investors in such bonds, including shareholders of a Fund, to an alternative minimum tax. Each Fund will purchase such "private activity bonds" and the Trust will report to shareholders within 60 days after each Fund's taxable year-end the portion of its dividends declared during the year which constitutes an item of tax preference for alternative minimum tax purposes. The Code further provides that corporations are subject to an alternative minimum tax based, in part, on certain differences between taxable income as adjusted for other tax preferences and the corporation's "adjusted current earnings", which more closely reflect a corporation's economic income. Because an exempt-interest dividend paid by a Fund will be included in adjusted current earnings, a corporate shareholder may be required to pay alternative minimum tax on exempt-interest dividends paid by such Fund. No gain or loss will be recognized by Class B shareholders on the conversion of their Class B shares into Class D shares. A shareholder's basis in the Class D shares acquired will be the same as such shareholder's basis in the Class B shares converted, and the holding period of the acquired Class D shares will include the holding period for the converted Class B shares. If a shareholder exercises an exchange privilege within 90 days of acquiring the shares, then the loss the shareholder can recognize on the exchange will be reduced (or the gain increased) to the extent any sales charge paid to the Fund on the exchanged shares reduces any sales charge the shareholder would have owed upon purchase of the new shares in the absence of the exchange privilege. Instead, such sales charge will be treated as an amount paid for the new shares. A loss realized on a sale or exchange of shares of a Fund will be disallowed if other Fund shares are acquired (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period 51 beginning 30 days before and ending 30 days after the date that the shares are disposed of. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Under certain Code provisions, some shareholders may be subject to a 31% withholding tax on certain ordinary income dividends and on capital gain dividends and redemption payments ("backup withholding"). Generally, shareholders subject to backup withholding will be those for whom no certified taxpayer identification number is on file with the Trust or who, to the Trust's knowledge, have furnished an incorrect number. When establishing an account, an investor must certify under penalty of perjury that such number is correct and that such investor is not otherwise subject to backup withholding. The Code provides that every person required to file a tax return must include for information purposes on such return the amount of exempt-interest dividends received from all sources (including each Fund), during the taxable year. The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury regulations presently in effect. For the complete provisions, reference should be made to the pertinent Code sections and the Treasury regulations promulgated thereunder. The Code and the Treasury regulations are subject to change by legislative, judicial or administrative action either prospectively or retroactively. Shareholders are urged to consult their tax advisors regarding specific questions as to Federal, foreign, state or local taxes. State. The State Municipal Bonds in which each Fund will invest consist of obligations with remaining maturities of between one and ten years which are issued by or on behalf of the designated state or its political subdivisions, agencies or instrumentalities, and obligations of other qualifying issuers, such as issuers located in Puerto Rico, the Virgin Islands and Guam. State Municipal Bonds pay interest which is exempt, in the opinion of bond counsel to the issuer, from Federal income taxes, personal income taxes in the designated state and, in certain instances, franchise and local personal income taxes. In certain states, State Municipal Bonds are exempt from intangible personal property taxes in the designated state. Exempt-interest dividends paid by a Fund and attributable to interest income from State Municipal Bonds of a designated state generally will be exempt from income taxation to shareholders otherwise subject to personal income taxation by such designated state or in some cases, franchise or local personal income taxes. Shareholders subject to income taxation by states other than the Fund's designated state will realize a lower after-tax rate of return than shareholders in that state since the dividends distributed by a Fund generally will not be exempt, to any significant degree, from income taxation by any state other than that Fund's designated state. The Trust will inform shareholders annually as to the portion of a Fund's distributions which constitutes exempt-interest dividends and the portion which is not subject to state and, if applicable, city income or franchise taxes. Interest on indebtedness incurred or continued to purchase or carry Fund shares generally will not be deductible for state personal income tax purposes to the extent attributable to interest income exempt from personal income taxation by the designated state. The foregoing description relates generally to state personal income tax issues; investors should consult with their tax advisors with respect to such taxes as well as state corporate income or franchise taxes and any state or local income taxes not described above, as well as to the availability of any exemptions from state or local income taxes. Additional considerations relating to income taxation in the various states is set forth under "Distributions and Taxes" in the Statement of Additional Information. 52 PERFORMANCE DATA From time to time each Fund may include its average annual total return, yield and tax-equivalent yield for various specified time periods in advertisements or information furnished to present or prospective shareholders. Average annual total return, yield and tax-equivalent yield are computed in accordance with formulas specified by the Commission. Average annual total return quotations for the specified periods will be computed by finding the average annual compounded rates of return (based on net investment income and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return is computed assuming all dividends and distributions are reinvested and taking into account all applicable recurring and nonrecurring expenses, including any CDSC that would be applicable to a complete redemption of the investment at the end of the specified period such as in the case of Class B and Class C shares of that Fund and the maximum sales charge in the case of Class A and Class D shares of that Fund. Dividends paid by each Fund with respect to all shares, to the extent any dividends are paid, will be calculated in the same manner at the same time on the same day and will be in the same amount, except that account maintenance fees and distribution charges and any incremental transfer agency costs relating to each class of shares will be borne exclusively by that class. Each Fund will include performance data for all classes of shares of that Fund in any advertisement or information including performance data of that Fund. The Funds also may quote total return and aggregate total return performance data for various specified time periods. Such data will be calculated substantially as described above, except that (1) the rates of return calculated will not be average annual rates, but rather, actual annual, annualized or aggregate rates of return and (2) the maximum applicable sales charges will not be included with respect to annual or annualized rates of return calculations. Aside from the impact on the performance data calculations of including or excluding the maximum applicable sales charges, actual annual or annualized total return data generally will be lower than average annual total return data since the average annual rates of return reflect compounding and aggregate total return data generally will be higher than average annual total return data since the aggregate rates of return reflect compounding over a longer period of time. In advertisements distributed to investors whose purchases are subject to waiver of the CDSC in the case of Class B and Class C shares or to reduced sales charges in the case of Class A and Class D shares, performance data may take into account the reduced, and not the maximum, sales charge or may not take into account the CDSC and therefore may reflect greater total return since, due to the reduced sales charges or waiver of the CDSC, a lower amount of expenses is deducted. See "Purchase of Shares". A Fund's total return may be expressed either as a percentage or as a dollar amount in order to illustrate such total return on a hypothetical $1,000 investment in the Fund at the beginning of each specified period. Yield quotations will be computed based on a 30-day period by dividing (a) the net income based on the yield of each security earned during the period by (b) the average daily number of shares outstanding during the period that were entitled to receive dividends multiplied by (c) the maximum offering price per share on the last day of the period. Tax-equivalent yield quotations will be computed by dividing (a) the part of the Fund's yield that is tax-exempt by (b) one minus a stated tax rate and (c) adding the result to that part, if any, of the Fund's yield that is not tax-exempt. The following sets forth the yield for the Class A, Class B, Class C and Class D shares of each of the Funds for the 30-day period ended July 31, 1996. The table also sets forth the tax-equivalent yield (based on a Federal 53 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.
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 ------ -------------- ------ -------------- ------ -------------- ------ -------------- Arizona Fund.......... 3.63% 5.04% 3.31% 4.60% 3.51% 4.88% 3.53% 4.90% California Fund....... 3.26% 4.53% 2.94% 4.08% 3.21% 4.46% 3.16% 4.39% Florida Fund.......... 3.61% 5.01% 3.29% 4.57% 3.47% 4.82% 3.51% 4.88% Massachusetts Fund................ 3.63% 5.04% 3.31% 4.60% 3.51% 4.88% 3.53% 4.90% Michigan Fund......... 3.68% 5.11% 3.35% 4.65% 3.35% 4.65% 3.58% 4.97% New Jersey Fund....... 3.54% 4.92% 3.23% 4.49% 3.43% 4.76% 3.45% 4.79% New York Fund......... 3.92% 5.44% 3.61% 5.01% 3.80% 5.28% 3.83% 5.32% Pennsylvania Fund................ 3.54% 4.92% 3.22% 4.47% 3.38% 4.69% 3.44% 4.78%
Total return, yield and tax-equivalent yield figures are based on a Fund's historical performance and are not intended to indicate future performance. A Fund's total return, yield and tax-equivalent yield will vary depending on market conditions, the securities comprising the Fund's portfolio, the Fund's operating expenses and the amount of realized and unrealized net capital gain or losses during the period. The value of an investment in a Fund will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. Investors' tax-equivalent yields may differ from those listed above because of the application of state and local income and intangibles taxes and Federal income tax rates which are higher or lower than 28%. On occasion, a Fund may compare its performance to performance data published by Lipper Analytical Services, Inc., Morningstar Publications, Inc. ("Morningstar") and CDA Investment Technology, Inc., or to data contained in publications such as Money Magazine, U.S. News & World Report, Business Week, Forbes Magazine and Fortune Magazine. From time to time, a Fund may include its Morningstar risk-adjusted performance ratings in advertisements or supplemental sales literature. As with other performance data, performance comparisons should not be considered indicative of a Fund's relative performance for any future period. 54 ADDITIONAL INFORMATION Determination of Net Asset Value The net asset value of all of the classes of shares of each Fund is determined by the Manager once daily 15 minutes after the close of business on the NYSE (generally, 4:00 p.m., New York time), on each day during which the NYSE is open for trading. The net asset value per share is computed by dividing the sum of the value of the securities held by a Fund plus any cash or other assets minus all liabilities by the total number of shares outstanding at such time, rounded to the nearest cent. Expenses, including the fees payable to the Manager and the Distributor, are accrued daily. The net asset value per share of the shares of all classes of a Fund are expected to be equivalent. Under certain circumstances, however, the per share net asset value of Class A shares of that Fund will be higher than the per share net asset value of shares of the other classes, reflecting the daily expense accruals of the account maintenance, distribution and higher transfer agency fees applicable with respect to Class B and Class C shares and the daily expense accruals of the account maintenance fees applicable with respect to Class D shares; moreover, the per share net asset value of Class D shares generally will be higher than the per share net asset value of Class B and Class C shares, reflecting the daily expense accruals of the distribution fees and the higher account maintenance and transfer agency fees applicable with respect to Class B and Class C shares. It is expected, however, that the per share net asset value of the classes will tend to converge (although not necessarily meet) immediately after the payment of dividends or distributions, which will differ by approximately the amount of the expense accrual differentials between the classes. Organization of the Trust The Trust is an unincorporated business trust organized on February 14, 1991 under the laws of Massachusetts. The Trust is an open-end management investment company comprised of separate series ("Series"), each of which is a separate portfolio offering shares to selected groups of purchasers. Each of the Series is managed independently in order to provide to shareholders who are residents of the state to which such Series relates as high a level of income exempt from Federal and, in certain cases, state and local personal income taxes as is consistent with prudent investment management. The Trustees are authorized to create an unlimited number of Series and, with respect to each Series, to issue an unlimited number of full and fractional shares of beneficial interest of $.10 par value of different classes. Shareholder approval is not required for the authorization of additional Series or classes of a Series of the Trust. At the date of this Prospectus, the shares of each Fund are divided into four classes designated Class A, Class B, Class C and Class D shares. Each share of Class A, Class B, Class C and Class D represents an interest in the same assets of a Fund and have identical voting, dividend, liquidation and other rights and the same terms and conditions except that Class B, Class C and Class D shares bear certain expenses related to the account maintenance associated with such shares, and Class B and Class C shares bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to such expenditures, as applicable. See "Purchase of Shares". The Trustees of the Trust may classify and reclassify the shares of any Series into additional classes at a future date. Shareholders are entitled to one vote for each full share and to fractional votes for fractional shares held in the election of Trustees (to the extent hereinafter provided) and on other matters submitted to the vote of shareholders. All shares of the Trust have equal voting rights, except that only shares of the respective Series are entitled to vote on matters concerning only that Series and, as noted above, only Class B, Class C and Class D shares of a Series will have exclusive voting rights with respect to matters relating to the account maintenance and distribution expenditures being borne solely by such class. There normally will be no meeting of 55 shareholders for the purpose of electing Trustees unless and until such time as less than a majority of the Trustees holding office have been elected by shareholders, at which time the Trustees then in office will call a shareholders' meeting for the election of Trustees. Shareholders, in accordance with the terms of the Declaration of Trust, may cause a meeting of shareholders to be held for the purpose of voting on the removal of Trustees. Also, the Trust will be required to call a special meeting of shareholders of a Series in accordance with the requirements of the 1940 Act to seek approval of new management and advisory arrangements, of a material increase in distribution fees or of a change in the fundamental policies, objectives or restrictions of a Series. Except as set forth above, the Trustees shall continue to hold office and appoint successor Trustees. Each issued and outstanding share is entitled to participate equally in dividends and distributions declared by the respective Series and in net assets of such Series upon liquidation or dissolution remaining after satisfaction of outstanding liabilities except that, as noted above, the Class B, Class C and Class D shares of a Series bear certain additional expenses. The obligations and liabilities of a particular Series are restricted to the assets of that Series and do not extend to the assets of the Trust generally. The shares of each Series, when issued, will be fully-paid and non-assessable by the Trust. Shareholder Reports Only one copy of each shareholder report and certain shareholder communications will be mailed to each identified shareholder regardless of the number of accounts such shareholder has. If a shareholder wishes to receive separate copies of each report and communication for each of the shareholder's related accounts, the shareholder should notify in writing: Merrill Lynch Financial Data Services, Inc. P.O. Box 45289 Jacksonville, FL 32232-5289 The written notification should include the shareholder's name, address, tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated and/or mutual fund account numbers. Shareholders having any questions regarding this matter should call their Merrill Lynch Financial Consultant or Merrill Lynch Financial Data Services, Inc. at 800-637-3863. Shareholder Inquiries Shareholder inquiries may be addressed to the Trust at the address or telephone number set forth on the cover page of this Prospectus. The Declaration of Trust establishing the Trust, dated February 14, 1991, a copy of which together with all amendments thereto (the "Declaration") is on file in the office of the Secretary of the Commonwealth of Massachusetts, provides that the name "Merrill Lynch Multi-State Limited Maturity Municipal Series Trust" refers to the Trustees under the Declaration collectively as Trustees, but not as individuals or personally; and no Trustee, shareholder, officer, employee or agent of the Trust shall be held to any personal liability, nor shall resort be had to such person's private property for the satisfaction of any obligation or claim of the Trust, but the 'Trust Property' (as defined in the Declaration) only shall be liable. 56 MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST -- AUTHORIZATION FORM (PART 1) - -------------------------------------------------------------------------------- 1. Share Purchase Application I, being of legal age, wish to purchase: (choose one)* [_] Class A shares [_] Class B shares [_] Class D shares of [_] Merrill Lynch Arizona Limited Maturity Municipal Bond Fund [_] Merrill Lynch California Limited Maturity Municipal Bond Fund [_] Merrill Lynch Florida Limited Maturity Municipal Bond Fund [_] Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund [_] Merrill Lynch Michigan Limited Maturity Municipal Bond Fund [_] Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund [_] Merrill Lynch New York Limited Maturity Municipal Bond Fund [_] Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund (The Fund selected above is herein referred to as the "Fund") and establish an Investment Account as described in the Prospectus. In the event that I am not eligible to purchase Class A shares, I understand that Class D shares will be purchased. Basis for establishing an Investment Account: A. I enclose a check for $.......payable to Merrill Lynch Financial Data Services, Inc. as an initial investment (minimum $1,000). I understand that this purchase will be executed at the applicable offering price next to be determined after this Application is received by you. B. I already own shares of the following Merrill Lynch mutual funds that would qualify for the Right of Accumulation as outlined in the Statement of Additional Information: (Please list all funds. Use a separate sheet of paper if necessary.) 1. ........................................................ 2. ........................................................ 3. ........................................................ 4. ........................................................ 5. ........................................................ 6. ........................................................ (PLEASE PRINT) Name............................................................................ First Name Initial Last Name of Co-Owner (if any)....................................................... First Name Initial Last Address......................................................................... Date......................, 19......... ................................................................................ (Zip Code) Occupation................ Name and Address of Employer........................ .................................................... .................................................... .......................... .................................................... Signature of Owner Signature of Co-Owner (if any) (In the case of co-owners, a joint tenancy with right of survivorship will be presumed unless otherwise specified.) - -------------------------------------------------------------------------------- 2. Dividend and Capital Gain Distribution Option Ordinary Income Dividends Long-Term Capital Gains Select [_] Reinvest Select [_] Reinvest One: [_] Cash One: [_] Cash If no election is made, dividends and capital gains will be automatically reinvested at net asset value without a sales charge. If cash, specify how you would like your distributions paid to you: [_] Check or [_] Direct Deposit to bank account If direct deposit to bank account is selected, please complete below: I hereby authorize payment of dividend and capital gain distributions by direct deposit to my bank account and, if necessary, debit entries and adjustments for any credit entries made to my account in accordance with the terms I have selected on the Merrill Lynch Multi-State Limited Maturity Municipal Series Trust Authorization Form. Specify type of account (check one): [_] checking [_] savings Name on your Account ........................................................... Bank Name ...................................................................... Bank Number ......................... Account Number ......................... Bank Address ................................................................... I agree that this authorization will remain in effect until I provide written notification to Merrill Lynch Financial Data Services, Inc. amending or terminating this service. Signature of Depositor ......................................................... Signature of Depositor ......................... Date ........................ (if joint account, both must sign) Note: If direct deposit to bank account is selected, your blank, unsigned check marked "VOID" or a deposit slip from your savings account should accompany this application. 57 MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST -- AUTHORIZATION FORM (PART 1) -- (Continued) - -------------------------------------------------------------------------------- 3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER [ ] Social Security Number or Taxpayer Identification Number Under penalty of perjury, I certify (1) that the number set forth above is my correct Social Security Number or Taxpayer Identification Number and (2) that I am not subject to backup withholding (as discussed in the Prospectus under "Distributions and Taxes--Taxes") either because I have not been notified that I am subject thereto as a result of a failure to report all interest or dividends, or the Internal Revenue Service ("IRS") has notified me that I am no longer subject thereto. INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS. ...................................... ....................................... Signature of Owner Signature of Co-Owner (if any) - -------------------------------------------------------------------------------- 4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION) .................. , 19 ...... Date of Initial Purchase Dear Sir/Madam: Although I am not obligated to do so, I intend to purchase shares of the Fund or any other investment company with an initial sales charge or deferred sales charge for which the Merrill Lynch Funds Distributor, Inc. acts as distributor over the next 13 month period which will equal or exceed: [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000 Each purchase will be made at the then reduced offering price applicable to the amount checked above, as described in the Merrill Lynch Multi-State Limited Maturity Municipal Series Trust Prospectus. I agree to the terms and conditions of this Letter of Intention. I hereby irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc. my attorney, with full power of substitution, to surrender for redemption any or all shares of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust held as security. By: ................................... ....................................... Signature of Owner Signature of Co-Owner (If registered in joint names, both must sign) In making purchases under this letter, the following are the related accounts on which reduced offering prices are to apply: (1) Name .............................. (2) Name .............................. Account Number ........................ Account Number ........................ - -------------------------------------------------------------------------------- 5. FOR DEALER ONLY Branch Office, Address, Stamp - --------------------------------- - --------------------------------- This form, when completed, should be mailed to: Merrill Lynch Multi-State Limited Maturity Municipal Series Trust c/o Merrill Lynch Financial Data Services, Inc. P.O. Box 45289 Jacksonville, Florida 32232-5289 We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in connection with transactions under this authorization form and agree to notify the Distributor of any purchases or sales made under a Letter of Intention, Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the Shareholder's signature. ................................................................................ Dealer Name and Address By:............................................................................. Authorized Signature of Dealer [ ][ ][ ] [ ][ ][ ][ ] ....................................... Branch Code F/C No. F/C Last Name [ ][ ][ ] [ ][ ][ ][ ][ ] Dealer's Customer Account No. 58 MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST -- AUTHORIZATION FORM (PART 2) - -------------------------------------------------------------------------------- Note: This form is required to apply for the Systematic Withdrawal or Automatic Investment Plans only. - -------------------------------------------------------------------------------- 1. Account Registration [ ] (Please Print) Social Security No. or Taxpayer Identification Number Name of Owner ............................................... First Name Initial Last Name Name of Co-Owner (if any) ................................... First Name Initial Last Name Address ........................ Account Number .......................... (if existing account) ............................... (Zip Code) - -------------------------------------------------------------------------------- 2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND D SHARES ONLY (SEE TERMS AND CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION) MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly, of [ ] Class A or [ ] Class D shares in (choose one) [ ] Merrill Lynch Arizona Limited Maturity Municipal Bond Fund [ ] Merrill Lynch California Limited Maturity Municipal Bond Fund [ ] Merrill Lynch Florida Limited Maturity Municipal Bond Fund [ ] Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund [ ] Merrill Lynch Michigan Limited Maturity Municipal Bond Fund [ ] Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund [ ] Merrill Lynch New York Limited Maturity Municipal Bond Fund [ ] Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund (THE FUND SELECTED ABOVE IS HEREIN REFERRED TO AS THE "FUND") at cost or current offering price. Withdrawals to be made either (check one) [ ] Monthly on the 24th day of each month, or [ ] Quarterly on the 24th day of March, June, September and December. If the 24th falls on a weekend or holiday, the next succeeding business day will be utilized. Begin systematic withdrawal on _______ or as soon as possible thereafter. (month) SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [ ] $_________ or [ ]_________% of the current value of [ ] Class A or [ ] Class D shares in the account. SPECIFY WITHDRAWAL METHOD: [ ] check or [ ] direct deposit to bank account (check one and complete part (a) or (b) below): DRAW CHECKS PAYABLE (CHECK ONE) (a) I hereby authorize payment by check [ ] as indicated in Item 1. [ ] to the order of ....................................................... Mail to (check one) [ ] the address indicated in Item 1. [ ] Name (please print) ................................................... Address ....................................................................... ....................................................................... Signature of Owner ....................... Date ....................... Signature of Co-Owner (if any) .......................................... (b) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING THIS SERVICE. Specify type of account (check one): [ ] checking [ ] savings Name on your Account .......................................................... Bank Name ..................................................................... Bank Number ......................... Account Number ........................ Bank Address .................................................................. ................................................................... Signature of Depositor ........................ Date ........................ Signature of Depositor ........................................................ (If joint account, both must sign) NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION. 59 MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST -- AUTHORIZATION FORM (PART 2) -- (Continued) - -------------------------------------------------------------------------------- 3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN I hereby request that Merrill Lynch Financial Data Services, Inc. draw an automated clearing house ("ACH") debit on my checking account as described below each month to purchase: (choose one) [ ] Class A shares [ ] Class B shares [ ] Class D shares of the Fund subject to the terms set forth below. In the event that I am not eligible to purchase Class A shares, I understand that Class D shares will be purchased. MERRILL LYNCH FINANCIAL DATA SERVICES, INC. You are hereby authorized to draw an ACH debit each month on my bank account for investment in the Fund as indicated below: Amount of each ACH debit $ ................................................ Account No. ............................................................... Please date and invest ACH debits on the 20th of each month beginning _______________ or as soon thereafter as possible. (Month) I agree that you are drawing these ACH debits voluntarily at my request and that you shall not be liable for any loss arising from any delay in preparing or failure to prepare any such debit. If I change banks or desire to terminate or suspend this program, I agree to notify you promptly in writing. I hereby authorize you to take any action to correct erroneous ACH debits of my bank account or purchases of Fund shares including liquidating shares of the Fund and credit my bank account. I further agree that if a debit is not honored upon presentation, Merrill Lynch Financial Data Services, Inc. is authorized to discontinue immediately the Automatic Investment Plan and to liquidate sufficient shares held in my account to offset the purchase made with the dishonored debit. .................. ....................................... Date Signature of Depositor ....................................... Signature of Depositor (If joint account, both must sign) AUTHORIZATION TO HONOR ACH DEBITS DRAWN BY MERRILL LYNCH FINANCIAL DATA SERVICES, INC. To ....................................................................... Bank (Investor's Bank) Bank Address .................................................................. City ............ State ............ Zip Code ............................... As a convenience to me, I hereby request and authorize you to pay and charge to my account ACH debits drawn on my account by and payable to Merrill Lynch Financial Data Services, Inc. I agree that your rights in respect to each such debit shall be the same as if it were a check drawn on you and signed personally by me. This authority is to remain in effect until revoked by me in writing. Until you receive such notice, you shall be fully protected in honoring any such debit. I further agree that if any such debit be dishonored, whether with or without cause and whether intentionally or inadvertently, you shall be under no liability. ................... ....................................... Date Signature of Depositor ................... ....................................... Bank Account Number Signature of Depositor (If joint account, both must sign) NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION. 60 MANAGER Fund Asset Management Administrative Offices: 800 Scudders Mill Road Plainsboro, New Jersey 08536 Mailing Address: P.O. Box 9011 Princeton, New Jersey 08543-9011 DISTRIBUTOR Merrill Lynch Funds Distributor, Inc. Administrative Offices: 800 Scudders Mill Road Plainsboro, New Jersey 08536 Mailing Address: P.O. Box 9081 Princeton, New Jersey 08543-9081 CUSTODIAN The Bank of New York 90 Washington Street 12th Floor New York, New York 10005 TRANSFER AGENT Merrill Lynch Financial Data Services, Inc. Administrative Offices: 4800 Deer Lake Drive East Jacksonville, Florida 32246-6484 Mailing Address: P.O. Box 45289 Jacksonville, Florida 32232-5289 INDEPENDENT AUDITORS Deloitte & Touche LLP 117 Campus Drive Princeton, New Jersey 08540-6400 COUNSEL Brown & Wood LLP One World Trade Center New York, New York 10048-0557 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 Page ---- Fee Table................................... 3 Merrill Lynch Select Pricing(SM) System....... 7 Financial Highlights........................ 11 Investment Objectives and Policies.......... 19 Potential Benefits........................ 21 Risk Factors and Special Considerations... 22 Description of Municipal Bonds............ 24 When-Issued Securities and Delayed Delivery Transactions................... 26 Indexed and Inverse Floating Obligations............................. 26 Synthetic Short-Term Municipal Bonds...... 27 Call Rights............................... 27 Financial Futures Contracts and Options Thereon................................. 28 Repurchase Agreements..................... 30 Investment Restrictions................... 30 Management of the Trust..................... 32 Trustees.................................. 32 Management and Advisory Arrangements...... 32 Code of Ethics............................ 33 Transfer Agency Services.................. 33 Purchase of Shares.......................... 34 Initial Sales Charge Alternatives--Class A and Class D Shares...................... 36 Deferred Sales Charge Alternatives--Class B and Class C Shares.................... 38 Distribution Plans........................ 41 Limitations on the Payment of Deferred Sales Charges........................... 44 Redemption of Shares........................ 44 Redemption................................ 44 Repurchase................................ 45 Reinstatement Privilege--Class A and Class D Shares................................ 45 Shareholder Services........................ 46 Investment Account........................ 46 Exchange Privilege........................ 46 Automatic Reinvestment of Dividends and Capital Gains Distributions............. 47 Systematic Withdrawal Plans............... 47 Automatic Investment Plans................ 48 Fee-Based Programs........................ 48 Portfolio Transactions...................... 48 Distributions and Taxes..................... 50 Distributions............................. 50 Taxes..................................... 50 Performance Data............................ 53 Additional Information...................... 55 Determination of Net Asset Value.......... 55 Organization of the Trust................. 55 Shareholder Reports....................... 56 Shareholder Inquiries..................... 56 Authorization Form.......................... 57 Code # 16925-1196 [LOGO] MERRILL LYNCH Merrill Lynch Multi- State Limited Maturity Municipal Series Trust Merrill Lynch Arizona Limited Maturity Municipal Bond Fund Merrill Lynch California Limited Maturity Municipal Bond Fund Merrill Lynch Florida Limited Maturity Municipal Bond Fund Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund Merrill Lynch Michigan Limited Maturity Municipal Bond Fund Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund Merrill Lynch New York Limited Maturity Municipal Bond Fund Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund PROSPECTUS November 27, 1996 Distributor: Merrill Lynch Funds Distributor, Inc. This Prospectus should be retained for future reference. STATEMENT OF ADDITIONAL INFORMATION - ----------------------------------- MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST MERRILL LYNCH ARIZONA LIMITED MATURITY MUNICIPAL BOND FUND MERRILL LYNCH CALIFORNIA LIMITED MATURITY MUNICIPAL BOND FUND MERRILL LYNCH FLORIDA LIMITED MATURITY MUNICIPAL BOND FUND MERRILL LYNCH MASSACHUSETTS LIMITED MATURITY MUNICIPAL BOND FUND MERRILL LYNCH MICHIGAN LIMITED MATURITY MUNICIPAL BOND FUND MERRILL LYNCH NEW JERSEY LIMITED MATURITY MUNICIPAL BOND FUND MERRILL LYNCH NEW YORK LIMITED MATURITY MUNICIPAL BOND FUND MERRILL LYNCH PENNSYLVANIA LIMITED MATURITY MUNICIPAL BOND FUND P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 O PHONE NO. (609) 282-2800 Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the "Trust"), an open-end management investment company organized as a Massachusetts business trust, consists of eight separate series: Merrill Lynch Arizona Limited Maturity Municipal Bond Fund (the "Arizona Fund"), Merrill Lynch California Limited Maturity Municipal Bond Fund (the "California Fund"), Merrill Lynch Florida Limited Maturity Municipal Bond Fund (the "Florida Fund"), Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund (the "Massachusetts Fund"), Merrill Lynch Michigan Limited Maturity Municipal Bond Fund (the "Michigan Fund"), Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund (the "New Jersey Fund"), Merrill Lynch New York Limited Maturity Municipal Bond Fund (the "New York Fund") and Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund (the "Pennsylvania Fund") (together, the "Funds"). The investment objective of each Fund is to provide shareholders with as high a level of income exempt from Federal income taxes and personal income taxes imposed by the designated state (and, in certain instances, local personal income taxes) as is consistent with prudent investment management. Under normal market conditions, each Fund invests primarily in a portfolio of intermediate-term investment grade obligations of the designated state or its political subdivisions, agencies or instrumentalities, or certain other jurisdictions, that pay interest exempt, in the opinion of bond counsel to the issuer, from Federal income taxes and personal income taxes of the designated state and, where applicable, local personal income taxes. There can be no assurance that the investment objective of any Fund will be realized. Pursuant to the Merrill Lynch Select Pricing(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 27, 1996 (the "Prospectus"), which has been filed with the Securities and Exchange Commission (the "Commission") and can be obtained, without charge, by calling or by writing the Trust at the above telephone number or address. This Statement of Additional Information has been incorporated by reference into the Prospectus. Capitalized terms used but not defined herein have the same meanings as in the Prospectus. ------------------------ FUND ASSET MANAGEMENT -- MANAGER MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR ------------------------ THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS NOVEMBER 27, 1996 INVESTMENT OBJECTIVES AND POLICIES The investment objective of each Fund is to provide shareholders with as high a level of income exempt from Federal income taxes, the designated state's personal income taxes and, where applicable, local personal income taxes, as is consistent with prudent investment management. Each Fund seeks to achieve its objective by investing primarily in a portfolio of intermediate-term investment grade obligations issued by or on behalf of the designated state or its political subdivisions, agencies or instrumentalities, and obligations of other qualifying issuers, such as issuers located in Puerto Rico, the Virgin Islands and Guam. Such obligations pay interest exempt, in the opinion of bond counsel to the issuer, from Federal income taxes, the designated state's personal income taxes and, in certain instances, local personal income taxes. Obligations that pay interest exempt from Federal income taxes are referred to herein as "Municipal Bonds". Obligations that pay interest exempt from Federal income taxes, the designated state's personal income taxes and, where applicable, local personal income taxes, and obligations that would not subject shareholders to intangible personal property taxes in the designated state, are referred to herein as "State Municipal Bonds". Unless otherwise indicated, references to Municipal Bonds shall be deemed to include State Municipal Bonds. Each Fund anticipates that at all times, except during temporary defensive periods, it will maintain at least 65% of its total assets invested in its respective State Municipal Bonds; the New Jersey Fund will maintain at least 80% of its total assets invested in New Jersey State Municipal Bonds. At times, a Fund may seek to hedge its portfolio through the use of futures transactions to reduce volatility in the net asset value of Fund shares. Reference is made to "Investment Objectives and Policies" in the Prospectus for a discussion of the investment objective and policies of each Fund. Each Fund will invest primarily in Municipal Bonds with remaining maturities of between one and ten years. It is anticipated that, depending on market conditions, the dollar weighted average maturity of each Fund's portfolio will not exceed five years. For purposes of these investment policies, an obligation will be treated as having a maturity earlier than its stated maturity date if such obligation has technical features which, in the judgment of Fund Asset Management, L.P. (the "Manager"), will result in the obligation being valued in the market as though it has such earlier maturity. Interest rates on shorter-term Municipal Bonds may fluctuate more widely from time to time than interest rates on longer-term Municipal Bonds. However, because of their limited maturities, the market value of the Municipal Bonds held by each Fund can be expected to fluctuate less as a result of changes in interest rates. Municipal Bonds may include general obligation bonds of a state and its political subdivisions, revenue bonds to finance utility systems, highways, bridges, port and airport facilities, colleges, hospitals, housing facilities, etc., and industrial development bonds or private activity bonds. The interest on such obligations may bear a fixed rate or be payable at a variable or floating rate. The Municipal Bonds purchased by each Fund will be primarily what are commonly referred to as "investment grade" securities, which are obligations rated at the time of purchase within the four highest quality ratings as determined by either Moody's Investors Service, Inc. ("Moody's") (currently Aaa, Aa, A and Baa), Standard & Poor's Ratings Services ("Standard & Poor's") (currently AAA, AA, A and BBB) or Fitch Investors Service, Inc. ("Fitch") (currently AAA, AA, A and BBB). If unrated, such securities will possess creditworthiness comparable, in the opinion of the Manager, to investment grade obligations. Certain Municipal Bonds may be entitled to the benefits of letters of credit or similar credit enhancements issued by financial institutions. In such instances, the Trustees and the Manager will take into account in assessing the quality of such obligations not only the creditworthiness of the issuer of such obligations but also the creditworthiness of the financial institution. In evaluating the creditworthiness of the financial institution, the Trustees and the Manager will consider factors such as whether the letter of credit or similar credit enhancement being issued is conditional or unconditional. The Funds ordinarily do not intend to realize investment income not exempt from Federal income taxes, the designated state's personal income taxes and, where applicable, local personal income taxes, or to hold investments that would subject shareholders to intangible personal property taxes in the designated state. However, to the extent that suitable State Municipal Bonds are not available for investment by a Fund, a Fund may purchase Municipal Bonds issued by other states or their agencies or instrumentalities, the interest income 2 on which is exempt, in the opinion of bond counsel to the issuer, from Federal but not the designated state's taxation. Each Fund also may invest in securities not issued by or on behalf of a state or territory or by an agency or instrumentality thereof, if the Fund nevertheless believes such securities to be exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities"). Non-Municipal Tax-Exempt Securities may include securities issued by other investment companies that invest in municipal bonds, to the extent permitted by applicable law. Other Non-Municipal Tax-Exempt Securities could include trust certificates or other instruments evidencing interests in one or more long-term municipal securities. Except when acceptable securities are unavailable as determined by the Manager, each Fund, under normal circumstances, will invest at least 65% (80% in the case of the New Jersey Fund) of its total assets in its respective State Municipal Bonds. For temporary defensive purposes or to provide liquidity, each Fund has the authority to invest in tax-exempt or taxable money market obligations with maturities of one year or less (such short-term obligations being referred to herein as "Temporary Investments"), except that taxable Temporary Investments shall not exceed 20% of a Fund's net assets. Each Fund at all times will have at least 80% of its net assets invested in securities exempt from Federal income taxation. However, interest received on certain otherwise tax-exempt securities which are classified as "private activity bonds" (in general, bonds that benefit non-governmental entities) may be subject to an alternative minimum tax. Each Fund may purchase such private activity bonds. See "Distributions and Taxes". In addition, each Fund reserves the right to invest temporarily a greater portion of its assets in Temporary Investments for defensive purposes, when, in the judgment of the Manager, market conditions warrant. The investment objective of each Fund set forth in this paragraph is a fundamental policy of the Fund which may not be changed without a vote of a majority of the outstanding shares of the Fund. A Fund's hedging strategies are not fundamental policies and may be modified by the Trustees of the Trust without the approval of the Fund's shareholders. Municipal Bonds at times may be purchased or sold on a delayed delivery basis or on a when-issued basis. These transactions arise when securities are purchased or sold by a Fund with payment and delivery taking place in the future, often a month or more after the purchase. The payment obligation and the interest rate are each fixed at the time the buyer enters into the commitment. A Fund only will make commitments to purchase such securities with the intention of actually acquiring the securities, but a Fund (subject to any state or local personal income tax limitations) may sell these securities prior to the settlement date if it is deemed advisable. Purchasing Municipal Bonds on a when-issued basis involves the risk that the yields available in the market when the delivery takes place actually may be higher than those obtained in the transaction itself; if yields so increase, the value of the when-issued obligations generally will decrease. Each Fund will maintain a separate account at its custodian bank consisting of cash, cash equivalents or liquid securities or Temporary Investments (valued on a daily basis) equal at all times to the amount of the when-issued commitment. The Funds may invest in Municipal Bonds (and Non-Municipal Tax-Exempt Securities) the return on which is based on a particular index of value or interest rates. For example, the Funds may invest in Municipal Bonds that pay interest based on an index of Municipal Bond interest rates or based on the value of gold or some other commodity. The principal amount payable upon maturity of certain Municipal Bonds also may be based on the value of an index. To the extent the Funds invest in these types of Municipal Bonds, their return on such Municipal Bonds will be subject to risk with respect to the value of the particular index, which may include reduced or eliminated interest payments and losses of invested principal. Also, the Funds may invest in so-called "inverse floating obligations" or "residual interest bonds" on which the interest rates typically vary inversely with a short-term floating rate (which may be reset periodically by a dutch auction, by a remarketing agent or by reference to a short-term tax-exempt interest rate index). The Funds may purchase original issue inverse floating rate bonds in both the primary and secondary markets and also may purchase in the secondary market synthetically-created inverse floating rate bonds evidenced by custodial or trust receipts. Generally, interest rates on inverse floating rate bonds will decrease when short-term rates increase and increase when short-term rates decrease. Such securities have the effect of providing a degree of investment leverage, since they may increase or decrease in value in response to changes, as an illustration, in market interest rates at a rate which is a multiple (typically two) of the rate at which fixed-rate, long-term, tax-exempt securities increase or decrease in response to such changes. As a result, the market values of such securities generally will be more volatile than the market 3 values of fixed-rate, tax-exempt securities. To seek to limit the volatility of these securities, the Funds may purchase inverse floating obligations with shorter term maturities or which contain limitations on the extent to which the interest rate may vary. The Manager believes that indexed and inverse floating obligations represent flexible portfolio management instruments for the Funds which allow the Funds to seek potential investment rewards, hedge other portfolio positions or vary the degree of investment leverage relatively efficiently under different market conditions. Certain investments in such obligations may be illiquid. A Fund may not invest in such illiquid obligations if such investments, together with other illiquid investments, would exceed 15% of that Fund's total assets. The Funds may purchase a Municipal Bond issuer's right to call all or a portion of such Municipal Bond for mandatory tender for purchase (a "Call Right"). A holder of a Call Right may exercise such right to require a mandatory tender for the purchase of related Municipal Bonds, subject to certain conditions. A Call Right that is not exercised prior to the maturity of the related Municipal Bond will expire without value. The economic effect of holding both the Call Right and the related Municipal Bond is identical to holding a Municipal Bond as a non-callable security. Certain investments in such obligations may be illiquid. A Fund may not invest in such illiquid obligations if such investments, together with other illiquid investments, would exceed 15% of that Fund's total assets. A Fund may invest up to 20% of its total assets in Municipal Bonds which are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch or which, in the Manager's judgment, possess similar credit characteristics ("high yield securities"). See Appendix I--"Ratings of Municipal Bonds" for additional information regarding ratings of debt securities. The Manager considers the ratings assigned by Standard & Poor's, Moody's or Fitch as one of several factors in its independent credit analysis of issuers. High yield securities are considered by Standard & Poor's, Moody's and Fitch to have varying degrees of speculative characteristics. Consequently, although high yield securities can be expected to provide higher yields, such securities may be subject to greater market price fluctuations and risk of loss of principal than lower yielding, higher rated debt securities. Investments in high yield securities will be made only when, in the judgment of the Manager, such securities provide attractive total return potential relative to the risk of such securities, as compared to higher quality debt securities. The Funds generally will not invest in debt securities in the lowest rating categories (those rated CC or lower by Standard & Poor's or Fitch or Ca or lower by Moody's) unless the Manager believes that the financial condition of the issuer or the protection afforded the particular securities is stronger than otherwise would be indicated by such low ratings. Issuers or obligors of high yield securities may be highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risks associated with acquiring the securities of such issuers or obligors generally are greater than is the case with higher rated securities. For example, during an economic downturn or a sustained period of rising interest rates, issuers or obligors of high yield securities may be more likely to experience financial stress, especially if such issuers or obligors are highly leveraged. In addition, the market for high yield municipal securities is relatively new and has not weathered a major economic recession, and it is unknown what effects such a recession might have on such securities. During such periods, such issuers may not have sufficient revenues to meet their interest payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific issuer developments, or the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by the issuer is significantly greater for the holders of high yield securities because such securities may be unsecured and may be subordinated to other creditors of the issuer. High yield securities frequently have call or redemption features that would permit an issuer to repurchase the security from a Fund. If a call were exercised by the issuer during a period of declining interest rates, a Fund likely would have to replace such called security with a lower yielding security, thus decreasing the net investment income to the Fund and dividends to shareholders. The Funds may have difficulty disposing of certain high yield securities because there may be a thin trading market for such securities. Because not all dealers maintain markets in all high yield securities, there is no established secondary market for many of these securities, and the Funds anticipate that such securities could be 4 sold only to a limited number of dealers or institutional investors. To the extent that a secondary trading market for high yield securities does exist, it generally is not as liquid as the secondary market for higher rated securities. Reduced secondary market liquidity may have an adverse impact on market price and a Fund's ability to dispose of particular issues when necessary to meet the Fund's liquidity needs or in response to a specific economic event such as a deterioration in the creditworthiness of the issuer. Reduced secondary market liquidity for certain securities also may make it more difficult for a Fund to obtain accurate market quotations for purposes of valuing the Fund's portfolio. Market quotations generally are available on many high yield securities only from a limited number of dealers and may not necessarily represent firm bids of such dealers or prices for actual sales. It is expected that a significant portion of the high yield securities acquired by a Fund will be purchased upon issuance, which may involve special risks because the securities so acquired are new issues. In such instances the Fund may be a substantial purchaser of the issue and therefore have the opportunity to participate in structuring the terms of the offering. Although this may enable a Fund to seek to protect itself against certain of such risks, the considerations discussed herein would nevertheless remain applicable. Adverse publicity and investor perceptions, which may not be based on fundamental analysis, also may decrease the value and liquidity of high yield securities, particularly in a thinly traded market. Factors adversely affecting the market value of high yield securities are likely to affect adversely a Fund's net asset value. In addition, a Fund may incur additional expenses to the extent that it is required to seek recovery upon a default on a portfolio holding or participate in the restructuring of the obligation. DESCRIPTION OF MUNICIPAL BONDS AND TEMPORARY INVESTMENTS Set forth below is a description of the Municipal Bonds and Temporary Investments in which each Fund may invest. A more complete discussion concerning futures and options transactions and Municipal Bonds is set forth under "Investment Objectives and Policies" in the Prospectus. Information with respect to ratings assigned to tax-exempt obligations which the Funds may purchase is set forth in Appendix I to this Statement of Additional Information. DESCRIPTION OF MUNICIPAL BONDS Municipal Bonds include debt obligations issued to obtain funds for various public purposes, including construction of a wide range of public facilities, refunding outstanding obligations and obtaining funds for general operating expenses and loans to other public institutions and facilities. In addition, certain types of industrial development bonds or private activity bonds are issued by or on behalf of public authorities to finance various privately owned or operated facilities. Such obligations are included within the term Municipal Bonds if the interest paid thereon, in the opinion of bond counsel, is excluded from gross income for Federal income tax purposes ("exempt from Federal income tax"). Such obligations are referred to herein as State Municipal Bonds if the interest paid thereon is exempt, in the opinion of bond counsel, from Federal income taxes, the designated state's personal income taxes and, where applicable, local personal income taxes, and if the Fund's investment in such obligations would not subject Fund shareholders to intangible personal property taxes in the designated state. Other types of industrial development bonds or private activity bonds, the proceeds of which are used for the construction, equipment or improvement of privately operated industrial or commercial facilities, may constitute Municipal Bonds, although the current Federal tax laws place substantial limitations on the size of such issues. The two principal classifications of Municipal Bonds are "general obligation" bonds and "revenue" bonds, which latter category includes industrial development bonds ("IDBs") and, for bonds issued after August 15, 1986, private activity bonds. General obligation bonds are secured by the issuer's pledge of its faith, credit and taxing power for the payment of principal and interest. Revenue bonds are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special or limited tax or other specific revenue source such as payments from the user of the facility being financed. IDBs and, in the case of bonds issued after August 15, 1986, private activity bonds are in most cases revenue bonds and generally do not constitute the pledge of the credit or taxing power of the issuer of such bonds. Generally, the 5 payment of the principal of and interest on such bonds depends solely on the ability of the user of the facility financed by the bonds to meet its financial obligations and the pledge, if any, of real and personal property so financed as security for such payment, unless a line of credit, bond insurance or other security is furnished. The Funds may invest in Municipal Bonds that are so-called "moral obligation" bonds, which normally are issued by special purpose public authorities. If an issuer of moral obligation bonds is unable to meet its obligations, the repayment of such bonds becomes a moral commitment, but not a legal obligation, of the state or municipality in question. Also included within the general category of Municipal Bonds are participation certificates issued by government authorities or entities to finance the acquisition or construction of equipment, land and/or facilities. The certificates represent participations in a lease, an installment purchase contract or a conditional sales contract (hereinafter collectively called "lease obligations") relating to such equipment, land or facilities. Although lease obligations do not constitute general obligations of the issuer for which the issuer's unlimited taxing power is pledged, a lease obligation frequently is backed by the issuer's covenant to budget for, appropriate and make the payments due under the lease obligation. Certain investments in lease obligations may be illiquid. A Fund may not invest in illiquid lease obligations if such investments, together with all other illiquid investments, would exceed 15% of the Fund's total assets. A Fund, however, may invest without regard to such limitation in lease obligations which the Manager, pursuant to the guidelines which have been adopted by the Board of Trustees and subject to the supervision of the Board of Trustees, determines to be liquid. The Manager will deem lease obligations liquid if they are publicly offered and have received an investment grade rating of Baa or better by Moody's, or BBB or better by Standard & Poor's or Fitch. Unrated lease obligations, or those rated below investment grade, will be considered liquid if the obligations come to the market through an underwritten public offering and at least two dealers are willing to give competitive bids. In reference to the latter, the Manager, among other things, also must review the creditworthiness of the municipality obligated to make payment under the lease obligation and make certain specified determinations based on such factors as the existence of a rating or credit enhancement such as insurance, the frequency of trades or quotes for the obligation and the willingness of dealers to make a market in the obligation. Yields on Municipal Bonds are dependent on a variety of factors, including the general condition of the money market and of the municipal bond market, the size of a particular offering, the financial condition of the issuer, the general conditions of the Municipal Bond market, the maturity of the obligation and the rating of the issue. The ability of a Fund to achieve its investment objective also is dependent on the continuing ability of the issuers of the bonds in which the Fund invests to meet their obligations for the payment of interest and principal when due. There are variations in the risks involved in holding Municipal Bonds, both within a particular classification and between classifications, depending on numerous factors. Furthermore, the rights of owners of Municipal Bonds and the obligations of the issuer of such Municipal Bonds may be subject to applicable bankruptcy, insolvency and similar laws and court decisions affecting the rights of creditors generally and to general equitable principles, which may limit the enforcement of certain remedies. DESCRIPTION OF TEMPORARY INVESTMENTS AND VARIABLE RATE DEMAND OBLIGATIONS The Funds may invest in short-term tax-free and taxable securities subject to the limitations set forth under "Investment Objectives and Policies". The tax-exempt money market securities may include municipal notes, municipal commercial paper, municipal bonds with a remaining maturity of less than one year, variable rate demand notes and participations therein. Municipal notes include tax anticipation notes, bond anticipation notes and grant anticipation notes. Anticipation notes are sold as interim financing in anticipation of tax collection, bond sales, government grants or revenue receipts. Municipal commercial paper refers to short-term unsecured promissory notes generally issued to finance short-term credit needs. The taxable money market securities in which the Funds may invest as Temporary Investments consist of U.S. Government securities, U.S. Government agency securities, domestic bank or savings institution certificates of deposit and bankers' acceptances, short-term corporate debt securities such as commercial paper, and repurchase agreements. These Temporary Investments must have a stated maturity not in excess of one year from the date of purchase. 6 Variable rate demand obligations ("VRDOs") are tax-exempt obligations which contain a floating or variable interest rate adjustment formula and an unconditional right of demand on the part of the holder thereof to receive payment of the unpaid principal balance plus accrued interest upon a short notice period not to exceed seven days. There is, however, the possibility that because of default or insolvency the demand feature of VRDOs and Participating VRDOs, described below, may not be honored. The interest rates are adjustable at intervals (ranging from daily to up to one year) to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market value of the VRDOs at approximately the par value of the VRDOs on the adjustment date. The adjustments typically are set at a rate determined by the remarketing agent or based upon the Public Securities Association Index or some other appropriate interest rate adjustment index. The Funds may invest in all types of tax-exempt instruments currently outstanding or to be issued in the future which satisfy the short-term maturity and quality standards of the Funds. The Funds also may invest in VRDOs in the form of participation interests ("Participating VRDOs") in variable rate tax-exempt obligations held by a financial institution, typically a commercial bank. Participating VRDOs provide the Funds with a specified undivided interest (up to 100%) of the underlying obligation and the right to demand payment of the unpaid principal balance plus accrued interest on the Participating VRDOs from the financial institution upon a specified number of days' notice, not to exceed seven days. In addition, a Participating VRDO is backed by an irrevocable letter of credit or guaranty of the financial institution. The Funds would have an undivided interest in the underlying obligation and thus participate on the same basis as the financial institution in such obligation except that the financial institution typically retains fees out of the interest paid on the obligation for servicing the obligation, providing the letter of credit and issuing the repurchase commitment. The Trust has been advised by its counsel that the Funds should be entitled to treat the income received on Participating VRDOs as interest from tax-exempt obligations. VRDOs that contain an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest on a notice period exceeding seven days may be deemed to be illiquid securities. A VRDO with a demand notice period exceeding seven days therefore will be subject to a Fund's restriction on illiquid investments unless, in the judgment of the Trustees, such VRDO is liquid. The Trustees may adopt guidelines and delegate to the Manager the daily function of determining and monitoring liquidity of such VRDOs. The Trustees, however, will retain sufficient oversight and will be ultimately responsible for such determination. The Trust has established the following standards with respect to money market securities and VRDOs in which the Funds invest. Commercial paper investments at the time of purchase must be rated A-1 through A-3 by Standard & Poor's, Prime-1 through Prime-3 by Moody's or F-1 through F-3 by Fitch or, if not rated, issued by companies having an outstanding debt issue rated at least A by Standard & Poor's, Fitch or Moody's. Investments in corporate bonds and debentures (which must have maturities at the date of purchase of one year or less) must be rated at the time of purchase at least A by Standard & Poor's, Moody's or Fitch. Notes and VRDOs at the time of purchase must be rated SP-1+/A-1+ through SP-2/A-3 by Standard & Poor's, MIG-l/VMIG-1 through MIG-4/VMIG-4 by Moody's or F-1 through F-3 by Fitch. Temporary Investments, if not rated, must be of comparable quality to securities rated in the above rating categories in the opinion of the Manager. A Fund may not invest in any security issued by a commercial bank or a savings institution unless the bank or institution is organized and operating in the United States, has total assets of at least one billion dollars and is a member of the Federal Deposit Insurance Corporation (the "FDIC"), except that up to 10% of a Fund's total assets may be invested in certificates of deposit of small institutions if such certificates are insured fully by the FDIC. REPURCHASE AGREEMENTS The Funds may invest in securities pursuant to repurchase agreements. Repurchase agreements may be entered into only with a member bank of the Federal Reserve System or a primary dealer in U.S. Government securities or an affiliate thereof. Under such agreements, the seller agrees, upon entering into the contract, to repurchase the security at a mutually agreed upon time and price, thereby determining the yield during the term of the agreement. This results in a fixed rate of return insulated from market fluctuations during such period. In repurchase agreements, the prices at which the trades are conducted do not reflect accrued interest on the underlying obligations. Such agreements usually cover short periods, such as under one week. Repurchase 7 agreements may be construed to be collateralized loans by the purchaser to the seller secured by the securities transferred to the purchaser. In a repurchase agreement, a Fund will require the seller to provide additional collateral if the market value of the securities falls below the repurchase price at any time during the term of the repurchase agreement. In the event of default by the seller under a repurchase agreement construed to be a collateralized loan, the underlying securities are not owned by a Fund but only constitute collateral for the seller's obligation to pay the repurchase price. Therefore, a Fund may suffer time delays and incur costs or possible losses in connection with the disposition of the collateral. In the event of a default under such a repurchase agreement, instead of the contractual fixed rate of return, the rate of return to a Fund will depend on intervening fluctuations of the market value of such security and the accrued interest on the security. In such event, a Fund would have rights against the seller for breach of contract with respect to any losses arising from market fluctuations following the failure of the seller to perform. A Fund may not invest in repurchase agreements maturing in more than seven days if such investments, together with all other illiquid investments, would exceed 15% of the Fund's total assets. In general, for Federal income tax purposes, repurchase agreements are treated as collateralized loans secured by the securities "sold". Therefore, amounts earned under such agreements will not be considered tax-exempt interest. FINANCIAL FUTURES TRANSACTIONS AND OPTIONS Reference is made to the discussion concerning futures and options transactions under "Investment Objectives and Policies" in the Prospectus. Set forth below is additional information concerning these transactions. As described in the Prospectus, each Fund may purchase and sell exchange-traded financial futures contracts ("financial futures contracts") and options thereon to hedge its portfolio of Municipal Bonds against declines in the value of such securities and to hedge against increases in the cost of securities a Fund intends to purchase. However, any transactions involving financial futures or options will be in accordance with a Fund's investment policies and limitations. To hedge its portfolio, a Fund may take an investment position in a financial futures contract or option thereon which will move in the opposite direction from the portfolio position being hedged. While a Fund's use of hedging strategies is intended to moderate capital changes in portfolio holdings and thereby reduce the volatility of the net asset value of Fund shares, each Fund anticipates that its net asset value will fluctuate. Set forth below is information concerning financial futures contracts and options thereon. Description of Financial Futures Contracts. A financial futures contract is an agreement between two parties to buy and sell a security or, in the case of an index-based futures contract, to make and accept a cash settlement for a set price on a future date. A majority of transactions in financial futures contracts, however, do not result in the actual delivery of the underlying instrument or cash settlement, but are settled through liquidation, i.e., by entering into an offsetting transaction. Financial futures contracts have been designed by boards of trade which have been designated "contracts markets" by the Commodity Futures Trading Commission (the "CFTC"). The purchase or sale of a financial futures contract differs from the purchase or sale of a security in that no price or premium is paid or received. Instead, an amount of cash or securities acceptable to the broker and the relevant contract market, which varies, but is generally about 5% of the contract amount, must be deposited with the broker. This amount is known as "initial margin" and represents a "good faith" deposit assuring the performance of both the purchaser and seller under the financial futures contract. Subsequent payments to and from the broker, called "variation margin", are required to be made on a daily basis as the price of the financial futures contract fluctuates making the long and short positions in the financial futures contract more or less valuable, a process known as "mark to the market". At any time prior to the settlement date of the financial futures contract, the position may be closed out by taking an opposite position which will operate to terminate the position in the financial futures contract. A final determination of variation margin is then made, additional cash is required to be paid to or released by the broker, and the purchaser realizes a loss or gain. In addition, a nominal commission is paid on each completed sale transaction. 8 The Funds may enter into financial futures contracts based on a long-term municipal bond index developed by the Chicago Board of Trade (the "CBT") and The Bond Buyer (the "Municipal Bond Index"). The Municipal Bond Index is comprised of 40 tax-exempt municipal revenue and general obligation bonds. Each bond included in the Municipal Bond Index must be rated A or higher by Moody's or Standard & Poor's and must have a remaining maturity of 19 years or more. Twice a month new issues satisfying the eligibility requirements are added to, and an equal number of old issues are deleted from, the Municipal Bond Index. The value of the Municipal Bond Index is computed daily according to a formula based on the price of each bond in the Municipal Bond Index, as evaluated by six dealer-to-dealer brokers. The Municipal Bond Index financial futures contract is traded only on the CBT. Like other contract markets, the CBT assures performance under financial futures contracts through a clearing corporation, a nonprofit organization managed by the exchange membership which also is responsible for handling daily accounting of deposits or withdrawals of margin. As described in the Prospectus, the Funds may purchase and sell financial futures contracts on U.S. Government securities as a hedge against adverse changes in interest rates as described below. With respect to U.S. Government securities, currently there are financial futures contracts based on long-term U.S. Treasury bonds, U.S. Treasury notes, Government National Mortgage Association ("GNMA") Certificates and three-month U.S. Treasury bills. The Funds may purchase and write call and put options on financial futures contracts on U.S. Government securities in connection with their hedging strategies. Subject to policies adopted by the Trustees, the Funds also may enter into other financial futures contracts and options thereon, such as financial futures contracts or options on other municipal bond or interest rate indices which may become available if the Manager and the Trustees should determine that there is normally a sufficient correlation between the prices of such financial futures contracts or options thereon and the Municipal Bonds in which the Funds invest to make such hedging appropriate. Financial Futures Strategies. A Fund may sell a financial futures contract (i.e., assume a short position) in anticipation of a decline in the value of its investments in Municipal Bonds resulting from an increase in interest rates or otherwise. The risk of decline could be reduced without employing futures as a hedge by selling such Municipal Bonds and either reinvesting the proceeds in securities with shorter maturities or by holding assets in cash. This strategy, however, entails increased transaction costs in the form of dealer spreads and typically would reduce the average yield of a Fund's portfolio securities as a result of the shortening of maturities. The sale of financial futures contracts provides an alternative means of hedging against declines in the value of a Fund's investments in Municipal Bonds. As such values decline, the value of a Fund's positions in the financial futures contracts will tend to increase, thus offsetting all or a portion of the depreciation in the market value of the Fund's Municipal Bond investments which are being hedged. While a Fund will incur commission expenses in selling and closing out financial futures positions, commissions on financial futures contracts are lower than transaction costs incurred in the purchase and sale of Municipal Bonds. In addition, the ability of a Fund to trade in the standardized contracts available in the financial futures contract markets may offer a more effective defensive position than a program to reduce the average maturity of the portfolio securities due to the unique and varied credit and technical characteristics of the municipal debt instruments available to a Fund. Employing financial futures contracts as a hedge also may permit a Fund to assume a defensive posture without reducing the yield on its investments beyond any amounts required to engage in financial futures contract trading. When the Funds intend to purchase Municipal Bonds, the Funds may purchase financial futures contracts as a hedge against any increase in the cost of such Municipal Bonds, resulting from a decrease in interest rates or otherwise, that may occur before such purchases can be effected. Subject to the degree of correlation between the Municipal Bonds and the financial futures contracts, subsequent increases in the cost of Municipal Bonds should be reflected in the value of the financial futures contracts held by the Funds. As such purchases are made, an equivalent amount of financial futures contracts will be closed out. Due to changing market conditions and interest rate forecasts, however, a financial futures contract position may be terminated without a corresponding purchase of portfolio securities. 9 Call Options on Financial Futures Contracts. The Funds also may purchase and sell exchange-traded call and put options on financial futures contracts on U.S. Government securities. The purchase of a call option on a financial futures contract is analogous to the purchase of a call option on an individual security. Depending on the pricing of the option compared to either the futures contract on which it is based or the price of the underlying debt securities, it may or may not be less risky than ownership of the financial futures contract or underlying debt securities. Like the purchase of a financial futures contract, a Fund will purchase a call option on financial futures contracts to hedge against a market advance when such Fund is not fully invested. The writing of a call option on a financial futures contract constitutes a partial hedge against declining prices of the securities which are deliverable upon exercise of the financial futures contract. If the futures price at expiration is below the exercise price, a Fund will retain the full amount of the option premium which provides a partial hedge against any decline that may have occurred in such Fund's portfolio holdings. Put Options on Financial Futures Contracts. The purchase of a put option on a financial futures contract is analogous to the purchase of a protective put option on portfolio securities. A Fund will purchase put options on financial futures contracts to hedge such Fund's portfolio against the risk of rising interest rates. The writing of a put option on a financial futures contract constitutes a partial hedge against increasing prices of the securities which are deliverable upon exercise of the financial futures contract. If the futures price at expiration is higher than the exercise price, a Fund will retain the full amount of the option premium which provides a partial hedge against any increase in the price of Municipal Bonds which such Fund intends to purchase. The writer of an option on a financial futures contract is required to deposit initial and variation margin pursuant to requirements similar to those applicable to financial futures contracts. Premiums received from the writing of an option will be included in initial margin. The writing of an option on a financial futures contract involves risks similar to those relating to financial futures contracts. The Trust has received an order from the Commission exempting it from the provisions of Section 17(f) and Section 18(f) of the Investment Company Act of 1940, as amended (the "1940 Act") in connection with its strategy of investing in financial futures contracts. Section 17(f) relates to the custody of securities and other assets of an investment company and may be deemed to prohibit certain arrangements between the Trust and commodities brokers with respect to initial and variation margin. Section 18(f) of the 1940 Act prohibits an open-end investment company such as the Trust from issuing a "senior security" other than a borrowing from a bank. The staff of the Commission in the past has indicated that a financial futures contract may be a "senior security" under the 1940 Act. Restrictions on Use of Financial Futures Transactions. Regulations of the CFTC applicable to each Fund require that all of a Fund's financial futures transactions constitute bona fide hedging transactions and that a Fund purchase and sell futures contracts and options thereon (i) for bona fide hedging purposes, and (ii) for non-hedging purposes, if the aggregate initial margin and premiums required to establish positions in such contracts and options does not exceed 5% of the liquidation value of the Fund's portfolio assets after taking into account unrealized profits and unrealized losses on any such contracts and options. (However, each Fund intends to engage in options and futures transactions only for hedging purposes.) Margin deposits may consist of cash or securities acceptable to the broker and the relevant contract market. When a Fund purchases a financial futures contract or a call option with respect thereto or writes a put option on a futures contract, an amount of cash, cash equivalents or liquid securities will be deposited in a segregated account with the Fund's custodian so that the amount so segregated, plus the amount of initial and variation margin held in the account of its broker, equals the market value of the financial futures contract or related option, thereby ensuring that the use of such futures is unleveraged. Risk Factors in Financial Futures Contracts and Options Thereon. Investment in financial futures contracts and options thereon involves the risk of imperfect correlation between movements in the price of the financial futures contract and the price of the security being hedged. The hedge will not be fully effective when there is imperfect correlation between the movements in the prices of two financial instruments. For example, if 10 the price of a financial futures contract moves more than the price of the hedged security, a Fund will experience either a loss or gain on the financial futures contract which is not offset completely by movements in the price of the hedged securities. To compensate for imperfect correlations, a Fund may purchase or sell financial futures contracts or options thereon in a greater dollar amount than the hedged securities if the volatility of the hedged securities is historically greater than the volatility of the futures transaction. Conversely, a Fund may purchase or sell fewer financial futures contracts or options thereon if the volatility of the price of the hedged securities is historically less than that of the futures transaction. The particular municipal bonds comprising the index underlying the Municipal Bond Index financial futures contracts may vary from the Municipal Bonds held by a Fund. As a result, a Fund's ability to hedge effectively all or a portion of the value of its Municipal Bonds through the use of such financial futures contracts or options thereon will depend in part on the degree to which price movements in the index underlying the financial futures contract correlate with the price movements of the Municipal Bonds held by a Fund. The correlation may be affected by disparities in the average maturity, ratings, geographical mix or structure of a Fund's investments as compared to those comprising the Municipal Bond Index, and general economic or political factors. In addition, the correlation between movements in the value of the Municipal Bond Index may be subject to change over time as additions to and deletions from the Municipal Bond Index alter its structure. The correlation between financial futures contracts on U.S. Government securities or options thereon and the Municipal Bonds held by a Fund may be affected adversely by similar factors, and the risk of imperfect correlation between movements in the prices of financial futures contracts or options thereon and the prices of the Municipal Bonds held by a Fund may be greater. Each Fund expects to liquidate a majority of the financial futures contracts it enters into through offsetting transactions on the applicable contract market. There can be no assurance, however, that a liquid secondary market will exist for any particular financial futures contract at any specific time. Thus, it may not be possible to close out a futures position. In the event of adverse price movements, a Fund would continue to be required to make daily cash payments of variation margin. In such situations, if a Fund has insufficient cash, it may be required to sell portfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so. The inability to close out financial futures positions also could have an adverse impact on a Fund's ability to hedge effectively its investments in Municipal Bonds. A Fund will enter into a financial futures position only if, in the judgment of the Manager, there appears to be an actively traded secondary market for such financial futures contracts or options thereon. The successful use of transactions in financial futures and related options also depends on the ability of the Manager to forecast correctly the direction and extent of interest rate movements within a given time frame. To the extent interest rates remain stable during the period in which a financial futures contract or option is held by a Fund or such rates move in a direction opposite to that anticipated, a Fund may realize a loss on the hedging transaction which is not fully or partially offset by an increase in the value of portfolio securities. As a result, a Fund's total return for such period may be less than if it had not engaged in the hedging transaction. Because of low initial margin deposits made on the opening of a financial futures position, financial futures transactions involve substantial leverage. As a result, relatively small movements in the price of the financial futures contracts or related options can result in substantial unrealized gains or losses. Because a Fund will engage in the purchase and sale of financial futures contracts or related options solely for hedging purposes, however, any losses incurred in connection therewith should, if the hedging strategy is successful, be offset in whole or in part by increases in the value of securities held by a Fund or decreases in the price of securities a Fund intends to acquire. The amount of risk a Fund assumes when it purchases an option on a financial futures contract is the premium paid for the option plus related transaction costs. In addition to the correlation risks discussed above, the purchase of an option on a financial futures contract also entails the risk that changes in the value of the underlying financial futures contract will not be reflected fully in the value of the option purchased. Municipal Bond Index financial futures contracts were approved for trading in 1986. Trading in such financial futures contracts may tend to be less liquid than that in other futures contracts. The trading of financial 11 futures contracts also is subject to certain market risks, such as inadequate trading activity, which could at times make it difficult or impossible to liquidate existing positions. INVESTMENT RESTRICTIONS The Trust has adopted a number of restrictions and policies relating to the investment of the assets of each Fund and its activities, which are fundamental policies of each Fund and may not be changed without the approval of the holders of a majority of such Fund's outstanding voting securities (which for this purpose and under the 1940 Act means the lesser of (i) 67% of a Fund's shares present at a meeting at which more than 50% of the outstanding shares of that Fund are represented or (ii) more than 50% of such Fund's outstanding shares). Under the fundamental investment restrictions, each Fund may not: 1. Invest more than 25% of its assets, taken at market value at the time of each investment, in the securities of issuers in any particular industry (excluding the U.S. Government and its agencies and instrumentalities). For purposes of this restriction, states, municipalities and their political subdivisions are not considered part of any industry. 2. Make investments for the purpose of exercising control or management. 3. Purchase or sell real estate, except that to the extent permitted by applicable law, a Fund may invest in securities directly or indirectly secured by real estate or interests therein or issued by companies which invest in real estate or interests therein. 4. Make loans to other persons, except that the acquisition of bonds, debentures or other corporate debt securities and investment in government obligations, commercial paper, pass-through instruments, certificates of deposit, bankers' acceptances, repurchase agreements or any similar instruments shall not be deemed to be the making of a loan, and except further that a Fund may lend its portfolio securities, provided that the lending of portfolio securities may be made only in accordance with applicable law and the guidelines set forth in the Trust's Prospectus and Statement of Additional Information, as they may be amended from time to time. 5. Issue senior securities to the extent such issuance would violate applicable law. 6. Borrow money, except that (i) a Fund may borrow from banks (as defined in the 1940 Act) in amounts up to 33 1/3% of its total assets (including the amount borrowed), (ii) a Fund may, to the extent permitted by applicable law, borrow up to an additional 5% of its total assets for temporary purposes, (iii) a Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities and (iv) a Fund may purchase securities on margin to the extent permitted by applicable law. A Fund may not pledge its assets other than to secure such borrowings or, to the extent permitted by the Trust's investment policies as set forth in its Prospectus and Statement of Additional Information, as they may be amended from time to time, in connection with hedging transactions, short sales, when-issued and forward commitment transactions and similar investment strategies. 7. Underwrite securities of other issuers, except insofar as a Fund technically may be deemed an underwriter under the Securities Act of 1933, as amended (the "Securities Act"), in selling portfolio securities. 8. Purchase or sell commodities or contracts on commodities, except to the extent that a Fund may do so in accordance with applicable law and the Trust's Prospectus and Statement of Additional Information, as they may be amended from time to time, and without registering as a commodity pool operator under the Commodity Exchange Act. Under the non-fundamental investment restrictions, a Fund may not: a. Purchase securities of other investment companies, except to the extent such purchases are permitted by applicable law. b. Make short sales of securities or maintain a short position, except to the extent permitted by applicable law. None of the Funds currently intends to engage in short sales, except short sales "against the box". 12 c. Invest in securities which cannot be readily resold because of legal or contractual restrictions or which cannot otherwise be marketed, redeemed or put to the issuer or a third party, if at the time of acquisition more than 15% of its total assets would be invested in such securities. This restriction shall not apply to securities which mature within seven days or securities which the Board of Trustees of the Trust has otherwise determined to be liquid pursuant to applicable law. d. Invest in warrants if, at the time of acquisition, its investments in warrants, valued at the lower of cost or market value, would exceed 5% of that Fund's net assets; included within such limitation, but not to exceed 2% of that Fund's net assets, are warrants which are not listed on the New York Stock Exchange (the NYSE) or the American Stock Exchange or a major foreign exchange. For purposes of this restriction, warrants acquired by a Fund in units or attached to securities may be deemed to be without value. e. Invest in securities of companies having a record, together with predecessors, of less than three years of continuous operation, if more than 5% of that Fund's total assets would be invested in such securities. This restriction shall not apply to mortgage-backed securities, asset-backed securities or obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. f. Purchase or retain the securities of any issuer, if those individual officers and Trustees of the Trust, the officers and general partner of the Manager, the directors of such general partner or the officers and directors of any subsidiary thereof each owning beneficially more than one-half of one percent of the securities of such issuer own in the aggregate more than 5% of the securities of such issuer. g. Invest in real estate limited partnership interests or interests in oil, gas or other mineral leases, or exploration or development programs, except that a Fund may invest in securities issued by companies that engage in oil, gas or other mineral exploration or development activities. h. Write, purchase or sell puts, calls, straddles, spreads or combinations thereof, except to the extent permitted in the Trust's Prospectus and Statement of Additional Information, as they may be amended from time to time. i. Notwithstanding fundamental investment restriction (6) above, borrow amounts in excess of 20% of its total assets, taken at market value (including the amount borrowed), and then only from banks as a temporary measure for extraordinary or emergency purposes. [Usually only "leveraged" investment companies may borrow in excess of 5% of their assets; however, each Fund will not borrow to increase income but only to meet redemption requests which might otherwise require untimely disposition of portfolio securities, such as the redemption of Fund shares. No Fund will purchase securities while borrowings are outstanding. Interest paid on such borrowings will reduce net income.] Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") with the Trust, each Fund is prohibited from engaging in certain transactions involving such firm or its affiliates except for brokerage transactions permitted under the 1940 Act involving only usual and customary commissions or transactions pursuant to an exemptive order under the 1940 Act. Included among such restricted transactions will be purchases from or sales to Merrill Lynch of securities in transactions in which it acts as a principal and purchases of securities from underwriting syndicates of which Merrill Lynch is a member. See "Portfolio Transactions". An exemptive order has been obtained which permits the Trust to effect principal transactions with Merrill Lynch in high quality, short-term, tax-exempt securities subject to conditions set forth in such order. 13 MANAGEMENT OF THE TRUST Trustees and Officers Information about the Trustees, executive officers and the portfolio managers of the Trust, including their ages and their principal occupations for at least the last five years, is set forth below. Unless otherwise noted, the address of each Trustee and executive officer is P.O. Box 9011, Princeton, New Jersey 08543-9011. ARTHUR ZEIKEL (64)--President and Trustee(1)(2)--President of the Manager (which term, as used herein, includes the Manager's corporate predecessors) since 1977; President of Merrill Lynch Asset Management, L.P. ("MLAM", which term as used herein includes MLAM's corporate predecessors) since 1977; President and Director of Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice President of Merrill Lynch & Co., Inc. ("ML&Co.") since 1990; Director of Merrill Lynch Funds Distributor, Inc. ("MLFD" or the "Distributor") since 1977. JAMES H. BODURTHA (52)--Trustee(2)--36 Popponesset Road, Cotuit, Massachusetts 02635. Director and Executive Vice President, The China Business Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since 1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993. HERBERT I. LONDON (57)--Trustee(2)--113-115 University Place, New York, New York 10003. John M. Olin Professor of Humanities, New York University since 1993 and Professor thereof since 1980; Dean, Gallatin Division of New York University from 1978 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson Institute from 1984 to 1985; Trustee, Hudson Institute since 1980; Director, Damon Corporation since 1991; Overseer, Center for Naval Analyses from 1983 to 1993; Limited Partner, Hypertech L.P. since 1996. ROBERT R. MARTIN (69)--Trustee(2)--513 Grand Hill, St. Paul, Minnesota 55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc. from 1990 to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989; Director, Carnegie Capital Management from 1977 to 1985 and Chairman thereof in 1979; Director, Securities Industry Association from 1981 to 1982 and Public Securities Association from 1979 to 1980; Chairman of the Board, WTC Industries, Inc. in 1994; Trustee, Northland College since 1992. JOSEPH L. MAY (67)--Trustee(2)--424 Church Street, Suite 2000, Nashville, Tennessee 37219. Attorney in private practice since 1984; President, May and Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to 1983; Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The May Corporation (personal holding company) from 1972 to 1983; Director, Signal Apparel Co. from 1972 to 1989. ANDRE F. PEROLD (44)--Trustee(2)--Morgan Hall, Soldiers Field, Boston, Massachusetts 02163. Professor, Harvard Business School since 1989 and Associate Professor from 1983 to 1989; Trustee, The Common Fund, since 1989; Director, Quantec Limited since 1991. TERRY K. GLENN (56)--Executive Vice President(1)(2)--Executive Vice President of the Manager and of MLAM since 1983; Executive Vice President and Director of Princeton Services since 1993; President of MLFD since 1986 and Director thereof since 1991; President of Princeton Administrators, L.P. since 1988. VINCENT R. GIORDANO (52)--Senior Vice President(1)(2)--Portfolio Manager of the Manager and MLAM since 1977 and Senior Vice President of the Manager and MLAM since 1984; Vice President of MLAM from 1980 to 1984; Senior Vice President of Princeton Services since 1993. EDWARD J. ANDREWS (36)--Vice President and Portfolio Manager(1)(2)--Vice President of the Manager and of MLAM since 1991. PETER J. HAYES (37)--Vice President and Portfolio Manager(1)(2)--Vice President of the Manager and of MLAM since 1989 and Assistant Vice President of MLAM from 1987 to 1989. HELEN M. SHEEHAN (36)--Vice President and Portfolio Manager(1)(2)--Vice President of the Manager and of MLAM since 1991. 14 DONALD C. BURKE (36)--Vice President(1)(2)--Vice President and Director of Taxation of MLAM since 1990; Employee of Deloitte & Touche LLP from 1982 to 1990. GERALD M. RICHARD (47)--Treasurer(1)(2)--Senior Vice President and Treasurer of the Manager and MLAM since 1984; Senior Vice President and Treasurer of Princeton Services since 1993; Treasurer of the Distributor since 1984 and Vice President thereof since 1981. ROBERT HARRIS (44)--Secretary(1)(2)--Vice President of MLAM since 1984; Secretary of MLFD since 1982. - ------------ (1) Interested person, as defined in the 1940 Act, of the Trust. (2) Such Trustee or officer is a director, trustee or officer of certain other investment companies for which the Manager or MLAM acts as investment adviser or manager. At November 1, 1996, the Trustees and officers of the Trust as a group (14 persons) owned an aggregate of less than 1% of the outstanding shares of Common Stock of ML&Co. and owned an aggregate of less than 1% of the outstanding shares of any Fund, except that Vincent R. Giordano owns Class A shares representing approximately 12.8% of the New Jersey Fund Class A shares (3.5% of the aggregate outstanding shares of the New Jersey Fund). Compensation of Trustees The Trust pays each Trustee not affiliated with the Manager (each a "non-affiliated Trustee") a fee of $5,000 per year plus $500 per meeting attended, together with such Trustee's actual out-of-pocket expenses relating to attendance at meetings. The Trust also compensates members of its Audit and Nominating Committee (the "Committee"), which consists of all of the non-affiliated Trustees, an additional fee of $1,000 per year plus $250 per meeting attended. The Trust reimburses each non-affiliated Trustee for his out-of-pocket expenses relating to attendance at Board and Committee meetings. Fees and expenses paid to non-affiliated Trustees aggregated $42,132 for the fiscal year ended July 31, 1996, and were allocated to each Fund on the basis of the relative asset size of each Fund: Arizona Fund, $3,015; California Fund, $7,114; Florida Fund, $13,676; Massachusetts Fund, $4,419; Michigan Fund, $2,243; New Jersey Fund, $4,589; New York Fund, $6,879 and Pennsylvania Fund, $197. The following table sets forth for the fiscal year ended July 31, 1996, compensation paid by the Trust to the non-affiliated Trustees and, for the calendar year ended December 31, 1995, the aggregate compensation paid by all registered investment companies (including the Trust) advised by the Manager and its affiliate, MLAM ("FAM/MLAM Advised Funds") to the non-affiliated Trustees:
Aggregate Pension or Compensation Retirement from Trust and Benefits other Accrued as FAM/MLAM Part of Adivsed Funds Compensation Trust's Paid to Name of Trustee From Trust Expenses Trustee(1) - --------------- ------------ -------------- -------------- James H. Bodurtha................................................. $ 9,000 None $157,500* Herbert I. London................................................. $ 9,000 None $157,500 Robert R. Martin.................................................. $ 9,000 None $157,500 Joseph L. May..................................................... $ 9,000 None $157,500 Andre F. Perold................................................... $ 9,000 None $157,500
- ------------ (1) The Trustees serve on the boards of FAM/MLAM Advised Funds as follows: Mr. Bodurtha (22 registered investment companies consisting of 46 portfolios); Mr. London (22 registered investment companies consisting of 46 portfolios); Mr. Martin (22 registered investment companies consisting of 46 portfolios); Mr. May (22 registered investment companies consisting of 46 portfolios); and Mr. Perold (22 registered investment companies consisting of 46 portfolios). * $157,500 represents the amount Mr. Bodurtha would have received if he had been a Trustee for the entire calendar year ended December 31, 1995. Mr. Bodurtha was elected to the Trust's Board of Trustees effective June 23, 1995. 15 Management and Advisory Arrangements Reference is made to "Management of the Trust--Management and Advisory Arrangements" in the Prospectus for certain information concerning the management and advisory arrangements of the Funds. Securities held by the Funds also may be held by, or be appropriate investments for, other funds or investment advisory clients of the Manager or its affiliates (collectively, the "clients"). Because of different objectives or other factors, a particular security may be bought for one or more clients when one or more clients are selling the same security. If the Manager or its affiliates purchase or sell securities for the Funds or other funds for which they act as manager or for their advisory clients and such sales or purchases arise for consideration at or about the same time, transactions in such securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all. To the extent that transactions on behalf of more than one client of the Manager or its affiliates during the same period may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. Pursuant to separate management agreements between the Trust on behalf of each Fund and the Manager (each a "Management Agreement"), the Manager receives for its services to each Fund monthly compensation based upon the average daily net assets of that Fund at the annual rate of 0.35% of the average daily net assets of that Fund. The table below sets forth for the fiscal years ended July 31, 1996 and 1995, and for the period November 26, 1993 (commencement of operations) to July 31, 1994, the total advisory fee payable by each Fund to the Manager:
For the Year Ended July 31, For the Period -------------------- November 26, 1993+ Fund 1996 1995 to July 31, 1994 ---- -------- -------- ------------------ Arizona Fund............................................... $ 21,459 $ 26,468 $ 16,109 California Fund............................................ $ 54,033 $ 52,287 $ 34,377 Florida Fund............................................... $108,720 $112,421 $ 83,640 Massachusetts Fund......................................... $ 30,736 $ 41,496 $ 33,156 Michigan Fund.............................................. $ 16,413 $ 19,277 $ 13,621 New Jersey Fund............................................ $ 33,770 $ 39,629 $ 30,851 New York Fund.............................................. $ 57,995 $ 52,164 $ 32,105 Pennsylvania Fund.......................................... $ 30,196 $ 34,403 $ 25,192
- ------------ + Commencement of Operations. For the fiscal year ended July 31, 1996, the total advisory fee payable to the Manager by each Fund (other than the Florida Fund) was voluntarily waived. Of the $108,720 advisory fee payable during the year by the Florida Fund, $24,123 was voluntarily waived. For the fiscal year ended July 31, 1995, and for the period from November 26, 1993 (commencement of operations) to July 31, 1994, the total advisory fee payable to the Manager by each Fund was voluntarily waived. Each Management Agreement obligates the Manager to provide investment advisory services to the related Fund and to pay all compensation of and furnish office space for officers and employees of the Trust connected with investment and economic research, trading and investment management of the Trust, as well as the fees of all Trustees of the Trust who are affiliated persons of ML&Co. or any of its affiliates. Each Fund pays all other expenses incurred in its operation and a portion of the Trust's general administrative expenses allocated pro rata on the basis of the asset size of the respective series of the Trust ("Series"), including the Funds and any additional Series added in the future. Expenses that will be borne directly by the Series include, among other things, redemption expenses, expenses of portfolio transactions, expenses of registering the shares under Federal and state securities laws, pricing costs (including the daily calculation of net asset value), expenses of printing shareholder reports, prospectuses and statements of additional information (except to the extent paid by the Distributor as described below), fees for legal and auditing services, Commission fees, interest, certain taxes and 16 other expenses attributable to a particular Series. Expenses which will be allocated on the basis of asset size of the respective Series include fees and expenses of unaffiliated Trustees, state franchise taxes, costs of printing proxies and other expenses related to shareholder meetings, and other expenses properly payable by the Trust. The organizational expenses of the Trust were paid by the Trust, and as additional Series are added to the Trust, the organizational expenses are allocated among the Series in a manner deemed equitable by the Trustees. Depending upon the nature of a lawsuit, litigation costs may be assessed to the specific Series to which the lawsuit relates or allocated on the basis of the asset size of the respective Series. The Trustees have determined that this is an appropriate method of allocation of expenses. Accounting services are provided to the Funds by the Manager, and each Fund reimburses the Manager for the Manager's costs in connection with such services. The table below sets forth for the fiscal years ended July 31, 1996 and 1995, and for the period November 26, 1993 (commencement of operations) to July 31, 1994, the amount reimbursed by each Fund to the Manager for accounting services:
For the Year Ended July 31, For the Period ------------------ November 26, 1993+ Fund 1996 1995 to July 31, 1994 ---- ------- ------- ------------------ Arizona Fund................................................. $30,172 $36,140 $ 20,900 California Fund.............................................. $38,245 $50,033 $ 19,998 Florida Fund................................................. $34,053 $32,012 $ 24,625 Massachusetts Fund........................................... $53,983 $49,502 $ 14,821 Michigan Fund................................................ $47,178 $19,568 $ 22,555 New Jersey Fund.............................................. $43,508 $36,998 $ 18,734 New York Fund................................................ $62,140 $ 3,623 $ 22,165 Pennsylvania Fund............................................ $43,426 $15,577 $ 22,273
- ------------ + Commencement of Operations. As required by the Funds' distribution agreements, the Distributor will pay the promotional expenses of the Funds incurred in connection with the offering of shares of the Funds. Certain expenses in connection with account maintenance and the distribution of Class B, Class C and Class D shares will be financed by the Funds pursuant to Distribution Plans in compliance with Rule 12b-1 under the 1940 Act. See "Purchase of Shares-- Distribution Plans". The Manager is a limited partnership, the partners of which are ML&Co. and Princeton Services. ML&Co. and Princeton Services are "controlling persons" of the Manager as defined under the 1940 Act because of their ownership of its voting securities or their power to exercise a controlling influence over its management or policies. Duration and Termination. Unless earlier terminated as described below, the Management Agreements will remain in effect from year to year if approved annually (a) by the Trustees of the Trust or by a majority of the outstanding shares of the Funds and (b) by a majority of the Trustees who are not parties to such contract or interested persons (as defined in the 1940 Act) of any such party. Such contracts are not assignable and may be terminated without penalty on 60 days' written notice at the option of either party thereto or by vote of the shareholders of the Funds. PURCHASE OF SHARES Reference is made to "Purchase of Shares" in the Prospectus for certain information as to the purchase of shares of each Fund. Each Fund issues four classes of shares under the Merrill Lynch Select Pricing(SM) System: shares of Class A and Class D are sold to investors choosing the initial sales charge alternatives, and shares of Class B are sold to investors choosing the deferred sales charge alternative. Class C shares of the Funds are not available for purchase but will be issued only pursuant to the exchange privilege to holders of Class C shares of other MLAM-advised mutual funds who elect to exchange Class C shares of such other MLAM-advised mutual fund for Class C shares of one of the Funds. Each Class A, Class B, Class C and Class D share of each Fund 17 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. 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 which utilize the Merrill Lynch Select Pricing(SM) System are referred to herein as "MLAM-advised mutual funds". On behalf of each Fund, the Trust has entered into a separate distribution agreement with the Distributor in connection with the continuous offering of each class of shares of such Fund (each a "Distribution Agreement"). Each Distribution Agreement obligates the Distributor to pay certain expenses in connection with the offering of each class of shares of the related Fund. After the prospectuses, statements of additional information and periodic reports have been prepared, set in type and mailed to shareholders, the Distributor pays for the printing and distribution of copies thereof used in connection with the offering to dealers and prospective investors. The Distributor also pays for other supplementary sales literature and advertising costs. The Distribution Agreements are subject to the same renewal requirements and termination provisions as the Management Agreements described above. Initial Sales Charge Alternatives--Class A and Class D Shares The gross sales charges, the amounts of such charges received by the Distributor and Merrill Lynch for the sale of Class A shares, and the CDSCs paid with respect to redemption within one year after purchase of Class A shares purchased subject to a front-end sales charge waiver for each of the Funds for the periods indicated are set forth below:
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 - ---- ----------- ----------- ------------- ----------- Arizona Fund................................................. $ 463 $ 17 $ 446 -- California Fund.............................................. $ 580 $ 67 $ 513 -- Florida Fund................................................. $ 497 $ 22 $ 475 -- Massachusetts Fund........................................... $ 964 $ 93 $ 871 -- Michigan Fund................................................ $ 102 $ 4 $ 98 -- New Jersey Fund.............................................. $ 239 $ 2 $ 237 -- New York Fund................................................ $ 34 $ 1 $ 33 -- Pennsylvania Fund............................................ $ 5 -- $ 5 -- For the Year Ended July 31, 1995 ---------------------------------------------------------- Class A Amount Amount CDSCs Gross Sales Paid to Paid to Paid to Fund Charges Distributor Merrill Lynch Distributor - ---- ----------- ----------- ------------- ----------- Arizona Fund................................................. $ 1,026 $ 101 $ 925 -- California Fund.............................................. $ 754 $ 83 $ 671 -- Florida Fund................................................. $ 2,628 $ 154 $ 2,474 $ 2,894 Massachusetts Fund........................................... $ 1,544 $ 284 $ 1,260 $10,565 Michigan Fund................................................ $ 915 $ 56 $ 859 -- New Jersey Fund.............................................. $ 451 $ 30 $ 421 -- New York Fund................................................ $ 5,190 $ 157 $ 5,033 -- Pennsylvania Fund............................................ $ 79 $ 9 $ 70 --
18
For the Period November 26, 1993+ to July 31, 1994 ---------------------------------------------------------- Class A Amount Amount CDSCs Gross Sales Paid to Paid to Paid to Fund Charges Distributor Merrill Lynch Distributor - ---- ----------- ----------- ------------- ----------- Arizona Fund................................................. $17,369 $ 473 $16,896 -- California Fund.............................................. $25,074 $ 555 $24,519 -- Florida Fund................................................. $67,354 $ 1,464 $65,890 -- Massachusetts Fund........................................... $36,132 $ 2,023 $34,109 -- Michigan Fund................................................ $24,819 $ 550 $24,269 -- New Jersey Fund.............................................. $ 9,444 $ 380 $ 9,064 -- New York Fund................................................ $21,122 $ 811 $20,311 -- Pennsylvania Fund............................................ $ 5,405 $ 127 $ 5,278 --
- ------------ + Commencement of Operations. The gross sales charges and the amounts of such charges received by the Distributor and Merrill Lynch for the sale of Class D shares for each of the Funds for the periods indicated are set forth below:
For the Year Ended July 31, 1996 ------------------------------------------- Class D Amount Amount Gross Sales Paid to Paid to Fund Charges Distributor Merrill Lynch - ---- ----------- ----------- ------------- Arizona Fund............................................................. $ 241 $ 14 $ 227 California Fund.......................................................... $ 3,148 $ 299 $ 2,849 Florida Fund............................................................. $ 2,943 $ 373 $ 2,570 Massachusetts Fund....................................................... $ 3,387 $ 298 $ 3,089 Michigan Fund............................................................ $ 479 $ 59 $ 420 New Jersey Fund.......................................................... $ 1,128 $ 31 $ 1,097 New York Fund............................................................ $ 4,790 $ 476 $ 4,314 Pennsylvania Fund........................................................ $ 533 $ 14 $ 519 For the Period October 21, 1994+ to July 31, 1995 ------------------------------------------- Class D Amount Amount Gross Sales Paid to Paid to Fund Charges Distributor Merrill Lynch - ---- ----------- ----------- ------------- Arizona Fund............................................................. $ 98 $ 3 $ 95 California Fund.......................................................... $ 2,145 $ 115 $ 2,030 Florida Fund............................................................. $12,063 $ 1,099 $10,964 Massachusetts Fund....................................................... $ 64 $ 33 $ 31 Michigan Fund............................................................ $ 888 $ 91 $ 797 New Jersey Fund.......................................................... $ 2,108 $ 222 $ 1,886 New York Fund............................................................ $ 3,877 $ 232 $ 3,645 Pennsylvania Fund........................................................ $ 1,198 $ 49 $ 1,149
- ------------ + Commencement of Operations. No Fund received CDSCs with respect to redemption within one year after purchase of Class D shares purchased subject to a front-end sales charge waiver during the fiscal year ended July 31, 1996 or the period October 21, 1994 (commencment of operations) to July 31, 1995. 19 The term "purchase", as used in the Prospectus and this Statement of Additional Information in connection with an investment in Class A and Class D shares of a Fund, refers to a single purchase by an individual, or to concurrent purchases, which in the aggregate are at least equal to the prescribed amounts, by an individual, his or her spouse and their children under the age of 21 years purchasing shares for his or her or their own account and to single purchases by a trustee or other fiduciary purchasing shares for a single trust estate or single fiduciary account although more than one beneficiary is involved. The term "purchase" also includes purchases by any "company", as that term is defined in the 1940 Act, but does not include purchases by any such company which has not been in existence for at least six months or which has no purpose other than the purchase of shares of the Fund or shares of other registered investment companies at a discount; provided, however, that it shall not include purchases by any group of individuals whose sole organizational nexus is that the participants therein are credit cardholders of a company, policyholders of an insurance company, customers of either a bank or broker-dealer or clients of an investment adviser. Closed-End Fund Investment Option. Class A shares of each Fund and other MLAM-advised mutual funds ("Eligible Class A shares") are offered at net asset value to shareholders of certain closed-end funds advised by the Manager or MLAM who purchased such closed-end fund shares prior to October 21, 1994, the date the Merrill Lynch Select Pricing(SM) System commenced operations, and wish to reinvest the net proceeds of a sale of their closed-end fund shares of common stock in Eligible Class A shares, if the conditions set forth below are satisfied. Alternatively, closed-end fund shareholders who purchased such shares on or after October 21, 1994 and wish to reinvest the net proceeds from a sale of their closed-end fund shares are offered Class A shares (if eligible to purchase Class A shares) or Class D shares of each Fund and other MLAM-advised mutual funds ("Eligible Class D shares"), if the following conditions are met. First, the sale of closed-end fund shares must be made through Merrill Lynch, and the net proceeds therefrom must be reinvested immediately in Eligible Class A or Class D shares. Second, the closed-end fund shares must either have been acquired in the initial public offering or be shares representing dividends from shares of common stock acquired in such offering. Third, the closed-end fund shares must have been maintained continuously in a Merrill Lynch securities account. Fourth, there must be a minimum purchase of $250 to be eligible for the investment option. Shareholders of certain MLAM-advised continuously offered closed-end funds may reinvest at net asset value the net proceeds from a sale of certain shares of common stock of such funds in shares of a Fund. Upon exercise of this investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. will receive Class D shares of the Fund, except that shareholders already owning Class A shares of the Fund will be eligible to purchase additional Class A shares pursuant to this option, if such additional Class A shares will be held in the same account as the existing Class A shares and the other requirements pertaining to the reinvestment privilege are met. In order to exercise this investment option, a shareholder of one of the above-referenced continuously offered closed-end funds (an "eligible fund") must sell his or her shares of common stock of the eligible fund (the "eligible shares") back to the eligible fund in connection with a tender offer conducted by the eligible fund and reinvest the proceeds immediately in the designated class of shares of the Fund. This investment option is available only with respect to eligible shares as to which no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's prospectus) is applicable. Purchase orders from eligible fund shareholders wishing to exercise this investment option will be accepted only on the day that the related tender offer terminates and will be effected at the net asset value of the designated class of the Fund on such day. Reduced Initial Sales Charges Right of Accumulation. Reduced sales charges are applicable through a right of accumulation under which eligible investors are permitted to purchase shares of a Fund subject to an initial sales charge at the offering price applicable to the total of (a) the public offering price of the shares then being purchased plus (b) an amount equal to the then current net asset value or cost, whichever is higher, of the purchaser's combined holdings of all classes of shares of a Fund and of other MLAM-advised mutual funds. For any such right of accumulation to be made available, the Distributor must be provided at the time of purchase, by the purchaser or the purchaser's securities dealer, with sufficient information to permit confirmation of qualification. Acceptance of the purchase 20 order is subject to such confirmation. The right of accumulation may be amended or terminated at any time. Shares held in the name of a nominee or custodian under pension, profit-sharing or other employee benefit plans may not be combined with other shares to qualify for the right of accumulation. Letter of Intention. Reduced sales charges are applicable to purchases aggregating $100,000 or more of the Class A or Class D shares of a Fund or any other MLAM-advised mutual funds within a 13-month period starting with the first purchase pursuant to a Letter of Intention in the form provided in the Prospectus. The Letter of Intention is available only to investors whose accounts are maintained at the Trust's Transfer Agent. The Letter of Intention is not available to employee benefit plans for which Merrill Lynch provides plan participant record-keeping services. The Letter of Intention is not a binding obligation to purchase any amount of Class A or Class D shares of any Fund; however, its execution will result in the purchaser paying a lower sales charge at the appropriate quantity purchase level. A purchase not originally made pursuant to a Letter of Intention may be included under a subsequent Letter of Intention executed within 90 days of such purchase if the Distributor is informed in writing of this intent within such 90-day period. The value of Class A and Class D shares of a Fund and of other MLAM-advised mutual funds presently held, at cost or maximum offering price (whichever is higher), on the date of the first purchase under the Letter of Intention, may be included as a credit toward the completion of such Letter, but the reduced sales charge applicable to the amount covered by such Letter will be applied only to new purchases. If the total amount of shares does not equal the amount stated in the Letter of Intention (minimum of $100,000), the investor will be notified and must pay, within 20 days of the expiration of such Letter, the difference between the sales charge on the Class A or Class D shares of the Fund purchased at the reduced rate and the sales charge applicable to the shares of the Fund actually purchased through the Letter. Class A or Class D shares of the Fund equal to at least five percent of the intended amount will be held in escrow during the 13-month period (while remaining registered in the name of the purchaser) for this purpose. The first purchase under the Letter of Intention must be at least five percent of the dollar amount of such Letter. If during the term of such Letter, a purchase brings the total amount invested to an amount equal to or in excess of the amount indicated in the Letter, the purchaser will be entitled on that purchase and subsequent purchases to the reduced percentage sales charge which would be applicable to a single purchase equal to the total dollar value of the Class A or Class D shares then being purchased under such Letter, but there will be no retroactive reduction of the sales charges on any previous purchase. The value of any shares redeemed or otherwise disposed of by the purchaser prior to termination or completion of the Letter of Intention will be deducted from the total purchases made under such Letter. An exchange from a MLAM-advised money market fund into a Fund that creates a sales charge will count toward completing a new or existing Letter of Intention to the Fund. Employee Access Accounts(SM). Class A or Class D shares are offered at net asset value to Employee Access Accounts(SM) available through qualified employers that provide employer-sponsored retirement or savings plans that are eligible to purchase such shares at net asset value. The initial minimum for such accounts is $500, except that the initial minimum for shares purchased for such accounts pursuant to the Automatic Investment Program is $50. TMA(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 21 such redemption had been made within 60 days prior to the investment in the Fund, and the proceeds from the redemption had been maintained in the interim in cash or a money market fund. Class D shares of the Fund are also offered at net asset value, without a sales charge, to an investor who has a business relationship with a Merrill Lynch Financial Consultant and who has invested in a mutual fund for which Merrill Lynch has not served as a selected dealer if the following conditions are satisfied: first, the investor must advise Merrill Lynch that it will purchase Class D shares of the Fund with proceeds from the redemption of shares of such other mutual fund and that such shares have been outstanding for a period of no less than six months; and second, such purchase of Class D shares must be made within 60 days after the redemption and the proceeds from the redemption must be maintained in the interim in cash or a money market fund. Class D shares of the Fund are also offered at net asset value, without a sales charge, to an investor who has a business relationship with a Merrill Lynch Financial Consultant and who has invested in a mutual fund sponsored by a non-Merrill Lynch company for which Merrill Lynch has served as a selected dealer and where Merrill Lynch has either received or given notice that such arrangement will be terminated ("notice"), if the following conditions are satisfied: first, the investor must purchase Class D shares of the Fund with proceeds from a redemption of shares of such other mutual fund and the shares of such other fund were subject to a sales charge either at the time of purchase or on a deferred basis; and second, such purchase of Class D shares must be made within 90 days after such notice. Acquisition of Certain Investment Companies. The public offering price of Class D shares of a Fund may be reduced to the net asset value per Class D share of that Fund in connection with the acquisition of the assets of or merger or consolidation with a personal holding company or a public or private investment company. The value of the assets or company acquired in a tax-free transaction may be adjusted in appropriate cases to reduce possible adverse tax consequences to each Fund which might result from an acquisition of assets having net unrealized appreciation which is disproportionately higher at the time of acquisition than the realized or unrealized appreciation of each Fund. The issuance of Class D shares for consideration other than cash is limited to bona fide reorganizations, statutory mergers or other acquisitions of portfolio securities which (i) meet the investment objectives and policies of the related Fund; (ii) are acquired for investment and not for resale (subject to the understanding that the disposition of a Fund's portfolio securities shall at all times remain within its control); and (iii) are liquid securities, the value of which is readily ascertainable, which are not restricted as to transfer either by law or liquidity of market (except that a Fund may acquire through such transactions restricted or illiquid securities to the extent the Fund does not exceed the applicable limits for that Fund on acquisition of such securities set forth under "Investment Objectives and Policies" herein). Reductions in or exemptions from the imposition of a sales load are due to the nature of the investors and/or the reduced sales efforts that will be needed in obtaining such investments. Distribution Plans Reference is made to "Purchase of Shares--Distribution Plans" in the Prospectus for certain information with respect to the separate distribution plans of each Fund for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the 1940 Act (each a "Distribution Plan") with respect to the account maintenance and/or distribution fees paid by the Funds to the Distributor with respect to such classes. Payments of the account maintenance fees and/or distribution fees are subject to the provisions of Rule 12b-1 under the 1940 Act. Among other things, each Distribution Plan provides that the Distributor shall provide and the Trustees shall review quarterly reports of the disbursement of the account maintenance and/or distribution fees paid by each Fund to the Distributor. In their consideration of each of the Distribution Plans, the Trustees must consider all factors they deem relevant, including information as to the benefits of each Distribution Plan to its Fund and its related class of shareholders. Each Distribution Plan further provides that, so long as the Distribution Plan remains in effect, the selection and nomination of Trustees who are not "interested persons" of the Trust, as defined in the 1940 Act (the "Independent Trustees"), shall be committed to the discretion of the Independent Trustees then in office. In separately approving each Distribution Plan in accordance with Rule 12b-1, the Independent Trustees concluded that there is a reasonable likelihood that such Distribution Plan will benefit the related Fund and its related class of shareholders. Any Distribution Plan can be 22 terminated at any time, without penalty, by the vote of a majority of the Independent Trustees or by the vote of the holders of a majority of the outstanding related class of voting securities of the related Fund. No Distribution Plan can be amended to increase materially the amount to be spent by the related Fund without approval by the related class of shareholders of that Fund, and all material amendments are required to be approved by the vote of Trustees, including a majority of the Independent Trustees who have no direct or indirect financial interest in the Distribution Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further requires that the Trust preserve copies of each Distribution Plan and any report made pursuant to such plan for a period of not less than six years from the date of such Distribution Plan or such report, the first two years in an easily accessible place. Limitations on the Payment of Deferred Sales Charges The maximum sales charge rule in the Conduct Rules of the National Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain asset-based sales charges such as the distribution fee and the CDSC borne by the Class B shares of each Fund, but not the account maintenance fee. The maximum sales charge rule is applied separately to each class. As applicable to each Fund, the maximum sales charge rule limits the aggregate of distribution fee payments and CDSCs payable by each Fund to (1) 6.25% of eligible gross sales of Class B shares of that Fund, computed separately (defined to exclude shares issued pursuant to dividend reinvestments and exchanges) plus (2) interest on the unpaid balance for the respective class, computed separately, at the prime rate plus 1% (the unpaid balance being the maximum amount payable minus amounts received from the payment of the distribution fee and the CDSC of that Fund). In connection with the Class B shares, the Distributor has voluntarily agreed to waive interest charges on the unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the maximum amount payable to the Distributor in connection with each Fund (referred to as the "voluntary maximum") in connection with the Class B shares is 6.75% of eligible gross sales of that Fund. The Distributor retains the right to stop waiving the interest charges at any time. To the extent a Fund's payments would exceed the voluntary maximum, such Fund will not make further payments of the distribution fee with respect to Class B shares, and any CDSCs will be paid to the Fund rather than to the Distributor; however, such Fund will continue to make payments of the account maintenance fee. In certain circumstances the amount payable pursuant to the voluntary maximum may exceed the amount payable under the NASD formula. In such circumstances payment in excess of the amount payable under the NASD formula will not be made. The following table sets forth comparative information for the period November 26, 1993 (commencement of operations) to July 31, 1996 with respect to the Class B shares of each of the Funds, indicating the maximum allowable payments that can be made under the NASD maximum sales charge rule and the Distributor's voluntary maximum. No information is presented for the Class C shares of the Funds because Class C shares are not available for purchase but will be issued only pursuant to the exchange privilege to holders of Class C shares of other MLAM-advised mutual funds who elect to exchange Class C shares of such other MLAM-advised mutual fund for Class C shares of one of the Funds. 23
Data Calculated as of July 31, 1996 ------------------------------------------------------------------------------------------ (In Thousands) Annual Allowable Allowable Amounts Distribution Eligible Aggregate Interest on Maximum Previously Aggregate Fee at Gross Sales Unpaid Amount Paid to Unpaid Current Net Sales(1) Charges Balance(2) Payable Distributor(3) Balance Asset Level(4) -------- --------- ----------- ------- -------------- --------- -------------- Arizona Fund Under NASD Rule as Adopted........... $ 6,624 $ 414 $ 92 $ 506 $ 52 $ 454 $ 6 Under Distributor's Voluntary Waiver............................. $ 6,624 $ 414 $ 33 $ 447 $ 52 $ 395 $ 6 California Fund Under NASD Rule as Adopted........... $ 12,777 $ 798 $ 173 $ 971 $ 71 $ 900 $ 20 Under Distributor's Voluntary Waiver............................. $ 12,777 $ 798 $ 64 $ 862 $ 71 $ 791 $ 20 Florida Fund Under NASD Rule as Adopted........... $ 22,409 $ 1,400 $ 284 $1,684 $330 $ 1,354 $ 27 Under Distributor's Voluntary Waiver............................. $ 22,409 $ 1,400 $ 112 $1,512 $330 $ 1,182 $ 27 Massachusetts Fund Under NASD Rule as Adopted........... $ 10,460 $ 654 $ 137 $ 791 $ 60 $ 731 $ 9 Under Distributor's Voluntary Waiver............................. $ 10,460 $ 654 $ 52 $ 706 $ 60 $ 646 $ 9 Michigan Fund Under NASD Rule as Adopted........... $ 3,216 $ 201 $ 45 $ 246 $ 27 $ 219 $ 4 Under Distributor's Voluntary Waiver............................. $ 3,216 $ 201 $ 16 $ 217 $ 27 $ 190 $ 4 New Jersey Fund Under NASD Rule as Adopted........... $ 10,628 $ 664 $ 144 $ 808 $ 59 $ 749 $ 10 Under Distributor's Voluntary Waiver............................. $ 10,628 $ 664 $ 53 $ 717 $ 59 $ 658 $ 10 New York Fund Under NASD Rule as Adopted........... $ 13,525 $ 845 $ 163 $1,008 $ 73 $ 935 $ 20 Under Distributor's Voluntary Waiver............................. $ 13,525 $ 845 $ 68 $ 913 $ 73 $ 840 $ 20 Pennsylvania Fund Under NASD Rule as Adopted........... $ 10,547 $ 659 $ 150 $ 809 $ 63 $ 746 $ 13 Under Distributor's Voluntary Waiver............................. $ 10,547 $ 659 $ 53 $ 712 $ 63 $ 649 $ 13
- ------------ (1) Purchase price of all eligible Class B shares sold since November 26, 1993 (commencement of operations) other than shares acquired through dividend reinvestment and the exchange privilege. (2) Interest is computed on a monthly basis based upon the prime rate, as reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD Rule. (3) Consists of CDSC payments, distribution fee payments and accruals. See "Purchase of Shares--Distribution Plans" in the Prospectus. (4) Provided to illustrate the extent to which the current level of distribution fee payments (not including any CDSC payments) is amortizing the unpaid balance. No assurance can be given that payments of the distribution fee will reach either the voluntary maximum or the NASD maximum. 24 REDEMPTION OF SHARES Reference is made to "Redemption of Shares" in the Prospectus for certain information as to the redemption and repurchase of shares of each Fund. The right to redeem shares of any Fund or to receive payment with respect to any such redemption may be suspended only for any period during which trading on the NYSE is restricted as determined by the Commission or the NYSE is closed (other than customary weekend and holiday closings), for any period during which an emergency exists, as defined by the Commission, as a result of which disposal of portfolio securities or determination of the net asset value of a Fund is not reasonably practicable, and for such other periods as the Commission may by order permit for the protection of shareholders of the Funds. Deferred Sales Charges--Class B and Class C Shares As discussed in the Prospectus under "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares", while Class B shares redeemed within one year of purchase are subject to a CDSC under most circumstances, the charge is waived on redemptions of Class B shares following the death or disability of a Class B shareholder. Redemptions for which the waiver applies are any partial or complete redemption following the death or disability (as defined in the Internal Revenue Code of 1986, as amended (the "Code")) of a Class B shareholder (including one who owns the Class B shares as joint tenant with his or her spouse), provided the redemption is requested within one year of the death or initial determination of disability. For the fiscal years ended July 31, 1996 and 1995, and for the period November 26, 1993 (commencement of operations) to July 31, 1994, the Distributor received CDSCs from the Funds with respect to redemptions of Class B shares as follows, all of which were paid to Merrill Lynch:
For the Year Ended July 31, For the Period ------------------- November 26, 1993+ Fund 1996 1995 to July 31, 1994 - ---- ------- -------- ------------------------ Arizona Fund..................................................... $10,222 $ 13,587 $ 1,505 California Fund.................................................. $ 3,459 $ 5,805 $ 5,716 Florida Fund..................................................... $18,456 $202,558 $ 17,622 Massachusetts Fund............................................... $ 4,849 $ 10,430 $ 11,965 Michigan Fund.................................................... $ 6,724 $ 3,977 $ 3,454 New Jersey Fund.................................................. $ 8,141 $ 6,305 $ 6,854 New York Fund.................................................... $ 6,475 $ 6,435 $ 9,833 Pennsylvania Fund................................................ $ 3,775 $ 7,971 $ 6,500
- ------------------ + Commencement of Operations. For the fiscal year ended July 31, 1996 and for the period October 21, 1994 (commencement of operations) to July 31, 1995, the Distributor received no CDSCs with respect to redemptions of Class C shares. 25 PORTFOLIO TRANSACTIONS Reference is made to "Investment Objectives and Policies" and "Portfolio Transactions" in the Prospectus. Under the 1940 Act, persons affiliated with the Trust are prohibited from dealing with the Trust or any Fund as principals in the purchase and sale of securities unless such trading is permitted by an exemptive order issued by the Commission. Since over-the-counter transactions are usually principal transactions, affiliated persons of the Trust, including Merrill Lynch, may not serve as dealers in connection with transactions with the Funds absent an exemptive order from the Commission. The Trust has obtained an exemptive order permitting it to engage in certain principal transactions with Merrill Lynch involving high quality short-term municipal bonds subject to certain conditions. The table below sets forth for the fiscal years ended July 31, 1996 and 1995, and for the period November 26, 1993 (commencement of operations) to July 31, 1994, information about the transactions engaged in by the Funds pursuant to this order.
For the Period For the Year Ended For the Year Ended November 26, 1993+ July 31, 1996 July 31, 1995 to July 31, 1994 ----------------------------- ----------------------------- ----------------------------- Number of Aggregate Number of Aggregate Number of Aggregate Fund Transactions Dollar Amount Transactions Dollar Amount Transactions Dollar Amount - ---- ------------ ------------- ------------ ------------- ------------ ------------- Arizona Fund............ 3 $ 300,000 2 $ 600,000 0 -- California Fund......... 0 -- 5 $ 1,800,000 8 $ 4,704,660 Florida Fund............ 2 $ 1,000,000 0 -- 1 $ 1,102,552 Massachusetts Fund...... 3 $ 600,000 1 $ 200,000 0 -- Michigan Fund........... 1 $ 200,000 0 -- 2 $ 400,464 New Jersey Fund......... 5 $ 800,000 4 $ 1,100,000 1 $ 401,652 New York Fund........... 0 -- 0 -- 3 $ 1,601,675 Pennsylvania Fund....... 1 $ 401,836 3 $ 1,300,000 1 $ 322,314
- ------------------ + Commencement of Operations. The Trust has applied for an exemptive order permitting it to, among other things, (i) purchase high quality tax-exempt securities from Merrill Lynch when Merrill Lynch is a member of an underwriting syndicate and (ii) purchase tax-exempt securities from and sell tax-exempt securities to Merrill Lynch in secondary market transactions. Affiliated persons of the Trust may serve as its broker in over-the-counter transactions conducted on an agency basis. Certain court decisions have raised questions as to the extent to which investment companies should seek exemptions under the 1940 Act in order to seek to recapture underwriting and dealer spreads from affiliated entities. The Trustees have considered all factors deemed relevant and have made a determination not to seek such recapture at this time. The Trustees will reconsider this matter from time to time. As a non-fundamental restriction, the Trust will prohibit the purchase or retention by any Fund of the securities of any issuer if the officers and Trustees of the Trust, the officers and general partner of the Manager, the directors of such general partner or the officers and directors of any subsidiary thereof each owning beneficially more than one-half of one per cent of the securities of an issuer own in the aggregate more than five per cent of the securities of such issuer. In addition, under the 1940 Act, the Funds may not purchase securities from any underwriting syndicate of which Merrill Lynch is a member except pursuant to an exemptive order or rules adopted by the Commission. Rule 10f-3 under the 1940 Act sets forth conditions under which a Fund may purchase municipal bonds in such transactions. The rule sets forth requirements relating to, among other things, the terms of an issue of municipal bonds purchased by a Fund, the amount of municipal bonds which may be purchased in any one issue and the assets of a Fund which may be invested in a particular issue. The Funds do not expect to use any particular dealer in the execution of transactions but, subject to obtaining the best net results, dealers who provide supplemental investment research (such as information concerning tax-exempt securities, economic data and market forecasts) to the Manager may receive orders for transactions by the Funds. Information so received will be in addition to and not in lieu of the services required to be performed by the Manager under its Management Agreement, and the expenses of the Manager will not necessarily be reduced as a result of the receipt of such supplemental information. 26 The Funds have no obligation to deal with any broker in the execution of transactions for their portfolio securities. In addition, consistent with the Conduct Rules of the NASD and policies established by the Trustees of the Trust, the Manager may consider sales of shares of the Funds as a factor in the selection of brokers or dealers to execute portfolio transactions for the Funds. DETERMINATION OF NET ASSET VALUE The net asset value of the shares of all classes of each Fund is determined by the Manager once daily, Monday through Friday, as of 15 minutes after the close of business on the NYSE (generally, 4:00 p.m., New York time) on each day during which the NYSE is open for trading. The NYSE is not open on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Net asset value per share of a Fund is computed by dividing the sum of the value of the securities held by the Fund plus any cash or other assets minus all liabilities by the total number of shares outstanding at such time, rounded to the nearest cent. Expenses, including the fees payable to the Manager and Distributor, are accrued daily. The net asset value per share of each class of shares of a Fund are expected to be equivalent. The per share net asset value of a Fund's Class B, Class C and Class D shares generally will be lower than the per share net asset value of its Class A shares, reflecting the daily expense accruals of the account maintenance, distribution and higher transfer agency fees applicable with respect to Class B and Class C shares of the Fund and the daily expense accruals of the account maintenance fees applicable with respect to Class D shares; in addition, the per share net asset value of Class B and Class C shares generally will be lower than the per share net asset value of its Class D shares, reflecting the daily expense accruals of the distribution fees, higher account maintenance fees and higher transfer agency fees applicable with respect to Class B and Class C shares of the Fund. It is expected, however, that the per share net asset value of the four classes will tend to converge (although not necessarily meet) immediately after the payment of dividends, which will differ by approximately the amount of the expense accrual differentials between the classes. The Municipal Bonds and other portfolio securities in which the Funds invest are traded primarily in over-the-counter municipal bond and money markets and are valued at the last available bid price in the over-the-counter market or on the basis of yield equivalents as obtained from one or more dealers that make markets in the securities. One bond is the "yield equivalent" of another bond when, taking into account market price, maturity, coupon rate, credit rating and ultimate return of principal, both bonds theoretically will produce an equivalent return to the bondholder. Financial futures contracts and options thereon, which are traded on exchanges, are valued at their settlement prices as of the close of such exchanges. Short-term investments with a remaining maturity of 60 days or less are valued on an amortized cost basis, which approximates market value. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Trustees of the Trust, including valuations furnished by a pricing service retained by the Trust, which may utilize a matrix system for valuations. The procedures of the pricing service and its valuations are reviewed by the officers of the Trust under the general supervision of the Trustees. 27 SHAREHOLDER SERVICES The Trust offers a number of shareholder services described below which are designed to facilitate investment in shares of the Funds. Full details as to each of such services and copies of the various plans described below can be obtained from the Trust, the Distributor or Merrill Lynch. Investment Account Each shareholder whose account is maintained at the Transfer Agent has an Investment Account and will receive statements, at least quarterly, from the Transfer Agent. These statements will serve as transaction confirmations for automatic investment purchases and the reinvestment of ordinary income dividends and long-term capital gains distributions. The statements will also show any other activity in the account since the previous statement. Shareholders also will receive separate confirmations for each purchase or sale transaction other than automatic investment purchases and the reinvestment of ordinary income dividends and long-term capital gains distributions. A shareholder may make additions to his or her Investment Account at any time by mailing a check directly to the Transfer Agent. Share certificates are issued only for full shares and only upon the specific request of the shareholder who has an Investment Account. Issuance of certificates representing all or only part of the full shares in an Investment Account may be requested by a shareholder directly from the Transfer Agent. Shareholders considering transferring their Class A or Class D shares from Merrill Lynch to another brokerage firm or financial institution should be aware that, if the firm to which the Class A or Class D shares are to be transferred will not take delivery of shares of the relevant Fund, a shareholder either must redeem the Class A or Class D shares (paying any applicable CDSC) so that the cash proceeds can be transferred to the account at the new firm, or such shareholder must continue to maintain an Investment Account at the Transfer Agent for those Class A or Class D shares. Shareholders interested in transferring their Class B or Class C shares from Merrill Lynch and who do not wish to have an Investment Account maintained for such shares at the Transfer Agent may request their new brokerage firm to maintain such shares in an account registered in the name of the brokerage firm for the benefit of the shareholder at the Transfer Agent. If the new brokerage firm is willing to accommodate the shareholder in this manner, the shareholder must request that he or she be issued certificates for his or her shares, and then must turn the certificates over to the new firm for re-registration as described in the preceding sentence. Automatic Investment Plans A shareholder of a Fund may make additions to an Investment Account at any time by purchasing Class A shares (if he or she is an eligible Class A investor as described in the Prospectus) or Class B or Class D shares at the applicable public offering price either through the shareholder's securities dealer or by mail directly to the Transfer Agent, acting as agent for such securities dealers. Voluntary accumulation also can be made through a service known as a Fund's Automatic Investment Plan whereby each Fund is authorized through pre-authorized checks or automated clearing house debits of $50 or more to charge the regular bank account of the shareholder on a regular basis to provide systematic additions to the Investment Account of such shareholder. Alternatively, an investor who maintains a CMA(Registered) or CBA(Registered) account may arrange to have periodic investments made in a Fund in such CMA(Registered) or CBA(Registered) account or in certain related accounts in amounts of $100 or more through the CMA(Registered) or CBA(Registered) Automated Investment Program. Automatic Reinvestment of Dividends and Capital Gains Distributions Unless specific instructions are given as to the method of payment of dividends and capital gains distributions, dividends and distributions will be automatically reinvested in additional shares of the respective Fund. Such reinvestment will be at the net asset value of shares of the respective Fund as of the close of business on the monthly payment date for such dividends and distributions. Shareholders may elect in writing to receive either their income dividends or capital gains distributions, or both, in cash, in which event payment will be mailed on or about the payment date. 28 Shareholders, at any time, may notify the Transfer Agent in writing or by telephone (1-800-MER-FUND) that they no longer wish to have their dividends and/or capital gains distributions reinvested in shares of the respective Fund or vice versa and, commencing ten days after the receipt by the Transfer Agent of such notice, such instructions will be effected. Systematic Withdrawal Plans--Class A and Class D Shares A Class A or Class D shareholder may elect to make systematic withdrawals from an Investment Account on either a monthly or quarterly basis as provided below. Quarterly withdrawals are available for shareholders who have acquired Class A or Class D shares of a Fund having a value, based on cost or the current offering price, of $5,000 or more, and monthly withdrawals are available for shareholders with Class A or Class D shares with such a value of $10,000 or more. At the time of each withdrawal payment, sufficient Class A or Class D shares are redeemed from those on deposit in the shareholder's account to provide the withdrawal payment specified by the shareholder. The shareholder may specify either a dollar amount or a percentage of the value of his or her Class A or Class D shares. Redemptions will be made at net asset value as determined 15 minutes after the close of business on the NYSE (generally 4:00 p.m., New York time) on the 24th day of each month or the 24th day of the last month of each quarter, whichever is applicable. If the NYSE is not open for business on such date, the Class A or Class D shares will be redeemed at the close of business on the following business day. The check for the withdrawal payment will be mailed, or the direct deposit for the withdrawal payment will be made, on the next business day following redemption. When a shareholder is making systematic withdrawals, dividends and distributions on all Class A or Class D shares in the Investment Account are reinvested automatically in the respective Fund's Class A or Class D shares, respectively. A shareholder's Systematic Withdrawal Plan may be terminated at any time, without charge or penalty, by either the shareholder, the Trust, the Transfer Agent or the Distributor. Withdrawal payments should not be considered as dividends, yield or income. Each withdrawal is a taxable event. If periodic withdrawals continuously exceed reinvested dividends, the shareholder's original investment may be reduced correspondingly. Purchases of additional Class A or Class D shares concurrent with withdrawals are ordinarily disadvantageous to the shareholder because of sales charges and tax liabilities. The Trust will not knowingly accept purchase orders for Class A or Class D shares of a Fund from investors who maintain a Systematic Withdrawal Plan unless such purchase is equal to at least one year's scheduled withdrawals or $1,200, whichever is greater. Periodic investments may not be made into an Investment Account in which the shareholder has elected to make systematic withdrawals. Alternatively, a Class A or Class D shareholder whose shares are held within a CMA(Registered) or CBA(Registered) Account may elect to have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through the CMA(Registered) or CBA(Registered) Systematic Redemption Program. The minimum fixed dollar amount redeemable is $25. The proceeds of systematic redemptions will be posted to the shareholder's account three business days after the date the shares are redeemed. Monthly systematic redemptions will be made at net asset value on the first Monday of each month, bimonthly systematic redemptions will be made at net asset value on the first Monday of every other month, and quarterly, semiannual or annual redemptions are made at net asset value on the first Monday of months selected at the shareholder's option. If the first Monday of the month is a holiday, the redemption will be processed at net asset value on the next business day. The Systematic Redemption Program is not available if Fund shares are being purchased within the account pursuant to the Automatic Investment Program. For more information on the CMA(Registered) or CBA(Registered) Systematic Redemption Program, eligible shareholders should contact their Financial Consultant. Exchange Privilege Shareholders of each class of shares of each of the Funds have an exchange privilege with certain other MLAM-advised mutual funds. Under the Merrill Lynch Select Pricing(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 his account in which the exchange is made at the time of the 29 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 account at the time of the exchange and is not otherwise eligible to acquire Class A shares of the second fund, the shareholder will receive Class D shares of the second fund as a result of the exchange. Class D shares also may be exchanged for Class A shares of a second MLAM-advised mutual fund at any time as long as, at the time of the exchange, the shareholder holds Class A shares of the second fund in the account in which the exchange is made or is otherwise eligible to purchase Class A shares of the second fund. Class B, Class C and Class D shares are exchangeable with shares of the same class of other MLAM-advised mutual funds. For purposes of computing the CDSC that may be payable upon a disposition of the shares acquired in the exchange, the holding period for the previously owned shares of a Fund is "tacked" to the holding period for the newly acquired shares of the other fund as more fully described below. Class A, Class B, Class C and Class D shares also are exchangeable for shares of certain MLAM-advised money market funds as follows: Class A shares may be exchanged for shares of Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund (available only for exchanges with certain retirement plans), Merrill Lynch U.S.A. Government Reserves and Merrill Lynch U.S. Treasury Money Fund; Class B, Class C and Class D shares may be exchanged for shares of Merrill Lynch Government Fund, Merrill Lynch Institutional Fund, Merrill Lynch Institutional Tax-Exempt Fund and Merrill Lynch Treasury Fund. Shares with a net asset value of at least $100 are required to qualify for the exchange privilege, and any shares utilized in an exchange must have been held by the shareholder for 15 days. It is contemplated that the exchange privilege may be applicable to other new mutual funds whose shares may be distributed by the Distributor. Exchanges of Class A or Class D shares outstanding of each of the Funds ("outstanding Class A or Class D shares") for Class A or Class D shares of another MLAM-advised mutual fund ("new Class A or Class D shares") are transacted on the basis of relative net asset value per Class A or Class D share, respectively, plus an amount equal to the difference, if any, between the sales charge previously paid on the outstanding Class A or Class D shares and the sales charge payable at the time of the exchange on the new Class A or Class D shares. With respect to outstanding Class A or Class D shares as to which previous exchanges have taken place, the "sales charge previously paid" shall include the aggregate of the sales charges paid with respect to such Class A or Class D shares in the initial purchase and any subsequent exchange. Class A or Class D shares issued pursuant to dividend reinvestment are sold on a no-load basis in each of the funds offering Class A or Class D shares. For purposes of the exchange privilege, Class A or Class D shares acquired through dividend reinvestment shall be deemed to have been sold with a sales charge equal to the sales charge previously paid on the Class A or Class D shares on which the dividend was paid. Based on this formula, Class A or Class D shares generally may be exchanged into the Class A or Class D shares of the other funds or into shares of certain money market funds without or with a reduced sales charge. In addition, each of the Funds with Class B or Class C shares outstanding ("outstanding Class B or Class C shares") offers to exchange its Class B or Class C shares for Class B or Class C shares, respectively, of another MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of relative net asset value per Class B or Class C share, without the payment of any CDSC that might otherwise be due on redemption of the outstanding shares. Class B shareholders of each Fund exercising the exchange privilege will continue to be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares acquired through use of the exchange privilege. In addition, Class B shares of each Fund acquired through use of the exchange privilege will be subject to that Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares of the fund from which the exchange has been made. For purposes of computing the sales charge that may be payable on a disposition of the new Class B or Class C shares, the holding period for the outstanding Class B or Class C shares is "tacked" to the holding period of the new Class B or Class C shares. For example, an investor may exchange Class B shares of a Fund for those of Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having held the Fund's Class B shares for six months. The 1% CDSC that generally would apply to a redemption would not apply to the exchange. Three and a half years later the investor may decide to redeem the Class B shares of Special Value Fund and receive cash. There will be no CDSC due on this redemption, since by tacking the six month holding period of the Fund's 30 Class B shares onto the three and a half year holding period for the Special Value Fund Class B shares, the investor will be deemed to have held the new Class B shares for four years. Shareholders also may exchange shares from any of the Funds into shares of certain money market funds advised by the Manager or its affiliates, but the period of time that Class B or Class C shares are held in a money market fund will not count towards satisfaction of the holding period requirement for purposes of reducing the CDSC or, with respect to Class B shares, towards satisfaction of the conversion period. However, shares of a money market fund which were acquired as a result of an exchange for Class B or Class C shares of a Fund may, in turn, be exchanged back into Class B or Class C shares, respectively, of any fund offering such shares, in which event the holding period for Class B or Class C shares of the newly-acquired fund will be aggregated with previous holding periods for purposes of reducing the CDSC. Thus, for example, an investor may exchange Class B shares of a Fund for shares of Merrill Lynch Institutional Fund ("Institutional Fund") after having held the Fund's Class B shares for six months and three years later decide to redeem the shares of Institutional Fund for cash. At the time of this redemption, the 1% CDSC that would have been due had the Class B shares of the Fund been redeemed for cash rather than exchanged for shares of Institutional Fund will be payable. If, instead of such redemption, the shareholder exchanged such shares for Class B shares of a fund with a four-year CDSC period which the shareholder continued to hold for an additional three and a half years, any subsequent redemption would not incur a CDSC. Before effecting an exchange, shareholders of a Fund should obtain a currently effective prospectus of the fund into which the exchange is to be made. To exercise the exchange privilege, a shareholder should contact his or her Merrill Lynch Financial Consultant, who will advise the relevant Fund of the exchange. Shareholders of the Funds, and shareholders of the other funds described above with shares for which certificates have not been issued, may exercise the exchange privilege by wire through their securities dealers. Each Fund reserves the right to require a properly completed Exchange Application. This exchange privilege may be modified or terminated at any time in accordance with the rules of the Commission. Each Fund reserves the right to limit the number of times an investor may exercise the exchange privilege. Certain funds may suspend the continuous offering of their shares at any time and thereafter may resume such offering from time to time. The exchange privilege is available only to U.S. shareholders in states where the exchange legally may be made. 31 DISTRIBUTIONS AND TAXES Federal The Trust intends to continue to qualify each Fund for the special tax treatment afforded regulated investment companies ("RICs") under the Internal Revenue Code of 1986, as amended (the "Code"). If a Fund so qualifies, the Fund (but not its shareholders) will not be subject to Federal income tax to the extent that it distributes its net investment income and net realized capital gains. The Trust intends to cause each Fund to distribute substantially all of such income. As discussed in the Prospectus for the Trust, the Trust has established a number of series, each referred to herein as a "Fund". Each Fund is treated as a separate corporation for Federal income tax purposes. Each Fund, therefore, is considered to be a separate entity in determining its treatment under the rules for RICs described in the Prospectus. Losses in one Fund do not offset gains in another Fund, and the requirements (other than certain organizational requirements) for qualifying for RIC status are determined at the Fund level rather than at the Trust level. The Code requires a RIC to pay a nondeductible 4% excise tax to the extent the RIC does not distribute, during each calendar year, 98% of its ordinary income, determined on a calendar year basis, and 98% of its capital gains, determined, in general, on an October 31 year-end, plus certain undistributed amounts from previous years. The required distributions, however, are based only on the taxable income of a RIC. The excise tax, therefore, generally will not apply to the tax-exempt income of RICs, such as the Funds, that pay exempt- interest dividends. The Trust intends to qualify each Fund to pay "exempt-interest dividends" as defined in Section 852(b)(5) of the Code. Under such section if, at the close of each quarter of a Fund's taxable year, at least 50% of the value of its total assets consists of obligations exempt from Federal income tax ("tax-exempt obligations") under Section 103(a) of the Code (relating generally to obligations of a state or local governmental unit), a Fund shall be qualified to pay exempt-interest dividends to its Class A, Class B, Class C and Class D shareholders (together, the "shareholders"). Exempt-interest dividends are dividends or any part thereof paid by a Fund which are attributable to interest on tax-exempt obligations and designated by the Trust as exempt-interest dividends in a written notice mailed to each Fund's shareholders within 60 days after the close of such Fund's taxable year. For this purpose, the Funds will allocate interest from tax-exempt obligations (as well as ordinary income, capital gains and tax preference items, discussed below) among the Class A, Class B, Class C and Class D shareholders according to a method (which it believes is consistent with the Commission rule permitting the issuance and sale of multiple classes of shares) that is based on the gross income allocable to Class A, Class B, Class C and Class D shareholders during the taxable year, or such other method as the Internal Revenue Service may prescribe. The Fund will allocate exempt-interest dividends among shareholders for state income tax purposes in a similar manner. To the extent that the dividends distributed to a Fund's shareholders are derived from interest income exempt from Federal income tax under Code Section 103(a) and are properly designated as exempt-interest dividends, they will be excludable from a shareholder's gross income for Federal income tax purposes, subject to the possible application of the Federal alternative minimum tax as described below. Exempt-interest dividends are included, however, in determining the portion, if any, of a person's social security and railroad retirement benefits subject to Federal income taxes. The Trust will inform shareholders annually regarding the portion of each Fund's distributions which constitutes exempt-interest dividends. Interest on indebtedness incurred or continued to purchase or carry shares of RICs paying exempt-interest dividends, such as the Funds, will not be deductible by the investor for Federal income tax purposes to the extent attributable to exempt-interest dividends. Shareholders are advised to consult their tax advisers with respect to whether exempt-interest dividends retain the exclusion under Code Section 103(a) if a shareholder would be treated as a "substantial user" or "related person" under Code Section 147(a) with respect to property financed with the proceeds of an issue of "industrial development bonds" or "private activity bonds", if any, held by a Fund. To the extent that a Fund's distributions are derived from interest on its taxable investments or from an excess of net short-term capital gains over net long-term capital losses ("ordinary income dividends"), such 32 distributions are considered ordinary income for Federal income tax purposes. Distributions, if any, from an excess of net long-term capital gains over net short-term capital losses derived from the sale of securities or from certain transactions in futures or options ("capital gain dividends") are taxable as long-term capital gains for Federal income tax purposes, regardless of the length of time the shareholder has owned Fund shares. Distributions by the Fund, whether from exempt-interest income, ordinary income or capital gains, will not be eligible for the dividends received deduction allowed to corporations under the Code. All or a portion of a Fund's gain from the sale or redemption of tax-exempt obligations purchased at a market discount will be treated as ordinary income rather than capital gain. This rule may increase the amount of ordinary income dividends received by shareholders. Any loss upon the sale or exchange of shares held for six months or less will be disallowed to the extent of any exempt-interest dividends received by the shareholder. In addition, any such loss that is not disallowed under the rule stated above will be treated as long-term capital loss to the extent of any capital gain dividends received by the shareholder. Distributions in excess of a Fund's earnings and profits will first reduce the adjusted tax basis of a holder's shares and, after such adjusted tax basis is reduced to zero, will constitute capital gains to such holder (assuming the shares are held as a capital asset). If a Fund pays a dividend in January which was declared in the previous October, November or December to shareholders of record on a specified date in one of such months, then such dividend will be treated for tax purposes as being paid by the Fund and received by its shareholders on December 31 of the year in which such dividend was declared. The Code subjects interest received on certain otherwise tax-exempt securities to an alternative minimum tax. The alternative minimum tax applies to interest received on "private activity bonds" issued after August 7, 1986. Private activity bonds are bonds which, although tax-exempt, are used for purposes other than those generally performed by governmental units and which benefit non-governmental entities (e.g., bonds used for industrial development or housing purposes). Income received on such bonds is classified as an item of "tax preference", which could subject certain investors in such bonds, including shareholders of a Fund, to an alternative minimum tax. Each Fund will purchase such "private activity bonds", and the Trust will report to shareholders within 60 days after such Fund's taxable year-end the portion of the Fund's dividends declared during the year which constitutes an item of tax preference for alternative minimum tax purposes. The Code further provides that corporations are subject to an alternative minimum tax based, in part, on certain differences between taxable income as adjusted for other tax preferences and the corporation's "adjusted current earnings", which more closely reflect a corporation's economic income. Because an exempt-interest dividend paid by a Fund will be included in adjusted current earnings, a corporate shareholder may be required to pay alternative minimum tax on exempt-interest dividends paid by a Fund. The Funds may invest in high yield securities as described in the Prospectus. Furthermore, the Funds may also invest in instruments the return on which includes nontraditional features such as indexed principal or interest payments ("nontraditional instruments"). These instruments may be subject to special tax rules under which the Funds may be required to accrue and distribute income before amounts due under the obligations are paid. In addition, it is possible that all or a portion of the interest payments on such high yield securities and/or nontraditional instruments could be recharacterized as taxable ordinary income. No gain or loss will be recognized by Class B shareholders on the conversion of their Class B shares into Class D shares. A shareholder's basis in the Class D shares acquired will be the same as such shareholder's basis in the Class B shares converted, and the holding period of the acquired Class D shares will include the holding period for the converted Class B shares. If a shareholder exercises an exchange privilege within 90 days of acquiring the shares, then the loss the shareholder can recognize on the exchange will be reduced (or the gain increased) to the extent any sales charge paid to the Fund on the exchanged shares reduces any sales charge the shareholder would have owed upon purchase of the new shares in the absence of the exchange privilege. Instead, such sales charge will be treated as an amount paid for the new shares. A loss realized on a sale or exchange of shares of a Fund will be disallowed if other Fund shares are acquired (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period 33 beginning 30 days before and ending 30 days after the date that the shares are disposed of. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Ordinary income dividends paid to shareholders who are nonresident aliens or foreign entities will be subject to a 30% United States withholding tax under existing provisions of the Code applicable to foreign individuals and entities unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law. Nonresident shareholders are urged to consult their own tax advisers concerning the applicability of the United States withholding tax. Under certain Code provisions, some shareholders may be subject to a 31% withholding tax on certain ordinary income dividends and on capital gain dividends and redemption payments ("backup withholding"). Generally, shareholders subject to backup withholding will be those for whom no certified taxpayer identification number is on file with the Trust or who, to the Trust's knowledge, have furnished an incorrect number. When establishing an account, an investor must certify under penalty of perjury that such number is correct and that such investor is not otherwise subject to backup withholding. The Code provides that every person required to file a tax return must include for information purposes on such return the amount of exempt-interest dividends received from all sources (including the Funds) during the taxable year. Environmental Tax The Code previously imposed a deductible tax (the "Environmental Tax") on a corporation's modified alternative minimum taxable income (computed without regard to the alternative tax net operating loss deduction and the deduction for the Environmental Tax) at a rate of $12 per $10,000 (0.12%) of alternative minimum taxable income in excess of $2,000,000. The Environmental Tax has expired for tax years beginning after December 31, 1995, but may be reinstated in the future. The Environmental Tax was imposed even if the corporation was not required to pay an alternative minimum tax because the corporation's regular income tax liability exceeded its minimum tax liability. The Code provides, however, that RICs, such as the Funds, would not be subject to the Environmental Tax. However, exempt-interest dividends paid by the Funds that create alternative minimum taxable income for corporate shareholders (as described above) could subject corporate shareholders of such Funds to the Environmental Tax. Tax Treatment of Financial Futures Contracts and Options Thereon Each Fund may purchase or sell municipal bond index futures contracts and interest rate futures contracts on U.S. Government securities ("financial futures contracts"). Each Fund also may purchase and write call and put options on such financial futures contracts. In general, unless an election is available to a Fund or an exception applies, such options and financial futures contracts that are "Section 1256 contracts" will be "marked-to-market" for Federal income tax purposes at the end of each taxable year, i.e., each such option or financial futures contract will be treated as sold for its fair market value on the last day of the taxable year, and any gain or loss attributable to such Section 1256 contracts will be 60% long-term and 40% short-term capital gain or loss. Application of these rules to Section 1256 contracts held by a Fund may alter the timing and character of distributions to shareholders. The mark-to-market rules outlined above, however, will not apply to certain transactions entered into by the Fund solely to reduce the risk of changes in price or interest rates with respect to its investments. Code Section 1092, which applies to certain "straddles", may affect the taxation of a Fund's sales of securities and transactions in financial futures contracts and related options. Under Section 1092, a Fund may be required to postpone recognition for tax purposes of losses incurred in certain sales of securities and certain closing transactions in financial futures contracts or the related options. One of the requirements for qualification as a RIC is that less than 30% of a Fund's gross income be derived from gains from the sale or other disposition of securities held for less than three months. Accordingly, the Funds 34 may be restricted in effecting closing transactions within three months after entering into an option or financial futures contract. ------------------------ The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury regulations presently in effect. For the complete provisions, reference should be made to the pertinent Code sections and the Treasury regulations promulgated thereunder. The Code and the Treasury regulations are subject to change by legislative, judicial or administrative action either prospectively or retroactively. Shareholders are urged to consult their tax advisors regarding specific questions as to Federal, foreign, state or local taxes. State Arizona. Exempt-interest dividends from the Arizona Fund will not be subject to Arizona income tax for shareholders who are Arizona residents to the extent that the dividends are attributable to interest earned on Arizona State Municipal Bonds. To the extent that the Arizona Fund's distributions are derived from interest on its taxable investments or from an excess of net short-term capital gains over net long-term capital losses, such distributions are considered ordinary income for Arizona income tax purposes. Such distributions are not eligible for the dividends received deduction for corporations. Distributions, if any, of net long-term capital gains from the sale of securities or from certain transactions in futures or options are taxable as ordinary income for Arizona purposes. Inasmuch and for so long as the Arizona Fund is registered as a diversified management company under the 1940 Act, the Arizona Fund will not be subject to Arizona corporate income taxes, except to the extent of its "unrelated business income", as defined in Section 512 of the Code, if any, which would be taxed to the Fund (but not its shareholders) at the Arizona corporate income tax rate (currently 9.0%) or $50, whichever is greater. California. Exempt-interest dividends from the California Fund will not be subject to California personal income taxes for California resident individuals to the extent attributable to interest from California State Municipal Bonds, and such exempt-interest dividends will also be excludable from the income base used in calculating the California corporate income tax to the extent attributable to interest from California State Municipal Bonds. However, exempt-interest dividends paid to a corporate shareholder subject to California state corporate franchise tax will be taxable as ordinary income. Distributions of long-term capital gains will be treated as capital gains which are taxed at ordinary income rates for California state income tax purposes. Florida. The Florida Fund has received a ruling from the Florida Department of Revenue that if on the last business day of any calendar year the Florida Fund's assets consist solely of assets exempt from Florida intangible personal property tax, shares of the Florida Fund will be exempt from Florida intangible personal property tax in the following year. The Florida Department of Revenue has the authority to revoke or modify a previously issued ruling; however, if a ruling is revoked or modified, the revocation or modification is prospective only. Thus, if the ruling is not revoked or modified and if 100% of the Florida Fund's assets on the last business day of each calendar year consists of assets exempt from Florida intangible personal property tax, shares of the Florida Fund owned by Florida residents will be exempt from Florida intangible personal property tax. Assets exempt from Florida intangible personal property tax include obligations of the State of Florida and its political subdivisions; obligations of the United States Government or its agencies; and cash. If shares of the Florida Fund are subject to Florida intangible personal property tax because less than 100% of the Florida Fund's assets on the last business day of the previous calendar year consisted of assets exempt from Florida intangible personal property tax, only the portion of the net asset value of the Florida Fund that is attributable to obligations of the U.S. Government will be exempt from taxation. The Florida Fund anticipates that on the last business day of each calendar year the Florida Fund's assets will consist solely of assets exempt from Florida intangible personal property tax. Dividends paid by the Florida Fund to individuals who are Florida residents are not subject to personal income taxation by Florida, because Florida does not impose a personal income tax. Distributions of investment income and capital gains by the Florida Fund will be subject to Florida corporate income tax, state taxes in states 35 other than Florida and local taxes in cities other than those in Florida. Shareholders subject to taxation by states other than Florida may realize a lower after-tax rate of return than Florida shareholders since the dividends distributed by the Florida Fund may not be exempt, to any significant degree, from income taxation by such other states. If the Florida Fund does not have a taxable nexus to Florida, such as through the location within the state of the Trust's or the Florida Fund's activities or those of the Manager, under present Florida law, the Florida Fund is not subject to Florida corporate income taxation. Additionally, if the Florida Fund's assets do not have a taxable situs in Florida as of January 1 of each calendar year, the Florida Fund will not be subject to Florida intangible personal property tax. If the Florida Fund has a taxable nexus to Florida or the Florida Fund's assets have a taxable situs in Florida, the Florida Fund will be subject to Florida taxation. Massachusetts. Under existing Massachusetts law, as long as the Massachusetts Fund qualifies as a separate "regulated investment company" under the Code, (i) the Massachusetts Fund will not be liable for any personal income or any corporate excise tax in the Commonwealth of Massachusetts and (ii) shareholders of the Massachusetts Fund who are subject to Massachusetts personal income taxation will not be required to include in their Massachusetts taxable income (a) that portion of their "exempt-interest dividends" (as defined in Section 852(b)(5) of the Code) from the Massachusetts Fund which the Massachusetts Fund clearly identifies as directly attributable to interest received by the Massachusetts Fund on Massachusetts State Municipal Bonds or (b) that portion of their dividends which is identified as attributable to interest received by the Massachusetts Fund on obligations of the United States or its agencies or possessions that are exempt from state taxation (collectively, "Massachusetts-exempt dividends"). Any capital gains distributed by the Massachusetts Fund to a shareholder otherwise subject to Massachusetts personal income taxation (except for capital gains on certain Massachusetts State Municipal Bonds which are specifically exempt by statute), or gains realized by such a shareholder on a redemption or sale of shares of the Massachusetts Fund, will be subject to Massachusetts personal income taxation. The portion of any deduction (e.g., an interest deduction) otherwise available to a shareholder subject to Massachusetts personal income taxation which relates or is allocable to Massachusetts-exempt dividends will not be deductible for Massachusetts personal income tax purposes. In the case of any corporate shareholder otherwise subject to the Massachusetts corporate excise tax, distributions received from the Massachusetts Fund, and any gain on the sale or other disposition of Massachusetts Fund shares, will be includable in the corporation's Massachusetts gross income and taxed accordingly. Similarly, the value of shares held in the Massachusetts Fund will be taken into account in calculating the property component of the Massachusetts corporate excise tax. Interest on indebtedness incurred or continued to purchase or carry Fund shares will not be deductible in calculating the income component of the Massachusetts corporate excise tax. Michigan. Shareholders who are subject to the Michigan income tax or single business tax will not be subject to the Michigan income tax or single business tax on exempt-interest dividends from the Michigan Fund to the extent they are attributable to interest from Michigan State Municipal Bonds or on dividends that are attributable to interest from obligations of the United States or its possessions. To the extent the distributions from the Michigan Fund are attributable to sources other than Michigan State Municipal Bonds or obligations of the United States or its possessions, they will not be exempt from Michigan income tax or the single business tax. Distributions that are attributable to long- or short-term capital gains from both Michigan State and non-Michigan State Municipal Bonds will not be exempt from Michigan income tax or the single business tax, while those attributable to long- or short-term capital gains from obligations of the United States or its possessions will be exempt from Michigan income tax and the single business tax. For purposes of Michigan income tax laws, shareholders will have a taxable event upon redemption or sale of their shares of the Michigan Fund to the extent the transaction constitutes a taxable event for Federal income tax purposes. In 1986, the Michigan Department of Treasury issued a Bulletin stating that holders of interests in regulated investment companies who are subject to the Michigan intangibles tax will be exempt from the tax to the extent that the company's investment portfolio consists of items such as Michigan State Municipal Bonds. In addition, 36 shares owned by certain financial institutions or by certain other persons subject to the Michigan single business tax are not subject to the Michigan intangibles tax. The Intangibles Tax is being phased-out, with reductions of twenty-five percent (25%) in 1994 and 1995, fifty percent (50%) in 1996, and seventy-five percent (75%) in 1997, with total repeal effective January 1, 1988. New Jersey. To the extent distributions from the New Jersey Fund are derived from interest or gains on New Jersey State Municipal Bonds, such distributions will be exempt from New Jersey personal income tax. In order to pass through tax-exempt interest for New Jersey personal income tax purposes, the New Jersey Fund, among other requirements, must have not less than 80% of the aggregate principal amount of its investments invested in New Jersey State Municipal Bonds at the close of each quarter of the tax year (the "80% Test"). For purposes of calculating whether the 80% Test is satisfied, financial options, futures, forward contracts and similar financial instruments relating to interest-bearing obligations are excluded from the principal amount of the New Jersey Fund's investments. The New Jersey Fund intends to comply with this requirement so as to enable it to pass through tax-exempt interest. In the event the New Jersey Fund does not so comply, distributions by the New Jersey Fund will be taxable to shareholders for New Jersey personal income tax purposes. Interest on indebtedness incurred or continued to purchase or carry New Jersey Fund shares is not deductible either for Federal income tax purposes or New Jersey personal income tax purposes to the extent attributable to exempt- interest dividends. Exempt-interest dividends and gains paid to a corporate shareholder will be subject to the New Jersey corporation business (franchise) tax or, if applicable, the New Jersey corporation income tax. Under present New Jersey law, a RIC, such as the New Jersey Fund, pays a flat tax of $250 per year. The New Jersey Fund might be subject to the New Jersey corporation business (franchise) tax for any taxable year in which it does not qualify as a RIC. New York. The portion of the exempt-interest dividends equal to the proportion which the New York Fund's interest on New York State Municipal Bonds bears to all of the New York Fund's tax-exempt interest (whether or not distributed) will be exempt from New York State and New York City personal income taxes. To the extent the New York Fund's distributions are derived from interest on taxable investments, from gain from the sale of investments or from tax-exempt interest that is not attributable to New York State Municipal Bonds, they will constitute taxable income for New York State and New York City personal income tax purposes. Distributions from investment income and capital gains of the New York Fund, including exempt-interest dividends paid to a corporate shareholder, will be subject to New York State corporate franchise and New York City corporation income tax. Pennsylvania. To the extent distributions from the Pennsylvania Fund are derived from interest received by the Pennsylvania Fund from Pennsylvania State Municipal Bonds, such distributions will be exempt from the Pennsylvania personal income tax. However, distributions attributable to capital gains derived by the Pennsylvania Fund as well as distributions derived from income from investments other than Pennsylvania State Municipal Bonds will be taxable for purposes of the Pennsylvania personal income tax. In the case of residents of the City of Philadelphia, distributions which are derived from interest received by the Pennsylvania Fund from Pennsylvania State Municipal Bonds or which are designated as capital gain dividends for Federal income tax purposes will be exempt from the Philadelphia School District investment income tax. Shares of the Pennsylvania Fund will be exempt from Pennsylvania county personal property taxes to the extent the Pennsylvania Fund's portfolio securities consist of Pennsylvania State Municipal Bonds on the annual assessment date. At present it is unclear whether an investment in the Pennsylvania Fund by a corporate shareholder will qualify as an exempt asset for purposes of apportionment of the Pennsylvania capital stock/foreign franchise tax. To the extent exempt-interest dividends are excluded from taxable income for Federal corporate income tax purposes (determined before net operating loss carryovers and special deductions), they will not be subject to the Pennsylvania corporate net income tax. 37 The above discussion is a general and abbreviated summary of the relevant state and local tax provisions presently in effect. Shareholders are urged to consult their tax advisors regarding specific questions as to state or local taxes. PERFORMANCE DATA From time to time each Fund may include its average annual total return and other total return data, as well as yield and tax-equivalent yield, in advertisements or information furnished to present or prospective shareholders. From time to time, the Fund may include the Fund's Morningstar risk-adjusted ratings in advertisements or supplemental sales literature. Total return, yield and tax-equivalent yield figures are based on a Fund's historical performance and are not intended to indicate future performance. Average annual total return, yield and tax-equivalent yield are determined separately for Class A, Class B, Class C and Class D shares of each Fund in accordance with formulas specified by the Commission. Average annual total return quotations for the specified periods are computed by finding the average annual compounded rates of return (based on net investment income and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return is computed assuming all dividends and distributions are reinvested and taking into account all applicable recurring and nonrecurring expenses, including the maximum sales charge in the case of Class A and Class D shares of a Fund and the CDSC that would be applicable to a complete redemption of the investment at the end of the specified period in the case of Class B and Class C shares of that Fund. The Funds also may quote annual, average annual and annualized total return and aggregate total return performance data, both as a percentage and as a dollar amount based on a hypothetical $1,000 investment, for various periods other than those noted below. Such data will be computed as described above, except that (1) as required by the periods of the quotations, actual annual, annualized or aggregate data, rather than average annual data, may be quoted and (2) the maximum applicable sales charges will not be included with respect to annual or annualized rates of return calculations. Aside from the impact on the performance data calculations of including or excluding the maximum applicable sales charges, actual annual or annualized total return data generally will be lower than average annual total return data since the average rates of return reflect compounding of return; aggregate total return data generally will be higher than average annual total return data since the aggregate rates of return reflect compounding over a longer period of time. 38 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.
Arizona Fund - ------------------------------------------------------------------------------------------------------------------------------------ Class A Shares Class B Shares Class C Shares ------------------------------------ ------------------------------------ ----------------- Redeemable Value Redeemable Value of a of a Expressed as hypothetical Expressed as hypothetical Expressed as a percentage $1,000 a percentage $1,000 a percentage based on a investment based on a investment based on a hypothetical at the end of hypothetical at the end of hypothetical Period $1,000 investment the period $1,000 investment the period $1,000 investment ------ ----------------- ---------------- ----------------- ---------------- ----------------- Average Annual Total Return (including maximum applicable sales charge) One year ended July 31, 1996....... 2.12% $ 1,021.20 1.89% $ 1,018.90 1.79% Inception (November 26, 1993) to July 31, 1996.................... 3.95% $ 1,109.30 3.97% $ 1,109.90 Inception (October 21, 1994) to July 31, 1996.................... 4.88% Annual Total Return (excluding maximum applicable sales charge) Year ended July 31, 1996........... 3.16% $ 1,031.60 2.88% $ 1,028.80 2.78% Year ended July 31, 1995........... 6.47% $ 1,064.70 5.99% $ 1,059.90 Inception (October 21, 1994) to July 31, 1995.................... 5.90% Inception (November 26, 1993) to July 31, 1994.................... 2.02% $ 1,020.20 1.78% $ 1,017.80 Aggregate Total Return (including maximum applicable sales charge) Inception (November 26, 1993) to July 31, 1996.................... 10.93% $ 1,109.30 10.99% $ 1,109.90 Inception (October 21, 1994) to July 31, 1996.................... 8.85% Yield 30 days ended July 31, 1996........ 3.63% 3.31% 3.51% Tax Equivalent Yield* 30 days ended July 31, 1996........ 5.04% 4.60% 4.88% Arizona Fund - -------------------------------------------------------------------------------------------- Class C Shares Class D Shares ---------------- ------------------------------------ Redeemable Value Redeemable Value of a of a hypothetical Expressed as hypothetical $1,000 a percentage $1,000 investment based on a investment at the end of hypothetical at the end of Period the period $1,000 investment the period ------ ---------------- ----------------- ---------------- Average Annual Total Return (including maximum applicable sales charge) One year ended July 31, 1996....... $ 1,017.90 2.02% $ 1,020.20 Inception (November 26, 1993) to July 31, 1996.................... Inception (October 21, 1994) to July 31, 1996.................... $ 1,088.50 4.69% $ 1,084.90 Annual Total Return (excluding maximum applicable sales charge) Year ended July 31, 1996........... $ 1,027.80 3.05% $ 1,030.50 Year ended July 31, 1995........... Inception (October 21, 1994) to July 31, 1995.................... $ 1,059.00 6.34% $ 1,063.40 Inception (November 26, 1993) to July 31, 1994.................... Aggregate Total Return (including maximum applicable sales charge) Inception (November 26, 1993) to July 31, 1996.................... Inception (October 21, 1994) to July 31, 1996.................... $ 1,088.50 8.49% $ 1,084.90 Yield 30 days ended July 31, 1996........ 3.53% Tax Equivalent Yield* 30 days ended July 31, 1996........ 4.90%
- ------------ * Based on a Federal income tax rate of 28%. 39
California Fund - ------------------------------------------------------------------------------------------------------------------------------------ Class A Shares Class B Shares Class C Shares ------------------------------------ ------------------------------------ ----------------- Redeemable Value Redeemable Value of a of a Expressed as hypothetical Expressed as hypothetical Expressed as a percentage $1,000 a percentage $1,000 a percentage based on a investment based on a investment based on a hypothetical at the end of hypothetical at the end of hypothetical Period $1,000 investment the period $1,000 investment the period $1,000 investment ------ ----------------- ---------------- ----------------- ---------------- ----------------- Average Annual Total Return (including maximum applicable sales charge) One year ended July 31, 1996....... 3.52% $ 1,035.20 3.08% $ 1,030.80 3.35% Inception (November 26, 1993) to July 31, 1996.................... 3.85% $ 1,106.60 3.84% $ 1,106.10 Inception (October 21, 1994) to July 31, 1996.................... 5.61% Annual Total Return (excluding maximum applicable sales charge) Year ended July 31, 1996........... 4.56% $ 1,045.60 4.08% $ 1,040.80 4.35% Year ended July 31, 1995........... 5.60% $ 1,056.00 5.23% $ 1,052.30 Inception (October 21, 1994) to July 31, 1995.................... 5.60% Inception (November 26, 1993) to July 31, 1994.................... 1.23% $ 1,012.30 0.99% $ 1,009.90 Aggregate Total Return (including maximum applicable sales charge) Inception (November 26, 1993) to July 31, 1996.................... 10.66% $ 1,106.60 10.61% $ 1,106.10 Inception (October 21, 1994) to July 31, 1996.................... 10.20% Yield 30 days ended July 31, 1996........ 3.26% 2.94% 3.21% Tax Equivalent Yield* 30 days ended July 31, 1996........ 4.53% 4.08% 4.46% California Fund - -------------------------------------------------------------------------------------------- Class C Shares Class D Shares ---------------- ------------------------------------ Redeemable Value Redeemable Value of a of a hypothetical Expressed as hypothetical $1,000 a percentage $1,000 investment based on a investment at the end of hypothetical at the end of Period the period $1,000 investment the period ------ ---------------- ----------------- ---------------- Average Annual Total Return (including maximum applicable sales charge) One year ended July 31, 1996....... $ 1,033.50 3.41% $ 1,034.10 Inception (November 26, 1993) to July 31, 1996.................... Inception (October 21, 1994) to July 31, 1996.................... $ 1,102.00 5.22% $ 1,094.70 Annual Total Return (excluding maximum applicable sales charge) Year ended July 31, 1996........... $ 1,043.50 4.46% $ 1,044.60 Year ended July 31, 1995........... Inception (October 21, 1994) to July 31, 1995.................... $ 1,056.00 5.85% $ 1,058.50 Inception (November 26, 1993) to July 31, 1994.................... Aggregate Total Return (including maximum applicable sales charge) Inception (November 26, 1993) to July 31, 1996.................... Inception (October 21, 1994) to July 31, 1996.................... $ 1,102.00 9.47% $ 1,094.70 Yield 30 days ended July 31, 1996........ 3.16% Tax Equivalent Yield* 30 days ended July 31, 1996........ 4.39%
- ------------ * Based on a Federal income tax rate of 28%. 40
Florida Fund - ------------------------------------------------------------------------------------------------------------------------------------ Class A Shares Class B Shares Class C Shares ------------------------------------ ------------------------------------ ----------------- Redeemable Value Redeemable Value of a of a Expressed as hypothetical Expressed as hypothetical Expressed as a percentage $1,000 a percentage $1,000 a percentage based on a investment based on a investment based on a hypothetical at the end of hypothetical at the end of hypothetical Period $1,000 investment the period $1,000 investment the period $1,000 investment - ----------------------------------- ----------------- ---------------- ----------------- ---------------- ----------------- Average Annual Total Return (including maximum applicable sales charge) One year ended July 31, 1996....... 2.42% $ 1,024.20 2.09% $ 1,020.90 1.49% Inception (November 26, 1993) to July 31, 1996.................... 3.56% $ 1,098.40 3.58% $ 1,099.00 Inception (October 21, 1994) to July 31, 1996.................... 4.57% Annual Total Return (excluding maximum applicable sales charge) Year ended July 31, 1996........... 3.45% $ 1,034.50 3.08% $ 1,030.80 2.48% Year ended July 31, 1995........... 6.05% $ 1,060.50 5.57% $ 1,055.70 Inception (October 21, 1994) to July 31, 1995.................... 5.65% Inception (November 26, 1993) to July 31, 1994.................... 1.12% $ 1,011.20 0.99% $ 1,009.90 Aggregate Total Return (including maximum applicable sales charge) Inception (November 26, 1993) to July 31, 1996.................... 9.84% $ 1,098.40 9.90% $ 1,099.00 Inception (October 21, 1994) to July 31, 1996.................... 8.27% Yield 30 days ended July 31, 1996........ 3.61% 3.29% 3.47% Tax Equivalent Yield* 30 days ended July 31, 1996........ 5.01% 4.57% 4.82%
Florida Fund - ----------------------------------- Class C Shares Class D Shares ---------------- ------------------------------------ Redeemable Value Redeemable Value of a of a hypothetical Expressed as hypothetical $1,000 a percentage $1,000 investment based on a investment at the end of hypothetical at the end of Period the period $1,000 investment the period - ----------------------------------- ---------------- ----------------- ---------------- Average Annual Total Return (including maximum applicable sales charge) One year ended July 31, 1996....... $ 1,014.90 2.31% $ 1,023.10 Inception (November 26, 1993) to July 31, 1996.................... Inception (October 21, 1994) to July 31, 1996.................... $ 1,082.70 4.71% $ 1,085.30 Annual Total Return (excluding maximum applicable sales charge) Year ended July 31, 1996........... $ 1,024.80 3.35% $ 1,033.50 Year ended July 31, 1995........... Inception (October 21, 1994) to July 31, 1995.................... $ 1,056.50 6.07% $ 1,060.70 Inception (November 26, 1993) to July 31, 1994.................... Aggregate Total Return (including maximum applicable sales charge) Inception (November 26, 1993) to July 31, 1996.................... Inception (October 21, 1994) to July 31, 1996.................... $ 1,082.70 8.53% $ 1,085.30 Yield 30 days ended July 31, 1996........ 3.51% Tax Equivalent Yield* 30 days ended July 31, 1996........ 4.88%
- ------------ * Based on a Federal income tax rate of 28%. 41
Massachusetts Fund - ------------------------------------------------------------------------------------------------------------------------------------ Class A Shares Class B Shares Class C Shares ------------------------------------ ------------------------------------ ----------------- Redeemable Value Redeemable Value of a of a Expressed as hypothetical Expressed as hypothetical Expressed as a percentage $1,000 a percentage $1,000 a percentage based on a investment based on a investment based on a hypothetical at the end of hypothetical at the end of hypothetical Period $1,000 investment the period $1,000 investment the period $1,000 investment - ----------------------------------- ----------------- ---------------- ----------------- ---------------- ----------------- Average Annual Total Return (including maximum applicable sales charge) One year ended July 31, 1996....... 3.04% $ 1,030.40 2.70% $ 1,027.00 2.81% Inception (November 26, 1993) to July 31, 1996.................... 3.67% $ 1,101.40 3.69% $ 1,101.90 Inception (October 21, 1994) to July 31, 1996.................... 4.97% Annual Total Return (excluding maximum applicable sales charge) Year ended July 31, 1996........... 4.08% $ 1,040.80 3.70% $ 1,037.00 3.81% Year ended July 31, 1995........... 4.79% $ 1,047.90 4.41% $ 1,044.10 Inception (October 21, 1994) to July 31, 1995.................... 5.00% Inception (November 26, 1993) to July 31, 1994.................... 2.01% $ 1,020.10 1.77% $ 1,017.70 Aggregate Total Return (including maximum applicable sales charge) Inception (November 26, 1993) to July 31, 1996.................... 10.14% $ 1,101.40 10.19% $ 1,101.90 Inception (October 21, 1994) to July 31, 1996.................... 9.00% Yield 30 days ended July 31, 1996........ 3.63% 3.31% 3.51% Tax Equivalent Yield* 30 days ended July 31, 1996........ 5.04% 4.60% 4.88%
Massachusetts Fund - ----------------------------------- Class C Shares Class D Shares ---------------- ------------------------------------ Redeemable Value Redeemable Value of a of a hypothetical Expressed as hypothetical $1,000 a percentage $1,000 investment based on a investment at the end of hypothetical at the end of Period the period $1,000 investment the period - ----------------------------------- ---------------- ----------------- ---------------- Average Annual Total Return (including maximum applicable sales charge) One year ended July 31, 1996....... $ 1,028.10 2.93% $ 1,029.30 Inception (November 26, 1993) to July 31, 1996.................... Inception (October 21, 1994) to July 31, 1996.................... $ 1,090.00 4.52% $ 1,081.70 Annual Total Return (excluding maximum applicable sales charge) Year ended July 31, 1996........... $ 1,038.10 3.97% $ 1,039.70 Year ended July 31, 1995........... Inception (October 21, 1994) to July 31, 1995.................... $ 1,050.00 5.09% $ 1,050.90 Inception (November 26, 1993) to July 31, 1994.................... Aggregate Total Return (including maximum applicable sales charge) Inception (November 26, 1993) to July 31, 1996.................... Inception (October 21, 1994) to July 31, 1996.................... $ 1,090.00 8.17% $ 1,081.70 Yield 30 days ended July 31, 1996........ 3.53% Tax Equivalent Yield* 30 days ended July 31, 1996........ 4.90%
- ------------ * Based on a Federal income tax rate of 28%. 42
Michigan Fund - ------------------------------------------------------------------------------------------------------------------------------------ Class A Shares Class B Shares Class C Shares ------------------------------------ ------------------------------------ ----------------- Redeemable Value Redeemable Value of a of a Expressed as hypothetical Expressed as hypothetical Expressed as a percentage $1,000 a percentage $1,000 a percentage based on a investment based on a investment based on a hypothetical at the end of hypothetical at the end of hypothetical Period $1,000 investment the period $1,000 investment the period $1,000 investment - ----------------------------------- ----------------- ---------------- ----------------- ---------------- ----------------- Average Annual Total Return (including maximum applicable sales charge) One year ended July 31, 1996....... 2.67% $ 1,026.70 2.33% $ 1,023.30 2.20% Inception (November 26, 1993) to July 31, 1996.................... 3.53% $ 1,097.50 3.55% $ 1,098.00 Inception (October 21, 1994) to July 31, 1996.................... 4.84% Annual Total Return (excluding maximum applicable sales charge) Year ended July 31, 1996........... 3.71% $ 1,037.10 3.32% $ 1,033.20 3.20% Year ended July 31, 1995........... 5.16% $ 1,051.60 4.78% $ 1,047.80 Inception (October 21, 1994) to July 31, 1995.................... 5.40% Inception (November 26, 1993) to July 31, 1994.................... 1.66% $ 1,016.60 1.42% $ 1,014.20 Aggregate Total Return (including maximum applicable sales charge) Inception (November 26, 1993) to July 31, 1996.................... 9.75% $ 1,097.50 9.80% $ 1,098.00 Inception (October 21, 1994) to July 31, 1996.................... 8.77% Yield 30 days ended July 31, 1996........ 3.68% 3.35% 3.35% Tax Equivalent Yield* 30 days ended July 31, 1996........ 5.11% 4.65% 4.65%
Michigan Fund - ----------------------------------- Class C Shares Class D Shares ---------------- ------------------------------------ Redeemable Value Redeemable Value of a of a hypothetical Expressed as hypothetical $1,000 a percentage $1,000 investment based on a investment at the end of hypothetical at the end of Period the period $1,000 investment the period - ----------------------------------- ---------------- ----------------- ---------------- Average Annual Total Return (including maximum applicable sales charge) One year ended July 31, 1996....... $ 1,022.00 2.67% $ 1,026.70 Inception (November 26, 1993) to July 31, 1996.................... Inception (October 21, 1994) to July 31, 1996.................... $ 1,087.70 4.72% $ 1,085.40 Annual Total Return (excluding maximum applicable sales charge) Year ended July 31, 1996........... $ 1,032.00 3.71% $ 1,037.10 Year ended July 31, 1995........... Inception (October 21, 1994) to July 31, 1995.................... $ 1,054.00 5.72% $ 1,057.20 Inception (November 26, 1993) to July 31, 1994.................... Aggregate Total Return (including maximum applicable sales charge) Inception (November 26, 1993) to July 31, 1996.................... Inception (October 21, 1994) to July 31, 1996.................... $ 1,087.70 8.54% $ 1,085.40 Yield 30 days ended July 31, 1996........ 3.58% Tax Equivalent Yield 30 days ended July 31, 1996........ 4.97%
- ------------ * Based on a Federal income tax rate of 28%. 43
New Jersey Fund - ------------------------------------------------------------------------------------------------------------------------------------ Class A Shares Class B Shares Class C Shares ------------------------------------ ------------------------------------ ----------------- Redeemable Value Redeemable Value of a of a Expressed as hypothetical Expressed as hypothetical Expressed as a percentage $1,000 a percentage $1,000 a percentage based on a investment based on a investment based on a hypothetical at the end of hypothetical at the end of hypothetical Period $1,000 investment the period $1,000 investment the period $1,000 investment - ----------------------------------- ----------------- ---------------- ----------------- ---------------- ----------------- Average Annual Total Return (including maximum applicable sales charge) One year ended July 31, 1996....... 2.65% $ 1,026.50 2.21% $ 1,022.10 2.25% Inception (November 26, 1993) to July 31, 1996.................... 4.02% $ 1,111.50 4.04% $ 1,112.10 Inception (October 21, 1994) to July 31, 1996.................... (0.50)% Annual Total Return (excluding maximum applicable sales charge) Year ended July 31, 1996........... 3.68% $ 1,036.80 3.21% $ 1,032.10 3.24% Year ended July 31, 1995........... 6.45% $ 1,064.50 6.07% $ 1,060.70 Inception (October 21, 1994) to July 31, 1995.................... (4.01)% Inception (November 26, 1993) to July 31, 1994.................... 1.73% $ 1,017.30 1.59% $ 1,015.90 Aggregate Total Return (including maximum applicable sales charge) Inception (November 26, 1993) to July 31, 1996.................... 11.15% $ 1,111.50 11.21% $ 1,112.10 Inception (October 21, 1994) to July 31, 1996.................... (0.89)% Yield 30 days ended July 31, 1996........ 3.54% 3.23% 3.43% Tax Equivalent Yield* 30 days ended July 31, 1996........ 4.92% 4.49% 4.76%
New Jersey Fund - ----------------------------------- Class C Shares Class D Shares ---------------- ------------------------------------ Redeemable Value Redeemable Value of a of a hypothetical Expressed as hypothetical $1,000 a percentage $1,000 investment based on a investment at the end of hypothetical at the end of Period the period $1,000 investment the period - ----------------------------------- ---------------- ----------------- ---------------- Average Annual Total Return (including maximum applicable sales charge) One year ended July 31, 1996....... $ 1,022.50 2.44% $ 1,024.40 Inception (November 26, 1993) to July 31, 1996.................... Inception (October 21, 1994) to July 31, 1996.................... $ 991.10 5.03% $ 1,091.10 Annual Total Return (excluding maximum applicable sales charge) Year ended July 31, 1996........... $ 1,032.40 3.48% $ 1,034.80 Year ended July 31, 1995........... Inception (October 21, 1994) to July 31, 1995.................... $ 959.90 6.51% $ 1,065.10 Inception (November 26, 1993) to July 31, 1994.................... Aggregate Total Return (including maximum applicable sales charge) Inception (November 26, 1993) to July 31, 1996.................... Inception (October 21, 1994) to July 31, 1996.................... $ 991.10 9.11% $ 1,091.10 Yield 30 days ended July 31, 1996........ 3.45% Tax Equivalent Yield* 30 days ended July 31, 1996........ 4.79%
- ------------ * Based on a Federal income tax rate of 28%. 44
New York Fund - ------------------------------------------------------------------------------------------------------------------------------------ Class A Shares Class B Shares Class C Shares ------------------------------------ ------------------------------------ ----------------- Redeemable Value Redeemable Value of a of a Expressed as hypothetical Expressed as hypothetical Expressed as a percentage $1,000 a percentage $1,000 a percentage based on a investment based on a investment based on a hypothetical at the end of hypothetical at the end of hypothetical Period $1,000 investment the period $1,000 investment the period $1,000 investment - ----------------------------------- ----------------- ---------------- ----------------- ---------------- ----------------- Average Annual Total Return (including maximum applicable sales charge) One year ended July 31, 1996....... 3.41% $ 1,034.10 3.08% $ 1,030.80 3.28% Inception (November 26, 1993) to July 31, 1996.................... 4.12% $ 1,114.20 4.14% $ 1,114.70 Inception (October 21, 1994) to July 31, 1996.................... 5.78% Annual Total Return (excluding maximum applicable sales charge) Year ended July 31, 1996........... 4.46% $ 1,044.60 4.08% $ 1,040.80 4.28% Year ended July 31, 1995........... 6.03% $ 1,060.30 5.66% $ 1,056.60 Inception (October 21, 1994) to July 31, 1995.................... 5.97% Inception (November 26, 1993) to July 31, 1994.................... 1.61% $ 1,016.10 1.37% $ 1,013.70 Aggregate Total Return (including maximum applicable sales charge) Inception (November 26, 1993) to July 31, 1996.................... 11.42% $ 1,114.20 11.47% $ 1,114.70 Inception (October 21, 1994) to July 31, 1996.................... 10.50% Yield 30 days ended July 31, 1996........ 3.92% 3.61% 3.80% Tax Equivalent Yield* 30 days ended July 31, 1996........ 5.44% 5.01% 5.28%
New York Fund - ----------------------------------- Class C Shares Class D Shares ---------------- ------------------------------------ Redeemable Value Redeemable Value of a of a hypothetical Expressed as hypothetical $1,000 a percentage $1,000 investment based on a investment at the end of hypothetical at the end of Period the period $1,000 investment the period - ----------------------------------- ---------------- ----------------- ---------------- Average Annual Total Return (including maximum applicable sales charge) One year ended July 31, 1996....... $ 1,032.80 3.31% $ 1,033.10 Inception (November 26, 1993) to July 31, 1996.................... Inception (October 21, 1994) to July 31, 1996.................... $ 1,105.00 5.45% $ 1,098.90 Annual Total Return (excluding maximum applicable sales charge) Year ended July 31, 1996........... $ 1,042.80 4.35% $ 1,043.50 Year ended July 31, 1995........... Inception (October 21, 1994) to July 31, 1995.................... $ 1,059.70 6.37% $ 1,063.70 Inception (November 26, 1993) to July 31, 1994.................... Aggregate Total Return (including maximum applicable sales charge) Inception (November 26, 1993) to July 31, 1996.................... Inception (October 21, 1994) to July 31, 1996.................... $ 1,105.00 9.89% $ 1,098.90 Yield 30 days ended July 31, 1996........ 3.83% Tax Equivalent Yield* 30 days ended July 31, 1996........ 5.32%
- ------------ * Based on a Federal income tax rate of 28%. 45
Pennsylvania Fund - ------------------------------------------------------------------------------------------------------------------------------------ Class A Shares Class B Shares Class C Shares ------------------------------------ ------------------------------------ ----------------- Redeemable Value Redeemable Value of a of a Expressed as hypothetical Expressed as hypothetical Expressed as a percentage $1,000 a percentage $1,000 a percentage based on a investment based on a investment based on a hypothetical at the end of hypothetical at the end of hypothetical Period $1,000 investment the period $1,000 investment the period $1,000 investment - ----------------------------------- ----------------- ---------------- ----------------- ---------------- ----------------- Average Annual Total Return (including maximum applicable sales charge) One year ended July 31, 1996....... 3.14% $ 1,031.40 2.80% $ 1,028.00 3.28% Inception (November 26, 1993) to July 31, 1996.................... 4.05% $ 1,112.30 4.07% $ 1,112.90 Inception (October 21, 1994) to July 31, 1996.................... 5.62% Annual Total Return (excluding maximum applicable sales charge) Year ended July 31, 1996........... 4.18% $ 1,041.80 3.80% $ 1,038.00 4.28% Year ended July 31, 1995........... 5.89% $ 1,058.90 5.51% $ 1,055.10 Inception (October 21, 1994) to July 31, 1995.................... 5.68% Inception (November 26, 1993) to July 31, 1994.................... 1.85% $ 1,018.50 1.61% $ 1,016.10 Aggregate Total Return (including maximum applicable sales charge) Inception (November 26, 1993) to July 31, 1996.................... 11.23% $ 1,112.30 11.29% $ 1,112.90 Inception (October 21, 1994) to July 31, 1996.................... 10.20% Yield 30 days ended July 31, 1996........ 3.54% 3.22% 3.38% Tax Equivalent Yield* 30 days ended July 31, 1996........ 4.92% 4.47% 4.69%
Pennsylvania Fund - ----------------------------------- Class C Shares Class D Shares ---------------- ------------------------------------ Redeemable Value Redeemable Value of a of a hypothetical Expressed as hypothetical $1,000 a percentage $1,000 investment based on a investment at the end of hypothetical at the end of Period the period $1,000 investment the period - ----------------------------------- ---------------- ----------------- ---------------- Average Annual Total Return (including maximum applicable sales charge) One year ended July 31, 1996....... $ 1,032.80 3.03% $ 1,030.30 Inception (November 26, 1993) to July 31, 1996.................... Inception (October 21, 1994) to July 31, 1996.................... $ 1,102.00 5.13% $ 1,093.10 Annual Total Return (excluding maximum applicable sales charge) Year ended July 31, 1996........... $ 1,042.80 4.07% $ 1,040.70 Year ended July 31, 1995........... Inception (October 21, 1994) to July 31, 1995.................... $ 1,056.80 6.10% $ 1,061.00 Inception (November 26, 1993) to July 31, 1994.................... Aggregate Total Return (including maximum applicable sales charge) Inception (November 26, 1993) to July 31, 1996.................... Inception (October 21, 1994) to July 31, 1996.................... $ 1,102.00 9.31% $ 1,093.10 Yield 30 days ended July 31, 1996........ 3.44% Tax Equivalent Yield* 30 days ended July 31, 1996........ 4.78%
- ------------ * Based on a Federal income tax rate of 28%. 46 In order to reflect the reduced sales charges in the case of Class A or Class D shares or the waiver of the CDSC in the case of Class B or Class C shares applicable to certain investors, as described under "Purchase of Shares" and "Redemption of Shares", respectively, the total return data quoted by a Fund in advertisements directed to such investors may take into account the reduced, and not the maximum, sales charge or may take into account the CDSC and therefore may reflect greater total return since, due to the reduced sales charge or the waiver of sales charges, a lower amount of expenses is deducted. GENERAL INFORMATION DESCRIPTION OF SHARES The Declaration of Trust, dated February 14, 1991, of the Trust, as amended (the "Declaration"), provides that the Trust shall be comprised of separate Series, each of which will consist of a separate portfolio which will issue separate shares. The Trust is presently comprised of the Arizona Fund, the California Fund, the Florida Fund, the Massachusetts Fund, the Michigan Fund, the New Jersey Fund, the New York Fund and the Pennsylvania Fund. The Trustees are authorized to create an unlimited number of Series and, with respect to each Series, to issue an unlimited number of full and fractional shares of beneficial interest, par value $.10 per share, of different classes and to divide or combine the shares into a greater or lesser number of shares without thereby changing the proportionate beneficial interests in the Series. Shareholder approval is not necessary for the authorization of additional Series or classes of a Series of the Trust. At the date of this Statement of Additional Information, the shares of each Fund are divided into Class A, Class B, Class C and Class D shares. Class A, Class B, Class C and Class D shares represent interests in the same assets of the relevant Fund and have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class B, Class C and Class D shares bear certain expenses related to the account maintenance and/or distribution expenditures. The Board of Trustees may classify and reclassify the shares of any Series into additional classes at a future date. All shares of the Trust have equal voting rights, except that only shares of the respective Series are entitled to vote on matters concerning only that Series and, as noted above, Class B, Class C and Class D shares have exclusive voting rights with respect to matters relating to the account maintenance andor distribution expenses being borne solely by such class. Each issued and outstanding share is entitled to one vote and to participate equally in dividends and distributions declared by a Series and in the net assets of such Series upon liquidation or dissolution remaining after satisfaction of outstanding liabilities, except that, as noted above, expenses related to the account maintenance andor distribution of the Class B, Class C and Class D shares are borne solely by such class. There normally will be no meeting of shareholders for the purpose of electing Trustees unless and until such time as less than a majority of the Trustees holding office have been elected by shareholders, at which time the Trustees then in office will call a shareholders' meeting for the election of Trustees. Shareholders, in accordance with the terms of the Declaration, may cause a meeting of shareholders to be held for the purpose of voting on the removal of Trustees. Also, the Trust will be required to call a special meeting of shareholders in accordance with the requirements of the 1940 Act to seek approval of new management and advisory arrangements, of a material increase in distribution fees or of a change in the fundamental policies, objectives or restrictions of a Series. The obligations and liabilities of a particular Series are restricted to the assets of that Series and do not extend to the assets of the Trust generally. The shares of each Series, when issued, will be fully paid and non- assessable, have no preference, preemptive, conversion, exchange or similar rights, and will be freely transferable. Holders of shares of any Series are entitled to redeem their shares as set forth elsewhere herein and in the Prospectus. Shares do not have cumulative voting rights and the holders of more than 50% of the shares of the Trust voting for the election of Trustees can elect all of the Trustees if they choose to do so and in such event the holders of the remaining shares would not be able to elect any Trustees. No amendments may be made to the Declaration without the affirmative vote of a majority of the outstanding shares of the Trust. 47 COMPUTATION OF OFFERING PRICE PER SHARE An illustration of the computation of the offering price for Class A, Class B, Class C and Class D shares of each Fund based on the Funds' net assets and number of shares outstanding on July 31, 1996 is set forth below.
Class A Class B Class C Class D ---------- ----------- -------- ---------- ARIZONA FUND Net Assets....................................................... $ 813,180 $ 2,884,780 $135,060 $ 619,008 ========== =========== ======== ========== Number of Shares Outstanding..................................... 80,693 286,287 13,395 61,417 ========== =========== ======== ========== Net Asset Value Per Share (net assets divided by number of shares outstanding)................................................... $ 10.08 $ 10.08 $ 10.08 $ 10.08 Sales Charge (for Class A and Class D shares: 1.00% of offering price; 1.01% of net asset value per share)*.................... .10 ** ** .10 ---------- ----------- -------- ---------- Offering Price................................................... $ 10.18 $ 10.08 $ 10.08 $ 10.18 ========== =========== ======== ========== CALIFORNIA FUND Net Assets....................................................... $3,161,461 $ 9,918,998 $ 55,114 $2,185,238 ========== =========== ======== ========== Number of Shares Outstanding..................................... 314,706 987,501 5,486 217,532 ========== =========== ======== ========== Net Asset Value Per Share (net assets divided by number of shares outstanding)................................................... $ 10.05 $ 10.04 $ 10.05 $ 10.05 Sales Charge (for Class A and Class D shares: 1.00% of offering price; 1.01% of net asset value per share)*.................... .10 ** ** .10 ---------- ----------- -------- ---------- Offering Price................................................... $ 10.15 $ 10.04 $ 10.05 $ 10.15 ========== =========== ======== ========== FLORIDA FUND Net Assets....................................................... $7,874,368 $13,690,359 $ 51,502 $6,405,856 ========== =========== ======== ========== Number of Shares Outstanding..................................... 790,910 1,375,127 5,204 643,764 ========== =========== ======== ========== Net Asset Value Per Share (net assets divided by number of shares outstanding)................................................... $ 9.96 $ 9.96 $ 9.90 $ 9.95 Sales Charge (for Class A and Class D shares: 1.00% of offering price; 1.01% of net asset value per share)*.................... .10 ** ** .10 ---------- ----------- -------- ---------- Offering Price................................................... $ 10.06 $ 9.96 $ 9.90 $ 10.05 ========== =========== ======== ========== MASSACHUSETTS FUND Net Assets....................................................... $1,719,269 $ 4,576,988 $210,323 $ 889,590 ========== =========== ======== ========== Number of Shares Outstanding..................................... 172,634 459,494 21,134 89,337 ========== =========== ======== ========== Net Asset Value Per Share (net assets divided by number of shares outstanding)................................................... $ 9.96 $ 9.96 $ 9.95 $ 9.96 Sales Charge (for Class A and Class D shares: 1.00% of offering price; 1.01% of net asset value per share)*.................... .10 ** ** .10 ---------- ----------- -------- ---------- Offering Price................................................... $ 10.06 $ 9.96 $ 9.95 $ 10.06 ========== =========== ======== ========== MICHIGAN FUND Net Assets....................................................... $1,640,666 $ 1,841,924 $ 1,163 $ 541,318 ========== =========== ======== ========== Number of Shares Outstanding..................................... 164,986 185,219 117 54,464 ========== =========== ======== ========== Net Asset Value Per Share (net assets divided by number of shares outstanding)................................................... $ 9.94 $ 9.94 $ 9.94 $ 9.94 Sales Charge (for Class A and Class D shares: 1.00% of offering price; 1.01% of net asset value per share)*.................... .10 ** ** .10 ---------- ----------- -------- ---------- Offering Price................................................... $ 10.04 $ 9.94 $ 9.94 $ 10.04 ========== =========== ======== ==========
48
Class A Class B Class C Class D ---------- ----------- -------- ---------- NEW JERSEY FUND Net Assets....................................................... $2,662,645 $ 5,152,224 $271,989 $ 540,229 ========== =========== ======== ========== Number of Shares Outstanding..................................... 263,436 509,424 29,696 53,434 ========== =========== ======== ========== Net Asset Value Per Share (net assets divided by number of shares outstanding)................................................... $ 10.11 $ 10.11 $ 9.16 $ 10.11 Sales Charge (for Class A and Class D shares: 1.00% of offering price; 1.01% of net asset value per share)*.................... .10 ** ** .10 ---------- ----------- -------- ---------- Offering Price................................................... $ 10.21 $ 10.11 $ 9.16 $ 10.21 ========== =========== ======== ========== NEW YORK FUND Net Assets....................................................... $3,723,308 $10,070,519 $214,138 $3,912,159 ========== =========== ======== ========== Number of Shares Outstanding..................................... 370,162 1,001,114 21,296 388,837 ========== =========== ======== ========== Net Asset Value Per Share (net assets divided by number of shares outstanding)................................................... $ 10.06 $ 10.06 $ 10.06 $ 10.06 Sales Charge (for Class A and Class D shares: 1.00% of offering price; 1.01% of net asset value per share)*.................... .10 ** ** .10 ---------- ----------- -------- ---------- Offering Price................................................... $ 10.16 $ 10.06 $ 10.06 $ 10.16 ========== =========== ======== ========== PENNSYLVANIA FUND Net Assets....................................................... $ 832,986 $ 6,263,404 $ 1,188 $1,806,923 ========== =========== ======== ========== Number of Shares Outstanding..................................... 82,402 619,654 117 178,650 ========== =========== ======== ========== Net Asset Value Per Share (net assets divided by number of shares outstanding)................................................... $ 10.11 $ 10.11 $ 10.15 $ 10.11 Sales Charge (for Class A and Class D shares: 1.00% of offering price; 1.01% of net asset value per share)*.................... .10 ** ** .10 ---------- ----------- -------- ---------- Offering Price................................................... $ 10.21 $ 10.11 $ 10.15 $ 10.21 ========== =========== ======== ==========
- ------------ * Rounded to the nearest one-hundredth percent; assumes maximum sales charge is applicable. ** Class B and Class C shares are not subject to an initial sales charge but may be subject to a CDSC on redemption of shares within one year of purchase. See "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares" in the Prospectus and "Redemption of Shares--Deferred Sales Charges--Class B and Class C Shares" herein. INDEPENDENT AUDITORS Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400, has been selected as the independent auditors of the Trust. The independent auditors are responsible for auditing the annual financial statements of each Fund. CUSTODIAN The Bank of New York, 90 Washington Street, 12th Floor, New York, New York 10005, acts as the custodian of the Trust's assets. The custodian is responsible for establishing a separate account for each Fund, safeguarding and controlling each Fund's cash and securities, handling the delivery of securities and collecting interest on each Fund's investments. TRANSFER AGENT Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484, acts as the Trust's transfer agent. The Transfer Agent is responsible for the issuance, transfer and redemption of Fund shares and the opening, maintenance and servicing of Fund shareholder accounts. See "Management of the Trust--Transfer Agency Services" in the Prospectus. LEGAL COUNSEL Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is counsel for the Trust. 49 REPORTS TO SHAREHOLDERS The fiscal year of each Fund ends on July 31 of each year. The Trust sends to shareholders of each Fund at least semi-annually reports showing the Fund's portfolio and other information. An annual report, containing financial statements audited by independent auditors, is sent to shareholders each year. After the end of each year shareholders will receive Federal income tax information regarding dividends and capital gains distributions. ADDITIONAL INFORMATION The Prospectus and this Statement of Additional Information do not contain all the information set forth in the Registration Statement and the exhibits relating thereto, which the Trust has filed with the Commission, Washington, D.C., under the Securities Act and the 1940 Act, to which reference is hereby made. The Declaration, a copy of which is on file in the office of the Secretary of the Commonwealth of Massachusetts, provides that the name "Merrill Lynch Multi-State Limited Maturity Municipal Series Trust" refers to the Trustees under the Declaration collectively as Trustees, but not as individuals or personally; and no Trustee, shareholder, officer, employee or agent of the Trust shall be held to any personal liability; nor shall resort be had to any such person's private property for the satisfaction of any obligation or claim of the Trust but the "Trust Property" only shall be liable. To the knowledge of the Trust, the following persons or entities owned beneficially 5% or more of a class of a Fund's shares on November 1, 1996.
Percent of Name Address Class --------------------------- ---------------------------- --------------- California Fund............. Bernard Lipinsky and 700 Front St. #2501 10.3% Class A Dorris Lipinsky San Diego, CA 92101 6.4% Class B Blush & Co. P.O. Box 976 5.7% Class D New York, NY 10268 Florida Fund................ Est. of Edward J. McBride P.O. Box 880 11.4% Class D Fort Myers, FL 33902 Massachusetts Fund.......... Heatbath Corporation P.O. Box 2978 7.8% Class A Attn: Mary Simpson Springfield, MA 01101 Williams W. Walen and 129 Overbrook Rd. 10.2% Class B Donna Walen Long Meadow, MA 01106 Michigan Fund............... Thomas O. Muller, III 21 S. End Ave. 10.2% Class A # 1E PH Regatta New York, NY 10280 Margarete Drettmann 32901 Gratiot Ave. 5.4% Class B c/o Richard Zimmer Active Roseville, MI 48066 Tool New York Fund............... Morris M. Greenberg 601 Stratford Rd. 7.4% Class D North Baldwin, NY 11510 Karen E. Gitelson 2 Fox Run Rd. 5.5% Class D Briarcliff, NY 10510 Pennsylvania Fund........... A.J. Clegg 1400 N. Providence Rd. #3010 12.3% Class B Rose Tree Corp. Center II Media, PA 19063 Martin and Sylvia Kreithen 900 Roscommon Rd. 16.3% Class D Bryn Mawr, PA 19010
50 APPENDIX A ECONOMIC AND FINANCIAL CONDITIONS IN ARIZONA The following information is a brief summary of factors affecting the economy of the state and does not purport to be a complete description of such factors. Other factors will affect issuers. The summary is based primarily upon one or more publicly available offering statements relating to debt offerings of state issuers; however, it has not been updated nor will it be updated during the year. The Trust has not independently verified this information. Over the past several decades, the State's economy has grown faster than most other regions of the country as measured by nearly every major indicator of economic growth, including population, employment, and aggregate personal income. Although the rate of growth slowed considerably during the late 1980s and early 1990s, the State's efforts to diversify its economy have enabled it to realize, and then sustain, increasing growth rates in more recent years. While jobs in industries such as mining and agriculture have diminished in relative importance to the State's economy over the past two decades, substantial growth has occurred in the areas of aerospace, high technology, light manufacturing and the service industry. Other important industries that contributed to the State's growth in past years, such as construction and real estate, have rebounded from substantial declines during the late 1980s and early 1990s, and, like the rest of the State, are experiencing positive growth. Arizona's strong economy, warm climate, and reasonable cost of living have encouraged many people to move to the State in recent years. Between 1985 and 1990, the State ranked fifth in the country in population growth, and Maricopa County, the State's most populous county, had the single largest population inflow (in absolute terms) of any county in the country during that period. Since 1991, as a result of both the State's relatively good economy and the troubles experienced in surrounding areas like California, the State's population has grown by approximately 392,000, or 10.4%, including an increase of 105,000, or 2.6%, in 1995 alone. Population growth is expected to continue at or above 1995 levels for the foreseeable future. Part of the State's popularity in recent years can be attributed to the favorable job climate. Following 1994's near record employment rate increase of 6.7%, the State achieved an employment rate increase of 5.4% in 1995, recording more than 91,000 new jobs. Once again, the service sector of the economy, which represents more than 29% of all jobs in the State, showed significant growth. A relatively sound United States economy, a stronger economy in California (which historically has been a prime market for Arizona goods and services) and continued growth in high technology, manufacturing and services should enable the State to realize positive, though more modest, gains in job growth in 1996. The 1995 unemployment rate was 5.1%. The State's economic growth in recent times has enabled Arizonans to realize substantial gains in personal income. While the State's per capita personal income generally varies between 5% and 15% below the national average due to such factors as the chronic poverty on the State's Indian reservations, the State's relatively high numbers of retirees and children, and the State's below-average wage scale, the State's aggregate personal income grew nearly 8.6% during 1995 to approximately $84.8 billion, which translated into a gain in real personal income of 6.1%, or $4.5 billion, over 1994. The gains in per capita personal income during this period led to continued strong growth in retail sales. While the 8.9% retail sales growth rate in 1995 was lower than 1994's 12.0% increase, the State's strong employment and personal income figures should provide for continued growth in future years. The State government's fiscal situation has improved substantially in recent years. After experiencing several years of budget shortfalls requiring mid-year adjustments, the State has had budget surpluses. Although an amendment to the State's constitution requiring a 2/3 majority vote in both houses of the Legislature to pass a tax or fee increase constrains the State's ability to raise additional revenue when needed, the State has placed some of its surplus revenue in a rainy-day fund. In July 1994, a sharply divided Arizona Supreme Court ruled that the State's current system for financing public education itself created substantial disparities in facilities among school districts and therefore violated the A-1 provisions of Article XI, Section 1 of the Arizona Constitution, which requires the Legislature to establish and maintain "a general and uniform public school system." The Court remanded the case to the Superior Court "to determine whether, within a reasonable time, legislative action has been taken [to correct this situation]." In response to a subsequent motion for clarification, the Supreme Court ordered that, pending such legislative action or further order of the Supreme Court, "which would have prospective application only," the public school system "continue under existing statutes, and the validity and enforceability of past and future acts, bonded indebtedness and obligations incurred under applicable statutes, as long as they are in force and effect, are assured." In May 1995, a court dismissed a taxpayer's challenge to a school district bond issue that was authorized at an election subsequent to the Supreme Court decision on the ground that the Supreme Court decision contemplated and approved such bond issues pending legislative action or further court order. A new system of public school financing has not yet been implemented. However, in November, 1996, a Superior Court judge ruled that all public school funding be cut off after June 30, 1998 unless legislative action is taken to remedy the situation. It is unclear what action the legislature will take in light of this ruling or what effect, if any, the ruling will have on Arizona school district bonds. Maricopa County is the State's most populous and prosperous county, accounting for nearly 60% of the State's population and a substantial majority of its wage and salary employment and aggregate personal income. Within its borders lie the City of Phoenix, the State's largest city and the seventh largest city in the United States, and the Cities of Scottsdale, Tempe, Mesa, Glendale, Chandler, and Peoria, as well as the Towns of Paradise Valley and Gilbert. Good transportation facilities, a substantial pool of available labor, a variety of support industries and a warm climate have helped make Maricopa County a major business center in the southwestern United States. Once dependent primarily on agriculture, Maricopa County has substantially diversified its economic base. Led by the service sector, which includes transportation, communications, public utilities, hospitality and entertainment, trade, finance, insurance, real estate, and government, the County achieved an overall employment growth rate of 6.3% in 1995. In addition, several large, publicly-traded companies, such as The Dial Corp., Phelps Dodge and MicroAge, have their headquarters in Maricopa County, while others, such as Motorola, Intel and Honeywell, conduct major operations there. Already home to a variety of professional sports teams, including the Phoenix Suns and Arizona Cardinals, the County was also awarded one of two new major league baseball franchises; the Arizona Diamondbacks are expected to begin play in 1998 upon completion of a stadium currently under construction in downtown Phoenix. Pima County is the State's second most populous county, and includes the City of Tucson. Traditionally, Pima County's economy has been based primarily upon manufacturing, mining, government, agriculture, tourism, education, and finance. Hughes Aircraft, which transferred its Hughes Missile Systems division to Tucson from Canoga Park, California, several years ago, and several large mining companies, including Magma Copper, ASARCO, and Phelps Dodge, anchor the non-public sector of the Tucson economy. During the past decade, the County, and Tucson in particular, has become a base for hundreds of computer software companies, as well as a number of companies operating in the areas of environmental technology, bioindustry, and telecommunications. The County did experience a significant drop in the rate of job growth from 7.0% in 1994 to 2.3% in 1995, although positive job growth is expected to continue. In 1994, two special purpose irrigation districts, formed for the purpose of issuing bonds to finance the purchase of Colorado River water from the Central Arizona Project ("CAP"), filed for bankruptcy under Chapter 9 of the United States Bankruptcy Code due to the districts' inability to collect tax revenue in amounts and at times sufficient to service their bonded debt. The financial problems that led to the districts' default arose from a combination of the unexpectedly high cost of constructing the CAP and delivering the water to the districts, plummeting land values, resulting in a need to increase property taxes in order to pay the districts' bonds, and the refusal by many land owners in the districts to shoulder the increased tax burden. In June 1995, a bankruptcy plan was confirmed for one district which gave back to bondholders 57 cents of their principal and placed an additional 42 cents on the dollar in new 8 percent bonds maturing in seven years. The proceedings with respect to the second district are continuing. A-2 APPENDIX B ECONOMIC AND FINANCIAL CONDITIONS IN CALIFORNIA The following information is a brief summary of factors affecting the economy of the State and does not purport to be a complete description of such factors. Other factors will affect issuers. The summary is based primarily upon one or more publicly available offering statements relating to debt offerings of state issuers, however, it has not been updated nor will it be updated during the year. The Trust has not independently verified the information. Economic Conditions The economy of the State of California (sometimes referred to herein as the "State") is the largest among the 50 states and one of the largest in the world. This diversified economy has major components in agriculture, manufacturing, high technology, trade, entertainment, tourism, construction and services. Total State gross domestic product of about $890 billion in 1995 was larger than all but six nations in the world. California's July 1, 1994 population of over 32 million represented over 12 percent of the total United States population. The official 1990 Census population was 29,760,021 as of April 1, 1990, which represented an increase of over 6 million persons, or 26 percent, during the decade of the 1980s. As of the April 1, 1990 Census, the median age of California's population was 31.5 years, younger than the 1990 U.S. median of 32.9 years. California's population is concentrated in metropolitan areas. As of the April 1, 1990 Census, 96 percent resided in the 23 Metropolitan Statistical Areas in the State. Overall, California's population per square mile was 191 in 1990. As of July 1, 1994, 69 percent of the population of the State was located in the two consolidated Metropolitan Statistical Areas in California. As of July 1, 1995, the 5-county Los Angeles area accounted for 49 percent, with 15.6 million residents. The 10-county San Francisco Bay Area represented 21 percent, with a population of 6.6 million. After suffering through a severe recession, California's economy has been on a steady recovery since the start of 1994. Employment grew by over 500,000 in 1994 and 1995, and the pre-recession level of total employment is expected to be matched in 1996. The strongest growth has been in export-related industries, business services, electronics, entertainment and tourism, all of which have offset the recession-related losses which were heaviest in aerospace and defense-related industries (which accounted for two-thirds of the job losses), finance and insurance. Residential housing construction, with new permits for under 100,000 annual new units issued in 1994 and 1995, is weaker than in previous recoveries, but has been growing slowly since 1993. The State. In the years following enactment of the Federal Tax Reform Act of 1986, and conforming changes to the State's tax laws, taxpayer behavior became much more difficult to predict, and the State experienced a series of fiscal years in which revenue came in significantly higher or lower than original estimates. The 1989-90 Fiscal Year ended with revenues below estimates, so that the State's budget reserve (the Special Fund for Economic Uncertainties or "SFEU") was fully depleted by June 30, 1990. This date essentially coincided with the start of the current recession, which severely affected State General Fund revenues and increased expenditures above initial budget appropriations due to greater health and welfare costs. The State's budget problems in recent years have also been caused by a structural imbalance which has been identified by the current and previous Administrations. The largest General Fund Program--K-14 education, health, welfare and corrections--was increasing faster than the revenue base, driven by the State's rapid population growth. These pressures will continue as population trends maintain strong demand for health and welfare services, as the school-age population continues to grow and as the State's corrections program responds to a "Three Strikes" law enacted in 1994, which requires mandatory life prison terms for certain third-time felony offenders. Prior Years. As a result of these factors and others, from the late 1980s until 1992-93, the State had a period of budget imbalance. During this period, expenditures exceeded revenues in four out of six years, and the State accumulated and sustained a budget deficit in the SFEU approaching $2.8 billion at its peak at June 30, 1993. Starting in the 1990-91 Fiscal Year and for each fiscal year thereafter, each budget required multi-billion dollar actions to bring projected revenues and expenditures into balance and to close large "budget gaps" which were identified. Despite budget actions by the Legislature, the effects of the recession led to large, unanticipated deficits in the budget reserve, the SFEU, as compared to projected positive balances. By the 1993-94 Fiscal Year, B-1 the accumulated deficit was so large that it was impractical to budget to retire it in one year, so a two-year program was implemented, using the issuance of revenue anticipation warrants to carry a portion of the deficit over the end of the fiscal year. When the economy failed to recover sufficiently in 1993-94, a second two-year plan was implemented in 1994-95. Another consequence of the accumulated budget deficits, together with other factors such as disbursement of funds to local school districts "borrowed" from future fiscal years and hence not shown in the annual budget, was to significantly reduce the State's cash resources available to pay its ongoing obligations. The State's cash condition became so serious in late Spring of 1992 that the State Controller was required to issue revenue anticipation warrants maturing in the following fiscal year in order to pay the State's continuing obligations. The State was forced to rely increasingly on external debt markets to meet its cash needs, as a succession of notes and warrants were issued in the period from June 1992 to July 1994, often needed to pay previously maturing notes or warrants. These borrowings were used also in part to spread out the repayment of the accumulated budget deficit over the end of the fiscal year. The 1994-95 Fiscal Year represented the fourth consecutive year that the Governor and the Legislature were faced with a very difficult budget environment to produce a balanced budget. Many program cuts and budgetary adjustments had already been made in the last three years. The Governor's budget proposal, as updated in May and June, 1994, recognized that the accumulated deficit could not be repaid in one year and proposed a two-year solution. Pursuant to the Budget Adjustment Law (the "Law"), the State Controller was required to make a report by November 15, 1994 on whether the projected cash resources for the General Fund as of June 30, 1995 would decrease more than $430 million from the amount projected by the State in its Official Statement in July 1994 for the sale of $4,000,000,000 of revenue anticipation warrants. On November 15, 1994, the State Controller issued the report on the State's cash position required by the Law. The report indicated that the cash position of the General Fund on June 30, 1995 would be $581 million better than was estimated in the July 1994 cash flow projections and therefore, no budget adjustment procedures would be invoked for the 1994-95 Fiscal Year. On October 15, 1995, when the State Controller, in conjunction with the Legislative Analyst's Office, reviewed the estimated cash condition of the General Fund for the 1995-96 Fiscal Year, the State Controller estimated that the General Fund would not have negative internal cash resources on June 30, 1996 (i.e., external borrowing would be needed to pay all obligations due). If a cash shortfall had been identified by the State Controller, the State Legislature would have been required to enact legislation providing for sufficient General Fund expenditure reductions, revenue increases, or both. 1995-96. On January 10, 1995, the Governor presented his 1995-96 Fiscal Year budget proposal (the "Proposed Budget"). Two of the principal features of the Proposed Budget were a phased 15% cut in personal income and corporate taxes and a further expansion of the "realignment" process to transfer more responsibility and funding sources for certain health and welfare programs to local governments. Neither of these proposals was approved by the Legislature. As a result of the improving economy, with resulting improved revenue and caseload estimates, the State entered the 1995-96 budget negotiations with the smallest nominal "budget gap" to be enclosed in many years. The 1995-96 Budget Act was signed by the Governor on August 3, 1995. The Budget Act projects General Fund revenues and transfers of $44.1 billion, a 3.5 percent increase from the prior year. Expenditures are budgeted at $43.4 billion, a 4 percent increase. The Department of Finance projects that, after repaying the last of the carryover budget deficit, there will be a positive balance of $28 million in the budget reserve, the SFEU, at June 30, 1996. The Budget Act also projects Special Fund revenues of $12.7 billion and appropriates Special Fund expenditures of $13.4 billion. 1996-1997. The following are principal features of the 1996-97 Budget Act: 1. Proposition 98 funding for schools and community college districts increased by almost $1.6 billion (General Fund) and $1.65 billion total above revised 1995-96 levels. Almost half of this money was budgeted to fund class-size reductions in kindergarten and grades 1-3. Also, for the second year in a row, the full cost of living allowance (3.2 percent) was funded. The Proposition 98 increases have brought K-12 expenditures to almost $4,800 per pupil (also called per ADA, or Average Daily Attendance), an almost B-2 15% increase over the level prevailing during the recession years. Community colleges will receive an increase in funding of $157 million for 1996-97 out of this $1.6 billion total. Because of the higher than projected revenues in 1995-96, an additional $1.1 billion ($190 per K-12 ADA and $145 million for community colleges) was appropriated and retroactively applied towards the 1995-96 Proposition 98 guarantee, bringing K-12 expenditures in that year to over $4,600 per ADA. These new funds were appropriated for a variety of purposes, including block grants, allocations for each school site, facilities for class size reduction, and a reading initiative. Similar retroactive increases totaling $230 million, based on final figures on revenues and State population growth, were made to the 1991-92 and the 1994-95 Proposition 98 guarantees, most of which was allocated to each school site. 2. The Budget Act assumed savings of approximately $660 million in health and welfare costs which required changes in federal law, including federal welfare reform. The Budget Act further assumed federal law changes in August 1996 which would allow welfare cash grant levels to be reduced by October 1, 1996. These cuts totaled approximately $163 million of the anticipated $660 million savings. 3. A 4.9 percent increase in funding for the University of California ($130 million General Fund) and the California State University system ($101 million General Fund), with no increases in student fees, maintaining the second year of the Governor's four-year "Compact" with the State's higher education units. 4. The Budget Act assumed the federal government will provide approximately $700 million in new aid for incarceration and health care costs of illegal immigrants. These funds reduce appropriations in these categories that would otherwise have to be paid from the General Fund. (For purposes of cash flow projections, the Department of Finance expects $540 million of this amount to be received during the 1996-97 fiscal year.) 5. General Fund support for the Department of Corrections was increased by about 7 percent over the prior year, reflecting estimates of increased prison population. 6. With respect to aid to local governments, the principal new programs included in the Budget Act are $100 million in grants to cities and counties for law enforcement purposes, and budgeted $50 million for competitive grants to local governments for programs to combat juvenile crime. The Budget Act did not contain any tax increases. As noted, there was a reduction in corporate taxes. In addition, the Legislature approved another one-year suspension of the Renters Tax Credit, saving $520 million in expenditures. Federal Welfare Reform. Following enactment of the 1996-97 Budget Act, Congress passed and the President signed (on August 22, 1996) the Personal Responsibility and Work Opportunity Act of 1996 (P.L. 104-193, the "Law") making a fundamental reform of the current welfare system. Among many provisions, the Law includes: (i) conversion of Aid to Families with Dependent Children from an entitlement program to a block grant titled Temporary Assistance for Needy Families (TANF), with lifetime time limits on TANF recipients, work requirements and other changes; (ii) provisions denying certain federal welfare and public benefits to legal noncitizens, allowing states to elect to deny additional benefits (including TANF) to legal noncitizens, and generally denying almost all benefits to illegal immigrants; and (iii) changes in the Food Stamp program, including reducing maximum benefits and imposing work requirements. The Law requires states to implement the new TANF program not later than July 1, 1997 and provides California approximately $3.7 billion in block grant funds for FY 1996-97 for the provisions of the Law. States are allowed to implement TANF as soon as possible and will receive a prorated block grant effective the date of application. The California State Plan is to be submitted in time to allow grant reductions to be implemented effective January 1, 1997 (allowing $92 million of the $163 million referred to in Paragraph2 above to be saved) and to allow the State to capture approximately $267 million in additional federal block grant funds over the currently budgeted level. None of the other federal changes needed to achieve the balance of the $660 million cost savings were enacted. Thus, in lieu of the $660 million savings initially assumed to be saved, it is now projected that savings will total approximately $360 million. B-3 A preliminary analysis of the law by the Legislative Analyst's Office indicates that an overall assessment of how these changes will affect the State's General Fund will not be known for some time, and will depend on how the State implements the Law. There are many choices including how quickly the State implements the Law; the degree to which the State elects to make up for cuts in federal aid, provide more aid to counties, or cut some of its own existing programs for noncitizens; and the State's ability to avoid certain penalties written into the Law. Local Governments The primary units of local government in California are the counties, ranging in population from 1,300 (Alpine) to over 9,000,000 (Los Angeles). Counties are responsible for the provision of many basic services, including indigent healthcare, welfare, courts, jails and public safety in unincorporated areas. There are also about 480 incorporated cities and thousands of other special districts formed for education, utility and other services. The fiscal condition of local governments has been constrained since the enactment of "Proposition 13" in 1978, which reduced and limited the future growth of property taxes and limited the ability of local governments to impose "special taxes" (those devoted to a specific purpose) without two-thirds voter approval. A recent California Supreme Court decision has upheld the constitutionality of an initiative statute, previously held invalid by lower courts, which requires voter approval for "general" as well as "special" taxes at the local level. Counties, in particular, have had fewer options to raise revenues than other local government entities and have been required to maintain many services. In the aftermath of Proposition 13, the State provided aid from the General Fund to make up some of the loss of property tax moneys, including taking over the principal responsibility for funding local K-12 schools and community colleges. Under the pressure of the recent recession, the Legislature has eliminated remnants of this post-Proposition 13 aid to entities other than K-14 education districts, although it has also provided additional funding sources (such as sales taxes) and reduced mandates for local services. Many counties continue to be under severe fiscal stress. While such stress has in recent years most often been experienced by smaller, rural counties, larger urban counties, such as Los Angeles, have also been affected. Orange county implemented significant reductions in services and personnel, and continues to face fiscal constraints in the aftermath of its bankruptcy, which had been caused by large investment losses in its pooled investment funds. Constitutional and Statutory Limitations; Recent Initiatives; Pending Legislation Constitutional and Statutory Limitations. Article XIIIA of the California Constitution (which resulted from the voter-approved Proposition 13 in 1978) limits the taxing powers of California public agencies. Article XIIIA provides that the maximum ad valorem tax on real property cannot exceed 1 percent of the "full cash value" of the property and effectively prohibits the levying of any other ad valorem tax on real property for general purposes. However, on May 3, 1986, Proposition 46, an amendment to Article XIIIA, was approved by the voters of the State of California, creating a new exemption under Article XIIIA permitting an increase in ad valorem taxes on real property in excess of 1 percent for bonded indebtedness approved by two-thirds of the voters voting on the proposed indebtedness. "Full cash value" is defined as "the County Assessor"s valuation of real property as shown on the 1975-76 tax bill under "full cash value" or, thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment'. The "full cash value" is subject to annual adjustment to reflect increases (not to exceed 2 percent) or decreases in the consumer price index or comparable local data, or to reflect reductions in property value caused by damage, destruction or other factors. Article XIIIB of the California Constitution limits the amount of appropriations of the State and of the local governments to the amount of appropriations of the entity for the prior year, adjusted for changes in the cost of living, population and the services that local government has financial responsibility for providing. To the extent that the revenues of the State and/or local government exceed its appropriations, the excess revenues must be rebated to the public either directly or through a tax decrease. Expenditures for voter-approved debt services are not included in the appropriations limit. In 1986, California voters approved an initiative statute known as Proposition 62. This initiative (i) required that any tax for general governmental purposes imposed by a local governmental entity be approved by a majority of the electorate of the governmental entity, (ii) required that any special tax (defined as taxes levied for B-4 other than general government purposes) imposed by a local governmental entity be approved by a two-thirds vote of the voters within that jurisdiction, (iii) restricted the use of revenues from a special tax to the purposes or for the services for which the special tax is imposed, (iv) prohibited the imposition of ad valorem taxes on real property by local governmental entities except as permitted by Article XIIIA, (v) prohibited the imposition of transaction taxes and sales taxes on the sale of real property by local governments, (vi) required that any tax imposed by a local government on or after August 1, 1985 be ratified by a majority vote of the electorate within two years of the adoption of the initiative or be terminated by November 15, 1988, (vii) required that, in the event a local government fails to comply with the provisions of this measure, a reduction in the amount of property tax revenues allocated to such local government occurs in an amount equal to the revenues received by such entity attributable to the tax levied in violation of the initiative, and (viii) permitted those provisions to be amended exclusively by the voters of the State of California. On September 28, 1995 the California Supreme Court upheld the constitutionality of the provision requiring a two-thirds vote in order for a local government to impose a "special tax". Although the Supreme Court has yet to rule on the provision requiring a majority vote for a "general tax", it appears that the Supreme Court is favorably disposed to uphold that portion of Proposition 62 as well. In that event, a number of taxes currently being collected (especially by counties and general law cities) would be invalidated. Prior collection of such taxes may also be subject to claims for refund unless the Supreme Court chooses to apply its ruling prospectively. The California Supreme Court has yet to consider the validity of Proposition 62 with regard to charter cities. Recent Initiatives. At the November 9, 1988 general election, California voters approved an initiative known as Proposition 98. This initiative amends Article XIIIB to require that (i) the California Legislature establish a prudent state reserve fund in an amount it shall deem reasonable and necessary and (ii) revenues in excess of amounts permitted to be spent and which would otherwise be returned pursuant to Article XIIIB by revision of tax rates or fee schedules be transferred and allocated (up to a maximum of 40%) to the State School Fund and be expended solely for purposes of instructional improvement and accountability. Proposition 98 also amends Article XVI to require that the State of California provide a minimum level of funding for public schools and community colleges. Commencing with the 1988-89 Fiscal Year, money to be applied by the State for the support of school districts and community college districts shall not be less than the greater of: (i) the amount which, as a percentage of the State General Fund revenues which may be appropriated pursuant to Article XIIIB, equals the percentage of such State General Fund revenues appropriated for school districts and community college districts, respectively, in Fiscal Year 1986-87 or (ii) the amount required to ensure that the total allocations to school districts and community college districts from the State General Fund proceeds of taxes appropriated pursuant to Article XIIIB and allocated local proceeds of taxes shall not be less than the total amount from these sources in the prior year, adjusted for increases in enrollment and adjusted for changes in the cost of living pursuant to the provisions of Article XIIIB. The initiative permits the enactment of legislation, by a two-thirds vote, to suspend the minimum funding requirements for one year. As a result of Proposition 98, funds that the State might otherwise make available to its political subdivisions may be allocated instead to satisfy such minimum funding level. During the recent recession, General Fund revenues for several years were less than originally projected, so that the original Proposition 98 appropriations turned out to be higher than the minimum percentage provided in the law. The Legislature responded to these developments by designating the "extra" Proposition 98 payments in one year as a "loan" from future years' Proposition 98 entitlements and also intended that the "extra" payments would not be included in the Proposition 98 "base" for calculating future years' entitlement. By implementing these actions, per-pupil funding from Proposition 98 sources stayed almost constant at approximately $4,220 from Fiscal Year 1991-92 to Fiscal Year 1993-94. In 1992, a lawsuit was filed, called California Teachers' Association v. Gould, which challenged the validity of these off-budget loans. As part of the negotiations leading to the 1995-96 Budget Act, an oral agreement was reached to settle this case. The settlement was approved by the court in July 1996. The settlement provides, among other things, that both the State and K-14 schools share in the repayment of prior years' emergency loans to schools. Of the total $1.76 billion in loans, the State will repay $935 million by forgiveness of the amount owed, while schools will repay $825 million. The State share of the repayment will be B-5 reflected as expenditures above the current Proposition 98 base calculation. The schools' share of the repayment will count as appropriations that count toward satisfying the Proposition 98 guarantee, or from "below" the current base. Repayments are spread over the eight-year period of 1994-95 through 2001-02 to mitigate any adverse fiscal impact. The Director of Finance has certified that a settlement has occurred, allowing approximately $377 million in appropriations from the 1995-96 Fiscal Year to schools to be disbursed. On November 8, 1994, the voters approved Proposition 187, an initiative statute ("Proposition 187"). Proposition 187 specifically prohibits funding by the State of social services, health care services and public school education for the benefit of any person not verified as either a United States citizen or a person legally admitted to the United States. Among the provisions in Proposition 187 pertaining to public school education, the measure requires, commencing January 1, 1995, that every school district in the State verify the legal status of every child enrolling in the district for the first time. By January 1, 1996, each school district must also verify the legal status of children already enrolled in the district and of all parents or guardians of all students. If the district "reasonably suspects" that a student, parent or guardian is not legally in the United States, that district must report the student to the United States Immigration and Naturalization Service and certain other parties. The measure also prohibits a school district from providing education to a student it does not verify as either a United States citizen or a person legally admitted to the United States. The State Legislative Analyst estimates that verification costs could be in the tens of millions of dollars on a statewide level (including verification costs incurred by other local governments), with first-year costs potentially in excess of $100 million. The reporting requirements may violate the Family Educational Rights and Privacy Act ("FERPA"), which generally prohibits schools that receive Federal funds from disclosing information in student records without parental consent. Compliance with FERPA is a condition of receiving Federal education funds, which total $2.3 billion annually to California school districts. The Secretary of the United States Department of Education has indicated that the reporting requirements in Proposition 187 could jeopardize the ability of school districts to receive these funds. Opponents of Proposition 187 have filed at least eight lawsuits challenging the constitutionality and validity of the measure. On November 2, 1995, a United States District Court judge struck down the central provisions of Proposition 187 by ruling that parts of Proposition 187 conflict with Federal power over immigration. The ruling concluded that states may not enact their own schemes to "regulate immigration or devise immigration regulations which run parallel or purport to supplement Federal immigration law". As a consequence of the ruling, students may not be denied public education and may not be asked about their immigration status when enrolling in public schools. Further, the ruling struck down the requirements of Proposition 187 that teachers and district employees report information on the immigrant status of students, parents and guardians. An appeal has been filed. On November 5, 1996, voters approved Proposition 218, entitled the "Right to Vote on Taxes Act," which incorporates new Articles XIIIC and XIIID into the California Constitution. These new provisions enact limitations (including the need to obtain voter approval in many cases) on the ability of local government agencies to impose or raise various taxes, fees, charges and assessments. Additionally, certain "general taxes" imposed after January 1, 1995 must be approved by voters in order to remain in effect. Moreover, Article XIIIC grants the right to voters to reduce taxes, fees, assessments or charges through local initiatives. There are a number of ambiguities concerning the Proposition and its impact on local governments and their bonded debt which will require interpretation by the courts or the State Legislature. The State Legislative Analyst estimated that enactment of Propositoin 218 would reduce local government revenues statewide by over $100 million a year, and that over time local government revenues would be several hundred million dollars a year lower than under previous law. Proposition 218 does not affect California or its ability to levy or collect taxes. However, it is unknown what response the State may undertake to assist local governments in dealing with Proposition 218. Article XIIIA, Article XIIIB and a number of other propositions were adopted pursuant to California's constitutional initiative process. From time to time, other initiative measures could be adopted by California voters. The adoption of any such initiatives may cause California issuers to receive reduced revenues, or to increase expenditures, or both. B-6 Pending Litigation. The State is a party to numerous legal proceedings, many of which normally occur in governmental operations. Some of the more significant lawsuits pending against the State are described herein. The State is a defendant in 12 lawsuits involving the exclusion of small business stock gains from preference tax and in some cases, also from taxation. The lead cases are Mervin Morris v. Franchise Tax Board and James Lennane v. Franchise Tax Board. The majority of the remaining cases had been deferred pending the outcome of the Morris and Lennane cases. The Supreme Court has ruled against the State in Lennane but has not yet ruled in Morris. The State has lost at least $80 million as a result of the Lennane decision. In Parr v. State of California, a complaint was filed in Federal court claiming that payment of wages in registered warrants violated the Fair Labor Standards Act ("FLSA"). The Federal court held that the issuance of registered warrants does violate the FLSA but subsequently withdrew its order. The parties have agreed to a settlement which has to be approved by the trial court. Under the terms of the judgment, a maximum of $1.3 million will be paid to eligible separated State employees and approximately $1 million will be paid in statutory attorney's fees and costs. In addition, eligible current State employees will receive employee leave, in an amount presently not quantified. The State is involved in a lawsuit seeking reimbursement for alleged state-mandated costs. In Thomas Hayes v. Commission on State Mandates, the State Director of Finance is appealing a 1984 decision by the State Board of Control. The Board of Control decided in favor of local school districts' claims for reimbursement for special education programs for handicapped students; however, funds have not been appropriated. The amount of potential liability to the State, if all potentially eligible school districts pursue timely claims, has been estimated by the Department of Finance at over $1 billion. In another case, the State is a defendant in Long Beach Unified School Districts v. State of California. In this case, the school district seeks reimbursement for voluntary desegregation costs incurred in the implementation of California Department of Education guidelines. The years of reimbursement are from Fiscal Year 1977-78 and each fiscal year thereafter to the present. The district prevailed in a superior court, and the case has been decided by a State appellate court against the State. A petition for review was denied and the superior court judgment has become final, but the court retains jurisdiction to oversee payment. The State anticipates that the unfavorable outcome will affect pending claims by other school districts, and the total loss could be in excess of $300 million. A Federal Court of Appeals in the case of Deanna Beno et al. v. Donna Shalala, reversing a trial court ruling in favor of the State, recently determined that the Secretary of the United States Department of Health and Human Services violated the Federal Administrative Procedure Act when she approved California's Assistance Payment Demonstration Project, which in part, granted California a waiver from complying with requirements for state participation in the Federal program for medical assistance ("Medicaid"). The waiver has allowed California to reduce payments under the Aid to Families with Dependent Children program ("AFDC"), below 1988 payment levels without violating Medicaid requirements relating to maintenance of AFDC payments levels. California had relied, in part, on the waiver to reduce state AFDC payments in 1992, 1993 and 1994. The Court of Appeals remanded the case to the trial court with instructions to remand the Demonstration Project to the Secretary for additional consideration of objections raised by the plaintiffs. The State submitted a renewed waiver request to the Secretary, which was granted in early 1996. One of the features of the 1994-95 Budget Act is a 2.3 percent reduction in AFDC payments. In Welch v. Anderson, on August 19, 1994, the San Francisco Superior Court issued a preliminary injunction against the California Director of Social Services to prevent the 2.3 percent AFDC cuts from becoming effective September 1, 1994. While September cuts were already in process and could not be halted, the court ordered the cuts to be restored. The preliminary injunction has been upheld and the case on the merits remains pending. The State is involved in two lawsuits related to contamination at the Stringfellow toxic waste site. In one suit, the State is one of approximately 130 defendants in Penny Newman v. J.B. Stringfellow, et al. in which 3,800 plaintiffs are claiming damages of $850 million arising from contamination at the Stringfellow toxic waste site. The State is a defendant because it chose the site and approved the deposit of toxic wastes. Seventeen of the 3,800 plaintiffs have litigated their claims; in half of these cases plaintiffs' verdicts in the total amount of $159,000 were received and in the remaining cases verdicts were entered for the State. The other cases have been settled for $13.5 million. In the separate suit described in United States, People of the State of California v. J.B. B-7 Stringfellow Jr. et al., the State has been found liable by the District Court on the counterclaim. The amount of liability is still being litigated although allocation of liability has been determined by the trial court, including an allocation of liability to the State. The State is a defendant in a coordinated action involving 3,000 plaintiffs seeking recovery for damages caused by the Yuba River flood of February 1986. The appellate court affirmed the trial court finding of liability in inverse condemnation and awarded damages of $500,000 to 12 sample plaintiffs. Potential liability to the remaining 300 plaintiffs, from claims filed, ranges from $800 million to $1.5 billion. The State is involved in a case concerning the default by Triad Healthcare on a $167 million loan guaranteed by the Cal-Mortgage Loan Insurance Division of the Office of Statewide Health Planning and Development ("Cal-Mortgage"). Monies for the loan were raised through the sale of Certificates of Participation and Cal-Mortgage insured the debt service payments. Since July 1993, Triad has failed to make its monthly debt service payments; therefore, the reserve account of the bonds has been used to make the payments. Once the reserve account is exhausted, additional debt service payments would be made from the Health Facility Construction Loan Insurance Fund as they become due. However, if there is any shortfall in this fund, the State's General Fund would be used to make up the difference. In Jernigan & Burleson v. State, filed in Federal district court, the prison inmate plaintiffs claim they are entitled to minimum wages while working for the Prison Industry Authority. The inmates claim that the State has violated the FLSA. Plaintiffs are seeking back pay for the period from August 1990 onward, and liquidated damages for a total of approximately $350 million. In June 1995, the district court rules that the inmates are not employees under the FLSA. The decision has been appealed to the Ninth Circuit Court of Appeals, which affirmed the District Court decision holding that the inmates are not employees under the FLSA. The inmates have filed a Petition for Rehearing and a Petition for Hearing En Banc with the Ninth Circuit. Additional lawsuits challenge the transfer of moneys from special fund accounts within the State Treasury to the State's General Fund pursuant to the Budget Acts of 1991, 1992, 1993 and 1994. Plaintiffs in the two cases titled Abramovitz et al. v. Wilson et al., filed in State and Federal courts, seek to have the transfers reversed and the moneys allegedly totalling approximately $400 million returned to the special funds. Plaintiffs in the case of Kurt Hathaway, et al. v. Wilson, filed in State court, seek to reverse transfers of money from special fund accounts to the State's General Fund authorized in the 1994 and 1995 Budget Acts, allegedly totalling approximately $370 million. The State disputes both liability and the amount claimed. In the case of Professional Engineers in California Government v. Wilson, several State employees' unions have challenged transfers made from special funds to the General Fund pursuant to the Budget Act of 1993, 1994 and 1995 and seek reimbursement of over $400 million to these special funds. In the case of Board of Administration, California Public Employees' Retirement System, et al. v. Pete Wilson, Governor, et al., plaintiffs challenged the constitutionality of legislation which deferred payment of the State's employer contribution to the Public Employees' Retirement System ("PERS") beginning in Fiscal Year 1992-1993. On January 11, 1995, the Sacramento County Superior Court entered a judgment finding that the legislation unconstitutionally impaired the vested contract rights of PERS members. The judgment provides for issuance of a writ of mandate directing State defendants to disregard the provisions of the legislation, to implement the statute governing employer contributions that existed before the changes in the legislation were found to be unconstitutional and to transfer to PERS the 1993-94 and 1994-95 contributions that are unpaid to date. The State defendants have appealed. B-8 APPENDIX C ECONOMIC CONDITIONS IN FLORIDA The following information is a brief summary of factors affecting the economy of the state and does not purport to be a complete description of such factors. Other factors will affect issuers. The summary is based upon one or more publicly available offering statements relating to debt offerings of the state of Florida; however, it has not been updated nor will it be updated during the year. The Trust has not independently verified the information. Throughout the 1980s, the State's unemployment rate has, generally, tracked below that of the nation. In recent years, however, as the State's economic growth has slowed from its previous highs, the State's unemployment rate has tracked above the national average. The State's unemployment rate is projected to be 5.9% in both 1995-96. Nevertheless, the average rate of unemployment for the State since 1986 is 6.2%, while the national average is 6.4%. (The projections set forth in this Appendix were obtained from a report, prepared by the Revenue and Economic Analysis Unit of the Executive Office of the Governor for the State of Florida, contained within a recent official statement, dated August 7, 1996, for a State of Florida debt offering.) Personal income in the State has grown at a strong pace and has generally outperformed both the nation as a whole and the Southeast in particular. From 1985 through 1995, the State's per capita income rose an average 5.0% per year, while the national per capita income increased an average of 4.9%. Real personal income in Florida is estimated to increase 4.7% in 1995-96 and increase 3.8% in 1996-97 while real personal income per capita is projected to grow at 2.9% in 1995-96 and 1.9% in 1996-97. The structure of Florida's income differs from that of the nation and the Southeast. Because Florida has a proportionally greater retirement age population, property income (dividends, interest, and rent) and transfer payments (social security and pension benefits, among other sources of income) are a relatively more important source of income. For example, Florida's employment income in 1995 represented 60.6% of total personal income, while the nation's share of total personal income in the form of wages and salaries and other labor benefits was 70.8%. Florida's income is dependent upon transfer payments controlled by the federal government. The State's strong population growth is one fundamental reason why its economy has typically performed better than the nation as a whole. In 1980, the State was ranked seventh among the 50 states with a population of 9.7 million people. The State has grown dramatically since then and as of April 1, 1995 ranked fourth with an estimated population of 14.1 million. Since 1985, the State's average annual rate of population increase has been approximately 2.3% as compared to an approximately 1.0% for the nation as a whole. While annual growth in the State's population is expected to decline somewhat, it is still expected to grow close to 230,000 new residents per year throughout the 1990s. Tourism is one of the State's most important industries. 40.7 million people visited the State in 1994, according to the Florida Department of Commerce. Tourist arrivals are expected to decrease by 4.7% this fiscal year and rebound by 4.5% next year. By the end of the fiscal year, 39.4 million domestic and international tourists are expected to have visited the State. In 1996-97, tourist arrivals should approximate 41.2 million. Florida tourism still appears to be suffering from the effects of negative publicity regarding crime against tourists in the state. Also, factors such as 'product maturity' of a Florida vacation package, higher prices, and more aggressive marketing by competing vacation destinations, could be contributory causes of the tourism slowdown. Florida's economy has been and currently is dependent on the highly cyclical construction and construction-related manufacturing sectors. For example, total contract construction employment as a share of total non-farm employment was a little over 5% in 1995. Florida, nevertheless, has had a dynamic construction industry, with single and multi-family housing starts accounting for approximately 8.5% of total U.S. housing starts in 1995, while the State's population is 5.4% of the nation's population. Total housing starts were 115,000 in 1995. A driving force behind Florida's construction industry is its rapid growth in population. In Florida, single and multi-family housing starts in 1995-96 are projected to reach a combined level of 117,500 while dropping to 108,000 next year. Multi-family starts have been slow to recover, but are expected to maintain a level of nearly 37,400 in C-1 1995-96 and almost 32,100 in 1996-97. Total construction expenditures are forecasted to increase 2.4% in this year and increase 1.7% next year. This represents a slower pace of growth than what was originally projected. Financial operations of the State covering all receipts and expenditures are maintained through the use of four funds--the General Revenue Fund, Trust Funds, the Working Capital Fund, and beginning in fiscal year 1994-95, the Budget Stabilization Fund. In fiscal year 1994-95, the State derived approximately 66% of its total direct revenues to these funds from State taxes and fees. Federal funds and other special revenues accounted for the remaining revenues. Major sources of tax revenues to the General Revenue Fund are the sales and use tax, corporate income tax, intangible personal property tax, and beverage tax, which amounted to 67%, 7%, 4%, and 4%, respectively, of total General Revenue Funds available. State expenditures are categorized for budget and appropriation purposes by type of fund and spending unit, which are further subdivided by line item. In fiscal year 1994-95, expenditures from the General Revenue Fund for education, health and welfare, and public safety amounted to approximately 49%, 32% and 11%, respectively, of total General Revenues. The Sales and Use Tax is the greatest single source of tax receipts in the State. For the State fiscal year ended June 30, 1995, receipts from this source were $10,672 million, an increase of 6.0% from fiscal year 1993-94. The second largest source of State tax receipts is the Motor Fuel Tax. The estimated collections from this source during the fiscal year ending June 30, 1995, were $1,924.6 million. Alcoholic beverage tax revenues totalled $437.3 million for the State fiscal year ending June 30, 1995, down by $4.9 million from the previous year. The receipts of corporate income tax for the fiscal year ended June 30, 1995 were $1,063.5 million, an increase of 1.5% from fiscal year 1993-94. Gross Receipt tax collections for fiscal year 1994-95 totalled $508.4 million, an increase of 10.4% over the previous fiscal year. Documentary stamp tax collections totalled $695.3 million during fiscal year 1994-95, posting an 11.4% decrease from the previous fiscal year. The intangible personal property tax is a tax on stocks, bonds, notes, governmental leaseholds, certain limited partnership interests, mortgages and other obligations secured by liens on Florida realty, and other intangible personal property. Total collections from intangible personal property taxes were $818.0 million during the fiscal year ending June 30, 1995, down 2.1% from the previous fiscal year. Severance taxes totalled $61.2 million during fiscal year 1994-95, up 1.1% from the previous fiscal year. In November 1986, the voters of the State approved a constitutional amendment to allow the State to operate a lottery. Fiscal year 1994-95 produced ticket sales of $2.19 billion of which education received approximately $853.2 million. For fiscal year 1995-96 the estimated General Revenue plus Working Capital and Budget Stabilization funds available total $15,311.3 million, a 3.3% increase over 1994-95. The $14,538.8 million in estimated revenues represent a 6.5% increase over the analagous figure in 1994-95. With combined General Revenue, Working Capital Fund, and Budget Stabilization Fund appropriations at $14,808.6 million, unencumbered reserves at the end of 1995-96 are estimated at $502.7 million. Estimated fiscal year 1996-97 General Revenue plus Working Capital and Budget Stabilization funds available are expected to total $16,094.7 million, a 5.1% increase over fiscal year 1995-96. The State Constitution does not permit a state or local personal income tax. An amendment to the State Constitution by the electors of the State would be required in order to impose a personal income tax in the State. Property valuations for homestead property are subject to a growth cap. Growth in the just (market) value of property qualifying for the homestead exemption is limited to 3% or the change in the Consumer Price Index, whichever is less. If the property changes ownership or homestead status, it is to be re-valued at full just value on the next tax roll. Although the impact of the growth cap cannot be determined, it may have the effect of causing local government units in the State to rely more on non-ad valorem tax revenues to meet operating expenses and other requirements normally funded with ad valorem tax revenues. An amendment to the State Constitution was approved by statewide ballot in the November 8, 1994 general election which is commonly referred to as the "Limitation on State Revenues Amendment." This amendment provides that State revenues collected for any fiscal year shall be limited to State revenues allowed under the amendment for the prior fiscal year plus an adjustment for growth. Growth is defined as an amount equal to the average annual rate of growth in State personal income over the most recent twenty quarters times the State revenues allowed under the amendment for the prior fiscal year. State revenues collected for any fiscal year in C-2 excess of this limitation are required to be transferred to the Budget Stabilization Fund until the fund reaches the maximum balance specified in Section 19(g) of Article III of the State Constitution, and thereafter is required to be refunded to taxpayers as provided by general law. The limitation on State revenues imposed by the amendment may be increased by the Legislature, by a two-thirds vote of each house. The term "State revenues," as used in the amendment, means taxes, fees, licenses, and charges for services imposed by the Legislature on individuals, businesses, or agencies outside State government. However, the term "State revenues" does not include: (i) revenues that are necessary to meet the requirements set forth in documents authorizing the issuance of bonds by the State; (ii) revenues that are used to provide matching funds for the federal Medicaid program with the exception of the revenues used to support the Public Medical Assistance Trust Fund or its successor program and with the exception of State matching funds used to fund elective expansions made after July 1, 1994; (iii) proceeds from the State lottery returned as prizes; (iv) receipts of the Florida Hurricane Catastrophe Fund; (v) balances carried forward from prior fiscal years; (vi) taxes, licenses, fees and charges for services imposed by local, regional, or school district governing bodies; or (vii) revenue from taxes, licenses, fees and charges for services required to be imposed by any amendment or revision to the State Constitution after July 1, 1994. The amendment took effect on January 1, 1995 and is applicable to State fiscal year 1995-96. It should be noted that many of the provisions of the amendment are ambiguous, and likely will not be clarified until State courts have ruled on their meanings. Further, it is unclear how the Legislature will implement the language of the amendment and whether such implementing legislation will itself be the subject of further court interpretation. The Fund cannot predict the impact of the amendment on State finances. To the extent local governments traditionally receive revenues from the State which are subject to, and limited by, the amendment, the future distribution of such State revenues may be adversely affected by the amendment. Hurricanes continue to endanger the coastal and interior portions of Florida. Substantial damage resulted from Hurricane Andrew in 1992. The 1995 hurricane season has experienced a record number of tropical storms and hurricanes which caused substantial damage. During the 1996 hurricane season the State has suffered considerably less damage than in 1995. According to the Florida General Purposes Financial Statements for fiscal year ended June 30, 1994, reported as of June 30, 1995, the State had a high bond rating from Moody's Investors Service, Inc. (Aa), Standard & Poor's Rating Services (AA) and Fitch Investors Service, Inc. (AA) on all of its general obligation bonds. Outstanding general obligation bonds at June 30, 1995 totalled almost $6.8 billion and were issued to finance capital outlay for educational projects of both local school districts, community colleges and state universities, environmental protection and highway construction. The State has issued just over $1.13 billion of general obligation bonds since July 1, 1995. Due to investments in certain derivatives, Escambia County, Florida in 1994 sustained notable losses which may in the future affect their operations. As reported in the local press, several lawsuits have resulted regarding such investments. In late October, 1996, the Florida Auditor General notified the Governor's office that seventeen municipalities or special districts are in a state of financial emergency (including the Orlando-Orange County Expressway Authority and the Pinellas Suncoast Transit Authority) and that another twenty-five municipalities or special districts might be in a state of financial emergency (including the City of Miami). For these purposes, a state of emergency is considered two consecutive years of budget deficits. Municipalities or special districts that may be in a state of financial emergency are those that the Auditor General was unable to conclude had sufficient revenues to cover their deficits. The operations of all of these entities mentioned in the Auditor General's communication may be adversely affected by their financial condition. C-3 APPENDIX D ECONOMIC AND FINANCIAL CONDITIONS IN MASSACHUSETTS The following information is a brief summary of factors affecting the economy of the state and does not purport to be a complete description of such factors. Other factors will affect issuers. The summary is based primarily upon one or more publicly available offering statements relating to debt offerings of state issuers; however, it has not been updated nor will it be updated during the year. The Trust has not independently verified the information. Economic growth in the Commonwealth of Massachusetts (sometimes referred to as the "Commonwealth") has slowed since 1988, particularly in the construction, real estate, financial and manufacturing sectors, including certain high technology areas. Economic conditions have improved somewhat since 1993. The unemployment rate in Massachusetts averaged 6.9% during 1993, after rising steadily during the previous three years, from 3.4% at the beginning of 1989. As of September, 1996, however, the Commonwealth's unemployment rate was 4.2% as compared to a national average of 5.2%. Per capita personal income in the Commonwealth is currently higher than the national average. Ending fund balances in the budgeted operating funds for fiscal 1991 were $237.1 million. Fiscal 1992 ended with positive fund balances of $549.4 million after carrying forward the fund balances from fiscal 1991. Fiscal 1993 ended with positive fund balances of $562.5 million. In fiscal 1994, the total revenues of the budgeted operating funds of the Commonwealth during such fiscal year increased by approximately 5.7% over the prior fiscal year, to $15.550 billion. Expenditures increased by 5.6% over the prior year, to $15.523 billion. As a result, the Commonwealth ended fiscal 1994 with a positive closing fund balance of $589.3 million. In fiscal 1995, the total revenues of the budgeted operating funds of the Commonwealth during such fiscal year increased by approximately 5.4% over the prior fiscal year, to $16.387 billion. Expenditures increased by 4.7% over the prior fiscal year, to $16.251 billion. As a result, the Commonwealth ended fiscal 1995 with a positive closing fund balance of $726.0 million. On September 16, 1996, the Comptroller released his preliminary financial report for fiscal year 1996. According to such report budgeted revenues and other sources in fiscal 1996, which ended June 30, 1996, were approximately $17.323 billion, including tax revenues of approximately $12.049 billion. Fiscal 1996 budgeted expenditures totalled approximately $16.896 billion. Standard & Poor's and Moody's have rated the Commonwealth's general obligation bonds as A+ and A1, respectively. Fitch Investors Service, Inc. has recently rated the Commonwealth's bonds as A+. From time to time, the rating agencies may change their ratings. Growth of tax revenues in the Commonwealth is limited by law. Tax revenues in fiscal years 1988 through 1995 were lower than the limits set by law, and the Comptroller's report indicates that state tax revenues in fiscal 1996 were lower than the limits imposed by law. In addition, effective July 1, 1990, limitations were placed on the amount of direct bonds the Commonwealth may have outstanding in a fiscal year, and the amount of the total appropriation in any fiscal year that may be expended for repayment of principal of and payment of interest on general obligation debt of the Commonwealth was limited to 10% of such appropriation. Bonds in the aggregate principal amount of $1.416 billion issued in October and December 1990, under Chapter 151 of the Acts of 1990 to meet the fiscal 1990 deficit are excluded from the computation of these limitations, and principal of and interest on such bonds are to be paid from up to 15% of the Commonwealth's income tax receipts in each year that such principal or interest is payable. Furthermore, certain of the Commonwealth's cities and towns have at times experienced serious financial difficulties which have adversely affected their credit standing. The recurrence of such financial difficulties, or financial difficulties of the Commonwealth, could adversely affect the market values and marketability of outstanding obligations issued by the Commonwealth or its public authorities or municipalities. In addition, the Massachusetts statutes which limit the taxing authority of the Commonwealth or certain Massachusetts governmental entities may impair the ability of issuers of some Massachusetts obligations to pay debt service on their obligations. D-1 In Massachusetts, the tax on personal property and real estate is virtually the only source of tax revenues available to cities and towns to meet local costs. "Proposition 2 1/2," an initiative petition adopted by the voters of the Commonwealth of Massachusetts on November 4, 1980, limits the power of Massachusetts cities and towns and certain tax-supported districts and public agencies to raise revenue from property taxes to support their operations, including the payment of certain debt service. Proposition 2 1/2 required many cities and towns to reduce their property tax levels to a stated percentage of the full and fair cash value of their taxable real estate and personal property and limited the amount by which the total property taxes assessed by a city or town might increase from year to year. Although the limitations of Proposition 2 1/2 on tax increases may be overridden and amounts for debt service and capital expenditures excluded from such limitation by the voters of the relevant municipality, Proposition 2 1/2 will continue to restrain significantly the ability of cities and towns to pay for local services, especially in light of cost increases due to an inflation rate generally exceeding 2.5%. To offset shortfalls experienced by local governments as a result of the implementation of Proposition 2 1/2, the government of the Commonwealth increased direct local aid from the 1981 level of $1.632 billion to the fiscal 1991 level of $2.608 billion. Direct local aid decreased from fiscal 1991 to $2.359 billion in fiscal 1992, increased to $2.547 billion in fiscal 1993 and increased to $2.727 billion in fiscal 1994. Fiscal 1995 expenditures for direct local aid were $2.976 billion, which is an increase of approximately 9.1% above the 1994 level. It is estimated that fiscal 1996 expenditures for direct local aid will be $3.246 billion, which is an increase of approximately 9.1% above the fiscal 1995 level. The aggregate unfunded actuarial liabilities of the pension systems of the Commonwealth and the unfunded liability of the Commonwealth related to local retirement systems are significant-estimated to be approximately $8.227 billion as of January 1, 1995 (the last date that such liability was calculated) on the basis of certain actuarial assumptions regarding, among other things, future investment earnings, annual inflation rates, wage increases and cost of living increases. No assurance can be given that these assumptions will be realized. The legislature adopted a comprehensive pension bill addressing the issue in January 1988, which requires the Commonwealth, beginning in fiscal year 1989, to fund future pension liabilities currently and amortize the Commonwealth's unfunded liabilities over 40 years in accordance with funding schedules prepared by the Secretary for Administration and Finance and approved by the legislature. The amounts required for funding of current pension liabilities in fiscal years 1996, 1997 and 1998 are estimated to be $1.007 billion, $1.061 billion and $1.128 billion, respectively. D-2 APPENDIX E ECONOMIC AND FINANCIAL CONDITIONS IN MICHIGAN The following information is a brief summary of factors affecting the economy of the state and does not purport to be a complete description of such factors. Other factors will affect issuers. The summary is based primarily upon one or more publicly available offering statements relating to debt offerings of state issuers, however, it has not been updated nor will it be updated during the year. The Trust has not independently verified the information. Due primarily to the fact that the leading sector of the economy of the State of Michigan (sometimes referred to as the "State") is the manufacturing of durable goods, economic activity in the State has tended to be more cyclical than in the nation as a whole. While the State's efforts to diversify its economy have proven successful, as reflected by the fact that the share of employment in the State in the durable goods sector has fallen from 33.1% in 1960 to 15.8% in 1994, durable goods manufacturing still represents a sizable portion of the State's economy. As a result, any substantial national economic downturn is likely to have an adverse effect on the economy of the State and on the revenues of the State and some of its local governmental units. Historically, the average monthly unemployment rate in the State has been higher than the average figures for the United States. More recently, the unemployment rate in the State has been at or below the national average. During 1995, the average monthly unemployment rate in the State was 5.3% compared to a national average of 5.6%. The State's economy could continue to be affected by changes in the auto industry, notably consolidation and plant closings resulting from competitive pressures and overcapacity. Such actions could adversely affect State revenues and the financial impact on the local units of government in the areas in which plants are closed could be more severe. The impact on the financial condition of the municipalities in which the plants are located may be more severe than the impact on the State itself. The Michigan Constitution limits the amount of total revenues of the State raised from taxes and certain other sources to a level for each fiscal year equal to a percentage of the State's personal income for the prior calendar year. In the event the State's total revenues exceed the limit by 1% or more, the Constitution requires that the excess be refunded to taxpayers. To avoid exceeding the revenue limit in the State's 1994-95 fiscal year, the State is refunding approximately $113 million through income tax credits for the 1995 calendar year. The State Constitution does not prohibit the increasing of taxes so long as revenues are expected to amount to less than the revenue limit and authorizes exceeding the limit for emergencies. The State Constitution further provides that the proportion of State spending paid to all local units' total spending may not be reduced below the proportion in effect for the 1978-79 fiscal year. The Constitution requires that if spending does not meet the required level in a given year an additional appropriation for local units is required for the following fiscal year. The State Constitution also requires the State to finance any new or expanded activity of local units mandated by State law. Any expenditures required by this provision would be counted as State spending for local units for purposes of determining compliance with the provisions stated above. The State Constitution limits the purposes for which State general obligation debt may be issued. Such debt is limited to short-term debt for State operating purposes, short- and long-term debt for the purposes of making loans to school districts and long-term debt for voter approved purposes. In addition to the foregoing, the State authorizes special purpose agencies and authorities to issue revenue bonds payable from designated revenues and fees. Revenue bonds are not obligations of the State and in the event of shortfalls in self-supporting revenues, the State has no legal obligation to appropriate money to these debt service payments. The State's Constitution also directs or restricts the use of certain revenues. The State finances its operations through the State's General Fund and Special Revenue Funds. The General Fund receives revenues of the State that are not specifically required to be included in the Special Revenue Fund. General Fund revenues are obtained approximately 58% from the payment of State taxes and 42% from federal and non-tax revenue sources. The majority of the revenues from State taxes are from the State's personal income tax, single business tax, use tax, sales tax and various other taxes. Approximately 59% of total General Fund expenditures are for State support of public education and for social services programs. Other significant expenditures from the General Fund provide funds for law enforcement, general State government, debt service E-1 and capital outlay. The State Constitution requires that any prior year's surplus or deficit in any fund must be included in the next succeeding year's budget for that fund. In recent years, the State of Michigan has reported its financial results in accordance with generally accepted accounting principles. For the fiscal years ended September 30, 1990 and 1991, the State reported negative year-end General Fund balances of $310.3 million and $169.4 million, respectively, but ended the 1992, 1993, 1994 and 1995 fiscal years with its General Fund in balance after transfers in 1993, 1994 and 1995 from the General Fund to the Budget Stabilization Fund of $283 million, $464 million and $67.4 million, respectively. Those and certain other transfers into and out of the Budget Stabilization Fund raised the balance in the Budget Stabilization Fund to $987.9 million as of September 30, 1995. A positive cash balance in the combined General Fund/School Aid Fund was recorded at September 30, 1990. In each of the three prior fiscal years, the State undertook mid-year actions to address projected year-end budget deficits including expenditure costs and deferrals and one time expenditures or revenue recognition adjustments. From 1991 through 1993, the State experienced deteriorating cash balances which necessitated short-term borrowings and the deferral of certain scheduled cash payments of local units of government. The State borrowed between $500 million and $900 million for cash flow purposes in the 1992 and 1993 fiscal years, $500 million in the 1995 fiscal year and $900 million in the 1996 fiscal year. The State did not have to borrow for short-term cash flow purposes in the 1993-94 fiscal year due to improved cash balances. Amendments to the Michigan Constitution which placed limitations on increases in State taxes and local ad valorem taxes (including taxes used to meet debt service commitments on obligations of taxing units) were approved by the voters of the State of Michigan in November, 1978 and became effective on December 23, 1978. To the extent that obligations in the Fund are tax supported and are for local units and have not been voted by the taxing unit's electors, the ability of the local units to levy debt service taxes might be affected. State law provides for distributions of certain State collected taxes or portions thereof to local units based in part on population as shown by census figures and authorizes levy of certain local taxes by local units having a certain level of population as determined by census figures. Reductions in population in local units resulting from periodic census could result in a reduction in the amount of State collected taxes returned to those local units and in reductions in levels of local tax collections for such local units unless the impact of the census is changed by State law. No assurance can be given that any such State law will be enacted. In the 1991 fiscal year, the State deferred certain scheduled payments to municipalities, school districts, universities and community colleges. While such deferrals were made up at later dates, similar future deferrals could have an adverse impact on the cash position of some local units. Additionally, the State has reduced revenue sharing payments to municipalities below the level provided under formulas by increasing amounts in each of the last five fiscal years and has budgeted a reduction of $81.26 million in the fiscal year which ended on September 30, 1996. On March 15, 1994, the electors of the State voted to amend the State's Constitution to increase the State sales tax rate from 4% to 6% and to place an annual cap on property assessment increases for all property taxes. Companion legislation also cut the State's income tax rate from 4.6% to 4.4%, reduced some property taxes and shifted the balance of school funding sources among property taxes and State revenues, some of which are being provided from new or increased State taxes. The legislation also contains other provisions that may reduce or alter the revenues of local units of government and tax increment bonds could be particularly affected. While the ultimate impact of the constitutional amendment and related legislation cannot yet be accurately predicted, investors should be alert to the potential effect of such measures upon the operations and revenues of Michigan local units of government. The State is a party to various legal proceedings seeking damages or injunctive or other relief. In addition to routine litigation, certain of these proceedings could, if unfavorably resolved from the point of view of the State, substantially affect State or local programs or finances. These lawsuits involve programs generally in the areas of corrections, highway maintenance, social services, tax collection, commerce and budgetary reductions to school districts and governmental units and court funding. Currently, the State's general obligation bonds are rated Aa by Moody's Investors Service, Inc., AA by Standard & Poor's Ratings Services and Aa by Fitch Investors Service, Inc. E-2 APPENDIX F ECONOMIC AND FINANCIAL CONDITIONS IN NEW JERSEY The following information is a brief summary of factors affecting the economy of New Jersey and does not purport to be a complete description of such factors. Other factors will affect issuers. The summary is based primarily upon one or more publicly available offering statements relating to debt offerings of state issuers, however, it has not been updated nor will it be updated during the year. The Trust has not independently verified the information. Effective January 1, 1994, personal income tax rates in the State of New Jersey (the "State") were cut by 5% for all taxpayers. Effective January 1, 1995, the State's personal income tax rates were cut by an additional 10% for most taxpayers. By a bill signed into law on July 4, 1995, New Jersey personal income tax rates have been further reduced so that coupled with the prior rate reductions, beginning with tax year 1996, personal income tax rates will be, depending upon a taxpayer's level of income and filing status, 30%, 15% or 9% lower than 1993 rates. At this time the effect of the tax reduction cannot be evaluated. The State operates on a fiscal year beginning July 1 and ending June 30. For example, "fiscal year 1997" refers to the State's fiscal year beginning July 1, 1996 and ending June 30, 1997. The General Fund is the fund into which all State revenues not otherwise restricted by statute are deposited and from which appropriations are made. The largest part of the total financial operations of the State is accounted for in the General Fund. Revenues received from taxes and unrestricted by statute, most federal revenue and certain miscellaneous revenue items are recorded in the General Fund. The State's undesignated General Fund balance was $937 million for fiscal year 1993, $926 million for fiscal year 1994, $569 million for fiscal year 1995 and $471 million (estimated) for fiscal year 1996. For fiscal year 1997, the balance in the undesignated General Fund is estimated to be $255 million. The State finances capital projects primarily through the sale of the general obligation bonds of the State. These bonds are backed by the full faith and credit of the State. State tax revenues and certain other fees are pledged to meet the principal, interest payments and if provided, redemption premium payments, if any, required to pay the debt fully. No general obligation debt can be issued by the State without prior voter approval, except that no voter approval is required for any law authorizing the creation of a debt for the purpose of refinancing all or a portion of outstanding debt of the State, so long as such law requires that the refinancing provide a debt service savings. All appropriations for capital projects and all proposals for State bond authorizations are subject to the review and recommendation of the New Jersey Commission on Capital Budgeting and Planning. The State has extensive control over school districts, cities, counties and local financing authorities. State laws impose specific limitations on local appropriations, with exemptions subject to state approval. The State shares the proceeds of a number of taxes, with funds going primarily for local education programs, homestead rebates, medicaid and welfare programs. Certain bonds are issued by localities, but supported by direct State payments. In addition, the State participates in local wastewater treatment programs. The State's economic base is diversified, consisting of a variety of manufacturing, construction and service industries, supplemented by rural areas with selective commercial agriculture. After enjoying an extraordinary boom during the mid-1980s, New Jersey, as well as the rest of the Northeast, slipped into a slowdown well before the onset of the national recession which officially began in July 1990 (according to the National Bureau of Economic Research). By the beginning of the national recession, construction activity had already been declining in New Jersey for nearly two years, growth had tapered off markedly in the service sectors and the long-term downward trend of factory employment had accelerated, partly because of a leveling off of industrial demand nationally. The onset of recession caused an acceleration of New Jersey's job losses in construction and manufacturing, as well as an employment downturn in such previously growing sectors as wholesale trade, retail trade, finance, utilities and trucking and warehousing. The net effect was a decline in the State's total non-farm wage and salary employment from a peak of 3,689,800 in March 1989 to a low of 3,445,000 in March 1992. This loss was followed by an employment gain of 200,700 from May 1992 to August 1996; a recovery of 77% of the jobs lost during the recession. Almost two-thirds of this number, nearly 138,000 jobs, were recovered in the 31 month period from January 1994 to August 1996. F-1 Reflecting the downturn, the rate of unemployment in the State rose from a low of 3.6% during the first quarter of 1989 to a recessionary peak of 8.5% during 1992 (according to the U.S. Bureau of Labor Statistics and the New Jersey Department of Labor, Division of Labor Market and Demographic Research). Since then, the unemployment rate fell to an average of 6.4% in 1995 and 6.1% for the four month period from May 1996 through August 1996. For the recovery period as a whole, May 1992 to August 1996, service-producing employment in New Jersey has expanded by 228,500 jobs. Hiring has been reported by food stores, auto dealers, wholesale distributors, trucking and warehousing firms, utilities, business and engineering/management service firms, hotels/hotel-casinos, social service agencies and health care providers other than hospitals. Employment growth was particularly strong in business services and its personnel supply component with increases of 17,500 and 8,100, respectively, in the 12-month period ended August 1996. In the manufacturing sector, employment losses slowed between 1992 and 1994. After an average annual job loss of 33,500 from 1989 through 1992, New Jersey's factory job losses fell to 13,300 during 1993 and 7,300 during 1994. During 1995, however, manufacturing job losses increased slightly to 9,100, reflecting a slowdown in national manufacturing production activity. While experiencing growth in the number of production workers in 1994, the number declined in 1995 at the same time that managerial and office staff were also reduced as part of nationwide downsizing. Through August 1996, layoffs of white collar workers and corporate downsizing appear to be abating. Conditions have slowly improved in the construction industry, where employment has risen by 15,600 since its low in May 1992. Between 1992 and 1995, this sector's hiring rebound was driven primarily by increased homebuilding and nonresidential projects. During 1996, public works projects and homebuilding became the growth segments while nonresidential construction lessened. Residential construction contracts through August 1996, despite monthly fluctuations, increased by 1.4% for the first eight months of 1996 as compared to the first eight months of 1995 ($1,502 million and $1,481 million, respectively). Nonbuilding or infrastructure construction rose robustly by 17.8% during this period. Despite these increases, total construction contracts declined by 3.9% when comparing the first eight months of 1995 and 1996. Improvements in overall employment opportunities and the economy in general have led to increased consumer spending during the recovery. While overall retail sales in New Jersey grew by only 1.6% during 1993, they performed much better in 1994, advancing by 7.8% which exceeded the 7.5% growth registered nationwide. During 1995, especially in the winter months, consumer confidence and actual consumer spending moderated both nationally and in the State. For the year 1995, retail sales in New Jersey grew by 2.3%. Retail sales regained momentum in 1996 and have been on a moderately upward trend, rising to an annual rate of $76.5 billion through June. The State's pickup in growth, after a blizzard-related January decline, resulted in sales growth of 4.2% when comparing the first six months of 1995 with those of 1996. The rising trend in retail sales has translated into steady increases in retail trade jobs (both full- and part-time) with a rise in retail employment from December 1995 to August 1996 of 6,900 jobs. Total new vehicle registrations (new passenger cars and light trucks and vans) rose robustly in 1993 by more than 18% and in 1994 by 5.8%, but declined by 4.4% in 1995. Through July 1996 however, total new vehicle registrations rose by 3.5% compared to the same period in 1995. Unemployment in the State through August 1996 has been receding. According to the U.S. Bureau of Labor Statistics, the jobless rate dropped from 7.5% in 1993 to 6.8% in 1994 and to 6.4% in 1995. Subsequently, it has dropped to 6.1% for the four-month period from May 1996 through August 1996. The insured unemployment rate, i.e., the number of individuals claiming benefits as a percentage of the number of workers covered by unemployment insurance, declined from 3.9% during calendar years 1991 and 1992 to 3.3% during 1993 and then averaged 3.2% throughout 1994, 1995 and the first six months of 1996. As of August 1, 1996, the State's unemployment insurance trust fund balance stood at $2.1 billion. The State has benefited from the national recovery. New Jersey's recovery is in its fifth year and appears to be sustainable now that the national economy has "soft landed." The U.S. economy is in a period of steady, moderate growth, having slowed enough during the fourth quarter of 1995 and the first quarter of 1996 to avoid F-2 inflation, but not enough to slip into a recession. While the latest national indicators show that economic growth accelerated during the second quarter of this year, the inflation rate remained low. Business investment expenditures and consumer spending have increased substantially in the nation as well as in the State. Capital and consumer spending may very well continue to rise due to the sustained character of the recovery, although the interest-sensitive homebuilding industry may provide only a moderate amount of stimulus both nationally and in New Jersey. It is expected that the employment and income growth that has and is taking place will lead to further growth in consumer outlays. Reasons for cautious optimism in New Jersey include increasing employment levels, a declining jobless rate, and a higher-than-national level of per capita personal income. If the nation's economic growth rate slows from the robust 4.7% growth in the second quarter of 1996, business expansion could become somewhat more subdued in New Jersey as the rest of 1996 unfolds. However, the State's economy should have enough momentum to keep its trend line pointing upwards. Its growth potential is not yet limited by the labor supply constraints beginning to affect some other parts of the country. Looking further ahead, prospects for New Jersey appear favorable. While growth is likely to be slower than in the nation, the locational advantages that have served New Jersey well for many years will still be there. Structural changes that have been going on for years can be expected to continue, with job creation concentrated most heavily in the service industries. New Jersey Education Association, et al. v. State of New Jersey, et al. represents a challenge to amendments to the pension laws enacted on June 30, 1994 (P.L. 1994, Chapter 62), which concerned the funding of the Teachers Pension and Annuity Fund (TPAF), the Public Employee's Retirement System (PERS), the Police and Fireman's Retirement System (PFRS), the State Police Retirement System (SPRS) and the Judicial Retirement System (JRS). The complaint was filed in the United States District Court of New Jersey on October 17, 1994. The statute, as enacted, made several changes affecting these retirement systems including changing the actuarial funding method to projected unit credit; continuing the prefunding of post-retirement medical benefits but at a reduced level for TPAF and PERS; revising the employee member contribution rate to a flat 5% for TPAF and PERS; extending the phase-in period for the revised TPAF actuarial assumptions; changing the phase-in period for funding of cost-of-living adjustments and reducing the inflation assumption for the Cost of Living Adjustment for all retirement systems; and decreasing the average salary increase assumption for all retirement systems. Plaintiffs allege that the changes resulted in lower employer contributions in order to reduce a general budget deficit. The complaint further alleges that certain provisions of Chapter 62 violate the contract, due process, and taking clauses of the United States and New Jersey Constitutions, and further constitute a breach of the State's fiduciary duty to participants in TPAF and PERS. Plaintiffs seek to permanently enjoin the State from administering, enforcing or otherwise implementing Chapter 62. An adverse determination against the State would have a significant impact upon the fiscal year 1997 budget. The State filed a motion to dismiss and a motion for summary judgment. On October 6, 1995, the Court issued its opinion in which it dismissed the State as a party to the action. The only defendant is Treasurer Clymer. The claims surviving the motion are: (1) breach of trust and fiduciary duty (against the Treasurer in both his individual and official capacities); (2) violation of Due Process (against the Treasurer in both his individual and official capacities); and (3) a 42 U.S.C. Section1983 claim (against the Treasurer in his individual capacity). The forms of relief sought related to these surviving claims are: (1) a declaration that certain provisions of Chapter 62 violate Due Process of law under the Fifth and Fourteenth Amendments to the U.S. Constitution; (2) a declaration that the enactment and implementation of certain provisions of Chapter 62 constitute a breach of the fiduciary obligations owed to contributing participants, vested participants and retirees of the TPAF and PERS; (3) a declaration that Chapter 62 contravenes the statutory and common law duties to administer and fund the plans in an actuarially sound and fiscally responsible manner; (4) a permanent injunction against administering, enforcing or otherwise implementing certain provisions of Chapter 62; (5) directing payment of plaintiff's attorneys' fees, disbursements and costs pursuant to 42 U.S.C Section1988. The State filed a motion for reconsideration or, in the alternative, for certification to the Third Circuit Court of Appeals, of the remaining claims. By order dated December 19, 1995, the District Court denied the motion in F-3 all respects. On January 29, 1996, the State, on behalf of Treasurer Clymer, filed a Petition for a Writ of Mandamus and a Motion for a Stay of the Proceedings below, pending consideration and disposition of the petition, with the Third Circuit Court of Appeals. In the petition, Treasurer Clymer asked the Court of Appeals to direct the District Court to dismiss the complaint or enter summary judgment in his favor. Alternatively, the Treasurer asked the Court of Appeals to order the District Court to vacate its order denying summary judgment and resolve that motion as a matter of law without discovery or fact finding or to certify the issues for interlocutory appeal. The Third Circuit Court of Appeals denied the motion and petition on February 20, 1996. Discovery is proceeding in this matter. The State intends to vigorously defend this action. Beth Israel Hospital, et al. v. Essential Health Services Commission. This case represents a challenge by eleven New Jersey hospitals to the .53% hospital assessment authorized by the Health Care Reform Act of 1992, specifically N.J.S.A. 26:2H-18.62. Amounts collected pursuant to the assessment are paid into the hospital and other health care initiatives account of the Health Care Subsidy Fund, to be used for various health care programs. Specifically, the funds are currently used for those programs previously established pursuant to N.J.S.A. 26:2H-18.47. In this appeal of the assessment, filed with the Appellate Division on December 6, 1993, appellants argue that collection of the assessment is invalid in the absence of Hospital Rate Setting Commission approval of the approved revenue base used in the calculation. At the same time, appellants filed an application for injunctive relief, seeking to stay any collection, which application was denied. In a decision dated July 10, 1995, the Appellate Division rejected appellants' contention that the respondents were prohibited from collecting the assessment. However, the court also found that the hospitals had not been afforded an opportunity to be heard on the assessment, and thus remanded the case to the Essential Health Services Commission for a hearing. Because the Commission has been abolished by L. 1995, c. 133, and its responsibilities assigned to the Department of Health, the Department of Health held the hearing on August 30, 1995. By letters dated March 26, 1996, the Department of Health affirmed the prior assessments. The hospitals filed a notice of appeal challenging that decision on May 10, 1996. The State intends to vigorously defend this action. Tort, Contract and Other Claims. At any given time, there are various numbers of claims and cases pending against the State, State agencies and employees, seeking recovery of monetary damages that are primarily paid out of the fund created pursuant to the New Jersey Tort Claims Act (N.J.S.A. 59:1-1, et seq.). The State does not formally estimate its reserve representing potential exposure for these claims and cases. The State is unable to estimate its exposure for these claims and cases. The State routinely receives notices of claim seeking substantial sums of money. The majority of those claims have historically proven to be of substantially less value than the amount originally claimed. Under the New Jersey Tort Claims Act, any tort litigation against the State must be preceded by a notice of claim, which affords the State the opportunity for a six-month investigation prior to the filing of any suit against it. In addition, at any given time, there are various numbers of contract and other claims against the State and State agencies, including environmental claims asserted against the State, among other parties, arising from the alleged disposal of hazardous waste. Claimants in such matters are seeking recovery of monetary damages or other relief which, if granted, would require the expenditure of funds. The State is unable to estimate its exposure for these claims. At any given time, there are various numbers of claims and cases pending against the University of Medicine and Dentistry and its employees, seeking recovery of monetary damages that are primarily paid out of the Self Insurance Reserve Fund created pursuant to the New Jersey Tort Claims Act (N.J.S.A. 59:1-1, et seq.). An independent study estimated an aggregate potential exposure of $86,795,000 for tort and medical malpractice claims pending as of June 30, 1996. In addition, at any given time, there are various numbers of contract and other claims against the University of Medicine and Dentistry, seeking recovery of monetary damages or other relief which, if granted, would require the expenditure of funds. The State is unable to estimate its exposure for these claims. Currently, the State's general obligation bonds are rated AA+ by Standard & Poor's, Aa1 by Moody's, and AA+ by Fitch. From time to time agencies may change their ratings. F-4 APPENDIX G ECONOMIC AND FINANCIAL CONDITIONS IN NEW YORK The following information is a brief summary of factors affecting the economy of the state and does not purport to be a complete description of such factors. Other factors will affect specific issuers. The summary is based primarily upon one or more publicly available offering statements relating to debt offerings of state issuers; however, it has not been updated nor will it be updated during the year. The Trust has not independently verified the information. In recent years, New York State (sometimes referred to herein as the "State" or "New York"), some of its agencies, instrumentalities and public authorities and certain of its municipalities have faced serious financial difficulties that could have an adverse effect on the sources of payment for, or the market value of, the New York State Municipal Securities in which each Fund invests. NEW YORK STATE Current Economic Outlook. The national economy has resumed a more robust rate of growth after a "soft landing" in 1995, with over 11 million jobs added nationally since early 1992. The State economy has continued to expand, but growth remains somewhat slower than in the nation. Although the State has added approximately 240,000 jobs since late 1992, employment growth in the State has been hindered during recent years by significant cutbacks in the computer and instrument manufacturing, utility, defense and banking industries. Government downsizing has also moderated these job gains. The State expects modest economic growth in New York's economy during the first half of the 1996 calendar year, but some slowdown is projected during the second half of the year due to government cutbacks and tight fiscal constraints on health and social services. On an average annual basis, the State's employment growth is expected to be up slightly and personal income is expected to record moderate gains from the 1995 rate. Overall employment growth is projected to be 0.8 percent in 1996 and 0.6 percent in 1997 while personal income growth is projected to be 5.2 percent in 1996 and 4.7 percent in 1997. State Financial Plan for the 1996-1997 Fiscal Year. The State's budget for the 1996-1997 fiscal year (April 1, 1996-March 31, 1997) was enacted by the Legislature on July 13, 1996, more than three months after the start of the fiscal year. Prior to adoption of the budget, the Legislature enacted appropriations for disbursements considered to be necessary for State operations and other purposes, including necessary appropriations for all State-supported debt service. The State Financial Plan for the 1996-1997 fiscal year (the "State Financial Plan") is based on the State's budget as enacted by the Legislature and signed into law by the Governor, as well as actual results through the second quarter of the 1996-1997 fiscal year. The State Financial Plan projects a General Fund balanced on a cash basis with total projected receipts of $33.573 billion and total disbursements of $33.243 billion, representing increases of $765 million and $564 million, respectively, from the prior fiscal year. The State Financial Plan includes gap closing actions to offset a previously projected budget gap of $3.9 billion for the 1996-1997 fiscal year. Such gap closing actions include reductions in the State workforce, spending reductions in health care and education programs, projected increases in tax collections, pension and debt service savings and the use of certain reserve funds. There can be no assurance that additional gap closing measures will not be required and there is no assurance that any such measures will enable the State to achieve a balanced budget for its 1996-1997 fiscal year. The State Financial Plan is based upon forecasts of national and State economic activity. Economic forecasts have frequently failed to predict accurately the timing and magnitude of changes in the national and State economies. Many uncertainties exist in forecasts of both the national and State economies, including consumer attitudes toward spending, Federal financial and monetary policies, the availability of credit and the condition of the world economy, which could have an adverse effect on the State. There can be no assurance that the State economy will not experience worse-than-predicted results in the 1996-1997 and subsequent fiscal years, with corresponding material and adverse effects on the State's projections of receipts and disbursements. G-1 Special Considerations for Future Fiscal Years. Owing to uncertainties in the forecasts of both national and State economics, the State could face substantial potential budget gaps in future years resulting from a significant disparity between tax revenues from a lower recurring receipts base and the spending required to maintain State programs at mandated levels. Any such recurring imbalance would be exacerbated by the use by the State of nonrecurring resources to achieve budgetary balance in a particular fiscal year. To correct any recurring budgetary imbalance, the State would need to take significant actions to align recurring receipts and disbursements in future fiscal years. The State Financial Plan contains actions that provide nonrecurring resources or savings as well as actions that impose baseline losses of receipts. The Division of the Budget estimates the net amount of nonrecurring resources used in the State Financial Plan to be at least $1.3 billion. In addition to these nonrecurring actions, the adoption of a three-year 20% reduction in the State's personal income tax in 1995 in combination with business tax reductions enacted in 1994 will reduce State tax receipts by as much as $4.5 billion by the 1997-1998 fiscal year. On August 13, 1996, the State Comptroller released a report in which he estimated that the State faces a potential imbalance in receipts and disbursements of approximately $3 billion for the State's 1997-98 fiscal year and approximately $3.2 billion for the State's 1998-99 fiscal year. The Governor is required to submit a balanced budget to the State Legislature and has indicated he will close any potential imbalance in the 1997-98 Financial Plan primarily through General Fund expenditure reductions and without increases in taxes or deferrals of scheduled tax reductions. It is expected that the State's 1997-98 Financial Plan will reflect a continuing strategy of substantially reduced State spending, including agency consolidations, reductions in the State workforce, and efficiency and productivity initiatives. There can be no assurance, however, that the State's actions will be sufficient to preserve budget balances in the then-current or future fiscal years. On August 22, 1996, the President signed into law the Personal Responsibility and Work Opportunity Reconciliation Act of 1996. The new law abolishes the federal Aid to Families with Dependent Children program (AFDC), and creates a new Temporary Assistance to Needy Families program (TANF) funded with a fixed federal block grant to states. The new law also imposes (with certain exceptions) a five-year durational limit on TANF recipients, requires that virtually all recipients be engaged in work or community service activities within two years of receiving benefits, and limits assistance provided to certain immigrants and other classes of individuals. States are required to comply with the new federal welfare reform law no later than July 1, 1997. States who fail to meet these federally mandated job participation rates, or who fail to conform with certain other federal standards, face potential sanctions in the form of a reduced federal block grant. On October 16, 1996, the Governor submitted the State's TANF implementation plan to the federal government as required under the new federal welfare law. Submission of this plan to the federal government requires New York State to begin compliance with certain time limits on welfare benefits and permits the State to become eligible for approximately $2.36 billion in federal block grant funding. The Governor has indicated that he plans to introduce legislation necessary to conform with federal law for consideration by the Legislature either before the end of calendar 1996 or in the 1997 legislative session. Given the size and scope of the changes required under federal law, it is likely that these proposals will produce extensive public discussions. There can be no assurances that the State legislature will enact welfare reform proposals as submitted by the Governor and as required under federal law. It is expected that funding levels provided under the federal TANF block grant will be higher than currently anticipated in the State Financial Plan. However, the net fiscal impact of any changes to the State's welfare programs that are necessary to conform with federal law will be dependent upon such factors as the ability of the State to avoid any federal fiscal penalties, the level of additional resources required to comply with any new State and/or federal requirements, and the division of non-federal welfare costs between the State and its localities. Prior Fiscal Years. The State ended its 1995-1996 fiscal year in balance, with a reported 1995-1996 General Fund cash surplus of $445 million. Prior to adoption of the State's 1995-1996 fiscal year budget, the State had projected a potential budget gap of approximately $5 billion, which was closed primarily through spending reductions, cost containment measures, State agency actions and local assistance reforms. G-2 In July, 1995, the State Comptroller issued its audit of the State's 1994-1995 fiscal year prepared in accordance with generally accepted auditing standards. The State completed its 1994-1995 fiscal year with a General Fund operating deficit of $1.426 billion, as compared with an operating surplus of $914 million for the previous fiscal year. The 1994-1995 fiscal year deficit was caused by several factors, including the use of $1.026 billion of the 1993-1994 fiscal year surplus in the 1994-1995 fiscal year and the adoption of changes in accounting methodologies by the State Comptroller. Local Government Assistance Corporation. In 1990, as part of a state fiscal reform program, legislation was enacted creating the Local Government Assistance Corporation ("LGAC"), a public benefit corporation empowered to issue long-term obligations to fund certain payments to local governments traditionally funded through the State's annual seasonal borrowing. As of June, 1995, LGAC has issued bonds to provide net proceeds of $4.7 billion completing the program. The impact of LGAC's borrowing is that the State is able to meet its cash flow needs without relying on short-term seasonal borrowing. Financing Activities. State financing activities include general obligation debt of the State and State-guaranteed debt, to which the full faith and credit of the State has been pledged, as well as lease-purchase and contractual-obligation financings, moral obligation financings and other financings through public authorities and municipalities, where the State's obligation to make payments for debt service is generally subject to annual appropriation by the State Legislature. As of March 31, 1996, the total amount of outstanding general obligation debt was approximately $5.047 billion, including $293 million in Bond Anticipation Notes; the total amount of moral obligation debt was approximately $7.269 billion and $20.343 billion of bonds issued primarily in connection with lease-purchase and contractual-obligation financing of State capital programs were outstanding. Public Authorities. The fiscal stability of the State is related, in part, to the fiscal stability of its public authorities. The State anticipates that its capital programs will be financed, in part, by borrowings of State and public authorities in the 1996-1997 fiscal year. Public authorities are not subject to the constitutional restrictions on the incurrence of debt which apply to the State itself, and may issue bonds and notes within the amounts of, and as otherwise restricted by, their legislative authorization. As of September 30, 1995, the latest data available, there were 17 public authorities that had outstanding debt of $100 million or more and the aggregate outstanding debt, including refunding bonds, of these 17 public authorities was $73.45 billion. The State's access to the public credit markets could be impaired and the market price of its outstanding debt may be adversely affected, if any of its public authorities were to default on their respective obligations. Ratings. Currently, Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Rating Services ("Standard & Poor's") and Fitch Investors Services, Inc. ("Fitch") rate New York State's outstanding general obligation bonds "A", "A-" and "A+", respectively. Ratings reflect only the respective views of such organizations, and explanation of the significance of such ratings must be obtained from the rating agency furnishing the same. There is no assurance that a particular rating will continue for any given period of time or that any such rating will not be revised downward or withdrawn entirely if, in the judgment of the agency originally establishing the rating, circumstances so warrant. A downward revision or withdrawal of such ratings may have an effect on the market price of the New York Municipal Bonds in which each Fund invests. Litigation. The State is a defendant in numerous legal proceedings including, but not limited to, claims asserted against the State arising from alleged torts, alleged breaches of contracts, condemnation proceedings and other alleged violations of State and Federal laws. State programs are frequently challenged on State and Federal constitutional grounds. Adverse developments in legal proceedings or the initiation of new proceedings could affect the ability of the State to maintain a balanced State Financial Plan in any given fiscal year. The State believes that the State Financial Plan includes sufficient reserves for the payment of judgments that may be required during the 1996-1997 fiscal year. There can be no assurance, however, that an adverse decision in one or more legal proceedings would not exceed the amount of such reserves for the payment of judgments or materially impair the State's financial operations. G-3 Other Localities. Certain localities in addition to the City could have financial problems leading to requests for additional State assistance during the State's 1996-1997 fiscal year and thereafter. The potential impact on the State of such actions by localities is not included in the projections of the State receipts and disbursements in the State's 1996-1997 fiscal year. Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted in the creation of the Financial Control Board for Yonkers (the "Yonkers Board") by the State in 1984. The Yonkers Board is charged with oversight of the fiscal affairs of Yonkers. Future actions taken by the Governor or the State Legislature to assist Yonkers could result in the allocation of State resources in amounts that cannot yet be determined. NEW YORK CITY General. More than any other municipality, the fiscal health of New York City (sometimes referred to as the "City") has a significant effect on the fiscal health of the State. The national economic downturn which began in July 1990 adversely affected the local economy, which had been declining since late 1989. As a result, the City experienced job losses in 1990 and 1991 and real Gross City Product ("GCP") fell in those two years. Beginning in calendar year 1992, the improvement in the national economy helped stabilize conditions in the City. Employment losses moderated toward year-end and real GCP increased, boosted by strong wage gains. However, after noticeable improvements in the City's economy during the calendar year 1994, economic growth slowed in calendar year 1995, and the City's current four-year financial plan assumes that moderate economic growth will continue through calendar year 2000. For each of the 1981 through 1996 fiscal years, the City achieved balanced operating results as reported in accordance with generally accepted accounting principles ("GAAP"). The City was required to close substantial budget gaps in recent fiscal years in order to maintain balanced operating results. There can be no assurance that the City will continue to maintain a balanced budget as required by State law without additional reductions in City services or entitlement programs or tax or other revenue increases which could adversely affect the City's economic base. Pursuant to the laws of the State, the Mayor is responsible for preparing the City's four-year financial plan, including the City's current financial plan for the 1997 through 2000 fiscal years (the "1997-2000 Financial Plan" or the "City Financial Plan"). The City's projections set forth in the City Financial Plan are based on various assumptions and contingencies which are uncertain and which may not materialize. Changes in major assumptions could significantly affect the City's ability to balance its budget as required by State law and to meet its annual cash flow and financing requirements. Implementation of the City Financial Plan is also dependent upon the City's ability to market its securities successfully in the public credit markets. The City's financing program for fiscal years 1997 through 2000 contemplates the issuance of $7.7 billion of general obligation bonds and $5.0 billion of bonds to be issued by the proposed New York City Infrastructure Finance Authority to finance education and transportation capital projects. The creation of the Infrastructure Finance Authority, which is subject to the enactment of legislation by the State, is being proposed by the City as part of the City's effort to avoid certain State constitutional limitations on the amount of general obligation debt the City is authorized to issue. The City's projections indicate that projected issuance of City debt may exceed its general debt limit by the end of the 1997 fiscal year unless legislation is enacted creating the Infrastructure Finance Authority or other legislative initiatives are identified and implemented. Without the Infrastructure Finance Authority or other legislative relief, the City's general obligation financed capital program with respect to new capital projects would be virtually brought to a halt through the fiscal year 2000. In addition, the City issues revenue notes and tax anticipation notes to finance its seasonal working capital requirements. The success of projected public sales of City bonds and notes and Infrastructure Finance Authority bonds, if and when authorized, will be subject to prevailing market conditions, and no assurance can be given that such sales will be completed. If the City were unable to sell its general obligation bonds and notes or the proposed Infrastructure Finance Authority were unable to sell its bonds, the City would be prevented from meeting its planned operating and capital expenditures. G-4 1997-2000 Financial Plan. The City Financial Plan for the 1997 through 2000 fiscal years projects revenues and expenditures for the 1997 fiscal year (July 1, 1996-June 30, 1997) for the City balanced in accordance with GAAP and reflects proposed actions to close a previously projected budget gap of approximately $2.6 billion. Such gap-closing actions primarily include spending reductions for Medicaid and welfare programs, City agency spending reductions, additional State aid, pension and debt service savings and the sale of certain City assets. The City Financial Plan also sets forth projections for the 1998 through 2000 fiscal years and outlines a proposed gap-closing program to close projected budget gaps of $1.7 billion, $2.7 billion and $3.4 billion for the 1998 through 2000 fiscal years, respectively, after successful implementation of the gap-closing program for the 1997 fiscal year. The City's projections set forth in the City Financial Plan are based on various assumptions and contingencies which are uncertain and which may not materialize. Changes in major assumptions could significantly affect the City's ability to balance its budget as required by State law and to meet its annual cash flow and financing requirements. Such assumptions and contingencies include the condition of the regional and local economies, the impact on real estate tax revenues of the real estate market, employment growth, wage increases for City employees consistent with those assumed in the City Financial Plan, continuation of interest earnings assumptions for pension fund assets, the ability of the City's hospital and education entities to maintain balanced budgets, provision of State and federal aid, the impact of Federal welfare reforms on City revenues and adoption of the budget by the City Council in substantially the form submitted by the Mayor. The City Financial Plan also assumes the timely extension by the State Legislature of the current rate structures for personal income, corporation and sales taxes imposed by the City. The City Financial Plan is also subject to the ability of the City to implement the expenditure reductions, sell the assets and obtain the debt service savings outlined in the City Financial Plan. In addition, the City may incur expenditures which exceed those projected in the City Financial Plan. There can be no assurance that additional gap-closing measures will not be required to enable the City to achieve a balanced budget in a particular fiscal year. Certain of the proposed actions are subject to negotiation with the City's municipal unions. Various other actions proposed for the 1998 through 2000 fiscal years are subject to approval by the Governor and the State legislature. The City depends on the State for State aid both to enable the City to balance its budget and to meet its cash requirements. If the State experiences revenue shortfalls or spending increases beyond its projections during the current or subsequent fiscal years, such developments could result in reductions in anticipated State aid to the City. In addition, there can be no assurance that the State budget in any given State fiscal year will be adopted by the April 1 statutory deadline and that there will not be adverse effects on the City's cash flow and additional City expenditures as a result of such reductions or delays. The City's financial plans have been the subject of extensive public comment and criticim. On July 16, 1996, the City Comptroller issued a report on the City Financial Plan which identified budget risks of up to $941 million, $2.58 billion, $3.53 billion and $4.31 billion for the City's 1997, 1998, 1999 and 2000 fiscal years, respectively. On July 18, 1996, the New York State Financial Control Board issued a report on the City Financial Plan which identified budget risks of $594 million, $1.08 billion, $851 million and $813 million for the City's 1997, 1998, 1999 and 2000 fiscal years, respectively. On July 18, 1996, the Office of the State Deputy Comptroller of New York issued a report on the City Financial Plan which identified budget risks of up to $848 million, $1.39 billion, $1.09 billion and $1.12 billion for the City's 1997, 1998, 1999 and 2000 fiscal years, respectively. Each of the reports noted that the City Financial Plan achieves budget balance for the 1997 fiscal year only with the inclusion of approximately $1.5 billion in non-recurring resources. On October 31, 1996, the City's Independent Budget Office ("IBO") released a report assessing the costs that could be incurred by the City as a result of recent federal welfare reforms. Assuming continued moderate economic performance, the IBO report projects that the City's cost of providing welfare could increase by $33 million in 1999, growing to $269 million by 2002. Moreover, if the requirement that all recipients work after two years of receiving benefits is enforced, these additional costs could total $723 million in 1999 and approximately $1 billion annually through 2002, reflecting substantial costs for worker training and supervision of new workers and increased child care costs. The report further noted that, if economic performance weakened, resulting in an increased number of G-5 public assistance cases, potential costs to the City could substantially increase. It is reasonable to expect that such reports will continue to be issued and to engender public comment. Ratings. As of November 21, 1996, Moody's rated the City's general obligation bonds "Baa1", Standard & Poor's rated such bonds "BBB+" and Fitch rated such bonds "A-". On February 28, 1996, Fitch placed the City's general obligation bonds on FitchAlert with negative implications. On November 5, 1996, Fitch removed the City's general obligation bonds from FitchAlert, although Fitch stated that the outlook remains negative. On July 10, 1995, Standard & Poor's revised downward its ratings on outstanding general obligation bonds of the City from "A-" to "BBB+". Such ratings reflect only the view of Moody's, Standard & Poor's and Fitch, from which an explanation of the significance of such ratings may be obtained. There is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely. Any such downward revision or withdrawal could have an adverse effect on the market prices of City bonds. Outstanding Indebtedness. As of September 30, 1996, the City had approximately $25.1 billion of long-term debt and as of October 1, 1996, the New York City Municipal Water Finance Authority (the "Water Authority") had approximately $6.6 billion of net long-term debt. Debt service on Water Authority obligations is secured by fees and charges collected from the users of the City's water and sewer system. State and federal regulations require the City's water supply to meet certain standards to avoid filtration. The City's water supply now meets all technical standards and the City's current efforts are directed toward protection of the watershed area. The City has taken the position that increased regulatory, enforcement and other efforts to protect its water supply, relating to such matters as land use and sewage treatment, will preserve the high quality of water in the upstate water supply system and prevent the need for filtration. The U.S. Environmental Protection Agency has granted the City a waiver of filtration regulations through 1996 and has stated it will issue a waiver through April, 2002 if the City and State implement certain protective actions estimated to cost approximately $400 million. If filtration of the City's water supply is ultimately required, the capital expenditure required could be between $4 billion and $5 billion. Such an expenditure could cause significant increases in City water and sewer charges. Litigation. The City is a defendant in a significant number of lawsuits. Such litigation includes, but is not limited to, routine litigation incidental to the performance of its governmental and other functions, actions commenced and claims asserted against the City arising out of alleged constitutional violations, alleged torts, alleged breaches of contracts and other alleged violations of law and condemnation proceedings and other tax and miscellaneous actions. While the ultimate outcome and fiscal impact, if any, on the proceedings and claims are not currently predictable, adverse determination in certain of them might have a material adverse effect upon the City's ability to carry out the City Financial Plan. As of June 30, 1996, the City estimated its potential future liability on account of all outstanding claims to be approximately $2.8 billion. G-6 APPENDIX H ECONOMIC AND FINANCIAL CONDITIONS IN PENNSYLVANIA The following information is a brief summary of factors affecting the economy of the State and does not purport to be a complete description of such factors. Other factors will affect issuers. The summary is based primarily upon one or more publicly available offering statements relating to debt offerings of state issuers, however, it has not been updated nor will it be updated during the year. The Trust has not independently verified the information. Many factors affect the financial condition of the Commonwealth of Pennsylvania (also referred to as the "Commonwealth") and its political subdivisions, such as social, environmental and economic conditions, many of which are not within the control of such entities. Pennsylvania and certain of its counties, cities and school districts and public bodies, most notably the City of Philadelphia, have from time to time in the past encountered financial difficulties which have adversely affected their respective credit standings. Such difficulties could affect outstanding obligations of such entities, including obligations held by the Fund. Further, the Washington-based Center on Budget and Policy Priorities issued a report in the spring of 1996 stating that recent and proposed state tax cuts, combined with structural problems in the state's revenue system, will lead to a $600 million annual deficit within five years. Governor Ridge's administration has challenged that report. The General Fund, the Commonwealth's largest fund, receives all tax revenues, non-tax revenues and Federal grants and entitlements that are not specified by law to be deposited elsewhere. The majority of the Commonwealth's operating and administrative expenses are payable from the General Fund. Debt service on all bonded indebtedness of the Commonwealth, except that issued for highway purposes or for the benefit of other special revenue funds, is payable from the General Fund. For the five year period fiscal 1991 through fiscal 1995, total revenues and other sources rose at a 9.1% average annual rate while expenditures and other uses grew by 7.4% annually. Over two-thirds of the increase in total revenues and other sources during this period occurred during fiscal 1992 when a $2.7 billion tax increase was enacted to address a fiscal 1991 budget deficit and to fund increased expenditures for fiscal 1992. For the four year period from fiscal 1992 through fiscal 1995, total revenues and other sources increased at an annual average of 3.3%, less than one-half the rate of increase for the five year period beginning with fiscal 1991. This slower rate of growth was due, in part, to tax reductions and other tax law revisions that restrained the growth of tax receipts for the fiscal years 1993, 1994 and 1995. Expenditures and other uses followed a pattern similar to that for revenues, although with smaller growth rates, during the fiscal years 1991 through 1995. Program areas having the largest increase in costs for the fiscal years 1991 through 1995 were for protection of persons and property, due to an expansion of state prisons, and for public health and welfare, due to rising caseloads, program utilization and increased prices. Recent efforts to restrain the rapid expansion of public health and welfare program costs have resulted in expenditure increases at or below the total rate of increase for total expenditures in each fiscal year. Fiscal 1995 was the fourth consecutive fiscal year the Commonwealth reported an increase in the fiscal year-end unappropriated balance. The fiscal 1995 unappropriated surplus (prior to reserves for transfer to the Tax Stabilization Fund) was $540 million, an increase of $204.2 million over the fiscal 1994 unappropriated surplus (prior to transfers). Commonwealth revenues were $459.4 million (2.9%) above the estimate of revenues used at the time the budget was enacted. The higher than estimated revenues from tax sources were due to faster economic growth in the national and state economy than had been projected when the budget was adopted. Expenditures from Commonwealth revenues (excluding pooled financing expenditures), including $65.5 million of supplemental appropriations enacted at the close of the 1995 fiscal year, totaled $15,674 million, representing an increase of 5% over spending during fiscal 1994. For GAAP purposes, the General Fund recorded a $49.8 million deficit for fiscal 1995, leading to a decline in the fund balance to $688.3 million at June 30, 1995. The two items which predominately contributed to the decline in the fund balance were (i) the use of a more comprehensive procedure to compute the liabilities for certain public welfare programs, leading to an increase for the year-end accruals, and (ii) a change in the H-1 methodology used to calculate the year-end accrual for corporate tax payables which increased the tax refund liability by $72 million for the 1995 fiscal year when compared to the previous fiscal year. The fiscal 1996 unappropriated surplus (prior to transfer to the Tax Stabilization Reserve Fund) was $183.8 million, $65.5 million above estimate. Net expenditures and encumbrances from Commonwealth revenues, including $113 million of supplemental appropriations (but excluding pooled financing expenditures) totalled $16,162.9 million. Expenditures exceeded available revenues and lapses by $253.2 million. The difference was funded from a planned partial drawdown of the $437 million fiscal year adjusted beginning unappropriated surplus. Commonwealth revenues (prior to tax refunds) for fiscal 1996 increased by $113.9 million over the prior year to $16,338.5 million (representing a growth rate of .7%). Tax rate reductions and other tax law changes substantially reduced the amount and rate of revenue growth for the fiscal year. It is estimated the tax changes enacted for the fiscal year reduced Commonwealth revenues by $283.4 million. The most significant tax changes enacted for the fiscal year were (i) acceleration of the reduction of the corporate net income tax rate to 9.99%; (ii) double weighing of the sales factor of the corporate net income apportionment calculation; (iii) an increase in the maximum annual allowance for a net operating loss deduction from .5 million to $1 million; (iv) an increase in the basic exemption amount for the capital stock and franchise tax; (v) the repeal of the tax on annuities; and (vi) the elimination of inheritance tax on transfers of certain property to surviving spouses. The enacted fiscal 1997 budget provides for expenditures from Commonwealth revenues of $16,375.8 million, an increase of .6% over appropriated amounts from Commonwealth revenues for fiscal 1996. The fiscal 1997 budget is based on anticipated Commonwealth revenues (before refunds) of $16,744.5 million, an increase over actual fiscal 1996 revenues of 2.5%. The revenue estimate includes provision for a $15 million tax credit program enacted with the fiscal 1997 budget for businesses creating new jobs. Staggered corporation tax years will cause fiscal 1997 revenues to continue to be affected by the business tax reductions enacted during the two prior completed fiscal years. Those reductions, together with the new jobs creation tax credit, cause revenue growth comparisons between fiscal 1996 and 1997 to be understated. When these tax changes are taken into account, revenues in the fiscal 1997 budget are anticipated to increase at the rate of 3%. The fiscal 1997 revenue estimate is based on a forecast of the national economy for real gross domestic product to slow to a growth rate of 2% for 1996 and below 1.5% for 1997. This is based on the assumption that the Federal Reserve Board does not cut interest rates and that foreign economic growth is weak. The consequence of this economic scenario is a U.S. economy with very low growth, slow gains in consumer spending, declining inflation rates, but increasing unemployment. Increased authorized spending for fiscal 1997 is driven largely by increased costs of the corrections and probation and payroll programs. The fiscal 1997 budget contains an appropriation increase in excess of $110 million for these programs. The fiscal 1997 budget also contains some departmental restructurings. Providing funding for certain program increases required reductions and savings in other programs funded from the General Fund. A major reform of the current welfare system was enacted in May, 1996 to encourage recipients toward self-sufficiency through work requirements, to provide temporary support for families showing personal responsibility and to maintain safeguards for those who cannot help themselves. The fiscal 1997 budget anticipates receiving $60 million of proceeds from the securitization of $151.7 million of loans held by the Sunny Day Fund. This fund was created to finance large-scale economic development loans to attract significant employment opportunities to the Commonwealth. Its funding was generally obtained from General Fund appropriations. The fund has been abolished and its loans have been transferred to the Pennsylvania Industrial Development Fund, which will issue bonds secured by its loan reserves (including the Sunny Day Fund). These bond proceeds will be used to refund outstanding debt of the Commonwealth. The effect of this transaction on the fiscal 1997 budget is to reduce the amount of debt service needed to be appropriated from the General Fund by at least $60 million. The fiscal 1997 budget is based on the presumption that federally enacted reforms to Medicaid will raise the federal reimbursement percentage for those costs to 57% from an approximate 53% rate for fiscal 1996. The H-2 higher reimbursement rate was anticipated to provide an additional $260 million of federal funds during fiscal 1997 and enable the Commonwealth to reduce its appropriations for the medical assistance program by a like amount for fiscal 1997. However, the U.S. Congress has not approved the legislation making these changes and current expectations are that additional federal funds will not be available at the time and in the amount as anticipated in the approved fiscal 1997 budget. The Commonwealth expects to use intergovernmental transfer funds obtained through a pooling transaction to help make up the loss of this funding. The fiscal 1997 budget assumes a drawdown of the $153.3 million fiscal year beginning unappropriated surplus to fund the enacted level of appropriations within the current estimate of revenues. A disaster emergency was declared by the Governor and a federal major disaster declaration was made by the President of the United States for certain counties in the Commonwealth for a blizzard and subsequent flooding in January, 1996. Substantial damage to public and private facilities occurred and many municipalities' financial resources have been strained by the costs of responding to these weather-related conditions. A special session of the General Assembly was convened by the Governor to consider legislation to respond to these needs. Legislation was enacted that authorized $110 million of general obligation debt to provide for the state's share of the required match for federal public assistance and disaster mitigation funds. The legislation also appropriated $13 million from tax amnesty receipts to fund the state match for the federal individual assistance program, and authorized the use of current Motor License Fund revenues for capital projects to repair flood damaged state highways and bridges. Pennsylvania has historically been identified as a heavy industry state although that reputation has changed over the last thirty years as the coal, steel and railroad industries declined and the Commonwealth's business environment readjusted to reflect a more diversified industrial base. This economic readjustment was a direct result of a long-term shift in jobs, investment and workers away from the northeast part of the nation. Currently, the major sources of growth in Pennsylvania are in the service sector, including trade, medical and the health services, education and financial institutions. Nonagricultural employment in Pennsylvania over the last ten years increased at an annual rate of 1.02%. This compares to a .36% rate for the Middle Atlantic region and 1.8% rate for the United States as a whole during the period 1986 through 1995. For the last three years, employment in the Commonwealth has increased 3.4%, as compared to 2.9% growth in the Middle Atlantic region. The unemployment rate in Pennsylvania for August, 1996, stood at a seasonably adjusted rate of 5.3%. The seasonably adjusted national unemployment rate for August, 1996, was 5.1%. The current Constitutional provisions pertaining to Commonwealth debt permit the issuance of the following types of debt: (i) debt to suppress insurrection or rehabilitate areas affected by disaster, (ii) electorate approved debt, (iii) debt for capital projects subject to an aggregate debt limit of 1.75 times the annual average tax revenues of the preceding five fiscal years and (iv) tax anticipation notes payable in the fiscal year of issuance. All debt except tax anticipation notes must be amortized in substantial and regular amounts. Debt service on all bonded indebtedness of Pennsylvania, except that issued for highway purposes or the benefit of other special revenue funds, is payable from Pennsylvania's General Fund, which receives all Commonwealth revenues that are not specified by law to be deposited elsewhere. As of June 30, 1996, the Commonwealth had $5,054.5 million of general obligation debt outstanding. Other state-related obligations include "moral obligations". Moral obligation indebtedness may be issued by the Pennsylvania Housing Finance Agency ("PHFA"), a state agency which provides financing for housing for lower and moderate income families, and The Hospitals and Higher Education Facilities Authority of Philadelphia, a municipal authority organized by the City of Philadelphia to, among other things, acquire and prepare various sites for use as intermediate care facilities for the mentally retarded. PHFA's bonds, but not its notes, are partially secured by a capital reserve fund required to be maintained by PHFA in an amount equal to the maximum annual debt service on its outstanding bonds in any succeeding calendar year. PHFA is not permitted to borrow additional funds as long as any deficiency exists in the capital reserve fund. H-3 The Commonwealth, through several of its departments and agencies, has entered into various agreements to lease, as lessee, certain real property and equipment, and to make lease payments for the use of such property and equipment. Some of those leases and their respective lease payments are, with the Commonwealth approval, pledged as security for debt obligations issued by certain public authorities or other entities within the state. All lease payments due from Commonwealth departments and agencies are subject to and dependent upon an annual spending authorization approved through the Commonwealth's annual budget process. The Commonwealth is not required by law to appropriate or otherwise provide monies from which the lease payments are to be made. The obligations to be paid from such lease payments are not bonded debt of the Commonwealth. Certain state-created agencies have statutory authorization to incur debt for which state appropriations to pay debt service thereon is not required. The debt of these agencies is funded by assets of, or revenues derived from the various projects financed and is not an obligation of the Commonwealth. Some of these agencies, however, are indirectly dependent on Commonwealth operating appropriations. In addition, the Commonwealth maintains pension plans covering all state employees, public school employees and employees of certain state- related organizations. For the fiscal year ended in 1995, the State Employees' Retirement System had a $443 million surplus and the Public School Employees' Retirement System had a total unfunded actuarial accrued liability of $3,102 million. The City of Philadelphia is the largest city in the Commonwealth with an estimated population of 1,585,577 according to the 1990 Census. Legislation providing for the establishment of Pennsylvania Intergovernmental Cooperation Authority ("PICA") to assist Philadelphia in remedying fiscal emergencies was enacted by the Pennsylvania General Assembly and approved by the Governor in June, 1991. PICA is designed to provide assistance through the issuance of funding debt and to make factual findings and recommendations to Philadelphia concerning its budgetary and fiscal affairs. At this time, Philadelphia is operating under a five year fiscal plan approved by PICA on April 30, 1996. PICA has issued $1.76 billion of its Special Tax Revenue Bonds. This financial assistance has included the refunding of certain city general obligation bonds, funding of capital projects and the liquidation of the Cumulative General Fund balance deficit as of June 30, 1992 of $224.9 million. The audited General Fund balance of Philadelphia as of June 30, 1995 shows a surplus of approximately $80.5 million, up from approximately $15.4 million as of June 30, 1994. No further bonds are to be issued by PICA for the purpose of financing a capital project or deficit as the authority for such bond sales expired December 31, 1994. PICA's authority to issue debt for the purpose of financing a cash flow deficit expires on December 31, 1996. Its ability to refund existing outstanding debt is unrestricted. PICA had $1,146,175,000 in special revenue bonds outstanding as of June 30, 1996. There is various litigation pending against the Commonwealth, its officers and employees. In 1978, the Pennsylvania General Assembly approved a limited waiver of sovereign immunity. Damages for any loss are limited to $250,000 for each person and $1 million for each accident. The Supreme Court held that this limitation is constitutional. Approximately 3,500 suits against the Commonwealth are pending. The following are among the cases with respect to which the Office of Attorney General and the Office of General Counsel have determined that an adverse decision may have a material effect on government operations of the Commonwealth: Baby Neal v. Commonwealth, et al. In 1990, the American Civil Liberties Union and other various named plaintiffs filed an action against the Commonwealth in Federal court seeking an order that would require the Commonwealth to provide additional funding for child welfare services. No figures for the amount of funding sought are available. However, a similar lawsuit filed in the Commonwealth Court of Pennsylvania was resolved through a court approved settlement which provides, among other things, for Commonwealth funding for such services in fiscal year 1991 and a commitment to pay Pennsylvania counties $30 million over five years. In December 1994, the Third Circuit Court of Appeals reversed the District Court's denial of the plaintiff's motion for class certification with respect H-4 to the interests of 16 minor plaintiffs. As a result, the District Court has recently certified the class and the parties have resumed discovery. County of Allegheny v. Commonwealth of Pennsylvania On December 7, 1987, the Supreme Court of Pennsylvania held that the statutory scheme for county funding of the judicial system is in conflict with the Pennsylvania Constitution. However, judgment was stayed in order to afford the General Assembly an opportunity to enact appropriate funding legislation consistent with its opinion. Since that time, the Supreme Court has denied various actions and motions by several Pennsylvania municipalities to compel the Commonwealth to comply with the Supreme Court's 1987 decision or to restore funding for local courts and district justices to levels existing in 1987. On December 7, 1992, the State Association of County Commissioners filed a new action in mandamus seeking to compel the Commonwealth to comply with the Supreme Court's decision in County of Allegheny. The Commonwealth has filed a response in opposition to the new action. The Court issued the writ on July 26, 1996, and appointed a special master to devise and submit a plan for implementation. Recently, the President of the Senate and the Speaker of the House filed a petition seeking reconsideration from the Court. The General Assembly has yet to consider legislation implementing the Pennsylvania Supreme Court's judgment. Fidelity Bank v. Commonwealth of Pennsylvania On November 30, 1989, Fidelity Bank, N.A. ("Fidelity") filed an action challenging the constitutional validity of a 1989 amendment increasing the bank shares tax and related legislation. The Commonwealth Court ruled in favor of the Commonwealth finding no constitutional deficiencies in the tax increase, but invalidating one element of the legislation which provided a credit to new banks (the "new bank tax credit"). Fidelity, the Commonwealth and certain intervener banks appealed to the Pennsylvania Supreme Court. However, pursuant to a Settlement Agreement dated as of April 21, 1995, the Commonwealth agreed to enter a credit in favor of Fidelity in the amount of $4,100,000 in settlement of the constitutional and non-constitutional issues. The credit represents approximately 5% of the potential claim of Fidelity, had the constitutional issues been resolved in its favor. Pursuant to a separate Settlement Agreement dated as of April 21, 1995, the Commonwealth also settled with the intervening banks with respect to issues concerning the new bank tax credit. Notwithstanding the foregoing settlements, other banks have filed protective petitions which are currently pending at the various administrative agencies challenging the validity of the 1989 tax increase. Depending on the outcome of those administrative appeals, one or more of these banks may seek to raise the issues which were adjudicated by Fidelity, although not brought to resolution by the Pennsylvania Supreme Court. Pennsylvania Association of Rural and Small Schools (PARSS) v. Casey In January 1991, an association of rural and small schools and several other parties filed a lawsuit against then Governor Robert P. Casey and former Secretary of Education, Donald M. Carroll challenging the constitutionality of the Commonwealth system for funding local school districts. The litigation consists of two parallel cases, one in the Commonwealth Court of Pennsylvania and one in the United States District Court for the Middle District of Pennsylvania. The federal court case has been indefinitely stayed pending resolution of the state court case. The Judge in the state court case has issued an order scheduling trial to commence January 6, 1997. Because of the number of witnesses identified by the petitioners and the interviews that had not been previously disclosed, the Court has authorized the Commonwealth respondents to conduct additional discovery depositions. Austin v. Department of Corrections, et al. In November 1990, the American Civil Liberties Union filed a class action lawsuit in the United States District Court for the Eastern District of Pennsylvania on behalf of inmate populations in various Pennsylvania correctional institutions, challenging the conditions of confinement and seeking injunctive relief. On January 17, H-5 1995, the Court approved a Settlement Agreement between the parties, pursuant to which the Commonwealth paid $1.3 million in attorneys' fees to the plaintiffs' attorneys, with an additional $100,000 to be paid upon dismissal of a preliminary injunction relating to certain health issues. The parties are presently complying with monitoring provisions outlined in the Settlement Agreement. The monitoring phase will expire on January 8, 1998. The attorneys' fees for the 3-year monitoring period will not exceed $60,000 in any one year. Envirotest/Synterra Partners On December 15, 1995, Envirotest Systems Corporation, Envirotest Partners ("Envirotest") and the Commonwealth of Pennsylvania entered into a Settlement Agreement pursuant to which the parties settled all claims which Envirotest might have against the Commonwealth arising from the suspension of an emissions testing program. Under the Settlement Agreement, Envirotest is to receive $145 million, with interest at 6% per annum, in payments of $25 million in 1995, and $40 million each in 1996, 1997 and 1998. An additional $15 million may be required to be paid in 1998 depending on the results of property liquidations by Envirotest. Pennsylvania Human Relations Commission v. School District of Philadelphia, et al. v. Commonwealth of Pennsylvania, et al. On November 3, 1995, the Commonwealth of Pennsylvania and the Governor of Pennsylvania, along with the City of Philadelphia and the Mayor of Philadelphia, were joined as additional respondents in an enforcement action commenced in Commonwealth Court in 1973 by the Pennsylvania Human Relations Commission against the School District of Philadelphia pursuant to the Pennsylvania Human Relations Act. The enforcement action was pursued to remedy unintentional conditions of segregation in the public schools of Philadelphia. The Commonwealth and the City were joined in the "remedial phase" of the proceeding "to determine their liability, if any, to pay additional costs necessary to remedy the unlawful conditions found to exist in the Philadelphia public schools." On February 28, 1996, the School District of Philadelphia filed a third-party complaint against the Commonwealth of Pennsylvania asking Commonwealth Court to require the Commonwealth to "supply such funding as is necessary for full compliance with the November 28, 1994 and other remedial orders of the Commonwealth Court." In addition, a group of interveners on March 4, 1996 filed a third-party complaint against the Commonwealth of Pennsylvania and the City of Philadelphia requesting Commonwealth Court to declare that "it is the obligation of the Commonwealth and the City to supply the additional funds identified as necessary for the District to fully comply with the orders of the Commonwealth Court," and to require the Commonwealth and the City to supply such additional funding as is necessary for the District to comply with the orders. On April 30, 1996, Commonwealth Court Judge Doris A. Smith overruled the Commonwealth's and City's preliminary objections seeking dismissal of the claims against them. The Commonwealth and the City thereafter filed answers to the complaints, asserting numerous defenses. The Commonwealth also asserted a cross-claim against the City of Philadelphia claiming that if any party is liable, sole liability rests with the City; in the alternative, the Commonwealth argued that if it is held to be liable, it has a right of indemnity of contribution against the City. Trial commenced on May 30, 1996. During the course of the trial, upon motion of the Commonwealth, the Pennsylvania Supreme Court on July 3, 1996 assumed extraordinary plenary jurisdiction and directed Judge Smith to conclude the proceedings within 60 days and to file with the Supreme Court findings of fact, conclusions of law and a final opinion. On August 20, 1996, Judge Smith issued an Opinion and Order pursuant to which judgment was entered in favor of the School District of Philadelphia and the interveners and against the Commonwealth of Pennsylvania and the Governor of Pennsylvania. Judgment was also entered in favor of the City of Philadelphia and the Mayor of Philadelphia with respect to the intervener's claim and on the cross-claim filed by the Commonwealth and Governor. The Judge ordered the Commonwealth and Governor to submit a plan to the Court within thirty days detailing the means by which the Commonwealth will effectuate the transfer of additional funds payable to the H-6 School District of Philadelphia to enable it to comply with the remedial order during fiscal year 1996-1997 and any future years during which the School District establishes its fiscal incapacity to fund the remedial programs. Judge Smith specifically found that "[b]ecause of the lack of adequate funds to comply with the remedial order, the School District is entitled to additional resources for 1996-1997 of $45.1 million." On August 30, 1996, the Commonwealth filed exceptions to the Findings of Fact, Conclusions of Law and Opinion and Order of Judge Smith along with a Motion to Vacate the purported Order and a Notice of Appeal and Jurisdictional Statement. On September 10, 1996, the Pennsylvania Supreme Court issued an order granting the Commonwealth's Motion to Vacate and directed its Prothonotary to establish a briefing schedule and date for oral argument. It also issued a further order limiting the issues to be addressed and stated that the Commonwealth Court is divested of jurisdiction of the matter and all further proceedings in the Commonwealth Court are stayed pending further order of the Supreme Court. The Supreme Court retained jurisdiction in the matter. Currently, Pennsylvania general obligation bonds are rated AA- by Standard & Poor's and Fitch, and A1 by Moody's. There can be no assurance that the economic conditions on which these ratings are based will continue or that particular bond issues will not be adversely affected by changes in economic or political conditions. H-7 APPENDIX I RATINGS OF MUNICIPAL BONDS DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND RATINGS Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge". Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper- medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa Bonds which are rated Baa are considered as medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payment and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes possess the strongest investment attributes are designated by the symbols Aa1, A1, Baa1, Ba1 and B1. Short-term Notes: The four ratings of Moody's for short-term notes are MIG1/VMIG1, MIG2/VMIG2, MIG3/VMIG3 and MIG4/VMIG4; MIG1/VMIG1 denotes "best quality . . . strong protection by established cash flows"; MIG2/VMIG2 denotes "high quality" with ample margins of protection; MIG3/VMIG3 notes are of "favorable quality . . . but . . . lacking the undeniable strength of the preceding grades"; MIG4/VMIG4 notes are of "adequate quality . . . protection commonly regarded as required of an investment security is present . . . there is specific risk." I-1 DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS Excerpts from Moody's description of its corporate bond ratings: Aaa--judged to be the best quality, carry the smallest degree of investment risk; Aa--judged to be of high quality by all standards; A--possess many favorable investment attributes and are to be considered as upper-medium-grade obligations; Baa--considered as medium grade obligations, i.e, they are neither highly protected nor poorly secured. DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS Moody's Commercial Paper ratings are opinions of the ability of issuers to repay punctually promissory obligations not having an original maturity in excess of nine months. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers: Issuers rated Prime-1 (or related supporting institutions) have a superior capacity for repayment of short-term promissory obligations. Prime-1 repayment capacity will normally be evidenced by the following characteristics: leading market positions in well established industries; high rates of return on funds employed; conservative capitalization structures with moderate reliance on debt and ample asset protection; broad margins in earnings coverage of fixed financial charges and high internal cash generation; and well established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated Prime-2 (or related supporting institutions) have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated Prime-3 (or related supporting institutions) have an acceptable capacity for repayment of short-term promissory obligations. The effects of industry characteristics and market composition may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and the requirement for relatively high financial leverage. Adequate alternate liquidity is maintained. Issuers rated Not Prime do not fall within any of the Prime rating categories. DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES' ("STANDARD & POOR'S") MUNICIPAL DEBT RATINGS A Standard & Poor's municipal debt rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers or lessees. The debt rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished by the issuer or obtained by Standard & Poor's from other sources Standard & Poor's considers reliable. Standard & Poor's does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended or withdrawn as a result of changes in, or unavailability of, such information, or for other circumstances. The ratings are based, in varying degrees, on the following considerations: I. Likelihood of default--capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation; II. Nature of and provisions of the obligation; I-2 III. Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the higher-rated issues only in small degree. A Debt rated "A" has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. BBB Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than for debt in higher-rated categories. BB Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on balance, as B predominately speculative with respect to capacity to pay interest and CCC repay principal in accordance with the terms of the obligation. "BB" CC indicates the lowest degree of speculation and "C" the highest degree of C speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. C1 The rating "CI" is reserved for income bonds on which no interest is being paid. D Debt rated "D" is in payment default. The "D" rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The "D" rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. DESCRIPTION OF STANDARD & POOR'S CORPORATE BOND RATINGS A Standard & Poor's corporate debt rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. Debt rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. Debt rated "AA" has a very strong capacity to pay interest and to repay principal and differs from the highest rated issues only in small degree. Debt rated "A" has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt of a higher-rated category. Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories. The ratings from "AA" to "BBB" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS A Standard & Poor's Commercial Paper Rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into four categories, ranging from "A" for the highest quality obligations to "D" for the lowest. Ratings are applicable to both taxable and tax-exempt commercial paper. Issues assigned the highest rating are regarded as having the greatest capacity for I-3 timely payment. Issues in this category are further refined with the designation 1, 2 or 3 to indicate the relative degree of safety. These categories are as follows: A-1 This designation indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation. A-2 Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as overwhelming as for issues designated "A-1". A-3 Issues carrying this designation have a satisfactory capacity for timely payment. They are, however, somewhat more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. B Issues rated "B" are regarded as having only speculative capacity for timely payment. C This rating is assigned to short-term debt obligations with a doubtful capacity for payment. D Debt rated "D" is in payment default. The "D" rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. A Commercial Paper Rating is not a recommendation to purchase or sell a security. The ratings are based on current information furnished to Standard & Poor's by the issuer and obtained by Standard & Poor's from other sources it considers reliable. The ratings may be changed, suspended or withdrawn as a result of changes in, or unavailability of, such information. A Standard & Poor's note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in 3 years or less will likely receive a note rating. Notes maturing beyond 3 years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment. --Amortization schedule (the larger the final maturity relative to other maturities, the more likely it will be treated as a note). --Source of payment (the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note). Note rating symbols are as follows: SP-1 A very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a "+" designation. SP-2 A satisfactory capacity to pay principal and interest. SP-3 A speculative capacity to pay principal and interest. Standard & Poor's may continue to rate note issues with a maturity greater than three years in accordance with the same rating scale currently employed for municipal bond ratings. Unrated: Where no rating has been assigned or where a rating has been suspended or withdrawn, it may be for reasons unrelated to the quality of the issue. Should no rating be assigned, the reason may be one of the following: 1. An application for rating was not received or accepted. 2. The issue or issuers belongs to a group of securities that are not rated as a matter of policy. 3. There is a lack of essential data pertaining to the issue or issuer. 4. The issue was privately placed, in which case the rating is not published in Standard & Poor's publications. Suspension or withdrawal may occur if new and material circumstances arise, the effects of which preclude satisfactory analysis; if there is no longer available reasonable up-to-date information to permit a judgment to be formed; if a bond is called for redemption; or for other reasons. I-4 DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S ("FITCH") INVESTMENT GRADE BOND RATINGS Fitch investment grade bond ratings provide a guide to investors in determining the credit risk associated with a particular security. The ratings represent Fitch's assessment of the issuer's ability to meet the obligations of a specific debt issue or class of debt in a timely manner. The rating takes into consideration special features of the issue, its relationship to other obligations of the issuer, the current and prospective financial condition and operating performance of the issuer and of any guarantor, as well as the economic and political environment that might affect the issuer's future financial strength and credit quality. Fitch ratings do not reflect any credit enhancement that may be provided by insurance policies or financial guaranties unless otherwise indicated. Bonds that have the same rating are of similar but not necessarily identical credit quality since the rating categories do not fully reflect small differences in the degrees of credit risk. Fitch ratings are not recommendations to buy, sell or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect of any security. Fitch ratings are based on information obtained from issuers, other obligors, underwriters, their experts, and other sources Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of such information. Ratings may be changed, suspended or withdrawn as a result of changes in, or the unavailability of, information or for other reasons. AAA Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated "F-1+". A Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore, impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to indicate the relative position of a credit within the rating category. Plus and minus signs, however, are not used in the "AAA" category. Credit Trend Indicator: Credit trend indicators show whether credit fundamentals are improving, stable, declining, or uncertain, as follows: Improving (up arrow) Stable (left arrow)(right arrow) Declining (down arrow) Uncertain (up arrow)(down arrow) I-5 Credit trend indicators are not predictions that any rating change will occur, and have a longer-term time frame than issues placed on FitchAlert. NR Indicates that Fitch does not rate the specific issue. Conditional A conditional rating is premised on the successful completion of a project or the occurrence of a specific event. Suspended A rating is suspended when Fitch deems the amount of information available from the issuer to be inadequate for rating purposes. Withdrawn A rating will be withdrawn when an issue matures or is called or refinanced and, at Fitch's discretion, when an issuer fails to furnish proper and timely information. FitchAlert Ratings are placed on FitchAlert to notify investors of an occurrence that is likely to result in a rating change and the likely direction of such change. These are designated as "Positive," indicating a potential upgrade, "Negative," for potential downgrade, or "Evolving," where ratings may be raised or lowered. FitchAlert is relatively short-term, and should be resolved within 12 months. DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS Fitch speculative grade bond ratings provide a guide to investors in determining the credit risk associated with a particular security. The ratings ("BB" to "C") represent Fitch's assessment of the likelihood of timely payment of principal and interest in accordance with the terms of obligation for bond issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an assessment of the ultimate recovery value through reorganization or liquidation. The rating takes into consideration special features of the issue, its relationship to other obligations of the issuer, the current and prospective financial condition and operating performance of the issuer and any guarantor, as well as the economic and political environment that might affect the issuer's future financial strength. Bonds that have the same rating are of similar but not necessarily identical credit quality since rating categories cannot fully reflect the differences in degrees of credit risk. BB Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. B Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue. CCC Bonds have certain identifiable characteristics which, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment. CC Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time. C Bonds are in imminent default in payment of interest or principal. DDD, DD and D Bonds are in default on interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. "DDD" represents the highest potential for recovery on these bonds, and "D" represents the lowest potential for recovery. I-6 Plus (+) or Minus (-): Plus or minus signs are used with a rating symbol to indicate the relative position of a credit within the rating category. Plus and minus signs, however, are not used in the "DDD", "DD", or "D" categories. DESCRIPTION OF FITCH INVESTMENT GRADE SHORT-TERM RATINGS Fitch's short-term ratings apply to debt obligations that are payable on demand or have original maturities of generally up to three years, including commercial paper, certificates of deposit, medium-term notes, and municipal and investment notes. The short-term rating places greater emphasis than a long-term rating on the existence of liquidity necessary to meet the issuer's obligations in a timely manner. Fitch short-term ratings are as follows: F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. F-1 Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated "F-1+". F-2 Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned "F-1+" and "F-1" ratings. F-3 Fair Credit Quality. Issues assigned this rating have characteristics suggesting that the degree of assurance for timely payment is adequate; however, near-term adverse changes could cause these securities to be rated below investment grade. F-4 Weak Credit Quality. Issues assigned this rating have characteristics suggesting a minimal degree of assurance for timely payment and are vulnerable to near-term adverse changes in financial and economic conditions. D Default. Issues assigned this rating are in actual or imminent payment default. LOC The symbol "LOC" indicates that the rating is based on a letter of credit issued by a commercial bank. INS The symbol "INS" indicates that the rating is based on an insurance policy or financial guaranty issued by an insurance company. I-7 INDEPENDENT AUDITORS' REPORT The Board of Trustees and Shareholders, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust: We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of Merrill Lynch Limited Maturity Municipal Bond Funds for Arizona, California, Florida, Massachusetts, Michigan, New Jersey, New York, and Pennsylvania of the Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the "Trust") as of July 31, 1996, the related statements of operations for the year then ended and changes in net assets for each of the years in the two-year period then ended and the financial highlights for each of the years in the two-year period then ended and for the period November 26, 1993 (commencement of operations) to July 31, 1994. These financial statements and the financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at July 31, 1996 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of Merrill Lynch Limited Maturity Municipal Bond Funds for Arizona, California, Florida, Massachusetts, Michigan, New Jersey, New York, and Pennsylvania of the Merrill Lynch Multi-State Limited Maturity Municipal Series Trust as of July 31, 1996, the results of their operations, the changes in their net assets, and the financial highlights for the respective stated periods in conformity with generally accepted accounting principles. Deloitte & Touche LLP Princeton, New Jersey September 6, 1996 J-1 ++Highest short-term rating by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements. California Limited Maturity Municipal Bond Fund
S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) California--97.2% California Educational Facilities Authority, Revenue Refunding Bonds: NR* A1 $ 500 (Loyola Marymount University), 5.70% due 10/01/2002 $ 528 NR* A 685 (Saint Mary's College), 4.90% due 10/01/2003 688 AAA Aaa 500 California Health Facilities Financing Authority, Revenue Refunding Bonds (Catholic Healthcare West), Series A, 5.30% due 7/01/2003 (d) 516 California Pollution Control Financing Authority, PCR, Refunding, VRDN (a): A-1 NR* 600 (Pacific Gas and Electric Co.), AMT, Series G, 3.50% due 2/01/2016 600 A1+ VMIG1++ 400 (Shell Oil Company Project), Series C, 3.30% due 11/01/2000 400 California Pollution Control Financing Authority, Resource Recovery Revenue Bonds, VRDN, AMT (a): NR P1 500 (Delano Project), Series 1991, 3.65% due 8/01/2019 500 NR P1 200 Refunding (Ultra Power Malaga Project), Series A, 3.70% due 4/01/2017 200 California State, GO, UT: A+ A1 750 6.75% due 10/01/2003 840
J-2 A+ A1 1,000 6.10% due 9/01/2004 1,083 AAA Aaa 750 6.35% due 11/01/2004 (b) 829 AAA Aaa 600 California State Public Works Board, Lease Revenue Bonds (Department of Corrections--State Prison/Central California Women's Facility, Madera County), Series A, 7% due 9/01/2000 (e) 669 AAA Aaa 500 California Statewide Communities Development Authority, Lease Revenue Refunding Bonds (Oakland Convention Center Project), 5.70% due 10/01/2002 (d) 527 A+ NR* 700 East Bay, California, Municipal Utility District, Water System Revenue Bonds, Sub-Series, 7.40% due 6/01/2000 (e) 785 AAA Aaa 200 Los Angeles, California, Department of Airports, Airport Revenue Refunding Bonds, Series A, 6% due 5/15/2005 (b) 215 AA- Aa 650 Los Angeles, California, Department of Water and Power, Electric Plant Revenue Bonds, 6% due 4/01/2002 694 Los Angeles, California, Harbor Department Revenue Bonds, AMT, Series B: AA Aa 275 6% due 8/01/2000 289 AA Aa 295 6% due 8/01/2001 312 AA Aa 500 6% due 8/01/2004 535 Los Angeles County, California, Metropolitan Transportation Authority, Sales Tax Revenue Bonds (Proposition C-Second Senior): A1+ VMIG1++ 200 Refunding, VRDN, Series A, 3.25% due 7/01/2020 (a)(c) 200 AAA Aaa 400 Series B, 8% due 7/01/2003 (d) 474 AA- Aa1 1,000 Los Angeles County, California, Public Works Financing Authority, Revenue Refunding Bonds (Capital Construction), 4.80% due 3/01/2004 990 A1+ NR* 400 Moor Park, California, M/F Mortgage Revenue Refunding Bonds (Le Club Apartments Project), VRDN, Series A, 3.25% due 11/01/2015 (a) 400 AAA Aaa 750 San Diego County, California, Regional Transportation Commission, Sales Tax Revenue Bonds (Second Senior Sales Tax), Series A, 4% due 4/01/1997 (b) 752 AAA Aaa 700 San Francisco, California, City and County Sewer Revenue Bonds, Series A, 5.375% due 10/01/1999 (b) 723 AAA Aaa 500 Santa Clara County, California, Financing Authority, Lease Revenue Bonds (VMC Facility Replacement Project), Series A, 5.80% due 11/15/2000 (d) 527 AAA Aaa 500 University of California, Revenue Refunding Bonds (Multi-Purpose Projects), Series C, 10% due 9/01/2001 (d) 620 Puerto Rico--1.3% A1+ VMIG1++ 200 Puerto Rico Commonwealth, Government Development Bank, Refunding, VRDN, 3.20% due 12/01/2015 (a) 200 Total Investments (Cost--$14,538)--98.5% 15,096 Other Assets Less Liabilities--1.5% 225 ------- Net Assets--100.0% $15,321 ======= (a)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at July 31, 1996. (b)FGIC Insured. (c)MBIA Insured. (d)AMBAC Insured. (e)Prerefunded. *Not Rated. ++Highest short-term rating by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements. Portfolio Abbreviations To simplify the listings of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust's portfolio holdings in the Schedule of Investments, we have abbreviated the names of many of the securities according to the list at right. AMT Alternative Minimum Tax (subject to) COP Certificates of Participation DATES Daily Adjustable Tax-Exempt Securities EDA Economic Development Authority GO General Obligation Bonds HFA Housing Finance Agency IDA Industrial Development Authority IDR Industrial Development Revenue Bonds M/F Multi-Family PCR Pollution Control Revenue Bonds TAN Tax Anticipation Notes TRAN Tax Revenue AnticipationNotes UPDATES Unit Priced Demand Adjustable Tax-Exempt Securities UT Unlimited Tax VRDN Variable Rate Demand Notes J-3 MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996 SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Florida Limited Maturity Municipal Bond Fund S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Florida--92.0% AAA Aaa $ 1,000 Broward County, Florida, School District, UT, 7.125% due 2/15/1999 (e) $ 1,088 Dade County, Florida, Aviation Revenue Refunding Bonds, Series A (b): AAA Aaa 300 5.60% due 10/01/2004 315 AAA Aaa 1,000 AMT, 5.25% due 10/01/1997 1,014 A1+ VMIG1++ 1,200 Dade County, Florida, IDA, IDR (Dolphins Stadium Project), VRDN, Series D, 3.55% due 1/01/2016 (a) 1,200 AAA Aaa 800 Dade County, Florida, Special Obligation, Refunding, Series B, 4.80% due 10/01/2002 (b) 807 AAA Aaa 1,185 Dunedin, Florida, Hospital Revenue Bonds (Mease Health Care), 6.75% due 11/15/2001 (d)(e) 1,325 Florida State Board of Education, Capital Outlay (Public Education): AA Aa 850 Refunding, 5.50% due 6/01/2001 884 AAA Aaa 1,000 Refunding, Series A, 7.25% due 6/01/2000 (e) 1,114 AA Aa 1,000 Series B, 5.625% due 6/01/2005 1,047 Florida State Division, Bond Finance Department, General Services Revenue Bonds (Department of Natural Resources Preservation): AAA Aaa 1,730 Refunding (Save Our Coast), Series A, 6.30% due 7/01/2004 (d) 1,853 AAA Aaa 1,000 Series 2000-A, 5.75% due 7/01/2000 (d) 1,047 AAA Aaa 1,900 Series 2000-A, 6.40% due 7/01/2002 (b) 2,072 A A 100 Hillsborough County, Florida, Capital Improvement Revenue Bonds (County Center Project), Second Series, 6.75% due 7/01/2002 (e) 112 Jacksonville, Florida, Electric Authority, Revenue Refunding Bonds (Saint John's), Issue 2: AA Aa1 1,000 Series 6-C, 6.50% due 10/01/2001 1,082 AA Aa1 1,000 (Special Obligation) Series 6-B, 6.65% due 10/01/2002 1,081 NR VMIG1++ 300 Jacksonville, Florida, Health Facilities Authority, Hospital Revenue Refunding Bonds (Genesis Rehabilitation Hospital), VRDN, 3.65% due 5/01/2021 (a) 300 AAA Aaa 1,000 Kissimmee, Florida, Water and Sewer Revenue Refunding Bonds, 5.50% due 10/01/2003 (b) 1,042 AA- Aa 800 Lakeland, Florida, Electric and Water Revenue Bonds, 6.70% due 10/01/1999 856 AAA Aaa 500 Lee County, Florida, Capital Improvement Revenue Bonds, Sub-Series 2, 6.75% due 10/01/1997 (d)(e) 526 AAA Aaa 1,200 North Miami, Florida, Health Facilities Authority, Health Facility Revenue Bonds (Bon Secours Health System Project), 6% due 8/15/2002 (e)(f) 1,303 AAA Aaa 1,300 Okaloosa County, Florida, School Board Sales Tax Revenue Bonds, 5% due 9/01/1997 (c) 1,316 AAA Aaa 1,000 Palm Bay, Florida, Utility Revenue Bonds (Palm Bay Utility Corp. Project), Series B, 6.20% due 10/01/2002 (d)(e) 1,099 SP1+ NR* 250 Palm Beach County, Florida, School District, TAN, 4.50% due 9/27/1996 250 NR* Baa1 1,440 Pembroke Pines, Florida, Special Assessment No. 94-1, 4.80% due 11/01/1998 1,448 A1 VMIG1++ 200 Pinellas County, Florida, Health Facilities Authority, Revenue Refunding Bonds (Pooled Hospital Loan Program), DATES, 3.70% due 12/01/2015 (a) 200 AAA Aaa 1,235 Saint Lucie County, Florida, School Board, COP, Series A, 7.25% due 7/01/2000 (b)(e) 1,378 Puerto Rico--5.4% A Baa1 500 Puerto Rico Commonwealth, GO, UT, 5.55% due 7/01/2001 517 A Baa1 1,000 Puerto Rico Commonwealth, Refunding, Improvement Bonds, UT, 5.30% due 7/01/2004 1,013 Total Investments (Cost--$26,691)--97.4% 27,289 Other Assets Less Liabilities--2.6% 733 ------- Net Assets--100.0% $28,022 ======= (a)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at July 31, 1996. (b)AMBAC Insured. (c)FSA Insured. (d)MBIA Insured. (e)Prerefunded. *Not Rated. ++Highest short-term rating by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements. J-4 Massachusetts Limited Maturity Municipal Bond Fund
S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Massachusetts-- NR* A1 $ 295 Boston, Massachusetts, Economic Development and Industrial Corp., 97.2% Public Parking Facility, Series 1990, 5% due 7/01/2000 $ 291 AAA Aaa 300 Chelsea, Massachusetts, School Project Loan Act of 1948, UT, 6% due 6/15/2002 (c) 319 AAA Aaa 215 Fall River, Massachusetts, GO, 6.30% due 6/01/1998 (b) 223 A1+ NR* 200 Holyoke, Massachusetts, PCR, Refunding (Holyoke Water Power Project), VRDN, 3.25% due 11/01/2013 (a) 200 AAA Aaa 400 Lynn, Massachusetts, Water and Sewer Commission, Refunding, 4.95% due 12/01/2002 (e) 405 A+ A1 100 Massachusetts Bay Transportation Authority, Massachusetts General Transportation System, Series A, 4.90% due 3/01/2004 100 AAA Aaa 250 Massachusetts Educational Loan Authority, EducationalLoan Revenue Bonds, AMT, Issue E, Series B, 5.50% due 7/01/2001 (c) 258 BBB+ A 500 Massachusetts Municipal Wholesale Electric Company, Power Supply System, Revenue Refunding Bonds, Series B, 6.375% due 7/01/2001 533 A+ A1 750 Massachusetts State, GO, Refunding, Series B, 6.25% due 8/01/2001 802 Massachusetts State Health and Educational Facilities Authority Revenue Bonds: A1+ VMIG1++ 200 (Capital Assets Program), VRDN, Series D, 3.45% due 1/01/2035 (a)(b) 200 A1+ VMIG1++ 300 (Harvard University), VRDN, Series I, 3.50% due 8/01/2017 (a) 300 AAA Aaa 200 Refunding (Baystate Medical Center), Series D, 4.60% due 7/01/2002 (e) 197 AAA Aaa 540 Massachusetts State HFA, Housing Revenue Refunding Bonds (Insured-Rental), AMT, Series A, 5.90% due 7/01/2003 (c) 553 NR* MIG1++ 100 Massachusetts State Industrial Finance Agency, Health Care Facility Revenue Bonds (Beverly Enterprises, Inc.), VRDN, 3.40% due 10/01/2022 (a) 100 NR* VMIG1++ 300 Massachusetts State Industrial Finance Agency, PCR, Refunding (North East Power Company), VRDN, 3.55% due 8/01/1996 (a) 300 AAA Aaa 320 Massachusetts State Industrial Finance Agency, Revenue Bonds (Babson College), Series A, 5.40% due 10/01/2003 (b) 331 Massachusetts State Port Authority, Revenue Refunding Bonds, VRDN (a): A1+ P1 100 AMT, Series B, 2.65% due 7/01/2018 100 A1+ P1 200 Series A, 3.45% due 7/01/2015 200 AA A1 300 Massachusetts State Special Obligation Revenue Bonds (Highway Improvement Loan), Series A, 5.90% due 6/01/2001 316 AAA Aaa 500 Massachusetts State Water Resource Authority, Series A, 6.75% due 7/15/2002 (d) 561 NR* A1 500 New England Educational Loan Marketing Corp., Massachusetts Student Loan Revenue Bonds, AMT, Sub-Issue F, 6.60% due 9/01/2002 538 NR* NR* 365 South Hadley, Massachusetts, Industrial Revenue Bonds (South Hadley Health Care), AMT, Series A, 5% due 12/01/1996 364 Total Investments (Cost--$7,011)--97.2% 7,191 Other Assets Less Liabilities--2.8% 205 ------- Net Assets--100.0% $ 7,396 ======= (a)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at July 31, 1996. (b)MBIA Insured. (c)AMBAC Insured. (d)Prerefunded. (e)FGIC Insured. *Not Rated. ++Highest short-term rating by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements. J-5 MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996 SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Michigan Limited Maturity Municipal Bond Fund S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Michigan--90.0% A1+ VMIG1++$ 200 Bruce Township, Michigan, Hospital Finance Authority, Health Care System Revenue Bonds (Sisters Charity-Saint Joseph's), VRDN, Series A, 3.45% due 5/01/2018 (a)(d) $ 200 AAA Aaa 250 Dearborn, Michigan, Economic Development Corp., Hospital Revenue Bonds (Oakwood Obligated Group), Series A, 6.95% due 8/15/2001 (d)(e) 279 AAA Aaa 200 Detroit, Michigan, Distributable State Aid, Refunding Bonds, UT, 5.70% due 5/01/2001 (b) 208 AAA Aaa 250 Detroit, Michigan, Water Supply System, Revenue Refunding Bonds, 6.20% due 7/01/2004 (c) 270 AAA Aaa 200 Eastern Michigan University, Revenue Refunding Bonds, 5.40% due 6/01/1998 (b) 204 Michigan Municipal Bond Authority Revenue Bonds: AAA Aaa 200 (Local Government Loan Program), Series C, 5.50% due 5/01/2003 (d) 207 AA Aa 500 Refunding (Local Government--Qualified School), Series A, 6% due 5/01/2001 527 AA Aa 200 (State Revolving Fund), 7% due 10/01/2004 226 AA- A1 200 Michigan State Building Authority, Revenue Refunding Bonds, Series I, 6.40% due 10/01/2004 216 AA- A1 200 Michigan State Comprehensive Transportation, Revenue Refunding Bonds, Series B, 5.625% due 5/15/2003 209 A1+ NR* 200 Michigan State Housing Development Authority, Rental Housing Revenue Refunding Bonds, VRDN, Series C, 3.50% due 4/01/2019 (a) 200 AA Aa 200 Michigan State Recreation Program, GO, 6% due 11/01/2004 215 AAA Aaa 150 Michigan State South Central Power Agency, Power Supply System Revenue Refunding Bonds, 7% due 11/01/1996 (b)(e) 154 A1+ VMIG1++ 100 Michigan State Strategic Fund, Limited Obligation Revenue Bonds (United Waste Systems, Inc. Project), VRDN, AMT, 3.65% due 4/01/2010 (a) 100 AAA Aaa 160 Michigan State Underground Storage Tank, Financial Assurance Authority, Revenue Refunding Bonds, Series I, 6% due 5/01/2004 (b) 171 AAA Aaa 235 Royal Oak, Michigan, Refunding, UT, 4% due 10/01/1997 (b) 235 Puerto Rico--6.8% A Baa1 265 Puerto Rico Commonwealth, GO, UT, 5.55% due 7/01/2001 274 Total Investments (Cost--$3,771)--96.8% 3,895 Other Assets Less Liabilities--3.2% 130 ------- Net Assets--100.0% $ 4,025 ======= (a)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at July 31, 1996. (b)AMBAC Insured. (c)FGIC Insured. (d)MBIA Insured. (e)Prerefunded. *Not Rated. ++Highest short-term rating by Moody's Investor's Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements. J-6 New Jersey Limited Maturity Municipal Bond Fund
S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) New Jersey--99.8% AAA Aaa $ 600 Elizabeth, New Jersey, General Improvement and Sewer Utility Refunding Bonds, GO, UT, 6% due 8/15/2004 (b) $ 643 SP1+ VMIG1++ 400 Mercer County, New Jersey, Improvement Authority Revenue Bonds, VRDN, 3.25% due 11/01/1998 (a) 400 AA+ Aa1 400 Monmouth County, New Jersey, General Improvement Bonds, GO, UT, 6.625% due 8/01/2000 425 NR* Aa1 400 New Jersey EDA, Economic Development Revenue Bonds (400 International Drive Partners), VRDN, 3.20% due 9/01/2005 (a) 400 New Jersey, EDA, Industrial and Economic Development Revenue Bonds (a): NR* NR* 100 (Burmah Castrol Inc.), VRDN, 3.30% due 8/01/2005 100 A-1 NR* 100 (Toys `R' Us, Inc.), DATES, 3.05% due 4/01/2019 100 AAA Aaa 1,000 New Jersey, EDA, Market Transition Facility Revenue Bonds, Senior Lien, Series A, 7% due 7/01/2004 (c) 1,132 New Jersey, EDA, Natural Gas Facilities Revenue Bonds, VRDN, Series A (a)(b): A-1 VMIG1++ 100 (NUI Corp. Project), AMT, 3.75% due 7/01/2005 100 A1+ VMIG1++ 300 Refunding (New Jersey Natural Gas Co.), 3.40% due 8/01/2030 300 NR* Aaa 300 New Jersey EDA, Revenue Bonds (Hoffman-La Roche Incorporated Project), VRDN, AMT, 3.55% due 11/01/2011 (a) 300 AAA Aaa 100 New Jersey Health Care Facilities Financing Authority Revenue Bonds (Carrier Foundation), VRDN, Series C, 3.60% due 7/01/2005 (a)(d) 100 A1+ VMIG1++ 400 New Jersey Sports and Exposition Authority Revenue Bonds (State Contract), VRDN, Series C, 3.30% due 9/01/2024 (a)(c) 400 A+ Aa 1,000 New Jersey State Transportation Trust Fund Authority, Transportation System Revenue Bonds, Series A, 6% due 6/15/2000 (e) 1,050 BBB+ Baa1 400 New Jersey State Turnpike Authority, Turnpike Revenue Bonds, Series A, 5.70% due 1/01/2001 412 AA Aa 400 North Brunswick Township, New Jersey, Board of Education Refunding Bonds, GO, UT, 6.25% due 2/01/2004 434 NR* Aa 400 Ocean County, New Jersey, Utilities Authority, Wastewater Revenue Bonds, UT, Series A, 6.125% due 1/01/2003 429 AAA Aaa 1,310 Port Authority of New York and New Jersey, Consolidated Refunding Bonds, AMT, UT, 97th Series, 7.10% due 7/15/2004 (d) 1,485 AA+ Aaa 400 Union County, New Jersey (General Improvement and County Collection), UT, 4.40% due 9/01/1998 403 Total Investments (Cost--$8,322)--99.8% 8,613 Other Assets Less Liabilities--0.2% 14 ------- Net Assets--100.0% $ 8,627 ======= (a)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at July 31, 1996. (b)AMBAC Insured. (c)MBIA Insured. (d)FGIC Insured. (e)Prerefunded. *Not Rated. ++Highest short-term rating by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements. J-7 MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996 SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
New York Limited Maturity Municipal Bond Fund S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) New York--100.4% Nassau County, New York, General Improvement Bonds, UT (c): AAA Aaa $ 400 Series O, 5.625% due 8/01/2004 $ 421 AAA Aaa 700 Series Q, 5.10% due 8/01/2003 714 A1+ VMIG1++ 100 New York City, New York, GO, VRDN, UT, Series B, Sub-Series B-10, 3.35% due 8/15/2024 (a) 100 AAA Aaa 750 New York City, New York, IDA, Civic Facilities Revenue Bonds (USTA National Tennis Center Project), 6% due 11/15/2003 (d) 802 A1+ NR* 1,400 New York City, New York, IDA, IDR (Japan Airlines Company Ltd. Project), VRDN, AMT, 3.65% due 11/01/2015 (a) 1,400 AA- Aa 800 New York City, New York, Municipal Assistance Corporation, Series 68, 7.10% due 7/01/2000 869 New York City, New York, Municipal Water Finance Authority, Water and Sewer System Revenue Bonds, VRDN (a)(c): A1+ VMIG1++ 500 Series C, 3.55% due 6/15/2023 500 A1+ VMIG1++ 300 Series G, 3.55% due 6/15/2024 300 BBB+ Baa1 610 New York City, New York, Refunding, UT, Series A, 6% due 8/01/2000 630 New York State Dormitory Authority Revenue Bonds: AAA Aaa 500 (College and University Educational Loan), AMT, 6.30% due 7/01/2002 (e) 541 BBB Aaa 750 (Department of Health-Issue), 7.70% due 7/01/2000 (b) 849 AAA Aaa 670 (Rensselaer Polytechnic Institute), 4.90% due 7/01/2004 (e) 672 NR* VMIG1++ 400 New York State Energy Research and Development Authority, Electric Facilities Revenue Bonds (Long Island Lighting Co.), VRDN, AMT, Series B, 3.35% due 11/01/2023 (a) 400 A- Aa 400 New York State Environmental Facilities Corporation, PCR (State Water--Revolving Fund), Series E, 5.60% due 6/15/1999 414 A1+ NR* 200 New York State Environmental Facilities Corporation, Resource Recovery Revenue Bonds (OFS Equity Huntington Project), VRDN, AMT, 3.65% due 11/01/2014 (a) 200 A- A 600 New York State Environmental Quality, GO, 6% due 12/01/2004 643 A- A 735 New York State, GO, Refunding, Series B, 6.25% due 8/15/2004 798 A1+ VMIG1++ 400 New York State HFA, Revenue Bonds (Normandie Court--I Project), VRDN, 2.20% due 8/01/2016 (a) 400 New York State Local Government Assistance Corporation Revenue Bonds: A A 625 Series A, 7% due 4/01/2005 692 AAA Aaa 600 Series D, 7% due 4/01/2002 (b) 679 New York State Medical Care Facilities, Finance Agency Revenue Bonds, Series A: AA Aa 655 (Adult Day Care), 6% due 11/15/2003 690 AAA Aaa 725 (Mental Health Services Facilities), 7.75% due 2/15/2001 (b) 832 NR* Aa3 500 (Saratoga Hospital Project), 5.25% due 11/01/2004 505 AA NR* 675 New York State Tax Exempt Revenue Bonds (Rochester Museum & Science), 5.60% due 12/01/2015 688 BBB Baa1 450 New York State Urban Development Corporation, Revenue Refunding Bonds (Center for Industrial Innovation), 4.60% due 1/01/1998 451 AAA Aaa 760 Port Authority of New York and New Jersey, Refunding (Construction), AMT, UT, 97th Series, 7.10% due 7/15/2003 (c) 855 AA A1 700 Rockland County, New York, Sewer District, UT, 7.70% due 6/01/1997 (b) 736 AA A1 800 Syracuse, New York, GO, 5.70% due 6/15/2002 843 A+ Aa 340 Triborough Bridge and Tunnel Authority, New York, Revenue Bonds, Series R, 6.90% due 1/01/2000 366 Total Investments (Cost--$17,666)--100.4% 17,990 Liabilities in Excess of Other Assets--(0.4%) (70) ------- Net Assets--100.0% $17,920 ======= (a)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at July 31, 1996. (b)Prerefunded. (e)MBIA Insured. *Not Rated. ++Highest short-term rating by Moody's Investors Service, Inc.
J-8 (c)FGIC Insured. (d)FSA Insured. Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements. Pennsylvania Limited Maturity Municipal Bond Fund
S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Pennsylvania-- NR* A1 $ 200 Allegheny County, Pennsylvania, IDA, Revenue Refunding Bonds 82.6% (Commercial Development Parkway Center Mall Project), VRDN, Series A, 3.75% due 5/01/2009 (d) $ 200 AAA Aaa 400 Beaver County, Pennsylvania, Hospital Authority, Revenue Refunding Bonds (Beaver County Medical Center Inc.), 5.70% due 7/01/1999 (c) 413 A1+ P1 100 Beaver County, Pennsylvania, IDA, PCR, Refunding (Duquesne Light Project--Beaver Valley), VRDN, Series A, 3.45% due 8/01/2020 (d) 100 A1+ P1 200 Delaware County, Pennsylvania, IDA, PCR (BP Oil Inc. Project), UPDATES, 3.60% due 12/01/2009 (d) 200 AA Aa 250 Delaware County, Pennsylvania, Refunding Bonds, GO, UT, 4.80% due 10/01/2004 248 A1+ Aaa 250 Lehigh County, Pennsylvania, Authority Water Revenue Bonds, VRDN, 3.60% due 11/01/2004 (b)(d) 250 NR* VMIG1++ 400 Pennsylvania Energy Development Authority, Energy Development Revenue Bonds (B&W Ebensburg Project), VRDN, AMT, 3.70% due 12/01/2011 (d) 400 Pennsylvania State Higher Educational Facilities Authority, College and University Revenue Refunding Bonds, Series A: A+ Aa 380 (Thomas Jefferson University), 5.75% due 8/15/1998 392 AA Aa 275 (University of Pennsylvania), 4.70% due 9/01/1997 277 AAA Aaa 300 Pennsylvania State, Refunding (Projects--First), UT, Series A, 6.60% due 1/01/2001 (c) 324 AA- A1 1,100 Pennsylvania State University, Refunding, 5.85% due 3/01/2002 1,158 Philadelphia, Pennsylvania, Hospitals and Higher Education Facilities Authority, Hospital Revenue Bonds: NR* Aaa 1,000 (Children's Hospital of Philadelphia Project), Series A, 6.50% due 2/15/2002 (e) 1,101 A- NR* 650 (Children's Seashore House), Series B, 7% due 8/15/2003 705 SP1+ MIG1++ 400 Philadelphia, Pennsylvania, School District, TRAN, 4.50% due 6/30/1997 402 SP-1 MIG1++ 400 Philadelphia, Pennsylvania, TRAN, Series A, 4.50% due 6/30/1997 402 AAA Aaa 400 Union County, Pennsylvania, Higher Educational Facilities Authority Revenue Refunding Bonds (Bucknell University), 6% due 4/01/2002 (f) 423 AAA Aaa 325 Washington County, Pennsylvania, Lease Authority, Municipal Facility (Shadyside Hospital Project), Series C, Sub-Series C1-A, 7.45% due 6/15/2000 (a)(c)(e) 366 Puerto Rico--11.7% A- Baa1 1,000 Puerto Rico Municipal Finance Agency, GO, UT, Series A, 5.80% due 7/01/2004 1,037 Total Investments (Cost--$8,237)--94.3% 8,398 Other Assets Less Liabilities--5.7% 507 ------- Net Assets--100.0% $ 8,905 ======= (a)Escrowed to maturity. (b)Secured by escrow. (c)AMBAC Insured. (d)The interest rate is subject to change periodically based on prevailing market rates. The rates shown are those in effect at July 31, 1996. (e)Prerefunded. (f)MBIA Insured. *Not Rated. ++Highest short-term rating by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements. J-9 MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996 STATEMENTS OF ASSETS AND LIABILITIES
Arizona California Florida Massachusetts Limited Limited Limited Limited As of July 31, 1996 Maturity Maturity Maturity Maturity Assets: Investments, at value* (Note 1a) $ 4,136,875 $ 15,096,081 $ 27,288,445 $ 7,190,978 Cash 56,502 37,176 76,040 168,110 Receivables: Interest 25,595 240,691 347,804 73,352 Securities sold 241,346 -- 433,216 -- Investment adviser (Note 2) 19,404 -- -- 24,485 Beneficial interest sold -- 1,708 -- -- Deferred organization expenses (Note 1e) -- 8,453 28,115 4,599 Prepaid registration fees and other assets (Note 1e) 16,154 643 11,244 10,162 ------------ ------------ ------------ ------------ Total assets 4,495,876 15,384,752 28,184,864 7,471,686 ------------ ------------ ------------ ------------ Liabilities: Payables: Beneficial interest redeemed -- 711 75,095 10,129 Dividends to shareholders (Note 1f) 4,209 12,435 25,396 6,526 Investment adviser (Note 2) -- 1,933 8,332 -- Distributor (Note 2) 1,000 3,122 4,630 1,472 Accrued expenses and other liabilities 38,639 45,740 49,326 57,389 ------------ ------------ ------------ ------------ Total liabilities 43,848 63,941 162,779 75,516 ------------ ------------ ------------ ------------ Net Assets: Net assets $ 4,452,028 $ 15,320,811 $ 28,022,085 $ 7,396,170 ============ ============ ============ ============ Net Assets Class A Shares of beneficial Consist of: interest, $.10 par value, unlimited shares authorized $ 8,069 $ 31,471 $ 79,091 $ 17,264 Class B Shares of beneficial interest, $.10 par value, unlimited shares authorized 28,629 98,750 137,513 45,949 Class C Shares of beneficial interest, $.10 par value, unlimited shares authorized 1,339 549 521 2,113 Class D Shares of beneficial interest, $.10 par value, unlimited shares authorized 6,142 21,753 64,376 8,934 Paid-in capital in excess of par 4,334,656 15,140,165 28,023,107 7,494,663 Accumulated realized capital losses on investments --net (Note 5) (71,438) (529,724) (879,594) (352,257) Unrealized appreciation on investments --net 144,631 557,847 597,071 179,504 ------------ ------------ ------------ ------------ Net assets $ 4,452,028 $ 15,320,811 $ 28,022,085 $ 7,396,170 ============ ============ ============ ============ Net Asset Value: Class A: Net assets $ 813,180 $ 3,161,461 $ 7,874,368 $ 1,719,269 ============ ============ ============ ============ Shares outstanding 80,693 314,706 790,910 172,634 ============ ============ ============ ============ Net asset value $ 10.08 $ 10.05 $ 9.96 $ 9.96 ============ ============ ============ ============ Class B: Net assets $ 2,884,780 $ 9,918,998 $ 13,690,359 $ 4,576,988 ============ ============ ============ ============ Shares outstanding 286,287 987,501 1,375,127 459,494 ============ ============ ============ ============ Net asset value $ 10.08 $ 10.04 $ 9.96 $ 9.96 ============ ============ ============ ============ Class C: Net assets $ 135,060 $ 55,114 $ 51,502 $ 210,323 ============ ============ ============ ============ Shares outstanding 13,395 5,486 5,204 21,134 ============ ============ ============ ============ Net asset value $ 10.08 $ 10.05 $ 9.90 $ 9.95 ============ ============ ============ ============ Class D: Net assets $ 619,008 $ 2,185,238 $ 6,405,856 $ 889,590 ============ ============ ============ ============ Shares outstanding 61,417 217,532 643,764 89,337 ============ ============ ============ ============ Net asset value $ 10.08 $ 10.05 $ 9.95 $ 9.96 ============ ============ ============ ============ *Identified cost $ 3,992,244 $ 14,538,234 $ 26,691,374 $ 7,011,474 ============ ============ ============ ============
J-10
Michigan New Jersey New York Pennsylvania Limited Limited Limited Limited As of July 31, 1996 Maturity Maturity Maturity Maturity Assets: Investments, at value* (Note 1a) $ 3,895,326 $ 8,613,187 $ 17,990,267 $ 8,398,278 Cash 77,643 56,519 16,531 39,650 Receivables: Beneficial interest sold -- -- 627,229 -- Securities sold -- 51,148 -- 507,488 Interest 49,221 80,725 206,771 124,471 Investment adviser (Note 2) 24,857 16,407 20,090 7,414 Deferred organization expenses (Note 1e) 4,045 6,610 7,246 6,183 Prepaid registration fees and other assets (Note 1e) 7,914 10,280 5,166 8,464 ------------ ------------ ------------ ------------ Total assets 4,059,006 8,834,876 18,873,300 9,091,948 ------------ ------------ ------------ ------------ Liabilities: Payables: Securities purchased -- 100,000 845,597 -- Beneficial interest redeemed -- 32,288 26,087 129,736 Dividends to shareholders (Note 1f) 3,791 7,948 16,817 7,827 Distributor (Note 2) 590 1,674 3,304 2,044 Accrued expenses and other liabilities 29,554 65,879 61,371 47,840 ------------ ------------ ------------ ------------ Total liabilities 33,935 207,789 953,176 187,447 ------------ ------------ ------------ ------------ Net Assets: Net assets $ 4,025,071 $ 8,627,087 $ 17,920,124 $ 8,904,501 ============ ============ ============ ============ Net Assets Class A Shares of beneficial Consist of: interest, $.10 par value, unlimited shares authorized $ 16,499 $ 26,344 $ 37,016 $ 8,240 Class B Shares of beneficial interest, $.10 par value, unlimited shares authorized 18,522 50,942 100,111 61,965 Class C Shares of beneficial interest, $.10 par value, unlimited shares authorized 12 2,970 2,130 12 Class D Shares of beneficial interest, $.10 par value, unlimited shares authorized 5,446 5,343 38,884 17,865 Paid-in capital in excess of par 4,031,709 8,543,116 17,678,636 8,756,463 Accumulated realized capital losses on investments--net (Note 5) (171,774) (293,217) (261,279) (100,866) Unrealized appreciation on investments --net 124,657 291,589 324,626 160,822 ------------ ------------ ------------ ------------ Net assets $ 4,025,071 $ 8,627,087 $ 17,920,124 $ 8,904,501 ============ ============ ============ ============ Net Asset Value: Class A: Net assets $ 1,640,666 $ 2,662,645 $ 3,723,308 $ 832,986 ============ ============ ============ ============ Shares outstanding 164,986 263,436 370,162 82,402 ============ ============ ============ ============ Net asset value $ 9.94 $ 10.11 $ 10.06 $ 10.11 ============ ============ ============ ============ Class B: Net assets $ 1,841,924 $ 5,152,224 $ 10,070,519 $ 6,263,404 ============ ============ ============ ============ Shares outstanding 185,219 509,424 1,001,114 619,654 ============ ============ ============ ============ Net asset value $ 9.94 $ 10.11 $ 10.06 $ 10.11 ============ ============ ============ ============ Class C: Net assets $ 1,163 $ 271,989 $ 214,138 $ 1,188 ============ ============ ============ ============ Shares outstanding 117 29,696 21,296 117 ============ ============ ============ ============ Net asset value $ 9.94 $ 9.16 $ 10.06 $ 10.15 ============ ============ ============ ============ Class D: Net assets $ 541,318 $ 540,229 $ 3,912,159 $ 1,806,923 ============ ============ ============ ============ Shares outstanding 54,464 53,434 388,837 178,650 ============ ============ ============ ============ Net asset value $ 9.94 $ 10.11 $ 10.06 $ 10.11 ============ ============ ============ ============ *Identified cost $ 3,770,669 $ 8,321,598 $ 17,665,641 $ 8,237,456 ============ ============ ============ ============ See Notes to Financial Statements.
J-11 MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996 STATEMENT OF OPERATIONS
Arizona California Florida Massachusetts Limited Limited Limited Limited For the Year Ended July 31, 1996 Maturity Maturity Maturity Maturity Investment Interest and amortization of Income (Note 1d): premium and discount earned $ 291,905 $ 748,162 $ 1,527,243 $ 424,149 Expenses: Investment advisory fees (Note 2) 21,459 54,033 108,720 30,736 Professional fees 41,571 48,058 52,985 53,005 Accounting services (Note 2) 30,172 38,245 34,053 53,983 Account maintenance and distribution fees--Class B (Note 2) 15,724 35,889 53,229 17,257 Printing and shareholder reports 10,156 20,449 47,046 20,077 Registration fees (Note 1e) 24,744 19,983 13,634 18,980 Trustees' fees and expenses 3,015 7,114 13,676 4,419 Amortization of organization expenses (Note 1e) -- 3,653 12,163 1,990 Custodian fees 2,321 1,167 5,841 2,964 Pricing fees 2,329 4,831 4,015 2,981 Transfer agent fees--Class B (Note 2) 2,475 3,153 4,405 2,733 Account maintenance fees--Class D (Note 2) 655 1,776 6,850 565 Transfer agent fees--Class A (Note 2) 444 846 2,031 1,247 Transfer agent fees--Class D (Note 2) 319 451 1,551 264 Account maintenance and distribution fees --Class C (Note 2) 68 103 20 558 Transfer agent fees--Class C (Note 2) 33 27 10 182 Other 669 -- 2,049 2,701 ------------ ------------ ------------ ------------ Total expenses before reimbursement 156,154 239,778 362,278 214,642 Reimbursement of expenses (Note 2) (93,656) (54,497) (24,123) (126,014) ------------ ------------ ------------ ------------ Total expenses after reimbursement 62,498 185,281 338,155 88,628 ------------ ------------ ------------ ------------ Investment income--net 229,407 562,881 1,189,088 335,521 ------------ ------------ ------------ ------------ Realized & Realized gain (loss) on Unrealized Gain investments--net (691) (14,506) (1,278) 18,219 (Loss) on Change in unrealized appreciation Investments--Net on investments--net (45,086) 102,333 (174,866) (13,084) (Notes 1b, 1d & 3): ------------ ------------ ------------ ------------ Net Increase in Net Assets Resulting from Operations $ 183,630 $ 650,708 $ 1,012,944 $ 340,656 ============ ============ ============ ============ Michigan New Jersey New York Pennsylvania Limited Limited Limited Limited For the Year Ended July 31, 1996 Maturity Maturity Maturity Maturity Investment Interest and amortization of Income (Note 1d): premium and discount earned $ 225,785 $ 462,228 $ 793,554 $ 415,685 Expenses: Accounting services (Note 2) 47,178 43,508 62,140 43,426 Professional fees 44,286 43,780 42,051 40,761 Investment advisory fees (Note 2) 16,413 33,770 57,995 30,196 Account maintenance and distribution fees--Class B (Note 2) 7,629 22,973 34,048 24,307 Printing and shareholder reports -- 18,765 20,581 14,335 Registration fees (Note 1e) 11,903 13,375 19,353 -- Trustees' fees and expenses 2,243 4,589 6,879 197 Custodian fees 2,326 3,420 4,702 3,352 Transfer agent fees--Class B (Note 2) 1,782 2,895 3,938 3,550 Pricing fees 2,119 2,271 4,161 2,169
J-12 Amortization of organization expenses (Note 1e) 1,748 2,860 3,131 2,675 Transfer agent fees--Class A (Note 2) 1,420 991 1,306 391 Account maintenance fees-- Class D (Note 2) 415 310 2,638 725 Transfer agent fees--Class D (Note 2) 302 115 858 300 Account maintenance and distribution fees--Class C (Note 2) 1 174 206 41 Transfer agent fees--Class C (Note 2) 6 53 70 20 Other -- 1,275 4,638 -- ------------ ------------ ------------ ------------ Total expenses before reimbursement 139,771 195,124 268,695 166,445 Reimbursement of expenses (Note 2) (96,532) (98,714) (146,290) (71,504) ------------ ------------ ------------ ------------ Total expenses after reimbursement 43,239 96,410 122,405 94,941 ------------ ------------ ------------ ------------ Investment income--net 182,546 365,818 671,149 320,744 ------------ ------------ ------------ ------------ Realized & Realized gain (loss) on Unrealized investments--net 10,083 (12,586) 27,501 364 Gain (Loss) on Change in unrealized appreciation Investments--Net on investments--net (23,665) (41,469) (22,206) 12,631 (Notes 1b, 1d & 3): ------------ ------------ ------------ ------------ Net Increase in Net Assets Resulting from Operations $ 168,964 $ 311,763 $ 676,444 $ 333,739 ============ ============ ============ ============ See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
Arizona Limited Maturity California Limited Maturity For the Year Ended For the Year Ended July 31, July 31, Increase (Decrease) in Net Assets: 1996 1995 1996 1995 Operations: Investment income--net $ 229,407 $ 305,477 $ 562,881 $ 612,890 Realized loss on investments --net (691) (48,045) (14,506) (365,740) Change in unrealized appreciation/ depreciation on investments--net (45,086) 182,975 102,333 501,542 Investments--Net ------------ ------------ ------------ ------------ Net increase in net assets resulting from operations 183,630 440,407 650,708 748,692 ------------ ------------ ------------ ------------ Dividends to Investment income--net: Shareholders Class A (37,685) (78,637) (130,650) (159,781) (Note 1f): Class B (164,444) (226,411) (362,918) (422,409) Class C (1,762) (33) (2,149) (585) Class D (25,516) (396) (67,164) (30,115) ------------ ------------ ------------ ------------ Net decrease in net assets resulting from dividends to shareholders (229,407) (305,477) (562,881) (612,890) ------------ ------------ ------------ ------------ Beneficial Interest Net increase (decrease) in net Transactions assets derived from beneficial (Note 4): interest transactions (1,767,011) (1,547,482) (491,496) 354,485 ------------ ------------ ------------ ------------ Net Assets: Total increase (decrease) in net assets (1,812,788) (1,412,552) (403,669) 490,287 Beginning of year 6,264,816 7,677,368 15,724,480 15,234,193 ------------ ------------ ------------ ------------ End of year $ 4,452,028 $ 6,264,816 $ 15,320,811 $ 15,724,480 ============ ============ ============ ============ See Notes to Financial Statements.
J-13 STATEMENTS OF CHANGES IN NET ASSETS (concluded)
Florida Massachusetts Limited Maturity Limited Maturity For the Year Ended For the Year Ended July 31, July 31, Increase (Decrease) in Net Assets: 1996 1995 1996 1995 Operations: Investment income--net $ 1,189,088 $ 1,343,126 $ 335,521 $ 505,228 Realized gain (loss) on investments --net (1,278) (425,603) 18,219 (370,476) Change in unrealized appreciation/ depreciation on investments--net (174,866) 839,494 (13,084) 274,970 ------------ ------------ ------------ ------------ Net increase in net assets resulting from operations 1,012,944 1,757,017 340,656 409,722 ------------ ------------ ------------ ------------ Dividends & Investment income--net: Distributions to Class A (361,872) (531,680) (118,129) (252,210) Shareholders Class B (557,931) (756,233) (180,877) (242,775) (Note 1f): Class C (522) (32) (14,474) (7,683) Class D (268,763) (55,181) (22,041) (2,560) Realized gain on investments --net Class A -- -- -- (7,555) Class B -- -- -- (7,096) Class C -- -- -- (476) Class D -- -- -- (8) ------------ ------------ ------------ ------------ Net decrease in net assets resulting from dividends and distributions to shareholders (1,189,088) (1,343,126) (335,521) (520,363) ------------ ------------ ------------ ------------ Beneficial Interest Net decrease in net assets Transactions derived from beneficial (Note 4): interest transactions (5,075,030) (187,273) (2,526,578) (6,114,591) ------------ ------------ ------------ ------------ Net Assets: Total increase (decrease) in net assets (5,251,174) 226,618 (2,521,443) (6,225,232) (1,026,965) (793,586) Beginning of year 33,273,259 33,046,641 9,917,613 16,142,845 ------------ ------------ ------------ ------------ End of year $ 28,022,085 $ 33,273,259 $ 7,396,170 $ 9,917,613 ============ ============ ============ ============ Michigan Limited Maturity For the Year Ended July 31, Increase (Decrease) in Net Assets: 1996 1995 Operations: Investment income--net $ 182,546 $ 235,302 Realized gain (loss) on investments--net 10,083 (132,641) Change in unrealized appreciation/ depreciation on investments--net (23,665) 150,310 ------------ ------------ Net increase in net assets resulting from operations 168,964 252,971 ------------ ------------ Dividends & Investment income--net: Distributions to Class A (85,288) (123,016) Shareholders Class B (80,829) (102,718) (Note 1f): Class C (41) (33) Class D (16,388) (9,535) Realized gain on investments--net Class A -- -- Class B -- -- Class C -- -- Class D -- -- ------------ ------------ Net decrease in net assets resulting from dividends and distributions to shareholders (182,546) (235,302) ------------ ------------ Beneficial Interest Net decrease in net assets Transactions derived from beneficial (Note 4): interest transactions (1,013,383) (811,255) ------------ ------------ Net Assets: Total increase (decrease) in net assets (1,026,965) (793,586) Beginning of year 5,052,036 5,845,622 ------------ ------------ End of year $ 4,025,071 $ 5,052,036 ============ ============ New Jersey New York Limited Maturity Limited Maturity For the Year Ended For the Year Ended July 31, July 31, Increase (Decrease) in Net Assets: 1996 1995 1996 1995 Operations: Investment income--net $ 365,818 $ 441,857 $ 671,149 $ 634,544 Realized gain (loss) on investments--net (12,586) (190,903) 27,501 (166,770) Change in unrealized appreciation/ depreciation on investments--net (41,469) 328,757 (22,206) 337,132 ------------ ------------ ------------ ------------ Net increase in net assets resulting from operations 311,763 579,711 676,444 804,906 ------------ ------------ ------------ ------------ Dividends & Investment income--net: Distributions to Class A (107,284) (147,854) (174,431) (247,259) Shareholders Class B (241,855) (287,858) (381,150) (370,411) (Note 1f): Class C (4,447) (761) (5,588) (219) Class D (12,232) (5,384) (109,980) (16,655) ------------ ------------ ------------ ------------ Net decrease in net assets resulting from dividends to shareholders (365,818) (441,857) (671,149) (634,544) ------------ ------------ ------------ ------------ Beneficial Interest Net increase (decrease) in net Transactions assets derived from beneficial (Note 4): interest transactions (1,750,465) (3,524,093) 1,937,339 774,385 ------------ ------------ ------------ ------------ Net Assets: Total increase (decrease) in net assets (1,804,520) (3,386,239) 1,942,634 944,747 Beginning of year 10,431,607 13,817,846 15,977,490 15,032,743 ------------ ------------ ------------ ------------ End of year $ 8,627,087 $ 10,431,607 $ 17,920,124 $ 15,977,490 ============ ============ ============ ============ Pennsylvania Limited Maturity For the Year Ended July 31, Increase (Decrease) in Net Assets: 1996 1995 Operations: Investment income--net $ 320,744 $ 385,356 Realized gain (loss) on investments--net 364 (38,604) Change in unrealized appreciation/ depreciation on investments--net 12,631 150,668 ------------ ------------ Net increase in net assets resulting from operations 333,739 497,420 ------------ ------------ Dividends & Investment income--net: Distributions to Class A (37,384) (43,161) Shareholders Class B (254,375) (334,652) (Note 1f): Class C (1,049) (32) Class D (27,936) (7,511) ------------ ------------
J-14 Net decrease in net assets resulting from dividends to shareholders. (320,744) (385,356) ------------ ------------ Beneficial Interest Net increase (decrease) in net Transactions assets derived from beneficial (Note 4): interest transactions 150,949 (1,893,824) ------------ ------------ Net Assets: Total increase (decrease) in net assets 163,944 (1,781,760) Beginning of year 8,740,557 10,522,317 ------------ ------------ End of year $ 8,904,501 $ 8,740,557 ============ ============ See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
Arizona Limited Maturity Class A Class B The following per share data For the For the and ratios have been derived from Period Period information provided in the For the Nov. 26, For the Nov. 26, financial statements. Year Ended 1993++ to Year Ended 1993++ to July 31, July 31, July 31, July 31, Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994 Per Share Net asset value, beginning of period $ 10.17 $ 9.97 $ 10.00 $ 10.16 $ 9.97 $ 10.00 Operating ------- ------- ------- ------- ------- ------- Performance: Investment income--net .41 .43 .23 .37 .39 .20 Realized and unrealized gain (loss) on investments--net (.09) .20 (.03) (.08) .19 (.03) ------- ------- ------- ------- ------- ------- Total from investment operations .32 .63 .20 .29 .58 .17 ------- ------- ------- ------- ------- ------- Less dividends from investment income--net (.41) (.43) (.23) (.37) (.39) (.20) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 10.08 $ 10.17 $ 9.97 $ 10.08 $ 10.16 $ 9.97 ======= ======= ======= ======= ======= ======= Total Investment Based on net asset value per share 3.16% 6.47% 2.02%+++ 2.88% 5.99% 1.78%+++ Return:** ======= ======= ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement .74% .35% .02%* 1.09% .72% .38%* Net Assets: ======= ======= ======= ======= ======= ======= Expenses 2.27% 2.05% 1.82%* 2.61% 2.44% 2.18%* ======= ======= ======= ======= ======= ======= Investment income--net 4.01% 4.31% 3.37%* 3.65% 3.95% 3.02%* ======= ======= ======= ======= ======= ======= Supplemental Net assets, end of period Data: (in thousands) $ 813 $ 1,054 $ 2,103 $ 2,885 $ 5,191 $ 5,575 ======= ======= ======= ======= ======= ======= Portfolio turnover 43.53% 182.58% 142.37% 43.53% 182.58% 142.37% ======= ======= ======= ======= ======= ======= *Annualized. **Total investment returns exclude the effects of sales loads. ++Commencement of Operations. +++Aggregate total investment return.
See Notes to Financial Statements. J-15 FINANCIAL HIGHLIGHTS (continued)
Arizona Limited Maturity Class C Class D The following per share data and For the For the ratios have been derived from For the Period For the Period information provided in the Year Oct. 21, Year Oct. 21, financial statements. Ended 1994++ to Ended 1994++ to July 31, July 31, July 31, July 31, Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995 Per Share Net asset value, beginning of period $ 10.17 $ 9.89 $ 10.17 $ 9.89 Operating -------- -------- -------- -------- Performance: Investment income--net .37 .29 .40 .33 Realized and unrealized gain (loss) on investments--net (.09) .28 (.09) .28 -------- -------- -------- -------- Total from investment operations .28 .57 .31 .61 -------- -------- -------- -------- Less dividends from investment income--net (.37) (.29) (.40) (.33) -------- -------- -------- -------- Net asset value, end of period $ 10.08 $ 10.17 $ 10.08 $ 10.17 ======== ======== ======== ======== Total Investment Based on net asset value per share 2.78% 5.90%+++ 3.05% 6.34%+++ Return:** ======== ======== ======== ======== Ratios to Average Expenses, net of reimbursement 1.03% 1.05%* .90% .55%* Net Assets: ======== ======== ======== ======== Expenses 2.80% 2.79%* 2.42% 2.39%* ======== ======== ======== ======== Investment income--net 3.86% 3.80%* 3.88% 4.31%* ======== ======== ======== ======== Supplemental Net assets, end of period Data: (in thousands) $ 135 $ 1 $ 619 $ 19 ======== ======== ======== ======== Portfolio turnover 43.53% 182.58% 43.53% 182.58% ======== ======== ======== ========
California Limited Maturity Class A Class B The following per share data and For the For the ratios have been derived from Period Period information provided in the For the Nov. 26, For the Nov. 26, financial statements. Year Ended 1993++ to Year Ended 1993++ to July 31, July 31, July 31, July 31, Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994 Per Share Net asset value, beginning of period $ 9.99 $ 9.88 $ 10.00 $ 9.99 $ 9.88 $ 10.00 Operating ------- ------- ------- ------- ------- ------- Performance: Investment income--net .39 .42 .24 .36 .39 .21 Realized and unrealized gain (loss) on investments--net .06 .11 (.12) .05 .11 (.12) ------- ------- ------- ------- ------- ------- Total from investment operations .45 .53 .12 .41 .50 .09 ------- ------- ------- ------- ------- ------- Less dividends from investment income--net (.39) (.42) (.24) (.36) (.39) (.21) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 10.05 $ 9.99 $ 9.88 $ 10.04 $ 9.99 $ 9.88 ======= ======= ======= ======= ======= ======= Total Investment Based on net asset value per share 4.56% 5.60% 1.23%+++ 4.08% 5.23% .99%+++ Return:** ======= ======= ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement .94% .40% .02%* 1.30% .76% .38%* Net Assets: ======= ======= ======= ======= ======= ======= Expenses 1.30% 1.44% 1.16%* 1.66% 1.80% 1.52%* ======= ======= ======= ======= ======= ======= Investment income--net 3.89% 4.36% 3.54%* 3.53% 4.00% 3.19%* ======= ======= ======= ======= ======= =======
J-16 Supplemental Net assets, end of period Data: (in thousands) $ 3,162 $ 3,527 $ 3,804 $ 9,919 $10,363 $11,430 ======= ======= ======= ======= ======= ======= Portfolio turnover 11.09% 124.72% 130.10% 11.09% 124.72% 130.10% ======= ======= ======= ======= ======= =======
California Limited Maturity Class C Class D The following per share data For the For the and ratios have been derived from For the Period For the Period information provided in the Year Oct. 21, Year Oct. 21, financial statements. Ended 1994++ to Ended 1994++ to July 31, July 31, July 31, July 31, Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995 Per Share Net asset value, beginning of period $ 9.99 $ 9.76 $ 9.99 $ 9.76 Operating -------- -------- -------- -------- Performance: Investment income--net .37 .31 .38 .33 Realized and unrealized gain on investments--net .06 .23 .06 .23 -------- -------- -------- -------- Total from investment operations .43 .54 .44 .56 -------- -------- -------- -------- Less dividends from investment income--net (.37) (.31) (.38) (.33) -------- -------- -------- -------- Net asset value, end of period $ 10.05 $ 9.99 $ 10.05 $ 9.99 ======== ======== ======== ======== Total Investment Based on net asset value per share 4.35% 5.60%+++ 4.46% 5.85%+++ Return:** ======== ======== ======== ======== Ratios to Average Expenses, net of reimbursement 1.14% .82%* 1.06% .66%* Net Assets: ======== ======== ======== ======== Expenses 1.50% 1.98%* 1.40% 1.81%* ======== ======== ======== ======== Investment income--net 3.69% 4.04%* 3.77% 4.28%* ======== ======== ======== ======== Supplemental Net assets, end of period Data: (in thousands) $ 55 $ 64 $ 2,185 $ 1,771 ======== ======== ======== ======== Portfolio turnover 11.09% 124.72% 11.09% 124.72% ======== ======== ======== ======== *Annualized. **Total investment returns exclude the effects of sales loads. ++Commencement of Operations. +++Aggregate total investment return.
See Notes to Financial Statements. J-17 FINANCIAL HIGHLIGHTS (continued)
Florida Limited Maturity Class A Class B The following per share data and For the For the ratios have been derived from Period Period information provided in the For the Nov. 26, For the Nov. 26, financial statements. Year Ended 1993++ to Year Ended 1993++ to July 31, July 31, July 31, July 31, Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994 Per Share Net asset value, beginning of period $ 10.02 $ 9.87 $ 10.00 $ 10.02 $ 9.88 $ 10.00 Operating ------- ------- ------- ------- ------- ------- Performance: Investment income--net .40 .43 .24 .37 .40 .21 Realized and unrealized gain (loss) on investments--net (.06) .15 (.13) (.06) .14 (.12) ------- ------- ------- ------- ------- ------- Total from investment operations .34 .58 .11 .31 .54 .09 ------- ------- ------- ------- ------- ------- Less dividends from investment income--net (.40) (.43) (.24) (.37) (.40) (.21) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 9.96 $ 10.02 $ 9.87 $ 9.96 $ 10.02 $ 9.88 ======= ======= ======= ======= ======= ======= Total Investment Based on net asset value per share 3.45% 6.05% 1.12%+++ 3.08% 5.57% .99%+++ Return:** ======= ======= ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement .89% .39% .02%* 1.24% .75% .38%* Net Assets: ======= ======= ======= ======= ======= ======= Expenses .97% 1.03% .86%* 1.32% 1.38% 1.23%* ======= ======= ======= ======= ======= ======= Investment income--net 4.01% 4.39% 3.54%* 3.66% 4.05% 3.19%* ======= ======= ======= ======= ======= ======= Supplemental Net assets, end of period Data: (in thousands) $ 7,874 $ 9,849 $14,868 $13,690 $16,213 $18,179 ======= ======= ======= ======= ======= ======= Portfolio turnover 39.90% 138.97% 136.71% 39.90% 138.97% 136.71% ======= ======= ======= ======= ======= =======
Florida Limited Maturity Class C Class D The following per share data and For the For the ratios have been derived from For the Period For the Period information provided in the Year Oct. 21, Year Oct. 21, financial statements. Ended 1994++ to Ended 1994++ to July 31, July 31, July 31, July 31, Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995 Per Share Net asset value, beginning of period $ 10.01 $ 9.76 $ 10.01 $ 9.76 Operating -------- -------- -------- -------- Performance: Investment income--net . .36 .29 .39 .33 Realized and unrealized gain (loss) on investments --net (.11) .25 (.06) .25 -------- -------- -------- -------- Total from investment operations .25 .54 .33 .58 -------- -------- -------- -------- Less dividends from investment income--net (.36) (.29) (.39) (.33) -------- -------- -------- -------- Net asset value, end of period $ 9.90 $ 10.01 $ 9.95 $ 10.01 ======== ======== ======== ======== Total Investment Based on net asset value per share 2.48% 5.65%+++ 3.35% 6.07%+++ Return:** ======== ======== ======== ======== Ratios to Average Expenses, net of reimbursement 1.21% 1.09%* .99% .67%* Net Assets: ======== ======== ======== ======== Expenses 1.23% 1.67%* 1.07% 1.19%* ======== ======== ======== ======== Investment income--net 3.75% 3.83%* 3.91% 4.23%* ======== ======== ======== ========
J-18 Supplemental Net assets, end of period Data: (in thousands) $ 52 $ 1 $ 6,406 $ 7,210 ======== ======== ======== ======== Portfolio turnover 39.90% 138.97% 39.90% 138.97% ======== ======== ======== ========
Massachusetts Limited Maturity Class A Class B The following per share data and For the For the ratios have been derived from Period Period information provided in the For the Nov. 26, For the Nov. 26, financial statements. Year Ended 1993++ to Year Ended 1993++ to July 31, July 31, July 31, July 31, Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994 Per Share Net asset value, beginning of period $ 9.96 $ 9.95 $ 10.00 $ 9.96 $ 9.95 $ 10.00 Operating ------- ------- ------- ------- ------- ------- Performance: Investment income--net .40 .44 .25 .37 .40 .22 Realized and unrealized gain (loss) on investments--net -- .02 (.05) -- .02 (.05) ------- ------- ------- ------- ------- ------- Total from investment operations .40 .46 .20 .37 .42 .17 ------- ------- ------- ------- ------- ------- Less dividends and distributions: Investment income--net (.40) (.44) (.25) (.37) (.40) (.22) Realized gain on investments--net -- (.01) -- -- (.01) -- ------- ------- ------- ------- ------- ------- Total dividends and distributions (.40) (.45) (.25) (.37) (.41) (.22) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 9.96 $ 9.96 $ 9.95 $ 9.96 $ 9.96 $ 9.95 ======= ======= ======= ======= ======= ======= Total Investment Based on net asset value per share 4.08% 4.79% 2.01%+++ 3.70% 4.41% 1.77%+++ Return:** ======= ======= ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement .77% .37% .03%* 1.16% .74% .38%* Net Assets: ======= ======= ======= ======= ======= ======= Expenses 2.15% 1.71% 1.17%* 2.61% 2.08% 1.54%* ======= ======= ======= ======= ======= ======= Investment income--net 4.04% 4.45% 3.69%* 3.66% 4.08% 3.28%* ======= ======= ======= ======= ======= ======= Supplemental Net assets, end of period Data: (in thousands) $ 1,719 $ 4,453 $ 8,097 $ 4,577 $ 4,800 $ 8,046 ======= ======= ======= ======= ======= ======= Portfolio turnover 22.71% 89.96% 57.80% 22.71% 89.96% 57.80% ======= ======= ======= ======= ======= ======= *Annualized. **Total investment returns exclude the effects of sales loads. ++Commencement of Operations. +++Aggregate total investment return.
See Notes to Financial Statements. J-19 MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996 FINANCIAL HIGHLIGHTS (continued)
Massachusetts Limited Maturity Class C Class D The following per share data and For the For the ratios have been derived from For the Period For the Period information provided in the Year Oct. 21, Year Oct. 21, financial statements. Ended 1994++ to Ended 1994++ to July 31, July 31, July 31, July 31, Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995 Per Share Net asset value, beginning of period $ 9.96 $ 9.82 $ 9.96 $ 9.82 Operating -------- -------- -------- -------- Performance: Investment income--net .39 .33 .39 .34 Realized and unrealized gain (loss) on investments--net (.01) .15 -- .15 -------- -------- -------- -------- Total from investment operations .38 .48 .39 .49 -------- -------- -------- -------- Less dividends and distributions: Investment income--net (.39) (.33) (.39) (.34) Realized gain on investments --net -- (.01) -- (.01) -------- -------- -------- -------- Total dividends and distributions (.39) (.34) (.39) (.35) -------- -------- -------- -------- Net asset value, end of period $ 9.95 $ 9.96 $ 9.96 $ 9.96 ======== ======== ======== ======== Total Investment Based on net asset value per Return:** share 3.81% 5.00%+++ 3.97% 5.09%+++ ======== ======== ======== ======== Ratios to Average Expenses, net of reimbursement .94% .67%* .93% .70%* Net Assets: ======== ======== ======== ======== Expenses 2.37% 2.23%* 2.42% 2.31%* ======== ======== ======== ======== Investment income--net 3.88% 4.32%* 3.89% 4.21%* ======== ======== ======== ======== Supplemental Net assets, end of period Data: (in thousands) $ 210 $ 413 $ 890 $ 253 ======== ======== ======== ======== Portfolio turnover 22.71% 89.96% 22.71% 89.96% ======== ======== ======== ========
Michigan Limited Maturity Class A Class B The following per share data and For the For the ratios have been derived from Period Period information provided in the For the Nov. 26, For the Nov. 26, financial statements. Year Ended 1993++ to Year Ended 1993++ to July 31, July 31, July 31, July 31, Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994 Per Share Net asset value, beginning of period $ 9.98 $ 9.92 $ 10.00 $ 9.98 $ 9.92 $ 10.00 Operating ------- ------- ------- ------- ------- ------- Performance: Investment income--net .41 .44 .24 .37 .40 .22 Realized and unrealized gain (loss) on investments--net (.04) .06 (.08) (.04) .06 (.08) ------- ------- -------- ------- ------- ------- Total from investment operations .37 .50 .16 .33 .46 .14 ------- ------- ------- ------- ------- ------- Less dividends from investment income--net (.41) (.44) (.24) (.37) (.40) (.22) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 9.94 $ 9.98 $ 9.92 $ 9.94 $ 9.98 $ 9.92 ======= ======= ======= ======= ======= ======= Total Investment Based on net asset value per share 3.71% 5.16% 1.66%+++ 3.32% 4.78% 1.42%+++ Return:** ======= ======= ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement .74% .27% .02%* 1.10% .65% .38%* Net Assets ======= ======= ======= ======= ======= ======= Expenses 2.78% 2.18% 2.01%* 3.14% 2.56% 2.38%* ======= ======= ======= ======= ======= =======
J-20 Investment income--net 4.06% 4.42% 3.59%* 3.70% 4.09% 3.21%* ======= ======= ======= ======= ======= ======= Supplemental Net assets, end of period Data: (in thousands) $ 1,641 $ 2,302 $ 3,435 $ 1,842 $ 2,494 $ 2,411 ======= ======= ======= ======= ======= ======= Portfolio turnover 32.92% 93.08% 204.15% 32.92% 93.08% 204.15% ======= ======= ======= ======= ======= =======
Michigan Limited Maturity Class C Class D For the For the The following per share data and ratios For the Period For the Period have been derived from information Year Oct. 21, Year Oct. 21 provided in the financial statements. Ended 1994++ to Ended 1994++ to July 31, July 31, July 31, July 31, Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995 Per Share Net asset value, beginning of period $ 9.98 $ 9.76 $ 9.97 $ 9.76 Operating -------- -------- -------- -------- Performance: Investment income--net . .36 .30 .40 .34 Realized and unrealized gain (loss) on investments--net (.04) .22 (.03) .21 -------- -------- -------- -------- Total from investment operations .32 .52 .37 .55 -------- -------- -------- -------- Less dividends from investment income--net (.36) (.30) (.40) (.34) -------- -------- -------- -------- Net asset value, end of period $ 9.94 $ 9.98 $ 9.94 $ 9.97 ======== ======== ======== ======== Total Investment Based on net asset value per share 3.20% 5.40%+++ 3.71% 5.72%+++ Return:** ======== ======== ======== ======== Ratios to Average Expenses, net of reimbursement 1.24% .96%* .87% .44%* Net Assets: ======== ======== ======== ======== Expenses 3.31% 2.90%* 3.06% 2.38%* ======== ======== ======== ======== Investment income--net 3.57% 3.80%* 3.94% 4.47%* ======== ======== ======== ======== Supplemental Net assets, end of period Data: (in thousands) $ 1 $ 1 $ 541 $ 254 ======== ======== ======== ======== Portfolio turnover 32.92% 93.08% 32.92% 93.08% ======== ======== ======== ======== *Annualized. **Total investment returns exclude the effects of sales loads. ++Commencement of Operations. +++Aggregate total investment return.
See Notes to Financial Statements. J-21 MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996 FINANCIAL HIGHLIGHTS (continued)
New Jersey Limited Maturity Class A Class B The following per share data and For the For the ratios have been derived from Period Period information provided in the For the Nov. 26, For the Nov. 26, financial statements. Year Ended 1993++ to Year Ended 1993++ to July 31, July 31, July 31, July 31, Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994 Per Share Net asset value, beginning of period $ 10.15 $ 9.94 $ 10.00 $ 10.16 $ 9.95 $ 10.00 Operating ------- ------- ------- ------- ------- ------- Performance: Investment income--net .41 .42 .23 .37 .38 .20 Realized and unrealized gain (loss) on investments--net (.04) .21 (.06) (.05) .21 (.05) ------- ------- ------- ------- ------- ------- Total from investment operations .37 .63 .17 .32 .59 .15 ------- ------- ------- ------- ------- ------- Less dividends from investment income--net (.41) (.42) (.23) (.37) (.38) (.20) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 10.11 $ 10.15 $ 9.94 $ 10.11 $ 10.16 $ 9.95 ======= ======= ======= ======= ======= ======= Total Investment Based on net asset value per share 3.68% 6.45% 1.73%+++ 3.21% 6.07% 1.59%+++ Return:** ======= ======= ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement .76% .34% .03%* 1.10% .73% .38%* Net Assets: ======= ======= ======= ======= ======= ======= Expenses 1.78% 1.69% 1.14%* 2.12% 2.15% 1.52%* ======= ======= ======= ======= ======= ======= Investment income--net 4.02% 4.10% 3.45%* 3.67% 3.80% 3.04%* ======= ======= ======= ======= ======= ======= Supplemental Net assets, end of period Data: (in thousands) $ 2,663 $ 2,401 $ 5,933 $ 5,152 $ 7,593 $ 7,885 ======= ======= ======= ======= ======= ======= Portfolio turnover 6.57% 131.56% 205.04% 6.57% 131.56% 205.04% ======= ======= ======= ======= ======= =======
New Jersey Limited Maturity Class C Class D The following per share data For the For the and ratios have been derived For the Period For the Period from information provided in the Year Oct. 21, Year Oct. 21, financial statements. Ended 1994++ to Ended 1994++ to July 31, July 31, July 31, July 31, Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995 Per Share Net asset value, beginning of period $ 9.20 $ 9.86 $ 10.16 $ 9.85 Operating -------- -------- -------- -------- Performance: Investment income--net . .34 .26 .40 .32 Realized and unrealized gain (loss) on investments--net (.04) (.66) (.05) .31 -------- -------- -------- -------- Total from investment operations .30 (.40) .35 .63 -------- -------- -------- -------- Less dividends from investment income--net (.34) (.26) (.40) (.32) -------- -------- -------- -------- Net asset value, end of period $ 9.16 $ 9.20 $ 10.11 $ 10.16 ======== ======== ======== ======== Total Investment Based on net asset value per share 3.24% (4.01%)+++ 3.48% 6.51%+++ Return:** ======== ======== ======== ======== Ratios to Average Expenses, net of reimbursement 1.00% .55%* .84% .62%* Net Assets: ======== ======== ======== ======== Expenses 2.04% 2.22%* 1.86% 2.07%* ======== ======== ======== ======== Investment income--net 3.82% 4.06%* 3.93% 4.17%* ======== ======== ======== ========
J-22 Supplemental Net assets, end of period Data: (in thousands) $ 272 $ 1 $ 540 $ 437 ======== ======== ======== ======== Portfolio turnover 6.57% 131.56% 6.57% 131.56% ======== ======== ======== ========
New York Limited Maturity Class A Class B For the For the The following per share data and ratios Period Period have been derived from information For the Nov. 26, For the Nov. 26, provided in the financial statements. Year Ended 1993++ to Year Ended 1993++ to July 31, July 31, July 31, July 31, Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994 Per Share Net asset value, beginning of period $ 10.05 $ 9.91 $ 10.00 $ 10.05 $ 9.91 $ 10.00 Operating ------- ------- ------- ------- ------- ------- Performance: Investment income--net .43 .44 .25 .40 .41 .22 Realized and unrealized gain (loss) on investments--net .01 .14 (.09) .01 .14 (.09) ------- ------- ------- ------- ------- ------- Total from investment operations .44 .58 .16 .41 .55 .13 ------- ------- ------- ------- ------- ------- Less dividends from investment income--net (.43) (.44) (.25) (.40) (.41) (.22) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 10.06 $ 10.05 $ 9.91 $ 10.06 $ 10.05 $ 9.91 ======= ======= ======= ======= ======= ======= Total Investment Based on net asset value per share 4.46% 6.03% 1.61%+++ 4.08% 5.66% 1.37%+++ Return:** ======= ======= ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement .50% .33% .03%* .87% .69% .38%* Net Assets: ======= ======= ======= ======= ======= ======= Expenses 1.38% 1.30% 1.24%* 1.75% 1.65% 1.60%* ======= ======= ======= ======= ======= ======= Investment income--net 4.28% 4.49% 3.68%* 3.91% 4.11% 3.31%* ======= ======= ======= ======= ======= ======= Supplemental Net assets, end of period Data: (in thousands) $ 3,723 $ 4,811 $ 5,290 $10,071 $ 8,822 $ 9,743 ======= ======= ======= ======= ======= ======= Portfolio turnover 51.47% 139.16% 152.73% 51.47% 139.16% 152.73% ======= ======= ======= ======= ======= ======= *Annualized. **Total investment returns exclude the effects of sales loads. ++Commencement of Operations. +++Aggregate total investment return.
See Notes to Financial Statements. J-23 MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996 FINANCIAL HIGHLIGHTS (concluded)
New York Limited Maturity Class C Class D The following per share data and For the For the ratios have been derived from For the Period For the Period information provided in the financial Year Oct. 21, Year Oct. 21, statements. Ended 1994++ to Ended 1994++ to July 31, July 31, July 31, July 31, Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995 Per Share Net asset value, beginning of period $ 10.05 $ 9.78 $ 10.05 $ 9.78 Operating -------- -------- -------- -------- Performance: Investment income--net . .42 .30 .42 .34 Realized and unrealized gain on investments--net .01 .27 .01 .27 -------- -------- -------- -------- Total from investment operations .43 .57 .43 .61 -------- -------- -------- -------- Less dividends from investment income--net (.42) (.30) (.42) (.34) -------- -------- -------- -------- Net asset value, end of period $ 10.06 $ 10.05 $ 10.06 $ 10.05 ======== ======== ======== ======== Total Investment Based on net asset value per share 4.28% 5.97%+++ 4.35% 6.37%+++ Return:** ======== ======== ======== ======== Ratios to Average Expenses, net of reimbursement .71% .63%* .62% .48%* Net Assets: ======== ======== ======== ======== Expenses 1.59% 1.63%* 1.49% 1.48%* ======== ======== ======== ======== Investment income--net 4.06% 4.21%* 4.16% 4.47%* ======== ======== ======== ======== Supplemental Net assets, end of period Data: (in thousands) $ 214 $ 38 $ 3,912 $ 2,306 ======== ======== ======== ======== Portfolio turnover 51.47% 139.16% 51.47% 139.16% ======== ======== ======== ========
Pennsylvania Limited Maturity
Class A Class B The following per share data and For the For the ratios have been derived from Period Period information provided in the For the Nov. 26, For the Nov. 26, financial statements. Year Ended 1993++ to Year Ended 1993++ to July 31, July 31, July 31, July 31, Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994 Per Share Net asset value, beginning of period $ 10.10 $ 9.95 $ 10.00 $ 10.10 $ 9.95 $ 10.00 Operating ------- ------- ------- ------- ------- ------- Performance: Investment income--net .41 .42 .23 .37 .39 .21 Realized and unrealized gain (loss) on investments--net .01 .15 (.05) .01 .15 (.05) ------- ------- ------- ------- ------- ------- Total from investment operations .42 .57 .18 .38 .54 .16 ------- ------- ------- ------- ------- ------- Less dividends from investment income--net (.41) (.42) (.23) (.37) (.39) (.21) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 10.11 $ 10.10 $ 9.95 $ 10.11 $ 10.10 $ 9.95 ======= ======= ======= ======= ======= ======= Total Investment Based on net asset value per share 4.18% 5.89% 1.85%+++ 3.80% 5.51% 1.61%+++ Return:** ======= ======= ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement .80% .38% .02%* 1.15% .73% .38%* Net Assets: ======= ======= ======= ======= ======= ======= Expenses 1.63% 1.90% 1.48%* 1.99% 2.25% 1.83%* ======= ======= ======= ======= ======= ======= Investment income--net 4.01% 4.25% 3.46%* 3.65% 3.87% 3.05%* ======= ======= ======= ======= ======= =======
J-24 Supplemental Net assets, end of period Data: (in thousands) $ 833 $ 943 $ 990 $ 6,264 $ 7,414 $ 9,532 ======= ======= ======= ======= ======= ======= Portfolio turnover 30.90% 141.52% 237.47% 30.90% 141.52% 237.47% ======= ======= ======= ======= ======= =======
Pennsylvania Limited Maturity Class C Class D For the For the The following per share data and ratios For the Period For the Period have been derived from information Year Oct. 21, Year Oct. 21 provided in the financial statements Ended 1994++ to Ended 1994++ to July 31, July 31, July 31, July 31, Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995 Per Share Net asset value, beginning of period $ 10.10 $ 9.84 $ 10.10 $ 9.84 Operating -------- -------- -------- -------- Performance: Investment income--net . .38 .29 .40 .33 Realized and unrealized gain on investments--net .05 .26 .01 .26 -------- -------- -------- -------- Total from investment operations .43 .55 .41 .59 -------- -------- -------- -------- Less dividends from investment income--net (.38) (.29) (.40) (.33) -------- -------- -------- -------- Net asset value, end of period $ 10.15 $ 10.10 $ 10.11 $ 10.10 ======== ======== ======== ======== Total Investment Based on net asset value per share 4.28% 5.68%+++ 4.07% 6.10%+++ Return:** ======== ======== ======== ======== Ratios to Average Expenses, net of reimbursement .97% 1.05%* .96% .57%* Net Assets: ======== ======== ======== ======== Expenses 1.83% 2.55%* 1.71% 2.08%* ======== ======== ======== ======== Investment income--net 3.84% 3.77%* 3.84% 4.30%* ======== ======== ======== ======== Supplemental Net assets, end of period Data: (in thousands) $ 1 $ 1 $ 1,807 $ 382 ======== ======== ======== ======== Portfolio turnover 30.90% 141.52% 30.90% 141.52% ======== ======== ======== ======== *Annualized. **Total investment returns exclude the effects of sales loads. ++Commencement of Operations. +++Aggregate total investment return.
See Notes to Financial Statements. J-25 MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996 NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the "Trust") is registered under the Investment Company Act of 1940 as a non-diversified, open-end management investment company consisting of eight separate series: Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch California Limited Maturity Municipal Bond Fund, Merrill Lynch Florida Limited Maturity Municipal Bond Fund, Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund, Merrill Lynch Michigan Limited Maturity Municipal Bond Fund, Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund, Merrill Lynch New York Limited Maturity Municipal Bond Fund, and Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund. Each series of the Trust is referred to herein as a "Fund." The Trust offers four classes of shares under the Merrill Lynch Select Pricing SM System. Shares of Class A and Class D are sold with a front-end sales charge. Shares of Class B and Class C may be subject to a contingent deferred sales charge. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class B, Class C and Class D Shares bear certain expenses related to the account maintenance of such shares, and Class B and Class C Shares also bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to its account maintenance and distribution expenditures. The following is a summary of significant accounting policies followed by the Trust. (a) Valuation of investments--Municipal bonds and other portfolio securities in which the Funds invest are traded primarily in the over-the-counter municipal bond and money markets and are valued at the last available bid price in the over-the-counter market or on the basis of yield equivalents as obtained from one or more dealers that make markets in the securities. Financial futures contracts and options thereon, which are traded on exchanges, are valued at their settlement prices as of the close of such exchanges. Short-term investments with remaining maturities of sixty days or less are valued at amortized cost, which approximates market value. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Trustees of the Trust, including valuations furnished by a pricing service retained by the Trust, which may utilize a matrix system for valuations. The procedures of the pricing service and its valuations are reviewed by the officers of the Trust under the general supervision of the Trustees. (b) Derivative financial instruments--The Fund may engage in various portfolio strategies to seek to increase its return by hedging its portfolio against adverse movements in the debt markets. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. *Financial futures contracts--The Funds may purchase or sell interest rate futures contracts and options on such futures contracts for the purpose of hedging the market risk on existing securities or the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. (c) Income taxes--It is each Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. (d) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Interest income is recognized on the accrual basis. Discounts and market premiums are amortized into interest income. Realized gains and losses on security transactions are determined on the identified cost basis. (e) Deferred organization expenses and prepaid registration fees--Deferred organization expenses are charged to expense on a straight-line basis over a five-year period beginning with commencement of operations. Prepaid registration fees are charged to expense as the related shares are issued. (f) Dividends and distributions--Dividends from net investment income are declared daily and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. 2. Investment Advisory Agreement and Transactions with Affiliates: The Trust has entered into an Investment Advisory Agreement with Fund Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The Trust has also entered into a Distribution Agreement and Distribution Plans with Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of Merrill Lynch Group, Inc. FAM is responsible for the management of each Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of each Fund. For such services, each Fund pays a monthly fee at the annual rate of 0.35% of each Fund's average daily net assets. The Investment Advisory Agreement obligates FAM to reimburse each Fund to the extent each Fund's expenses (excluding interest, taxes, distribution fees, brokerage fees and commissions, and extraordinary items) exceed 2.5% of the Fund's first $30 million of average daily net assets, 2.0% of the next $70 million of average daily net assets and 1.5% of the average daily net assets in excess thereof. FAM's obligation to reimburse each Fund is limited to the amount of the management fee. No fee payment will be made during any fiscal year which will cause such expenses to exceed expense limitations at the time of such payment. J-26 For the year ended July 31, 1996, FAM had voluntarily waived management fees and reimbursed each Fund for additional expenses as follows: Arizona California Florida Limited Limited Limited Maturity Maturity Maturity Management fee $21,459 $54,033 $24,123 Additional expenses 72,197 464 -- Massachusetts Michigan New Jersey Limited Limited Limited Maturity Maturity Maturity Management fee $30,736 $16,413 $33,770 Additional expenses 95,278 80,119 64,944 New York Pennsylvania Limited Maturity Limited Maturity Management fee $57,995 $30,196 Additional expenses 88,295 41,308 Pursuant to the distribution plans (the "Distribution Plans") adopted by the Trust in accordance with Rule 12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor ongoing account maintenance and distribution fees. The Distributor voluntarily did not collect any Class C distribution fees for the year ended July 31, 1996. The fees are accrued daily and paid monthly at annual rates based upon the average daily net assets of the shares as follows: Account Maintenance Fee Distribution Fee Class B 0.15% 0.20% Class C 0.15% 0.20% Class D 0.10% -- Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account maintenance and distribution services to the Trust. The ongoing account maintenance fee compensates the Distributor and MLPF&S for providing account maintenance services to Class B, Class C and Class D shareholders. The ongoing distribution fee compensates the Distributor and MLPF&S for providing shareholder and distribution-related services to Class B and Class C shareholders. For the year ended July 31, 1996, MLFD earned underwriting discounts and MLPF&S earned dealer concessions on sales of the Fund's Class A and Class D Shares as follows: Arizona California Florida Massachusetts Limited Limited Limited Limited Maturity Maturity Maturity Maturity Class A: MLFD $ 17 $ 67 $ 22 $ 93 MLPF&S 446 513 475 871 Class D: MLFD $ 14 $ 299 $ 373 $ 298 MLPF&S 227 2,849 2,570 3,089 Michigan New Jersey New York Pennsylvania Limited Limited Limited Limited Maturity Maturity Maturity Maturity Class A: MLFD $ 4 $ 2 $ 1 -- MLPF&S 98 237 33 $ 5 Class D: MLFD $ 59 $ 31 $ 476 $ 14 MLPF&S 420 1,097 4,314 519 MLPF&S received contingent deferred sales charges relating to transactions in Class B Shares of beneficial interest as follows: Class B Shares Arizona Limited Maturity $10,222 California Limited Maturity 3,456 Florida Limited Maturity 18,456 Massachusetts Limited Maturity 4,849 Michigan Limited Maturity 6,724 New Jersey Limited Maturity 8,141 New York Limited Maturity 6,475 Pennsylvania Limited Maturity 3,775 Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned subsidiary of ML & Co., is the Trust's transfer agent. Accounting services are provided to the Trust by FAM at cost. Certain officers and/or trustees of the Trust are officers and/or directors of FAM, PSI, MLPF&S, MLFD, MLFDS, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the year ended July 31, 1996 were as follows: Purchases Sales Arizona Limited Maturity $ 1,965,889 $ 2,436,738 California Limited Maturity 3,066,927 1,317,493 Florida Limited Maturity 10,307,012 10,835,712 Massachusetts Limited Maturity 1,610,060 3,817,465 Michigan Limited Maturity 1,291,375 1,370,658 New Jersey Limited Maturity 452,439 647,468 New York Limited Maturity 10,824,437 6,698,374 Pennsylvania Limited Maturity 2,033,165 2,014,355 Net realized and unrealized gains (losses) as of July 31, 1996 were as follows: Realized Unrealized Arizona Limited Maturity Gains (Losses) Gains Long-term investments $ 1,540 $ 144,631 Short-term investments 11 -- Financial futures contracts (2,242) -- --------- --------- Total $ (691) $ 144,631 ========= ========= J-27 MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996 NOTES TO FINANCIAL STATEMENTS (continued) Realized Unrealized California Limited Maturity Gains (Losses) Gains Long-term investments $ (10,233) $ 557,847 Short-term investments 960 -- Financial futures contracts (5,233) -- --------- --------- Total $ (14,506) $ 557,847 ========= ========= Realized Unrealized Florida Limited Maturity Gains (Losses) Gains Long-term investments $ 9,277 $ 597,062 Short-term investments 658 9 Financial futures contracts (11,213) -- --------- --------- Total $ (1,278) $ 597,071 ========= ========= Realized Unrealized Massachusetts Limited Maturity Gains (Losses) Gains Long-term investments $ 21,469 $ 179,504 Financial futures contracts (3,250) -- --------- --------- Total $ 18,219 $ 179,504 ========= ========= Realized Unrealized Michigan Limited Maturity Gains (Losses) Gains Long-term investments $ 9,749 $ 124,657 Short-term investments 1,954 -- Financial futures contracts (1,620) -- --------- --------- Total $ 10,083 $ 124,657 ========= ========= Realized Unrealized New Jersey Limited Maturity Gains (Losses) Gains Long-term investments $ (9,159) $ 291,589 Short-term investments 218 -- Financial futures contracts (3,645) -- --------- --------- Total $ (12,586) $ 291,589 ========= ========= Realized Unrealized New York Limited Maturity Gains (Losses) Gains Long-term investments $ 33,981 $ 324,626 Financial futures contracts (6,480) -- --------- --------- Total $ 27,501 $ 324,626 ========= ========= Realized Unrealized Pennsylvania Limited Maturity Gains (Losses) Gains Long-term investments $ 3,604 $ 160,822 Financial futures contracts (3,240) -- --------- --------- Total $ 364 $ 160,822 ========= ========= As of July 31, 1996, net unrealized appreciation and the aggregate cost of investments for Federal income tax purposes were as follows: Limited Gross Gross Net Aggregate Maturity Unrealized Unrealized Unrealized Cost of Fund Appreciation Depreciation Appreciation Investments Arizona $144,631 -- $144,631 $ 3,992,244 California 535,204 -- 535,204 14,560,877 Florida 618,787 $ (21,716) 597,071 26,691,374 Massachusetts 183,699 (4,195) 179,504 7,011,474 Michigan 109,879 (101) 109,778 3,785,548 New Jersey 291,589 -- 291,589 8,321,598 New York 324,626 -- 324,626 17,665,641 Pennsylvania 161,811 (989) 160,822 8,237,456 4. Beneficial Interest Transactions: Net increase (decrease) in net assets derived from beneficial interest transactions for the years ended July 31, 1996 and July 31, 1995 were as follows: Increase (Decrease) in For the Year Ended July 31, Beneficial Interest Transactions 1996 1995 Arizona Limited Maturity $ (1,767,011) $ (1,547,482) California Limited Maturity (491,496) 354,485 Florida Limited Maturity (5,075,030) (187,273) Massachusetts Limited Maturity (2,526,578) (6,114,591) Michigan Limited Maturity (1,013,383) (811,255) New Jersey Limited Maturity (1,750,465) (3,524,093) New York Limited Maturity 1,937,339 774,385 Pennsylvania Limited Maturity 150,949 (1,893,824) Transactions in shares of beneficial interest for each class were as follows: Arizona Limited Maturity Class A Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 5,200 $ 52,303 Shares issued to shareholders in reinvestment of dividends 1,441 14,637 ----------- ----------- Total issued 6,641 66,940 Shares redeemed (29,641) (304,005) ----------- ----------- Net decrease (23,000) $ (237,065) =========== =========== J-28 Arizona Limited Maturity Class A Shares for the Year Dollar Ended July 31, 1995 Shares Amount Shares sold 34,228 $ 339,577 Shares issued to shareholders in reinvestment of dividends 3,317 33,017 ----------- ----------- Total issued 37,545 372,594 Shares redeemed (144,716) (1,448,887) ----------- ----------- Net decrease (107,171) $(1,076,293) =========== =========== Arizona Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 43,937 $ 449,980 Shares issued to shareholders in reinvestment of dividends 7,003 66,184 ----------- ----------- Total issued 50,940 516,164 Shares redeemed (275,350) (2,797,058) ----------- ----------- Net decrease (224,410) $(2,280,894) =========== =========== Class B Shares for the Year Dollar Ended July 31, 1995 Shares Amount Shares sold 327,604 $ 3,257,316 Shares issued to shareholders in reinvestment of dividends 10,498 104,547 ----------- ----------- Total issued 338,102 3,361,863 Shares redeemed (386,410) (3,852,363) ----------- ----------- Net decrease (48,308) $ (490,500) =========== =========== Arizona Limited Maturity Class C Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 13,124 $ 132,973 Shares issued to shareholders in reinvestment of dividends 162 1,633 ----------- ----------- Total issued 13,286 134,606 Shares redeemed (4) (41) ----------- ----------- Net increase 13,282 $ 134,565 =========== =========== Class C Shares for the Period Dollar October 21, 1994++ to July 31, 1995 Shares Amount Shares sold 110 $ 1,091 Shares issued to shareholders in reinvestment of dividends 3 29 ----------- ----------- Net increase 113 $ 1,120 =========== =========== ++Commencement of Operations. Arizona Limited Maturity Class D Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 104,371 $ 1,066,013 Shares issued to shareholders in reinvestment of dividends 2,220 22,565 ----------- ----------- Total issued 106,591 1,088,578 Shares redeemed (47,001) (472,195) ----------- ----------- Net increase 59,590 $ 616,383 =========== =========== Class D Shares for the Period Dollar October 21, 1994++ to July 31, 1995 Shares Amount Shares sold 1,801 $ 17,929 Shares issued to shareholders in reinvestment of dividends 26 262 ----------- ----------- Net increase 1,827 $ 18,191 =========== =========== ++Commencement of Operations. California Limited Maturity Class A Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 8,087 $ 80,919 Shares issued to shareholders in reinvestment of dividends 3,445 34,639 ----------- ----------- Total issued 11,532 115,558 Shares redeemed (49,796) (500,770) ----------- ----------- Net decrease (38,264) $ (385,212) =========== =========== Class A Shares for the Year Dollar Ended July 31, 1995 Shares Amount Shares sold 81,782 $ 801,557 Shares issued to shareholders in reinvestment of dividends 4,844 47,495 ----------- ----------- Total issued 86,626 849,052 Shares redeemed (118,656) (1,147,698) ----------- ----------- Net decrease (32,030) $ (298,646) =========== =========== California Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 210,376 $ 2,110,120 Shares issued to shareholders in reinvestment of dividends 15,717 158,020 ----------- ----------- Total issued 226,093 2,268,140 Automatic conversion of shares (7,895) (80,134) Shares redeemed (267,935) (2,686,717) ----------- ----------- Net decrease (49,737) $ (498,711) =========== =========== J-29 MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996 NOTES TO FINANCIAL STATEMENTS (continued) California Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1995 Shares Amount Shares sold 275,065 $ 2,701,344 Shares issued to shareholders in reinvestment of dividends 19,605 192,424 ----------- ----------- Total issued 294,670 2,893,768 Shares redeemed (414,211) (4,043,475) ----------- ----------- Net decrease (119,541) $(1,149,707) =========== =========== California Limited Maturity Class C Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 24 $ 250 Shares issued to shareholders in reinvestment of dividends 8 78 ----------- ----------- Total issued 32 328 Shares redeemed (983) (9,913) ----------- ----------- Net decrease (951) $ (9,585) =========== =========== Class C Shares for the Period Dollar October 21, 1994++ to July 31, 1995 Shares Amount Shares sold 6,910 $ 68,864 Shares issued to shareholders in reinvestment of dividends 26 260 ----------- ----------- Total issued 6,936 69,124 Shares redeemed (499) (4,971) ----------- ----------- Net increase 6,437 $ 64,153 =========== =========== ++Commencement of Operations. California Limited Maturity Class D Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 105,834 $ 1,060,270 Automatic conversion of shares 7,895 80,134 Shares issued to shareholders in reinvestment of dividends 1,093 10,986 ----------- ----------- Total issued 114,822 1,151,390 Shares redeemed (74,548) (749,378) ----------- ----------- Net increase 40,274 $ 402,012 =========== =========== Class D Shares for the Period Dollar October 21, 1994++ to July 31, 1995 Shares Amount Shares sold 299,589 $ 2,938,426 Shares issued to shareholders in reinvestment of dividends 404 4,019 ----------- ----------- Total issued 299,993 2,942,445 Shares redeemed (122,736) (1,203,760) ----------- ----------- Net increase 177,257 $ 1,738,685 =========== =========== ++Commencement of Operations. Florida Limited Maturity Class A Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 91,796 $ 926,979 Shares issued to shareholders in reinvestment of dividends 11,780 118,180 ----------- ----------- Total issued 103,576 1,045,159 Shares redeemed (296,045) (2,960,805) ----------- ----------- Net decrease (192,469) $(1,915,646) =========== =========== Class A Shares for the Year Dollar Ended July 31, 1995 Shares Amount Shares sold 189,974 $ 1,875,261 Shares issued to shareholders in reinvestment of dividends 24,282 237,815 ----------- ----------- Total issued 214,256 2,113,076 Shares redeemed (736,537) (7,241,200) ----------- ----------- Net decrease (522,281) $(5,128,124) =========== =========== Florida Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 374,709 $ 3,773,344 Shares issued to shareholders in reinvestment of dividends 28,155 282,558 ----------- ----------- Total issued 402,864 4,055,902 Shares redeemed (646,498) (6,500,752) ----------- ----------- Net decrease (243,634) $(2,444,850) =========== =========== Class B Shares for the Year Dollar Ended July 31, 1995 Shares Amount Shares sold 1,210,069 $11,716,749 Shares issued to shareholders in reinvestment of dividends 40,299 395,075 ----------- ----------- Total issued 1,250,368 12,111,824 Shares redeemed (1,472,459) (14,333,879) ----------- ----------- Net decrease (222,091) $(2,222,055) =========== =========== Florida Limited Maturity Class C Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 6,623 $ 65,559 Shares issued to shareholders in reinvestment of dividends 4 41 ----------- ----------- Total issued 6,627 65,600 Shares redeemed (1,536) (15,483) ----------- ----------- Net increase 5,091 $ 50,117 =========== =========== J-30 Florida Limited Maturity Class C Shares for the Period Dollar October 21, 1994++ to July 31, 1995 Shares Amount Shares sold 110 $ 1,074 Shares issued to shareholders in reinvestment of dividends 3 31 ----------- ----------- Net increase 113 $ 1,105 =========== =========== ++Commencement of Operations. Florida Limited Maturity Class D Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 316,584 $ 3,192,506 Shares issued to shareholders in reinvestment of dividends 4,342 43,518 ----------- ----------- Total issued 320,926 3,236,024 Shares redeemed (397,363) (4,000,675) ----------- ----------- Net decrease (76,437) $ (764,651) =========== =========== Class D Shares for the Period Dollar October 21, 1994++ to July 31, 1995 Shares Amount Shares sold 835,832 $ 8,301,886 Shares issued to shareholders in reinvestment of dividends 1,523 15,096 ----------- ----------- Total issued 837,355 8,316,982 Shares redeemed (117,154) (1,155,181) ----------- ----------- Net increase 720,201 $ 7,161,801 =========== =========== ++Commencement of Operations. Massachusetts Limited Maturity Class A Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 22,851 $ 226,189 Shares issued to shareholders in reinvestment of dividends 7,410 74,223 ----------- ----------- Total issued 30,261 300,412 Shares redeemed (304,602) (3,055,529) ----------- ----------- Net decrease (274,341) $(2,755,117) =========== =========== Class A Shares for the Year Dollar Ended July 31, 1995 Shares Amount Shares sold 113,925 $ 1,124,479 Shares issued to shareholders in reinvestment of dividends & distributions 18,553 182,392 ----------- ----------- Total issued 132,478 1,306,871 Shares redeemed (499,178) (4,904,822) ----------- ----------- Net decrease (366,700) $(3,597,951) =========== =========== Massachusetts Limited Maturity Class B Shares for the Year Ended Dollar July 31, 1996 Shares Amount Shares sold 163,902 $ 1,649,909 Shares issued to shareholders in reinvestment of dividends 9,837 98,401 ----------- ----------- Total issued 173,739 1,748,310 Shares redeemed (195,993) (1,955,850) ----------- ----------- Net decrease (22,254) $ (207,540) =========== =========== Class B Shares for the Year Ended Dollar July 31, 1995 Shares Amount Shares sold 144,229 $ 1,416,046 Shares issued to shareholders in reinvestment of dividends & distributions 12,243 120,528 ----------- ----------- Total issued 156,472 1,536,574 Shares redeemed (483,231) (4,711,225) ----------- ----------- Net decrease (326,759) $(3,174,651) =========== =========== Massachusetts Limited Maturity Class C Shares for the Year Ended Dollar July 31, 1996 Shares Amount Shares issued to shareholders in reinvestment of dividends 1,201 $ 12,027 Shares redeemed (21,496) (212,811) ----------- ----------- Net decrease (20,295) $ (200,784) =========== =========== Class C Shares for the Period October 21, 1994++ to Dollar July 31, 1995 Shares Amount Shares sold 61,378 $ 600,360 Shares issued to shareholders in reinvestment of dividends & distributions 667 6,580 ----------- ----------- Total issued 62,045 606,940 Shares redeemed (20,616) (199,766) ----------- ----------- Net increase 41,429 $ 407,174 =========== =========== ++Commencement of Operations. Massachusetts Limited Maturity Class D Shares for the Year Ended Dollar July 31, 1996 Shares Amount Shares sold 101,394 $ 1,009,332 Shares issued to shareholders in reinvestment of dividends 1,553 15,510 ----------- ----------- Total issued 102,947 1,024,842 Shares redeemed (38,979) (387,979) ----------- ----------- Net increase 63,968 $ 636,863 =========== =========== J-31 MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996 NOTES TO FINANCIAL STATEMENTS (continued) Massachusetts Limited Maturity Class D Shares for the Period Dollar October 21, 1994++ to July 31, 1995 Shares Amount Shares sold 32,116 $ 317,241 Shares issued to shareholders in reinvestment of dividends & distributions 123 1,219 ----------- ----------- Total issued 32,239 318,460 Shares redeemed (6,870) (67,623) ----------- ----------- Net increase 25,369 $ 250,837 =========== =========== ++Commencement of Operations. Michigan Limited Maturity Class A Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 40,664 $ 405,188 Shares issued to shareholders in reinvestment of dividends 1,529 15,293 ----------- ----------- Total issued 42,193 420,481 Shares redeemed (107,949) (1,077,796) ----------- ----------- Net decrease (65,756) $ (657,315) =========== =========== Class A Shares for the Year Dollar Ended July 31, 1995 Shares Amount Shares sold 28,337 $ 279,211 Shares issued to shareholders in reinvestment of dividends 3,430 33,654 ----------- ----------- Total issued 31,767 312,865 Shares redeemed (147,187) (1,432,908) ----------- ----------- Net decrease (115,420) $(1,120,043) =========== =========== Michigan Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 36,451 $ 365,718 Shares issued to shareholders in reinvestment of dividends 5,013 50,143 ----------- ----------- Total issued 41,464 415,861 Shares redeemed (106,251) (1,063,510) ----------- ----------- Net decrease (64,787) $ (647,649) =========== =========== Class B Shares for the Year Dollar Ended July 31, 1995 Shares Amount Shares sold 116,190 $ 1,105,484 Shares issued to shareholders in reinvestment of dividends 6,029 83,311 ----------- ----------- Total issued 122,219 1,188,795 Shares redeemed (115,161) (1,122,677) ----------- ----------- Net increase 7,058 $ 66,118 =========== =========== Michigan Limited Maturity Class C Shares for the Year Ended Dollar July 31, 1996 Shares Amount Shares issued to shareholders in reinvestment of dividends 4 $ 41 ----------- ----------- Net increase 4 $ 41 =========== =========== Class C Shares for the Period October 21, 1994++ to Dollar July 31, 1995 Shares Amount Shares sold 110 $ 1,073 Shares issued to shareholders in reinvestment of dividends 3 32 ----------- ----------- Net increase 113 $ 1,105 =========== =========== ++Commencement of Operations. Michigan Limited Maturity Class D Shares for the Year Ended Dollar July 31, 1996 Shares Amount Shares sold 29,731 $ 298,909 Shares issued to shareholders in reinvestment of dividends 1,126 11,245 ----------- ----------- Total issued 30,857 310,154 Shares redeemed (1,878) (18,614) ----------- ----------- Net increase 28,979 $ 291,540 =========== =========== Class D Shares for the Period October 21, 1994++ to Dollar July 31, 1995 Shares Amount Shares sold 64,155 $ 622,185 Shares issued to shareholders in reinvestment of dividends 689 6,780 ----------- ----------- Total issued 64,844 628,965 Shares redeemed (39,359) (387,400) ----------- ----------- Net increase 25,485 $ 241,565 =========== =========== ++Commencement of Operations. New Jersey Limited Maturity Class A Shares for the Year Ended Dollar July 31, 1996 Shares Amount Shares sold 102,101 $ 1,042,636 Shares issued to shareholders in reinvestment of dividends 8,892 90,367 ----------- ----------- Total issued 110,993 1,133,003 Shares redeemed (83,997) (856,193) ----------- ----------- Net increase 26,996 $ 276,810 =========== =========== J-32 New Jersey Limited Maturity Class A Shares for the Year Dollar Ended July 31, 1995 Shares Amount Shares sold 147,003 $ 1,452,568 Shares issued to shareholders in reinvestment of dividends 6,968 69,363 ----------- ----------- Total issued 153,971 1,521,931 Shares redeemed (514,441) (5,055,460) ----------- ----------- Net decrease (360,470) $(3,533,529) =========== =========== New Jersey Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 107,343 $ 1,095,824 Shares issued to shareholders in reinvestment of dividends 14,061 143,043 ----------- ----------- Total issued 121,404 1,238,867 Shares redeemed (359,338) (3,646,563) ----------- ----------- Net decrease (237,934) $(2,407,696) =========== =========== Class B Shares for the Year Dollar Ended July 31, 1995 Shares Amount Shares sold 318,885 $ 3,174,748 Shares issued to shareholders in reinvestment of dividends 18,151 180,493 ----------- ----------- Total issued 337,036 3,355,241 Shares redeemed (382,526) (3,775,067) ----------- ----------- Net decrease (45,490) $ (419,826) =========== =========== New Jersey Limited Maturity Class C Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 29,124 $ 272,904 Shares issued to shareholders in reinvestment of dividends 459 4,199 ----------- ----------- Net increase 29,583 $ 277,103 =========== =========== Class C Shares for the Period Dollar October 21, 1994++ to July 31, 1995 Shares Amount Shares sold 65,242 $ 620,177 Shares issued to shareholders in reinvestment of dividends 67 621 ----------- ----------- Total issued 65,309 620,798 Shares redeemed (65,196) (622,061) ----------- ----------- Net increase (decrease) 113 $ (1,263) =========== =========== ++Commencement of Operations. New Jersey Limited Maturity Class D Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 47,184 $ 477,087 Shares issued to shareholders in reinvestment of dividends 728 7,411 ----------- ----------- Total issued 47,912 484,498 Shares redeemed (37,500) (381,180) ----------- ----------- Net increase 10,412 $ 103,318 =========== =========== Class D Shares for the Period Dollar October 21, 1994++ to July 31, 1995 Shares Amount Shares sold 69,049 $ 691,844 Shares issued to shareholders in reinvestment of dividends 348 3,514 ----------- ----------- Total issued 69,397 695,358 Shares redeemed (26,375) (264,833) ----------- ----------- Net increase 43,022 $ 430,525 =========== =========== ++Commencement of Operations. New York Limited Maturity Class A Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 44,189 $ 446,602 Shares issued to shareholders in reinvestment of dividends 11,547 116,691 ----------- ----------- Total issued 55,736 563,293 Shares redeemed (164,328) (1,659,912) ----------- ----------- Net decrease (108,592) $(1,096,619) =========== =========== Class A Shares for the Year Dollar Ended July 31, 1995 Shares Amount Shares sold 189,338 $ 1,861,355 Shares issued to shareholders in reinvestment of dividends 16,001 157,598 ----------- ----------- Total issued 205,339 2,018,953 Shares redeemed (260,265) (2,576,091) ----------- ----------- Net decrease (54,926) $ (557,138) =========== =========== New York Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 465,594 $ 4,716,623 Shares issued to shareholders in reinvestment of dividends 17,959 181,459 ----------- ----------- Total issued 483,553 4,898,082 Automatic conversion of shares (3,459) (34,832) Shares redeemed (356,773) (3,612,208) ----------- ----------- Net increase 123,321 $ 1,251,042 =========== =========== J-33 MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL TRUST, JULY 31, 1996 NOTES TO FINANCIAL STATEMENTS (concluded) New York Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1995 Shares Amount Shares sold 331,365 $ 3,261,544 Shares issued to shareholders in reinvestment of dividends 18,265 180,012 ----------- ----------- Total issued 349,630 3,441,556 Shares redeemed (454,750) (4,436,666) ----------- ----------- Net decrease (105,120) $ (995,110) =========== =========== New York Limited Maturity Class C Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 20,376 $ 206,729 Shares issued to shareholders in reinvestment of dividends 398 4,008 ----------- ----------- Total issued 20,774 210,737 Shares redeemed (3,295) (32,843) ----------- ----------- Net increase 17,479 $ 177,894 =========== =========== Class C Shares for the Period October 21, 1994++ to Dollar July 31, 1995 Shares Amount Shares sold 3,813 $ 38,224 Shares issued to shareholders in reinvestment of dividends 4 40 ----------- ----------- Net increase 3,817 $ 38,264 =========== =========== ++Commencement of Operations. New York Limited Maturity Class D Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 162,557 $ 1,636,956 Automatic conversion of shares 3,456 34,832 Shares issued to shareholders in reinvestment of dividends 6,809 68,734 ----------- ----------- Total issued 172,822 1,740,522 Shares redeemed (13,363) (135,500) ----------- ----------- Net increase 159,459 $ 1,605,022 =========== =========== Class D Shares for the Period October 21, 1994++ to Dollar July 31, 1995 Shares Amount Shares sold 271,406 $ 2,697,692 Shares issued to shareholders in reinvestment of dividends 754 7,474 ----------- ----------- Total issued 272,160 2,705,166 Shares redeemed (42,782) (416,797) ----------- ----------- Net increase 229,378 $ 2,288,369 =========== =========== ++Commencement of Operations. Pennsylvania Limited Maturity Class A Shares for the Year Ended Dollar July 31, 1996 Shares Amount Shares sold 5,556 $ 56,865 Shares issued to shareholders in reinvestment of dividends 1,095 11,133 ----------- ----------- Total issued 6,651 67,998 Shares redeemed (17,647) (179,041) ----------- ----------- Net decrease (10,996) $ (111,043) =========== =========== Class A Shares for the Year Ended Dollar July 31, 1995 Shares Amount Shares sold 33,049 $ 326,744 Shares issued to shareholders in reinvestment of dividends 1,339 13,282 ----------- ----------- Total issued 34,388 340,026 Shares redeemed (40,535) (402,246) ----------- ----------- Net decrease (6,147) $ (62,220) =========== =========== J-34 Pennsylvania Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 89,391 $ 910,583 Shares issued to shareholders in reinvestment of dividends 17,173 174,586 ----------- ----------- Total issued 106,564 1,085,169 Shares redeemed (220,973) (2,241,767) ----------- ----------- Net decrease (114,409) $(1,156,598) =========== =========== Class B Shares for the Year Dollar Ended July 31, 1995 Shares Amount Shares sold 151,037 $ 1,497,108 Shares issued to shareholders in reinvestment of dividends 23,340 231,300 ----------- ----------- Total issued 174,377 1,728,408 Shares redeemed (398,422) (3,933,111) ----------- ----------- Net decrease (224,045) $(2,204,703) =========== =========== Pennsylvania Limited Maturity Class C Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 7,571 $ 82,082 Shares issued to shareholders in reinvestment of dividends 83 850 ----------- ----------- Total issued 7,654 82,932 Shares redeemed (7,650) (82,673) ----------- ----------- Net increase 4 $ 259 =========== =========== Class C Shares for the Period Dollar October 21, 1994++ to July 31, 1995 Shares Amount Shares sold 110 $ 1,082 Shares issued to shareholders in reinvestment of dividends 3 31 ----------- ----------- Net increase 113 $ 1,113 =========== =========== ++Commencement of Operations. Pennsylvania Limited Maturity Class D Shares for the Year Ended Dollar July 31, 1996 Shares Amount Shares sold 155,680 $ 1,569,272 Shares issued to shareholders in reinvestment of dividends 1,844 18,653 ----------- ----------- Total issued 157,524 1,587,925 Shares redeemed (16,678) (169,594) ----------- ----------- Net increase 140,846 $ 1,418,331 =========== =========== Class D Shares for the Period Dollar October 21, 1994++ to July 31, 1995 Shares Amount Shares sold 37,328 $ 367,223 Shares issued to shareholders in reinvestment of dividends 476 4,763 ----------- ----------- Net increase 37,804 $ 371,986 =========== =========== ++Commencement of Operations. 5. Capital Loss Carryforward: At July 31, 1996, each Fund of the Trust had an approximate net capital loss carryforward as follows: $69,000 in the Arizona Limited Maturity Fund, of which $66,000 expires in 2003 and $3,000 expires in 2004; $434,000 in the California Limited Maturity Fund, of which $156,000 expires in 2003 and $278,000 expires in 2004; $718,000 in the Florida Limited Maturity Fund, of which $518,000 expires in 2003 and $200,000 expires in 2004; $340,000 in Massachusetts Limited Maturity Fund, of which $70,000 expires in 2003 and $270,000 expires in 2004; $138,000 in the Michigan Limited Maturity Fund, of which $53,000 expires in 2003 and $85,000 expires in 2004; $281,000 in the New Jersey Limited Maturity Fund, of which $98,000 expires in 2003 and $183,000 expires in 2004; $207,000 in the New York Limited Maturity Fund, of which $122,000 expires in 2002, $2,000 expires in 2003 and $83,000 expires in 2004; and $91,000 in the Pennsylvania Limited Maturity Fund, all of which expires in 2003. These amounts will be available to offset like amounts of any future taxable gains. J-35 TABLE OF CONTENTS Page ---- Investment Objectives and Policies............. 2 Description of Municipal Bonds and Temporary Investments.................................. 5 Description of Municipal Bonds............... 5 Description of Temporary Investments and Variable Rate Demand Obligations........... 6 Repurchase Agreements........................ 7 Financial Futures Transactions and Options... 8 Investment Restrictions........................ 12 Management of the Trust........................ 14 Trustees and Officers........................ 14 Compensation of Trustees..................... 15 Management and Advisory Arrangements......... 16 Purchase of Shares............................. 17 Initial Sales Charge Alternatives--Class A and Class D Shares......................... 18 Reduced Initial Sales Charges................ 20 Distribution Plans........................... 22 Limitations on the Payment of Deferred Sales Charges.................................... 23 Redemption of Shares........................... 25 Deferred Sales Charges--Class B and Class C Shares................................... 25 Portfolio Transactions......................... 26 Determination of Net Asset Value............... 27 Shareholder Services........................... 28 Investment Account........................... 28 Automatic Investment Plans................... 28 Automatic Reinvestment of Dividends and Capital Gains Distributions................ 28 Systematic Withdrawal Plans--Class A and Class D Shares............................. 29 Exchange Privilege........................... 29 Distributions and Taxes........................ 32 Federal...................................... 32 Environmental Tax............................ 34 Tax Treatment of Financial Futures Contracts and Options Thereon........................ 34 State........................................ 35 Performance Data............................... 38 General Information............................ 47 Description of Shares........................ 47 Computation of Offering Price Per Share...... 48 Independent Auditors......................... 49 Custodian.................................... 49 Transfer Agent............................... 49 Legal Counsel................................ 49 Reports to Shareholders...................... 50 Additional Information....................... 50 Appendices..................................... A-1 Independent Auditors' Report................... J-1 Financial Statements........................... J-2 Code # 16926--1196 [LOGO] MERRILL LYNCH Merrill Lynch Multi- State Limited Maturity Municipal Series Trust Merrill Lynch Arizona Limited Maturity Municipal Bond Fund Merrill Lynch California Limited Maturity Municipal Bond Fund Merrill Lynch Florida Limited Maturity Municipal Bond Fund Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund Merrill Lynch Michigan Limited Maturity Municipal Bond Fund Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund Merrill Lynch New York Limited Maturity Municipal Bond Fund Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund STATEMENT OF ADDITIONAL INFORMATION November 27, 1996 Distributor: Merrill Lynch Funds Distributor, Inc. EX-17.(D) 7 ANNUAL REPORT TO STOCKHOLDERS OF M/L EXHIBIT 17(d) Page 1 Page 2 MERRILL LYNCH MULTI-STATE LIMITED MATURITY MUNICIPAL SERIES TRUST FUND LOGO Annual Report July 31, 1997 Officers and Trustees Arthur Zeikel, President and Trustee James H. Bodurtha, Trustee Herbert I. London, Trustee Robert R. Martin, Trustee Joseph L. May, Trustee Andre F. Perold, Trustee Terry K. Glenn, Executive Vice President Vincent R. Giordano, Senior Vice President Donald C. Burke, Vice President Edward J. Andrews, Vice President Peter J. Hayes, Vice President Helen M. Sheehan, Vice President Page 3 Gerald M. Richard, Treasurer Lawrence A. Rogers, Secretary Custodian The Bank of New York 90 Washington Street, 12th Floor New York, NY 10005 Transfer Agent Merrill Lynch Financial Data Services, Inc. 4800 Deer Lake Drive East Jacksonville, FL 32246-6484 (800) 637-3863 This report is not authorized for use as an offer of sale or a solicitation of an offer to buy shares of the Trust unless accompanied or preceded by the Trust's current prospectus. Past performance results shown in this report should not be considered a representation of future performance. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Statements and other information herein are as dated and are subject to change. Merrill Lynch Multi-State Limited Maturity Municipal Series Trust Box 9011 Princeton, NJ 08543-9011 Printed on post-consumer recycled paper TO OUR SHAREHOLDERS The Municipal Market Environment During the three months ended July 31, 1997, a number of very favorable factors combined to push both tax-exempt and taxable bond yields to recent historic lows. A slowing domestic economy, a continued benign, if not improving, inflationary environment, a declining Federal budget deficit with resultant reduced Treasury borrowing needs, and a successful Congressional budget accord all resulted in significant declines in fixed-income yields. By the end of July, three-year US Treasury note yields declined approximately Page 4 62 basis points (0.62%) to 5.77%, their lowest level in almost a year. Similarly, as measured by Municipal Market Data, three-year municipal AAA general obligation bond yields fell over 60 basis points to end the July 31, 1997 quarter at 4%, their lowest level of the year. The decline in tax-exempt bond yields in recent months was even more impressive given that the municipal market has lost much of the technical support it had enjoyed for over a year. In previous quarters, new tax-exempt bond issuance declined or remained stable. However, during the last three months of 1997, many municipal bond issuers took this opportunity to both issue new debt and refinance older, higher-couponed issues with lower-yielding issues. Consequently, during the July quarter, new tax-exempt bond issuance totaled over $54 billion, an increase of over 15% versus the July 31, 1996 quarter. The decline in municipal bond yields has also resulted in some reduction in retail investor demand. In earlier episodes of rapidly declining interest rates, individual investor demand initially fell until investors became more acclimated to the current levels. If interest rates stabilize, we expect investor demand to return to earlier levels. In addition, this past June and July, municipal bond investors received over $50 billion in assets from coupon income payments, bond maturities, and the proceeds from early bond redemptions. Despite the continued allure of the US equity market, most of these assets are expected to be reallocated to the municipal bond market as investors adjust to the new investment environment. Looking forward, given the extent of the recent bond market rally, some retrenchment or at least a period of consolidation is likely. However, the positive backdrop of modest economic growth and low inflation suggests that any such adjustment is not likely to be excessive. Despite recent increases in new bond issuance, supply for all of 1997 is not expected to be materially different than earlier estimates of approximately $175 billion. It is likely that the recent increase in issuance has largely borrowed from that originally scheduled for later this year. Additionally, any significant increase in tax-exempt bond yields will prevent any further bond refinancings, reducing future supply. Unless the current positive economic fundamentals undergo immediate and meaningful deterioration, any increase in municipal bond yields is likely to be viewed as an opportunity to purchase more attractively priced tax-exempt securities. Fiscal Year in Review Merrill Lynch Arizona Limited Maturity Municipal Bond Fund During much of the fiscal year ended July 31, 1997, we maintained a somewhat defensive strategy in response to concerns surrounding Federal Reserve Board monetary policy. We maintained the Fund's Page 5 average portfolio maturity at just under 4 years for much of the fiscal year, which benefited the Fund's total returns in the favorable interest rate environment which characterized most of the period. Because we had pursued a more aggressive stance in the beginning of the Fund's fiscal year, we were able to maintain a core position of higher-yielding securities which provided our shareholders with a more attractive yield than a money market fund. At the close of the year ended July 31, 1997, Merrill Lynch Arizona Limited Maturity Municipal Bond Fund's net assets were $3.3 million. During the July quarter, we maintained cash reserves of approximately 27% of net assets and an average portfolio maturity of about 3.5 years. We maintained a somewhat defensive posture during the July quarter as we had in the first quarter of the year because it appeared that the economy was operating at a strong pace and that the Federal Reserve Board was likely to continue to raise interest rates. We believed that securities in the two-year--ten-year range would be most vulnerable to a move by the Federal Reserve Board. At July 31, 1997, we began to extend our average portfolio maturity and slowly decrease our cash reserves. While the future of interest rates remains uncertain, the Fund's core composition leaves us well positioned, in our view. We expect to maintain our current portfolio strategy during upcoming months, continuing to reduce our cash reserves as economic data indicate a more neutral Federal Reserve Board policy. Merrill Lynch California Limited Maturity Municipal Bond Fund During the Fund's fiscal year, we used periods of rising interest rates as buying opportunities to lock in attractive yields. Conversely, we used periods of falling interest rates to take advantage of market strength and to book capital gains. Additionally, quality spreads have narrowed so much, especially in the last six months, that purchases were concentrated on higher-rated securities since there was little yield advantage to purchasing lower-rated issuers. This strategy served to enhance the Fund's performance by enabling us to maintain a yield well above that of similar tax-exempt money funds while keeping the net asset values of the Fund as stable as possible, especially as compared to longer-term bond funds. During the quarter ended July 31, 1997, unemployment in the state of California was below one million, its lowest level in seven years. For example, the unemployment rate in May 1997 was 6.3%, down from 7.3% in May 1996. The California economy is stronger and more balanced then ever, with less dependence on defense and aerospace. Services and manufacturing were the leading sectors in job creation during the last four quarters. Services relating to business, motion Page 6 pictures, television, engineering, management, amusement and recreation added 207,000 new jobs and manufacturing relating to high tech companies added another 43,000 new jobs. In 1997, non-farm employment is projected to grow 3.7%, compared to 2.5% nationwide. In 1996, personal income grew by more than $50 billion, or 6.5%. In 1997, California's personal income growth is projected to be 9.9%. California is the nation's leading exporter, with total volume of approximately $300 billion. Exports of California-made goods rose more than 8% in 1997, nearly double the growth of exports nationwide. As of July 31, 1997, the state had not passed its budget. Revenues are projected to be $960 million over budget plans this year. Governor Wilson is also proposing a $1 billion income tax cut that would begin in 1999 since the state's tax revenues have grown considerably. At the close of the year ended July 31, 1997, Merrill Lynch California Limited Maturity Municipal Bond Fund's net assets stood at approximately $14.1 million, a decrease of approximately 5% from the April quarter. As we discussed in our April shareholder letter, we expected to maintain a more aggressive investment posture in the July quarter under the premise that growth in the second quarter would slow considerably from the rapid first quarter pace. This posture enhanced performance considerably as second quarter gross domestic product slowed to 2.2% from 4.9% in the first quarter and inflation as measured by the core producer price index and core consumer price index declined. Five-year municipal bond yields declined almost 65 basis points during this period. We expect to maintain a less aggressive posture in the months ahead as continued strong employment and personal income growth and a reacceleration of consumer spending could raise some inflationary concerns among investors. We will continue to monitor economic statistics closely in an effort to seek to enhance return while limiting any net asset value deterioration. Merrill Lynch Florida Limited Maturity Municipal Bond Fund During the Fund's fiscal year, we used periods of rising interest rates as buying opportunities to lock in attractive yields. Conversely, we used periods of falling interest rates to take advantage of market strength and to book capital gains. Additionally, quality spreads have narrowed so much, especially in the last six months, that purchases were concentrated on higher-rated securities since there was little yield advantage to purchasing lower-rated issuers. This strategy served to enhance the Fund's performance by maintaining a yield well above that of similar tax-exempt money funds, while at the same time keeping the net asset Page 7 values of the Fund as stable as possible, especially as compared to longer-term bond funds. During the quarter ended July 31, 1997, Governor Lawton Chiles signed into law the state's $42.2 billion fiscal 1998 budget. During the signing, the Governor chided state legislators for not making available additional funds for building new schools. Children between the ages of 5 and 17 years now account for 2.2 million, or 16%, of the state's population. That figure is expected to rise to more than 2.5 million by the year 2000. The state's public school system is growing by about 60,000 new students each year. This rapidly growing group will require additional debt issuance in order to have school facilities and programs maintained. The state of Florida continues to show steady economic development, transforming itself from a narrow-based economy of agricultural and seasonal tourism into a service and trade economy with substantial insurance, banking and export participation in addition to being a year-round tourist attraction. Fiscal results for 1996 and 1997 are shaping up as stronger than expected. Sales tax growth in 1996 reached 7.4% compared to the 4% growth rate assumed in the fiscal 1997 budget. According to the state's economic reports, non-agricultural employment growth was 2.8% for the 12-month period ended March 31, 1997. At the close of the year ended July 31, 1997, Merrill Lynch Florida Limited Maturity Municipal Bond Fund's net assets stood at approximately $25.7 million, an increase of approximately 8% from the April quarter. As we discussed in our April shareholder letter, we had expected to maintain a more aggressive investment posture in the July quarter under the premise that growth in the second quarter would slow considerably from the rapid first quarter pace. This posture enhanced performance considerably as second quarter gross domestic product slowed to 2.2% from 4.9% in the first quarter and inflation as measured by the core producer price index and core consumer price index declined. Five- year municipal bond yields declined almost 65 basis points during this period. We expect to maintain a less aggressive posture in the months ahead as continued strong employment and personal income growth and a reacceleration of consumer spending could raise some inflationary concerns among investors. We will continue to monitor economic statistics closely in an effort to seek to enhance return while limiting any net asset value deterioration. Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund During much of the Fund's fiscal year, we maintained the Fund's Page 8 average portfolio maturity in the 4-year--4.5-year range, with cash reserves fluctuating between 7%--15% of net assets. We used periods of rising interest rates as buying opportunities to lock in attractive yields. We decreased the Fund's cash reserve position and increased its average portfolio maturity during such periods of rising interest rates. Conversely, we used periods of falling interest rates to take advantage of market strength and to book capital gains, increasing the Fund's cash reserve position and decreasing its average portfolio maturity. Additionally, quality spreads have narrowed so much, especially in the last six months, that purchases were concentrated on higher-rated securities since there was little yield advantage to purchasing lower-rated issuers. This strategy served to enhance the Fund's performance by maintaining a yield well above that of tax-exempt money funds, while at the same time keeping the net asset value of the Fund as stable as possible, especially as compared to longer- term bond funds. During the July quarter, the economy of the commonwealth of Massachusetts continued its trend of positive growth. This economic growth has been broad- based, encompassing most major industries and being fueled by three major growth industries. These industries were the high tech, financial services and business services industries. In addition, consumer confidence is at its highest level since the early 1990s, while income growth is once again above the national average. Strength in the housing sector has led to housing prices registering new highs, especially around the Boston area. The one caveat to this economic growth is that the Massachusetts economy is becoming increasingly supply constrained. With unemployment levels down to about 4%, labor shortages, which were once limited to highly skilled occupations, are now being reported for unskilled occupations. These labor shortages could be an obstacle to continued strong economic growth in the future. Governor Weld, who resigned his post as Governor to pursue an ambassadorship to Mexico, signed his final budget during the July 31, 1997 quarter. The total 1998 fiscal budget amounted to $18.4 billion and represented the commonwealth's eighth consecutive balanced budget. This 1998 fiscal budget increases spending by 3.8% over last year's budget and includes increases of $259 million for education reform, $288 million in aid to cities and towns, and about $50 million for higher education. In addition, newly appointed Governor Cellucci, recognizing the commonwealth's positive economic situation, proposed a bill which would reduce personal income taxes over four years to 5% from 5.95%. Merrill Lynch Michigan Limited Maturity Municipal Bond Fund During the Fund's fiscal year, we used periods of rising interest rates as buying opportunities to lock in attractive yields. Page 9 Conversely, we used periods of falling interest rates to take advantage of market strength and to book capital gains. Additionally, quality spreads have narrowed so much, especially in the last six months, that purchases were concentrated on higher-rated securities since there was little yield advantage to purchasing lower-rated issuers. This strategy served to enhance the Fund's performance by maintaining a yield well above that of tax-exempt money funds, while at the same time keeping the net asset values of the Fund as stable as possible, especially as compared to longer-term bond funds. During the quarter ended July 31, 1997, Michigan's unemployment rate fell to 4% in June and set another record for the lowest seasonally adjusted unemployment rate since the Michigan Employment Security Agency began taking estimates in 1970. Job gains were centered in the service and goods producing sectors. Service employment moved up by 36,000, mainly in response to seasonal gains in retail trade and services following the arrival of warmer weather. Goods producing jobs climbed by 23,000 as a result of seasonal growth in the construction industry. According to the August 1997 edition of World Trade, Detroit ranks first among US cities in exporting. From 1993 to 1995, Detroit experienced a surge in exporting of nearly 63%. This increase was driven by the trade flow between Mexico, Canada and the United States. Michigan was a major beneficiary of the North American Free Trade Agreement. During the July quarter, the Michigan Senate tried to pass a bill to increase the state's gasoline tax by four cents a gallon in order to raise $400 million for Michigan's aging roads and bridges. The bill is still up for consideration. At the close of the year ended July 31, 1997, Merrill Lynch Michigan Limited Maturity Municipal Bond Fund's net assets stood at approximately $4.3 million, a decrease of approximately 9% from the April quarter. As we discussed in our April shareholder letter, we maintained a maturity stance of approximately 4.3 years at the outset of the July quarter under the premise that growth in the second quarter would slow considerably from the rapid first quarter pace. This positioning, as well as some cash outflows, helped us move the Fund's maturity to a more aggressive 4.9 years in mid-May. This posture enhanced performance considerably as second quarter gross domestic product slowed to 2.2% from 4.9% in the first quarter and inflation as measured by the core producer price index and core consumer price index declined. Five-year municipal bond yields declined almost 65 basis points during this period. We expect to maintain a less aggressive posture in the upcoming Page 10 months as continued strong employment and personal income growth and a reacceleration of consumer spending could raise some inflationary concerns again in the marketplace. We will continue to monitor economic statistics closely in an effort to seek to enhance return while limiting any net asset value deterioration. Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund During much of the Fund's fiscal year, we maintained the Fund's average portfolio maturity at close to 5 years, the maximum allowed by the Fund's prospectus. This longer average portfolio maturity benefited the Fund's total returns because demand for New Jersey state-specific securities was strong. In addition, the short-term nature of the Fund offered an attractive alternative to a long-term bond fund without the same net asset value fluctuation. During the same period, cash reserves fluctuated between approximately 15%--20% of net assets. During much of the fiscal year, which was characterized by a favorable interest rate environment, we maintained the Fund's fully invested position, which contributed to the Fund's positive investment results. Our aggressive posture at the onset of the year provided the Fund with a core position of higher-yielding securities which also aided the Fund's performance. New Jersey Governor Christine Todd Whitman signed a $16.8 billion budget for the fiscal year which began July 1, 1997, an increase of 5% as compared to last year's budget. Also during the three months ended July 31, 1997, the state sold $2.75 billion in Federally taxable pension bonds, the largest sale of long-term municipal debt. Proceeds from the sale were used to shore up the state's underfunded pension system. The state continues to see moderate economic growth, and in June the unemployment rate was 5.5%. This compares to a national rate of 4.8%. Since May 1992, New Jersey has recaptured 78% of the jobs lost in the lows of the recession. For much of the three-month period ended July 31, 1997, we maintained cash reserves of approximately 23% of net assets and an average portfolio maturity of about 3.5 years. We maintained a defensive portfolio maturity strategy for most of the three-month period in response to the uncertainty surrounding Federal Reserve Board policy and the direction of short-term interest rates. In this environment, we believed that the municipal market was most vulnerable inside of ten years. In addition, demand for New Jersey municipal securities resulting from coupon payments in tandem with very little supply made New Jersey state- specific paper trade at aggressive levels for most of the three months. At July 31, 1997, we began to selectively extend the Fund's average portfolio maturity with the purchase of AAA-rated securities which we expect to outperform lesser- quality securities in turbulent markets. Page 11 Merrill Lynch New York Limited Maturity Municipal Bond Fund During the Fund's fiscal year, we used periods of rising interest rates as buying opportunities to lock in attractive yields. Conversely, we used periods of falling interest rates to take advantage of market strength and to book capital gains. Additionally, quality spreads have narrowed so much, especially in the last six months, that purchases were concentrated on higher-rated securities since there was little yield advantage to purchasing lower-rated issuers. This strategy served to enhance the Fund's performance by maintaining a yield well above that of similar tax-exempt money funds, while at the same time keeping the net asset values of the Fund as stable as possible, especially as compared to longer-term bond funds. During the quarter ended July 31, 1997, Governor Pataki and the state legislature finally passed a $68 billion budget, 121 days over the deadline. The budget included a $750 million increase in school aid and $2.2 billion in homeowner tax cuts over five years. The budget deal also seeks voter approval in November for a $2.4 billion bond act to build and repair schools with large increases in state budgets for additional construction over the next five years. On a negative note, the budget plan increases spending, is 5% larger than last year's budget and is $2 billion more than Governor Pataki originally proposed. The budget continues to avoid the state's structural fiscal shortcomings which have been glossed over by rising personal income, strong tax receipts and the profits generated by the strong stock market. The state continues to be fiscally vulnerable to a dip in consumer spending and a slowdown in economic performance. According to a mid-year report on New York City's economy by State Comptroller H. Carl McCall, personal income is on track to grow 6.6% this year. The securities industry is likely to generate $8 billion in profits for the city this year. Also, the city's real estate market continued to recover and inflation grew just 2.1%, the slowest first half pace since 1986. At the close of the year ended July 31, 1997, Merrill Lynch New York Limited Maturity Municipal Bond Fund's net assets stood at approximately $14.6 million, a decrease of approximately 5% from the April quarter. As we discussed in our April shareholder letter, we had expected to maintain a more aggressive investment posture in the July quarter under the premise that growth in the second quarter would slow considerably from the rapid first quarter pace. This posture enhanced performance considerably as second quarter gross domestic product slowed to 2.2% from 4.9% in the first quarter and inflation as measured by the core producer price index and core consumer price index declined. Five- year municipal bond yields Page 12 declined almost 65 basis points during this period. We expect to maintain a less aggressive posture in the months ahead as continued strong employment and personal income growth and a reacceleration of consumer spending could raise some inflationary concerns among investors. We will continue to monitor economic statistics closely in an effort to seek to enhance return while limiting any net asset value deterioration. Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund During much of the fiscal year ended July 31, 1997, we maintained a somewhat defensive strategy in response to concerns surrounding Federal Reserve Board monetary policy. We maintained the Fund's average portfolio maturity in the 3.5- year--4.0-year range for much of the fiscal year which, together with a limited cash reserve position of 13%--15% of net assets, benefited the Fund's total returns in the favorable interest rate environment which characterized most of the Fund's fiscal year. Our aggressive stance in the beginning of the Fund's fiscal year provided us with a core position of higher-yielding securities which provided our shareholders with a more attractive yield than a money market fund. During the three-month period ended July 31, 1997, the commonwealth of Pennsylvania's legislature approved its $17 billion budget. The budget included $167 million in tax cuts for businesses and an increase of 3.7% in commonwealth spending as compared to last year. Also during the three-month period, the Philadelphia Federal Reserve Board reported that business activity in the region had risen to its highest level in a year, signaling that manufacturing activity is picking up. In addition, job growth in the construction and service industries was strong. During the July quarter, we maintained cash reserves of approximately 15% of net assets and an average portfolio maturity of 3.5 years. We maintained a somewhat defensive average portfolio maturity during the quarter because it appeared that the economy was continuing to operate at a very strong pace and that the Federal Reserve Board was likely to continue to raise short-term interest rates. Despite the fact that the Federal Reserve Board did not raise interest rates, the Fund's limited cash position aided its performance during the period because of the limited availability of Pennsylvania intermediate-term municipal bonds and because the Fund's aggressive stance at the onset of the year provided the Fund with a core position of higher-yielding securities. While the future direction of interest rates remains uncertain, the composition of the Fund leaves us positioned to perform well, in our view. We expect to maintain our current strategy in the coming months. Page 13 Sincerely, (Arthur Zeikel) Arthur Zeikel President (Vincent R. Giordano) Vincent R. Giordano Senior Vice President (Edward J. Andrews) Edward J. Andrews Vice President and Portfolio Manager (Peter J. Hayes) Peter J. Hayes Vice President and Portfolio Manager (Helen M. Sheehan) Helen M. Sheehan Vice President and Portfolio Manager September 9, 1997 PERFORMANCE DATA About Fund Page 14 Performance Investors are able to purchase shares of the Trust through the Merrill Lynch Select Pricing SM System, which offers four pricing alternatives: * Class A Shares incur a maximum initial sales charge (front-end load) of 1% and bear no ongoing distribution or account maintenance fees. Class A Shares are available only to eligible investors. * Class B Shares are subject to a maximum contingent deferred sales charge of 1% if redeemed during the first year, decreasing 1% the next year to 0%. In addition, Class B Shares are subject to a distribution fee of 0.20% and an account maintenance fee of 0.15%. These shares automatically convert to Class D Shares after approximately 10 years. (There is no initial sales charge for automatic share conversions.) * Class C Shares are subject to a distribution fee of 0.20% and an account maintenance fee of 0.15%. In addition, Class C Shares are subject to a 1% contingent deferred sales charge if redeemed within one year of purchase. * Class D Shares incur a maximum initial sales charge of 1% and an account maintenance fee of 0.10% (but no distribution fee). None of the past results shown should be considered a representation of future performance. Figures shown in the "Average Annual Total Return" tables assume reinvestment of all dividends and capital gains distributions at net asset value on the payable date. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Dividends paid to each class of shares will vary because of the different levels of account maintenance, distribution and transfer agency fees applicable to each class, which are deducted from the income available to be paid to shareholders. Page 15
Recent Performance Results* Standardized 12 Month 3 Month 30-day Yield 12 Month 3 Month Total Total As of 7/31/97 4/30/97 7/31/96 % Change % Change Return Return 7/31/97 Arizona Limited Maturity Class A Shares $10.17 $ 9.99 $10.08 +0.89% +1.80% +4.62%(1) +2.72%(2) 3.37% Arizona Limited Maturity Class B Shares 10.17 9.99 10.08 +0.89 +1.80 +4.25(3) +2.63(4) 3.04 Arizona Limited Maturity Class C Shares 10.18 10.00 10.08 +0.99 +1.80 +4.55(5) +2.68(6) 3.22 Arizona Limited Maturity Class D Shares 10.18 10.00 10.08 +0.99 +1.80 +4.62(7) +2.70(8) 3.27 California Limited Maturity Class A Shares 10.22 9.98 10.05 +1.69 +2.40 +5.57(9) +3.42(10) 3.46 California Limited Maturity Class B Shares 10.21 9.98 10.04 +1.69 +2.30 +5.20(11) +3.23(12) 3.14 California Limited Maturity Class C Shares 10.22 9.98 10.05 +1.69 +2.40 +5.39(13) +3.37(14) 3.32 California Limited Maturity Class D Shares 10.22 9.98 10.05 +1.69 +2.40 +5.47(15) +3.39(16) 3.36 Florida Limited Maturity Class A Shares 10.07 9.86 9.96 +1.10 +2.13 +5.20(17) +3.15(10) 3.51 Florida Limited Maturity Class B Shares 10.07 9.86 9.96 +1.10 +2.13 +4.83(18) +3.06(12) 3.19 Florida Limited Maturity Class C Shares 10.00 9.80 9.90 +1.01 +2.04 +4.93(19) +3.02(20) 3.37 Florida Limited Maturity Class D Shares 10.06 9.86 9.95 +1.11 +2.03 +5.10(21) +3.02(22) 3.41 Massachusetts Limited Maturity Class A Shares 10.04 9.86 9.96 +0.80 +1.83 +4.86(23) +2.86(24) 3.59 Massachusetts Limited Maturity Class B Shares 10.04 9.87 9.96 +0.80 +1.72 +4.49(7) +2.66(2) 3.26 Massachusetts Limited Maturity Class C Shares 10.03 9.86 9.95 +0.80 +1.72 +4.70(19) +2.72(22) 3.47 Massachusetts Limited Maturity Class D Shares 10.04 9.86 9.96 +0.80 +1.83 +4.76(25) +2.84(26) 3.49 Michigan Limited Maturity Class A Shares 10.09 9.88 9.94 +1.51 +2.13 +5.61(27) +3.16(24) 3.62 Michigan Limited Maturity Class B Shares 10.09 9.88 9.94 +1.51 +2.13 +5.22(13) +3.06(2) 3.28 Michigan Limited Maturity Class C Shares 10.09 9.88 9.94 +1.51 +2.13 +5.22(28) +3.05(12) 3.12 Michigan Limited Maturity Class D Shares 10.08 9.87 9.94 +1.41 +2.13 +5.40(29) +3.14(22) 3.52 New Jersey Limited Maturity Class A Shares 10.14 10.00 10.11 +0.30 +1.40 +4.19(21) +2.30(12) 3.32 New Jersey Limited Maturity Class B Shares 10.15 10.01 10.11 +0.40 +1.40 +3.92(30) +2.21(31) 2.99 New Jersey Limited Maturity Class C Shares 9.19 9.06 9.16 +0.33 +1.43 +4.06(32) +2.30(33) 3.20 New Jersey Limited Maturity Class D Shares 10.15 10.00 10.11 +0.40 +1.50 +4.18(34) +2.38(35) 3.22 New York Limited Maturity Class A Shares 10.23 9.99 10.06 +1.69 +2.40 +6.09(36) +3.53(37) 3.86 New York Limited Maturity Class B Shares 10.23 9.99 10.06 +1.69 +2.40 +5.71(38) +3.43(39) 3.54 New York Limited Maturity Class C Shares 10.23 9.99 10.06 +1.69 +2.40 +5.91(40) +3.48(41) 3.72 New York Limited Maturity Class D Shares 10.23 9.99 10.06 +1.69 +2.40 +5.98(42) +3.50(43) 3.77 Pennsylvania Limited Maturity Class A Shares 10.23 10.07 10.11 +1.19 +1.59 +5.04(44) +2.56(16) 3.41 Pennsylvania Limited Maturity Class B Shares 10.23 10.07 10.11 +1.19 +1.59 +4.66(45) +2.47(6) 3.08 Pennsylvania Limited Maturity Class C Shares 10.27 10.11 10.15 +1.18 +1.58 +4.68(46) +2.48(8) 3.15 Pennsylvania Limited Maturity Class D Shares 10.24 10.07 10.11 +1.29 +1.69 +5.04(47) +2.64(20) 3.31
*Investment results shown do not reflect sales charges; results shown would be lower if a sales charge was included. (1)Percent change includes reinvestment of $0.367 per share ordinary income dividends. (2)Percent change includes reinvestment of $0.091 per share ordinary income dividends. (3)Percent change includes reinvestment of $0.331 per share ordinary income dividends. (4)Percent change includes reinvestment of $0.082 per share ordinary income dividends. (5)Percent change includes reinvestment of $0.350 per share ordinary income dividends. (6)Percent change includes reinvestment of $0.087 per share ordinary income dividends. (7)Percent change includes reinvestment of $0.357 per share Page 16 ordinary income dividends. (8)Percent change includes reinvestment of $0.089 per share ordinary income dividends. (9)Percent change includes reinvestment of $0.376 per share ordinary income dividends. (10)Percent change includes reinvestment of $0.099 per share ordinary income dividends. (11)Percent change includes reinvestment of $0.340 per share ordinary income dividends. (12)Percent change includes reinvestment of $0.090 per share ordinary income dividends. (13)Percent change includes reinvestment of $0.358 per share ordinary income dividends. (14)Percent change includes reinvestment of $0.095 per share ordinary income dividends. (15)Percent change includes reinvestment of $0.366 per share ordinary income dividends. (16)Percent change includes reinvestment of $0.096 per share ordinary income dividends. (17)Percent change includes reinvestment of $0.396 per share ordinary income dividends. (18)Percent change includes reinvestment of $0.360 per share ordinary income dividends. (19)Percent change includes reinvestment of $0.377 per share ordinary income dividends. (20)Percent change includes reinvestment of $0.094 per share ordinary income dividends. (21)Percent change includes reinvestment of $0.385 per share ordinary income dividends. (22)Percent change includes reinvestment of $0.097 per share ordinary income dividends. (23)Percent change includes reinvestment of $0.393 per share ordinary income dividends. (24)Percent change includes reinvestment of $0.100 per share ordinary income dividends. (25)Percent change includes reinvestment of $0.383 per share ordinary income dividends. (26)Percent change includes reinvestment of $0.098 per share ordinary income dividends. (27)Percent change includes reinvestment of $0.394 per share ordinary income dividends. (28)Percent change includes reinvestment of $0.359 per share ordinary income dividends. (29)Percent change includes reinvestment of $0.384 per share ordinary income dividends. (30)Percent change includes reinvestment of $0.349 per share ordinary income dividends. (31)Percent change includes reinvestment of $0.081 per share ordinary income dividends. Page 17 (32)Percent change includes reinvestment of $0.335 per share ordinary income dividends. (33)Percent change includes reinvestment of $0.078 per share ordinary income dividends. (34)Percent change includes reinvestment of $0.375 per share ordinary income dividends. (35)Percent change includes reinvestment of $0.088 per share ordinary income dividends. (36)Percent change includes reinvestment of $0.427 per share ordinary income dividends. (37)Percent change includes reinvestment of $0.110 per share ordinary income dividends. (38)Percent change includes reinvestment of $0.391 per share ordinary income dividends. (39)Percent change includes reinvestment of $0.101 per share ordinary income dividends. (40)Percent change includes reinvestment of $0.410 per share ordinary income dividends. (41)Percent change includes reinvestment of $0.106 per share ordinary income dividends. (42)Percent change includes reinvestment of $0.417 per share ordinary income dividends. (43)Percent change includes reinvestment of $0.108 per share ordinary income dividends. (44)Percent change includes reinvestment of $0.379 per share ordinary income dividends. (45)Percent change includes reinvestment of $0.342 per share ordinary income dividends. (46)Percent change includes reinvestment of $0.346 per share ordinary income dividends. (47)Percent change includes reinvestment of $0.369 per share ordinary income dividends. PERFORMANCE DATA (continued) Arizona Limited Maturity Total Return Based on a $10,000 Investment A line graph depicting the growth of an investment in the Fund's Class A Shares and Class B Shares compared to growth of an investment in the ML U1AO Index. Beginning and ending values are: Page 18
11/26/93** 7/97 Arizona Limited Maturity++-- Class A Shares* $ 9,900 $11,606 Arizona Limited Maturity++-- Class B Shares* $10,000 $11,571 Merrill Lynch U1AO Index++++ $10,000 $11,721
A line graph depicting the growth of an investment in the Fund's Class C Shares and Class D Shares compared to growth of an investment in the ML U1AO Index. Beginning and ending values are:
10/21/94** 7/97 Arizona Limited Maturity++-- Class C Shares* $10,000 $11,380 Arizona Limited Maturity++-- Class D Shares* $ 9,900 $11,350 Merrill Lynch U1AO Index++++ $10,000 $11,478
*Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. **Commencement of Operations. ++Arizona Limited Maturity invests in a portfolio of securities consisting primarily of intermediate-term investment-grade obligations issued by or on behalf of the State of Arizona or its political subdivisions, agencies or instrumentalities, and obligations of other qualifying issuers. ++++This unmanaged Index is comprised of AAA-rated bonds maturing within three years. Past performance is not predictive of future performance. Arizona Limited Maturity Average Annual Total Return Page 19
% Return Without % Return With Class A Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +4.16% +3.11% Inception (11/26/93) through 6/30/97 +4.21 +3.92 % Return % Return Class B Shares++ Without CDSC With CDSC++++ Year Ended 6/30/97 +3.78% +2.78% Inception (11/26/93) through 6/30/97 +3.84 +3.84 % Return % Return Class C Shares++ Without CDSC With CDSC++++ Year Ended 6/30/97 +3.98% +2.98% Inception (10/21/94) through 6/30/97 +4.51 +4.51 % Return Without % Return With Class D Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +4.05% +3.01% Inception (10/21/94) through 6/30/97 +4.79 +4.40
*Maximum sales charge is 1%. **Assuming maximum sales charge. ++Maximum contingent deferred sales charge is 1% and reduced to 0% after 1 year. ++++Assuming payment of applicable contingent deferred sales charge. California Limited Maturity Total Return Based on a $10,000 Investment A line graph depicting the growth of an investment in the Fund's Class A Shares and Class B Shares compared to growth of an investment in the ML U1AO Index. Beginning and ending values are: Page 20
11/25/93** 7/97 California Limited Maturity++-- Class A Shares* $ 9,900 $11,682 California Limited Maturity++-- Class B Shares* $10,000 $11,636 Merrill Lynch U1AO Index++++ $10,000 $11,721
A line graph depicting the growth of an investment in the Fund's Class C Shares and Class D Shares compared to growth of an investment in the ML U1AO Index. Beginning and ending values are:
10/21/94** 7/97 California Limited Maturity++-- Class C Shares* $10,000 $11,614 California Limited Maturity++-- Class D Shares* $ 9,900 $11,545 Merrill Lynch U1AO Index++++ $10,000 $11,478
*Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. **Commencement of Operations. ++California Limited Maturity invests in a portfolio of securities consisting primarily of intermediate-term investment-grade obligations issued by or on behalf of the State of California or its political subdivisions, agencies or instrumentalities, and obligations of other qualifying issuers. ++++This unmanaged Index is comprised of AAA-rated bonds maturing within three years. Past performance is not predictive of future performance. California Limited Maturity Average Annual Total Return California Limited Maturity Page 21
% Return Without % Return With Class A Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +5.13% +4.08% Inception (11/26/93) through 6/30/97 +4.31 +4.02 % Return % Return Class B Shares++ Without CDSC With CDSC++++ Year Ended 6/30/97 +4.66% +3.66% Inception (11/26/93) through 6/30/97 +3.91 +3.91 % Return % Return Class C Shares++ Without CDSC With CDSC++++ Year Ended 6/30/97 +4.96% +3.96% Inception (10/21/94) through 6/30/97 +5.17 +5.17 % Return Without % Return With Class D Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +5.03% +3.98% Inception (10/21/94) through 6/30/97 +5.33 +4.94
*Maximum sales charge is 1%. **Assuming maximum sales charge. ++Maximum contingent deferred sales charge is 1% and reduced to 0% after 1 year. ++++Assuming payment of applicable contingent deferred sales charge. PERFORMANCE DATA (continued) Florida Limited Maturity Total Return Based on a $10,000 Investment A line graph depicting the growth of an investment in the Fund's Class A Shares and Class B Shares compared to growth of an investment in the ML U1AO Index. Beginning and ending values are: Page 22
11/26/93** 7/97 Florida Limited Maturity++-- Class A Shares* $ 9,900 $11,554 Florida Limited Maturity++-- Class B Shares* $10,000 $11,521 Merrill Lynch U1AO Index++++ $10,000 $11,721
A line graph depicting the growth of an investment in the Fund's Class C Shares and Class D Shares compared to growth of an investment in the ML U1AO Index. Beginning and ending values are:
10/21/94** 7/97 Florida Limited Maturity++-- Class C Shares* $10,000 $11,360 Florida Limited Maturity++-- Class D Shares* $ 9,900 $11,406 Merrill Lynch U1AO Index++++ $10,000 $11,478
*Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. **Commencement of Operations. ++Florida Limited Maturity invests in a portfolio of securities consisting primarily of intermediate-term investment-grade obligations issued by or on behalf of the State of Florida or its political subdivisions, agencies or instrumentalities, and obligations of other qualifying issuers. ++++This unmanaged Index is comprised of AAA-rated bonds maturing within three years. Past performance is not predictive of future performance. Florida Limited Maturity Average Annual Total Return Florida Limited Maturity Page 23
% Return Without % Return With Class A Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +4.79% +3.74% Inception (11/26/93) through 6/30/97 +4.04 +3.75 % Return % Return Class B Shares++ Without CDSC With CDSC++++ Year Ended 6/30/97 +4.42% +3.42% Inception (11/26/93) through 6/30/97 +3.67 +3.67 % Return % Return Class C Shares++ Without CDSC With CDSC++++ Year Ended 6/30/97 +4.62% +3.62% Inception (10/21/94) through 6/30/97 +4.42 +4.42 % Return Without % Return With Class D Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +4.68% +3.64% Inception (10/21/94) through 6/30/97 +4.97 +4.58
*Maximum sales charge is 1%. **Assuming maximum sales charge. ++Maximum contingent deferred sales charge is 1% and reduced to 0% after 1 year. ++++Assuming payment of applicable contingent deferred sales charge. Massachusetts Limited Maturity Total Return Based on a $10,000 Investment A line graph depicting the growth of an investment in the Fund's Class A Shares and Class B Shares compared to growth of an investment in the ML U1AO Index. Beginning and ending values are: Page 24
11/26/93** 7/97 Massachusetts Limited Maturity++-- Class A Shares* $ 9,900 $11,550 Massachusetts Limited Maturity++-- Class B Shares* $10,000 $11,514 Merrill Lynch U1AO Index++++ $10,000 $11,721
A line graph depicting the growth of an investment in the Fund's Class C Shares and Class D Shares compared to growth of an investment in the ML U1AO Index. Beginning and ending values are:
10/21/94** 7/97 Massachusetts Limited Maturity++-- Class C Shares* $10,000 $11,413 Massachusetts Limited Maturity++-- Class D Shares* $ 9,900 $11,332 Merrill Lynch U1AO Index++++ $10,000 $11,478
*Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. **Commencement of Operations. ++Massachusetts Limited Maturity invests in a portfolio of securities consisting primarily of intermediate-term investment-grade obligations issued by or on behalf of the Commonwealth of Massachusetts or its political subdivisions, agencies or instrumentalities, and obligations of other qualifying issuers. ++++This unmanaged Index is comprised of AAA-rated bonds maturing within three years. Past performance is not predictive of future performance. Page 25 Massachusetts Limited Maturity Average Annual Total Return Massachusetts Limited Maturity
% Return Without % Return With Class A Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +4.53% +3.48% Inception (11/26/93) through 6/30/97 +4.08 +3.79 % Return % Return Class B Shares++ Without CDSC With CDSC++++ Year Ended 6/30/97 +4.15% +3.15% Inception (11/26/93) through 6/30/97 +3.71 +3.71 % Return % Return Class C Shares++ Without CDSC With CDSC++++ Year Ended 6/30/97 +4.37% +3.37% Inception (10/21/94) through 6/30/97 +4.63 +4.63 % Return Without % Return With Class D Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +4.32% +3.28% Inception (10/21/94) through 6/30/97 +4.71 +4.32
*Maximum sales charge is 1%. **Assuming maximum sales charge. ++Maximum contingent deferred sales charge is 1% and reduced to 0% after 1 year. ++++Assuming payment of applicable contingent deferred sales charge. Page 26 PERFORMANCE DATA (continued) Michigan Limited Maturity Total Return Based on a $10,000 Investment A line graph depicting the growth of an investment in the Fund's Class A Shares and Class B Shares compared to growth of an investment in the ML U1AO Index. Beginning and ending values are:
11/26/93** 7/97 Michigan Limited Maturity++-- Class A Shares* $ 9,900 $11,592 Michigan Limited Maturity++-- Class B Shares* $10,000 $11,553 Merrill Lynch U1AO Index++++ $10,000 $11,721
A line graph depicting the growth of an investment in the Fund's Class C Shares and Class D Shares compared to growth of an investment in the ML U1AO Index. Beginning and ending values are:
10/21/94** 7/97 Michigan Limited Maturity++-- Class C Shares* $10,000 $11,445 Michigan Limited Maturity++-- Class D Shares* $ 9,900 $11,441 Merrill Lynch U1AO Index++++ $10,000 $11,478
*Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. **Commencement of Operations. ++Michigan Limited Maturity invests in a portfolio of securities consisting primarily of intermediate-term investment-grade obligations issued by or on behalf of the State of Michigan or its political subdivisions, agencies or instrumentalities, and obligations of other qualifying issuers. ++++This unmanaged Index is comprised of AAA-rated bonds maturing within three years. Past performance is not predictive of future performance. Michigan Limited Maturity Average Annual Total Return Michigan Limited Maturity Page 27 % Return Without % Return With Class A Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +4.87% +3.82% Inception (11/26/93) through 6/30/97 +4.10 +3.81
% Return % Return Class B Shares++ Without CDSC With CDSC++++ Year Ended 6/30/97 +4.49% +3.49% Inception (11/26/93) through 6/30/97 +3.72 +3.72 % Return % Return Class C Shares++ Without CDSC With CDSC++++ Year Ended 6/30/97 +4.50% +3.50% Inception (10/21/94) through 6/30/97 +4.64 +4.64 % Return Without % Return With Class D Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +4.77% +3.72% Inception (10/21/94) through 6/30/97 +5.00 +4.61
*Maximum sales charge is 1%. **Assuming maximum sales charge. ++Maximum contingent deferred sales charge is 1% and reduced to 0% after 1 year. ++++Assuming payment of applicable contingent deferred sales charge. New Jersey Limited Maturity Total Return Based on a $10,000 Investment New Jersey Limited Maturity A line graph depicting the growth of an investment in the Fund's Class A Shares and Class B Shares compared to growth of an investment in the ML U1AO Index. Beginning and ending values are:
11/26/93** 7/97 New Jersey Limited Maturity++-- Class A Shares* $ 9,900 $11,581
Page 28 New Jersey Limited Maturity++-- Class B Shares* $10,000 $11,556 Merrill Lynch U1AO Index++++ $10,000 $11,721
A line graph depicting the growth of an investment in the Fund's Class C Shares and Class D Shares compared to growth of an investment in the ML U1AO Index. Beginning and ending values are:
10/21/94** 7/97 New Jersey Limited Maturity++-- Class C Shares* $10,000 $10,313 New Jersey Limited Maturity++-- Class D Shares* $ 9,900 $11,368 Merrill Lynch U1AO Index++++ $10,000 $11,478
*Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. **Commencement of Operations. ++New Jersey Limited Maturity invests in a portfolio of securities consisting primarily of intermediate-term investment-grade obligations issued by or on behalf of the State of New Jersey or its political subdivisions, agencies or instrumentalities, and obligations of other qualifying issuers. ++++This unmanaged Index is comprised of AAA-rated bonds maturing within three years. Past performance is not predictive of future performance. New Jersey Limited Maturity Average Annual Total Return New Jersey Limited Maturity
% Return Without % Return With Class A Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +4.12% +3.08%
Page 29 Inception (11/26/93) through 6/30/97 +4.20 +3.91
% Return % Return Class B Shares++ Without CDSC With CDSC++++ Year Ended 6/30/97 +3.75% +2.75% Inception (11/26/93) through 6/30/97 +3.83 +3.83 % Return % Return Class C Shares++ Without CDSC With CDSC++++ Year Ended 6/30/97 +3.98% +2.98% Inception (10/21/94) through 6/30/97 +0.80 +0.80 % Return Without % Return With Class D Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +4.02% +2.98% Inception (10/21/94) through 6/30/97 +4.89 +4.50
*Maximum sales charge is 1%. **Assuming maximum sales charge. ++Maximum contingent deferred sales charge is 1% and reduced to 0% after 1 year. ++++Assuming payment of applicable contingent deferred sales charge. PERFORMANCE DATA (concluded) New York Limited Maturity Total Return Based on a $10,000 Investment A line graph depicting the growth of an investment in the Fund's Class A Shares and Class B Shares compared to growth of an investment in the ML U1AO Index. Beginning and ending values are:
11/26/93** 7/97 New York Limited Maturity++-- Class A Shares* $ 9,900 $11,820
Page 30 New York Limited Maturity++-- Class B Shares* $10,000 $11,784 Merrill Lynch U1AO Index++++ $10,000 $11,721
A line graph depicting the growth of an investment in the Fund's Class C Shares and Class D Shares compared to growth of an investment in the ML U1AO Index. Beginning and ending values are:
10/21/94** 7/97 New York Limited Maturity++-- Class C Shares* $10,000 $11,703 New York Limited Maturity++-- Class D Shares* $ 9,900 $11,646 Merrill Lynch U1AO Index++++ $10,000 $11,478
*Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. **Commencement of Operations. ++New York Limited Maturity invests in a portfolio of securities consisting primarily of intermediate-term investment-grade obligations issued by or on behalf of the State of New York or its political subdivisions, agencies or instrumentalities, and obligations of other qualifying issuers. ++++This unmanaged Index is comprised of AAA-rated bonds maturing within three years. Past performance is not predictive of future performance. New York Limited Maturity Average Annual Total Return New York Limited Maturity
% Return Without % Return With Class A Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +5.25% +4.20%
Page 31 Inception (11/26/93) through 6/30/97 +4.61 +4.32
% Return % Return Class B Shares++ Without CDSC With CDSC++++ Year Ended 6/30/97 +4.87% +3.87% Inception (11/26/93) through 6/30/97 +4.24 +4.24 % Return % Return Class C Shares++ Without CDSC With CDSC++++ Year Ended 6/30/97 +5.07% +4.07% Inception (10/21/94) through 6/30/97 +5.42 +5.42 % Return Without % Return With Class D Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +5.14% +4.09% Inception (10/21/94) through 6/30/97 +5.66 +5.27
*Maximum sales charge is 1%. **Assuming maximum sales charge. ++Maximum contingent deferred sales charge is 1% and reduced to 0% after 1 year. ++++Assuming payment of applicable contingent deferred sales charge. Pennsylvania Limited Maturity Total Return Based on a $10,000 Investment A line graph depicting the growth of an investment in the Fund's Class A Shares and Class B Shares compared to growth of an investment in the ML U1AO Index. Beginning and ending values are:
11/26/93** 7/97 Pennsylvania Limited Maturity++-- Class A Shares* $ 9,900 $11,684
Page 32 Pennsylvania Limited Maturity++-- Class B Shares* $10,000 $11,648 Merrill Lynch U1AO Index++++ $10,000 $11,721
A line graph depicting the growth of an investment in the Fund's Class C Shares and Class D Shares compared to growth of an investment in the ML U1AO Index. Beginning and ending values are:
10/21/94** 7/97 Pennsylvania Limited Maturity++-- Class C Shares* $10,000 $11,536 Pennsylvania Limited Maturity++-- Class D Shares* $ 9,900 $11,482 Merrill Lynch U1AO Index++++ $10,000 $11,478
*Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. **Commencement of Operations. ++Pennsylvania Limited Maturity invests in a portfolio of securities consisting primarily of intermediate-term investment-grade obligations issued by or on behalf of the Commonwealth of Pennsylvania or its political subdivisions, agencies or instrumentalities, and obligations of other qualifying issuers. ++++This unmanaged Index is comprised of AAA-rated bonds maturing within three years. Past performance is not predictive of future performance. Pennsylvania Limited Maturity Average Annual Total Return Pennsylvania Limited Maturity
% Return Without % Return With Class A Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +4.63% +3.58% Inception (11/26/93) through 6/30/97 +4.43 +4.14
Page 33
% Return % Return Class B Shares++ Without CDSC With CDSC++++ Year Ended 6/30/97 +4.25% +3.25% Inception (11/26/93) through 6/30/97 +4.05 +4.05 % Return % Return Class C Shares++ Without CDSC With CDSC++++ Year Ended 6/30/97 +4.27% +3.27% Inception (10/21/94) through 6/30/97 +5.07 +5.07 % Return Without % Return With Class D Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +4.42% +3.38% Inception (10/21/94) through 6/30/97 +5.24 +4.84
*Maximum sales charge is 1%. **Assuming maximum sales charge. ++Maximum contingent deferred sales charge is 1% and reduced to 0% after 1 year. ++++Assuming payment of applicable contingent deferred sales charge. Portfolio Abbreviations To simplify the listings of Merrill Lynch Multi-State Limited Maturity Municipal Series Trust's portfolio holdings in the Schedule of Investments, we have abbreviated the names of many of the securities according to the list at right. ACES SM Adjustable Convertible Extendable Securities AMT Alternative Minimum Tax (subject to) BAN Bond Anticipation Notes COP Certificates of Participation EDA Economic Development Authority GO General Obligation Bonds IDA Industrial Development Authority IDR Industrial Development Revenue Bonds M/F Multi-Family Page 34 PCR Pollution Control Revenue Bonds TRAN Tax Revenue AnticipationNotes UT Unlimited Tax VRDN Variable Rate Demand Notes
SCHEDULE OF INVESTMENTS (in Thousands) Arizona Limited Maturity Municipal Bond Fund S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Arizona--87.1% A-1 P1 $ 100 Apache County, Arizona, IDA, IDR (Tucson Electric Power-- Springerville Project), VRDN, Series C, 3.75% due 12/15/2018 (a) $ 100 A1+ VMIG1++ 100 Arizona Health Facilities Authority Revenue Bonds (Arizona Voluntary Hospital Federation), VRDN, Series B, 3.70% due 10/01/2015 (a)(c) 100 AAA Aaa 200 Arizona State Transportation Board, Excise Tax Revenue Bonds (Maricopa County Regional Area Roads), Series A, 5.75% due 7/01/2004 (b) 217 NR* Aaa 100 Arizona Water Infrastructure, Finance Authority Revenue Bonds (Water Quality Financial Assistance), Series A, 4.50% due 7/01/2003 (d) 101 AA- A1 200 Central Arizona Water Conservation District, Contract Revenue Bonds (Central Arizona Project), Series B, 6.50% due 5/01/2001 (e) 220 NR* VMIG1++ 120 Chandler, Arizona, IDA, IDR, Refunding (SMP II, LP), VRDN, 3.50% due 12/01/2015 (a) 120 A1+ P1 100 Maricopa County, Arizona, Pollution Control Corporation, PCR, Refunding (Arizona Public Service Company), VRDN, Series B, 3.55% due 5/01/2029 (a) 100 AAA Aaa 480 Phoenix, Arizona, Airport Revenue Refunding Bonds, AMT, Series C, 5.70% due 7/01/2003 (d) 512 AA- Aa 200 Phoenix, Arizona, Civic Improvement Corporation, Water System Revenue Bonds, Junior Lien, 5% due 7/01/2006 208 AA+ Aa1 250 Phoenix, Arizona, Refunding, UT, 5.70% due 7/01/1999 258 A+ Aa 200 Pima County, Arizona, Refunding, Series A, 5.60% due 7/01/1999 206 AAA Aaa 200 Pima County, Arizona, Sewer Revenue Bonds, 6.20% due 7/01/2002 (b)(e) 220 A1+ P1 100 Pinal County, Arizona, IDA, PCR (Magma Copper/Newmont Mining Corporation), VRDN, 3.70% due 12/01/2009 (a) 100 A1+ NR* 100 Tempe, Arizona, IDA, M/F Revenue Bonds (Elliots Crossing), VRDN, 3.754% due 10/01/2008 (a) 100 A+ A1 150 Tucson, Arizona, Street and Highway User Revenue Refunding Bonds, 5.90% due 7/01/2003 163 AAA Aaa 200 Yuma County, Arizona, Jail District Revenue Bonds, 4.30% due 7/01/1999 (b) 201
Page 35 Puerto Rico-- A1+ VMIG1++ 100 Puerto Rico Commonwealth, Government Development Bank, Refunding, 3.0% VRDN, 3.25% due 12/01/2015 (a) 100 Total Investments (Cost--$2,939)--90.1% 3,026 Other Assets Less Liabilities--9.9% 331 ------- Net Assets--100.0% $ 3,357 =======
(a)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at July 31, 1997. (b)AMBAC Insured. (c)FGIC Insured. (d)MBIA Insured. (e)Prerefunded. *Not Rated. ++Highest short-term rating by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements.
California Limited Maturity Municipal Bond Fund S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) California--97.0% NR* A1 $ 500 California Educational Facilities Authority, Revenue Refunding Bonds (Loyola Marymount University), 5.70% due 10/01/2002 $ 537 AAA Aaa 500 California Health Facilities Financing Authority, Revenue Refunding Bonds (Catholic Healthcare West), Series A, 5.30% due 7/01/2003 (d) 528 A-1 VMIG1++ 200 California Pollution Control Financing Authority, Resource Recovery Revenue Bonds (Atlantic Richfield Company Project), VRDN, AMT, Series A, 3.55% due 12/01/2024 (a) 200 AA Aaa 500 California State Department of Water Resources, Water System Revenue Bonds (Central Valley Project), Series I, 6.95% due 6/01/2000 (e) 547 California State, GO, UT: A+ A1 750 6.75% due 10/01/2003 855 AAA Aaa 750 6.35% due 11/01/2004 (b) 848 California State Public Works Board, Lease Revenue Bonds, Series A (e):
Page 36 AAA Aaa 600 (Department of Corrections--State Prison/Central California Women's Facility, Madera County), 7% due 9/01/2000 664 AAA Aaa 500 (Various University of California Projects), 6.40% due 12/01/2002 (d) 564 AAA Aaa 500 California Statewide Communities Development Authority, Lease Revenue Refunding Bonds (Oakland Convention Center Project), 5.70% due 10/01/2002 (d) 537 NR* Aa2 100 California Statewide Communities Development Authority, Solid Waste Facilities Revenue Bonds (Chevron U.S.A. Inc. Project), VRDN, AMT, 3.50% due 12/15/2024 (a) 100 AAA Aaa 500 Contra Costa, California, Transportation Authority, Sales Tax Revenue Bonds, Series A, 6% due 3/01/2007 (b) 561 A+ NR* 700 East Bay, California, Municipal Utility District, Water System Revenue Bonds, Sub-Series, 7.40% due 6/01/2000 (e) 776 AAA Aaa 200 Los Angeles, California, Department of Airports, Airport Revenue Refunding Bonds, Series A, 6% due 5/15/2005 (b) 222 A+ Aa3 650 Los Angeles, California, Department of Water and Power, Electric Plant Revenue Bonds, 6% due 4/01/2002 702 Los Angeles, California, Harbor Department Revenue Bonds, AMT, Series B: AA Aa3 275 6% due 8/01/2000 289 AA Aa3 295 6% due 8/01/2001 314 AA Aa3 500 6% due 8/01/2004 542 Los Angeles County, California, Metropolitan Transportation Authority, Sales Tax Revenue Bonds (Proposition C--Second Senior): A1+ VMIG1++ 200 Refunding, VRDN, Series A, 3.35% due 7/01/2020 (a)(c) 200 AAA Aaa 400 Series B, 8% due 7/01/2003 (d) 478 AA- Aa1 1,000 Los Angeles County, California, Public Works Financing Authority, Revenue Refunding Bonds (Capital Construction), 4.80% due 3/01/2004 1,025 AA Aa 700 Metropolitan Water District, Southern California, Waterworks Revenue Bonds, 5.60% due 7/01/2006 747 AAA Aaa 700 San Francisco, California, City and County Sewer Revenue Bonds, Series A, 5.375% due 10/01/1999 (b) 722 AAA Aaa 500 Santa Clara County, California, Financing Authority, Lease Revenue Bonds (VMC Facility Replacement Project), Series A, 5.80% due 11/15/2000 (d) 529 SP1+ MIG1++ 600 Santa Clara County, California, TRAN, 4.75% due 10/01/1998 606 AAA Aaa 500 University of California, Revenue Refunding Bonds (Multi-Purpose Projects), Series C, 10% due 9/01/2001 (d) 610 Puerto Rico-- A1+ VMIG1++ 200 Puerto Rico Commonwealth, Government Development Bank, Refunding, 1.4% VRDN, 3.25% due 12/01/2015 (a) 200 Total Investments (Cost--$13,139)--98.4% 13,903 Other Assets Less Liabilities--1.6% 226 ------- Net Assets--100.0% $14,129 =======
Page 37 (a)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at July 31, 1997. (b)FGIC Insured. (c)MBIA Insured. (d)AMBAC Insured. (e)Prerefunded. *Not Rated. ++Highest short-term ratings by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements. SCHEDULE OF INVESTMENTS (continued)
Florida Limited Maturity Municipal Bond Fund S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Florida--95.5% AAA Aaa $ 1,000 Broward County, Florida, School District, UT, 7.125% due 2/15/1999 (f) $ 1,066 Dade County, Florida, Aviation Revenue Refunding Bonds, Series A (b): AAA Aaa 300 5.60% due 10/01/2004 323 AAA Aaa 1,000 AMT, 5.25% due 10/01/1997 1,002 AA- VMIG1++ 400 Dade County, Florida, IDA, Exempt Facilities Revenue Refunding Bonds (Florida Power and Light Company), VRDN, 3.60% due 6/01/2021 (a) 400 AAA Aaa 1,000 Dade County, Florida, School District, UT, 5.75% due 8/01/2001 (c) 1,060 AAA Aaa 1,185 Dunedin, Florida, Hospital Revenue Bonds (Mease Health Care), 6.75% due 11/15/2001 (d)(f) 1,327 Florida State Board of Education, Capital Outlay (Public Education): AA+ Aa2 850 Refunding, 5.50% due 6/01/2001 893 AAA Aaa 1,000 Refunding, Series A, 7.25% due 6/01/2000 (f) 1,103 AA+ Aa2 1,000 Series B, 5.625% due 6/01/2005 1,082 AAA Aaa 800 Florida State Board of Regents, University System Improvement Revenue Bonds, 7% due 7/01/2004 (d) 927 AAA Aaa 580 Florida State Department of Transportation Revenue Bonds (Alligator Alley), 6.25% due 7/01/2007 (c) 660 Florida State Division, Bond Finance Department, General Services Revenue Bonds (Department of Natural Resources), Series A: AAA Aaa 1,900 (Preservation 2000), 6.40% due 7/01/2002 (b) 2,084
Page 38 AAA Aaa 1,730 Refunding (Save Our Coast), 6.30% due 7/01/2004 (d) 1,864 A A3 100 Hillsborough County, Florida, Capital Improvement Revenue Bonds (County Center Project), Second Series, 6.75% due 7/01/2002 (f) 113 Jacksonville, Florida, Electric Authority, Revenue Refunding Bonds (Saint John's River), Issue 2: AA Aa1 1,000 Series 6-C, 6.50% due 10/01/2001 1,086 AA Aa1 1,000 (Special Obligation), Series 6-B, 6.65% due 10/01/2002 1,087 AAA Aaa 1,000 Jacksonville, Florida, Excise Taxes Revenue Bonds, AMT, Series B, 5.20% due 10/01/2004 (c) 1,037 NR* VMIG1++ 900 Jacksonville, Florida, Health Facilities Authority, Hospital Revenue Refunding Bonds (Genesis Rehabilitation Hospital), VRDN, 3.65% due 5/01/2021 (a) 900 AAA Aaa 1,200 North Miami, Florida, Health Facilities Authority, Health Facility Revenue Bonds (Bon Secours Health System Project), 6% due 8/15/2002 (e)(f) 1,317 AA- Aaa 1,000 Orlando, Florida, Utilities Commission, Water and Electric Revenue Bonds, Series A, 6.50% due 10/01/2001 (f) 1,109 AAA Aaa 1,000 Palm Bay, Florida, Utility Revenue Bonds (Palm Bay Utility Corporation Project), Series B, 6.20% due 10/01/2002 (d)(f) 1,109 NR* Baa1 1,360 Pembroke Pines, Florida, Special Assessment No. 94-1, 4.80% due 11/01/1998 1,372 A1+ VMIG1++ 200 Saint Lucie County, Florida, PCR, Refunding (Florida Power and Light Company Project), VRDN, 3.55% due 1/01/2026 (a) 200 AAA Aaa 1,235 Saint Lucie County, Florida, School Board, COP, Series A, 7.25% due 7/01/2000 (b)(f) 1,366 Puerto Rico--4.1% A Baa1 1,000 Puerto Rico Commonwealth, Refunding, Improvement Bonds, UT, 5.30% due 7/01/2004 1,045 Total Investments (Cost--$24,755)--99.6% 25,532 Other Assets Less Liabilities--0.4% 98 ------- Net Assets--100.0% $25,630 =======
(a)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at July 31, 1997. (b)AMBAC Insured. (c)FGIC Insured. (d)MBIA Insured. (e)FSA Insured. (f)Prerefunded. *Not Rated. ++Highest short-term rating by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements. Page 39
Massachusetts Limited Maturity Municipal Bond Fund S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Massachusetts-- NR* A1 $ 285 Boston, Massachusetts, Economic Development and Industrial 95.3% Corporation, Public Parking Facility, Series 1990, 5% due 7/01/2015 $ 290 AAA Aaa 250 Boston, Massachusetts, GO, UT, Series A, 5% due 11/01/2004 (e) 259 AAA Aaa 300 Chelsea, Massachusetts, School Project Loan Act of 1948, UT, 6% due 6/15/2002 (b) 323 AAA Aaa 215 Fall River, Massachusetts, GO, 6.30% due 6/01/1998 (d) 219 NR* Aa3 225 Framingham, Massachusetts, GO, 4.50% due 7/15/2005 227 AAA Aaa 200 Lynn, Massachusetts, Water and Sewer Commission, Refunding, 4.95% due 12/01/2002 (e) 206 A+ A1 100 Massachusetts Bay Transportation Authority, Massachusetts General Transportation System, Series A, 4.90% due 3/01/2004 102 AAA Aaa 250 Massachusetts Education Loan Authority, Education Loan Revenue Refunding Bonds, AMT, Issue E, Series B, 5.50% due 7/01/2001 (b) 261 A+ A1 750 Massachusetts State, GO, Refunding, Series B, 6.25% due 8/01/2001 806 Massachusetts State Health and Educational Facilities Authority Revenue Bonds: A1+ VMIG1++ 200 (Capital Asset Program), VRDN, Series B, 3.45% due 7/01/2005 (a)(d) 200 A1+ VMIG1++ 100 (Capital Asset Program), VRDN, Series C, 3.50% due 7/01/2005 (a)(d) 100 AAA Aaa 200 Refunding (Baystate Medical Center), Series D, 4.60% due 7/01/2002 (e) 202 NR* MIG1++ 100 Massachusetts State Industrial Finance Agency, Health Care Facility Revenue Bonds (Beverly Enterprises--DEDHM), VRDN, 3.65% due 4/01/2009 (a) 100 AAA Aaa 200 Massachusetts State Industrial Finance Agency, Revenue Refunding Bonds (Worcester Polytechnic), Series II, 4.50% due 9/01/2002 (d) 202 AA A1 300 Massachusetts State Special Obligation Revenue Bonds (Highway Improvement Loan), Series A, 5.90% due 6/01/2001 318 AAA Aaa 250 Massachusetts State Water Resource Authority, Series A, 6.75% due 7/15/2002 (c) 282 NR* Aaa 150 Nantucket, Massachusetts, GO, 5.75% due 7/15/2005 (d) 163 NR* A1 500 New England Education Loan Marketing Corporation, Massachusetts Student Loan Revenue Bonds, AMT, Sub-Issue F, 6.60% due 9/01/2002 536 AA Aa1 100 Peabody, Massachusetts, GO, Series A, 4.50% due 8/01/2000 101 Puerto Rico--5.4% A Baa1 250 Puerto Rico Public Buildings Authority, Guaranteed Public Education
Page 40 and Health Facilities, Refunding, Series K, 6.60% due 7/01/2004 276 Total Investments (Cost--$5,006)--100.7% 5,173 Liabilities in Excess of Other Assets--(0.7%) (37) ------- Net Assets--100.0% $ 5,136 =======
(a)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at July 31, 1997. (b)AMBAC Insured. (c)Prerefunded. (d)MBIA Insured. (e)FGIC Insured. *Not Rated. ++Highest short-term ratings by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements.
SCHEDULE OF INVESTMENTS (continued) (In Thousands) Michigan Limited Maturity Municipal Bond Fund S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Michigan--91.5% AAA Aaa $ 200 Anchor Bay, Michigan, School District, UT, 6.30% due 5/01/2004 (c) $ 222 AA Aa2 110 Ann Arbor, Michigan, School District, Public Schools, Refunding, UT, 4.75% due 5/01/2000 112 AAA Aaa 105 Chelsea, Michigan, School District, UT, 6.75% due 5/01/2002 (b) 116 AAA Aaa 150 Chippewa Valley, Michigan, Schools, Refunding, UT, 4.90% due 5/01/2004 (b) 154 AAA Aaa 250 Dearborn, Michigan, Economic Development Corporation, Hospital Revenue Bonds (Oakwood Obligated Group), Series A, 6.95% due 8/15/2001 (c)(d) 280 AAA Aaa 200 Detroit, Michigan, Refunding (Distributable State Aid), UT, 5.70% due 5/01/2001 (a) 210 AAA Aaa 250 Detroit, Michigan, Water Supply System, Revenue Refunding Bonds, 6.20% due 7/01/2004 (b) 274 AAA Aaa 200 Eastern Michigan University, General Revenue Refunding Bonds, 5.40% due 6/01/1998 (a) 203 AAA Aaa 200 Gull Lake, Michigan, Community School District, GO, UT, 6.80%
Page 41 due 5/01/2001 (b)(d) 222 Michigan Municipal Bond Authority Revenue Bonds: AAA Aaa 200 (Local Government Loan Program), Series C, 5.50% due 5/01/2003 (c) 212 AA Aa2 450 Refunding (Local Government--Qualified School), Series A, 6% due 5/01/2001 478 AA+ Aa1 200 (State Revolving Fund), 7% due 10/01/2004 (e) 231 AA- A1 200 Michigan State Building Authority, Revenue Refunding Bonds, Series I, 6.40% due 10/01/2004 218 AA- A1 200 Michigan State Comprehensive Transportation, Revenue Refunding Bonds, Series B, 5.625% due 5/15/2003 213 NR* Aaa 100 Michigan State Hospital Finance Authority Revenue Bonds (McLaren Obligated Group), Series A, 7.50% due 9/15/2001 (d) 114 AA Aa2 200 Michigan State Recreation Program, GO, 6% due 11/01/2004 219 AAA Aaa 160 Michigan State, Underground Storage Tank Financial Assurance Authority, Revenue Refunding Bonds, Series I, 6% due 5/01/2004 (a) 175 AAA Aaa 235 Royal Oak, Michigan, Refunding, UT, 4% due 10/01/1997 (a) 235 Puerto Rico--5.3% AAA Aaa 200 Puerto Rico Public Buildings Authority, Guaranteed Public Education and Health Facilities, Series L, 6.875% due 7/01/2002 (d) 227 Total Investments (Cost--$3,953)--96.8% 4,115 Other Assets Less Liabilities--3.2% 136 ------- Net Assets--100.0% $ 4,251 =======
(a)AMBAC Insured. (b)FGIC Insured. (c)MBIA Insured. (d)Prerefunded. (e)Escrowed to maturity. *Not Rated. Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements.
New Jersey Limited Maturity Municipal Bond Fund S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) New Jersey-- NR* Aaa $ 300 Bergen County, New Jersey, General Improvement Bonds, UT, 5.20% 105.5% due 10/01/1999 $ 308
Page 42 NR* NR* 400 East Orange, New Jersey, BAN (Water and Sewer), GO, UT, 4.75% due 8/28/1997 400 AAA Aaa 600 Elizabeth, New Jersey, General Improvement and Sewer Utility, Refunding, GO, UT, 6% due 8/15/2004 (b) 659 SP1+ VMIG1++ 300 Mercer County, New Jersey, Improvement Authority Revenue Bonds, VRDN, 3.35% due 11/01/1998 (a) 300 AA+ Aaa 400 Monmouth County, New Jersey, General Improvement Bonds, GO, UT, 6.625% due 8/01/2000 419 AAA Aaa 300 Morris County, New Jersey, General Improvement Bonds, GO, 4.625% due 8/15/2003 307 NR* NR* 195 New Brunswick, New Jersey, Temporary Notes, UT, 4% due 12/09/1997 195 AAA Aaa 1,000 New Jersey EDA, Market Transition Facility Revenue Bonds, Senior Lien, Series A, 7% due 7/01/2004 (c) 1,148 A1+ VMIG1++ 300 New Jersey EDA, Natural Gas Facilities Revenue Bonds (NUI Corporation Project), VRDN, AMT, Series A, 3.30% due 6/01/2026 (a)(b) 300 A1+ Aaa 200 New Jersey EDA, Water Facilities Revenue Refunding Bonds (United Water of New Jersey, Inc. Project), VRDN, AMT, Series A, 3% due 11/01/2026 (a)(b) 200 A1+ VMIG1++ 200 New Jersey Sports and Exposition Authority Revenue Bonds (State Contract), VRDN, Series C, 3.45% due 9/01/2024 (a)(c) 200 AAA Aaa 300 New Jersey State Educational Facilities Authority Revenue Bonds (Princeton University), Series E, 4.05% due 7/01/2000 301 NR* Aaa 200 New Jersey State Transportation Trust Fund Authority (Trans- portation System), Series A, 5.40% due 12/15/2002 (e) 212 AAA VMIG1++ 300 New Jersey State Turnpike Authority, Turnpike Revenue Refunding Bonds, VRDN, Series D, 3.30% due 1/01/2018 (a)(d) 300 NR* Aa2 400 Ocean County, New Jersey, Utilities Authority, Wastewater Revenue Bonds, Series A, 6.125% due 1/01/2003 436 A1+ VMIG1++ 300 Port Authority of New York and New Jersey, Special Obligation Revenue Bonds (Versatile Structure Obligation), VRDN, Series 3, 3.55% due 6/01/2020 (a) 300 AAA Aaa 125 Somerset County, New Jersey, GO, UT, 5.875% due 12/01/2001 134 A1+ P1 200 Union County, New Jersey, Industrial Pollution Control Financing Authority, Refunding (Exxon Project), 3.10% due 10/01/2024 200 AA+ Aaa 340 Union County, New Jersey, Refunding, GO, UT, 5.875% due 3/01/1999 350 Total Investments (Cost--$6,483)--105.5% 6,669 Liabilities in Excess of Other Assets--(5.5%) (346) ------- Net Assets--100.0% $ 6,323 =======
(a)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at July 31, 1997. (b)AMBAC Insured. (c)MBIA Insured. Page 43 (d)FGIC Insured. (e)Escrowed to maturity. *Not Rated. ++Highest short-term rating by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements. SCHEDULE OF INVESTMENTS (concluded)
New York Limited Maturity Municipal Bond Fund S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) New York--98.5% AAA Aaa $ 600 Clifton Park, New York, Water Authority, Water System Revenue Bonds, Series A, 6.375% due 10/01/2002 (b)(c) $ 671 Nassau County, New York, General Improvement Bonds, UT (c): AAA Aaa 400 Series O, 5.625% due 8/01/2004 430 AAA Aaa 700 Series Q, 5.10% due 8/01/2003 729 AAA Aaa 750 New York City, New York, IDA, Civic Facilities Revenue Bonds (USTA National Tennis Center Project), 6% due 11/15/2003 (d) 819 AA Aa2 800 New York City, New York, Municipal Assistance Corporation, Series 68, 7.10% due 7/01/2000 860 New York City, New York, Municipal Water Finance Authority, Water and Sewer System Revenue Bonds, VRDN (a)(c): A1+ VMIG1++ 600 Series A, 3.60% due 6/15/2025 600 A1+ VMIG1++ 100 Series G, 3.65% due 6/15/2024 100 BBB+ Baa1 610 New York City, New York, Refunding, UT, Series A, 6% due 8/01/2000 641 New York State Dormitory Authority Revenue Bonds: AAA Aaa 500 (College and University Education Loans), AMT, 6.30% due 7/01/2002 (e) 547 AA Aa 700 Refunding (Cornell University), 5% due 7/01/2005 732 A- Aa 400 New York State Environmental Facilities Corporation, PCR, State Water Revolving Fund (New York City Municipal Water Finance Authority Project), Series E, 5.60% due 6/15/1999 412 A- A2 600 New York State Environmental Quality, GO, 6% due 12/01/2004 658 New York State, GO: A- A2 505 6% due 7/15/2006 559 A- A2 735 Refunding, Series B, 6.25% due 8/15/2004 815 New York State Local Government Assistance Corporation (b): A A3 625 Series A, 7% due 4/01/2001 698 AAA Aaa 600 Series D, 7% due 4/01/2002 682 New York State Medical Care Facilities Finance Agency, Revenue Bonds, Series A: AAA Aaa 725 (Mental Health Services Facilities), 7.75% due 2/15/2001 (b) 825
Page 44 AA Aa 650 (Secured Mortgage Program, Adult Day Care), 6% due 11/15/2003 (f) 702 AA NR* 675 New York State Tax Exempt Revenue Bonds (Rochester Museum and Science), 5.60% due 12/01/2015 679 AAA VMIG1++ 100 New York State Thruway Authority, General Revenue Bonds, VRDN, 3.60% due 1/01/2024 (a)(c) 100 BBB Baa1 450 New York State Urban Development Corporation, Revenue Refunding Bonds (Center for Industrial Innovation Project), 4.60% due 1/01/1998 451 AAA Aaa 760 Port Authority of New York and New Jersey, Refunding, AMT, UT, Consolidated 97th Series, 7.10% due 7/15/2003 (c) 867 A1+ VMIG1++ 200 Syracuse, New York, IDA, Civic Facility Revenue Bonds (Multi- Modal Syracuse University Project), VRDN, 3.50% due 3/01/2023 (a) 200 Triborough Bridge and Tunnel Authority, New York, Revenue Bonds: A+ Aa 340 Series R, 6.90% due 1/01/2000 363 A1+ VMIG1++ 200 Special Obligation, VRDN, 3.60% due 1/01/2024 (a)(c) 200 Total Investments (Cost--$13,801)--98.5% 14,340 Other Assets Less Liabilities--1.5% 225 ------- Net Assets--100.0% $14,565 =======
(a)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at July 31, 1997. (b)Prerefunded. (c)FGIC Insured. (d)FSA Insured. (e)MBIA Insured. (f)SONYMA Insured. *Not Rated. ++Highest short-term rating by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements.
Pennsylvania Limited Maturity Municipal Bond Fund S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Pennsylvania-- NR* VMIG1++ $ 100 Allegheny County, Pennsylvania, Hospital Development Authority 83.6% Revenue Bonds (Presbyterian University Hospital), ACES, Series B1, 3.60% due 3/01/2018 (a) $ 100
Page 45 AAA Aaa 400 Beaver County, Pennsylvania, Hospital Authority, Revenue Refunding Bonds (Medical Center of Beaver County, Inc.), 5.70% due 7/01/1999 (e) 412 AA Aa 1,000 Bucks County, Pennsylvania, UT, Series A, 5.95% due 3/01/2000 1,047 NR* NR* 300 Emmaus, Pennsylvania, General Authority Revenue Bonds, VRDN, Sub- Series E-9, 3.70% due 3/01/2024 (a) 300 A1+ NR* 300 Harrisburg, Pennsylvania, Authority Revenue Bonds (Pooled Financing Fund), VRDN, 3.85% due 7/01/2021 (a) 300 A1+ Aaa 150 Lehigh County, Pennsylvania, Authority Water Revenue Bonds, VRDN, 3.60% due 11/01/2004 (a)(d) 150 NR* VMIG1++ 300 Pennsylvania Energy Development Authority, Energy Development Revenue Bonds (B&W Ebensburg Project), VRDN, AMT, 3.70% due 12/01/2011 (a) 300 Pennsylvania State Higher Educational Facilities Authority, College and University Revenue Refunding Bonds, Series A: A+ Aa3 380 (Thomas Jefferson University), 5.75% due 8/15/1998 387 AA Aa2 275 (University of Pennsylvania), 4.70% due 9/01/1997 275 AAA Aaa 255 Pennsylvania State Turnpike Commission, Turnpike Revenue Refunding Bonds, Series O, 5.35% due 12/01/2002 (d) 269 Philadelphia, Pennsylvania, Hospitals and Higher Education Facilities Authority, Hospital Revenue Bonds: NR* Aaa 1,000 (Children's Hospital of Philadelphia Project), Series A, 6.50% due 2/15/2002 (e) 1,109 A- NR* 650 (Children's Seashore House), Series B, 7% due 8/15/2003 724 SP1+ MIG1++ 300 Philadelphia, Pennsylvania, TRAN, Series A, 4.50% due 6/30/1998 301 AAA Aaa 400 Union County, Pennsylvania, Higher Educational Facilities Financing Authority, Revenue Refunding Bonds (Bucknell University), 6% due 4/01/2002 (b) 430 AAA Aaa 325 Washington County, Pennsylvania, Lease Authority, Municipal Facility Pooled Capital Revenue Bonds (Shadyside Hospital Project), Series C, Sub-Series C1-A, 7.45% due 6/15/2000 (c)(e)(f) 363 Puerto Rico-- A- Baa1 1,000 Puerto Rico Municipal Finance Agency, GO, UT, Series A, 5.80% due 13.8% 7/01/2004 1,067 Total Investments (Cost--$7,317)--97.4% 7,534 Other Assets Less Liabilities--2.6% 205 ------- Net Assets--100.0% $ 7,739 =======
(a)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at July 31, 1997. (b)MBIA Insured. (c)AMBAC Insured. (d)FGIC Insured. (e)Prerefunded. Page 46 (f)Escrowed to maturity. *Not Rated. ++Highest short-term ratings by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements. STATEMENTS OF ASSETS AND LIABILITIES
Arizona California Florida Massachusetts Limited Limited Limited Limited As of July 31, 1997 Maturity Maturity Maturity Maturity Assets: Investments, at value* (Note 1a) $ 3,025,568 $ 13,903,394 $ 25,532,248 $ 5,173,140 Cash 323,206 64,339 12,766 59,786 Receivables: Interest 15,409 217,188 329,785 60,377 Securities sold 101,366 -- -- -- Investment adviser (Note 2) 16,241 -- -- 21,354 Deferred organization expenses (Note 1e) -- 4,810 15,985 2,615 Prepaid registration fees and other assets (Note 1e) 11,380 336 10,220 7,698 ------------ ------------ ------------ ------------ Total assets 3,493,170 14,190,067 25,901,004 5,324,970 ------------ ------------ ------------ ------------ Liabilities: Payables: Beneficial interest redeemed -- -- 176,001 36,244 Securities purchased 101,467 -- -- 101,326 Dividends to shareholders (Note 1f) 2,974 14,836 26,116 5,338 Investment adviser (Note 2) -- 1,867 7,566 -- Distributor (Note 2) 680 2,558 4,071 942 Accrued expenses and other liabilities 30,654 42,090 57,374 45,369 ------------ ------------ ------------ ------------ Total liabilities 135,775 61,351 271,128 189,219 ------------ ------------ ------------ ------------ Net Assets: Net assets $ 3,357,395 $ 14,128,716 $ 25,629,876 $ 5,135,751 ============ ============ ============ ============ Net Assets Class A Shares of beneficial interest, Consist of: $.10 par value, unlimited shares authorized $ 6,974 $ 30,855 $ 63,324 $ 13,507 Class B Shares of beneficial interest, $.10 par value, unlimited shares
Page 47 authorized 20,997 67,326 113,852 27,957 Class C Shares of beneficial interest, $.10 par value, unlimited shares authorized 355 561 597 2,741 Class D Shares of beneficial interest, $.10 par value, unlimited shares authorized 4,684 39,561 76,841 6,956 Paid-in capital in excess of par 3,221,545 13,698,568 25,375,965 5,218,428 Undistributed (accumulated) realized capital gains (losses) on investments --net (Note 5) 16,274 (472,718) (777,982) (300,979) Unrealized appreciation on investments --net 86,566 764,563 777,279 167,141 ------------ ------------ ------------ ------------ Net assets $ 3,357,395 $ 14,128,716 $ 25,629,876 $ 5,135,751 ============ ============ ============ ============ Net Asset Value: Class A: Net assets $ 709,319 $ 3,152,191 $ 6,375,611 $ 1,355,818 ============ ============ ============ ============ Shares outstanding 69,741 308,546 633,237 135,068 ============ ============ ============ ============ Net asset value $ 10.17 $ 10.22 $ 10.07 $ 10.04 ============ ============ ============ ============ Class B: Net assets $ 2,135,376 $ 6,876,961 $ 11,461,594 $ 2,806,894 ============ ============ ============ ============ Shares outstanding 209,967 673,258 1,138,517 279,567 ============ ============ ============ ============ Net asset value $ 10.17 $ 10.21 $ 10.07 $ 10.04 ============ ============ ============ ============ Class C: Net assets $ 36,084 $ 57,282 $ 59,716 $ 274,926 ============ ============ ============ ============ Shares outstanding 3,545 5,607 5,969 27,406 ============ ============ ============ ============ Net asset value $ 10.18 $ 10.22 $ 10.00 $ 10.03 ============ ============ ============ ============ Class D: Net assets $ 476,616 $ 4,042,282 $ 7,732,955 $ 698,113 ============ ============ ============ ============ Shares outstanding 46,841 395,606 768,414 69,563 ============ ============ ============ ============ Net asset value $ 10.18 $ 10.22 $ 10.06 $ 10.04 ============ ============ ============ ============ *Identified cost $ 2,939,002 $ 13,138,831 $ 24,754,969 $ 5,005,999 ============ ============ ============ ============
Page 48
Michigan New Jersey New York Pennsylvania Limited Limited Limited Limited As of July 31, 1997 Maturity Maturity Maturity Maturity Assets: Investments, at value* (Note 1a) $ 4,115,441 $ 6,668,628 $ 14,340,013 $ 7,534,238 Cash 90,032 50,867 63,618 30,350 Receivables: Interest 58,775 85,004 190,115 117,057 Securities sold -- 52,156 -- 100,010 Beneficial interest sold -- -- 12,515 84,550 Investment adviser (Note 2) Deferred organization expenses (Note 1e) 2,302 3,758 4,123 3,516 Prepaid registration fees and other assets (Note 1e) 243 7,803 7,385 5,267 ------------ ------------ ------------ ------------ Total assets 4,289,935 6,870,691 14,622,987 7,884,078 ------------ ------------ ------------ ------------ Liabilities: Payables: Securities purchased -- 441,227 -- 100,000 Beneficial interest redeemed -- 68,809 619 4,035 Dividends to shareholders (Note 1f) 4,454 5,671 15,836 7,338 Distributor (Note 2) 548 1,286 2,764 1,677 Accrued expenses and other liabilities 33,588 31,097 38,433 32,371 ------------ ------------ ------------ ------------ Total liabilities 38,590 548,090 57,652 145,421 ------------ ------------ ------------ ------------ Net Assets: Net assets $ 4,251,345 $ 6,322,601 $ 14,565,335 $ 7,738,657 ============ ============ ============ ============ Net Assets Class A Shares of beneficial interest, Consist of: $.10 par value, unlimited shares authorized $ 13,557 $ 17,100 $ 25,477 $ 7,190 Class B Shares of beneficial interest, $.10 par value, unlimited shares authorized 13,979 40,478 80,271 50,185 Class C Shares of beneficial interest, $.10 par value, unlimited shares authorized 12 2,624 659 77 Class D Shares of beneficial interest, $.10 par value, unlimited shares authorized 14,589 2,350 36,009 18,177 Paid-in capital in excess of par 4,198,169 6,241,536 14,108,036 7,509,162 Accumulated realized capital losses on investments--net (Note 5) (150,077) (167,187) (224,431) (63,042) Accumulated distributions in excess of realized gain on investments--net (Note 1f) (1,779) -- -- -- Unrealized appreciation on investments --net 162,895 185,700 539,314 216,908
Page 49 ------------ ------------ ------------ ------------ Net assets $ 4,251,345 $ 6,322,601 $ 14,565,335 $ 7,738,657 ============ ============ ============ ============ Net Asset Value: Class A: Net assets $ 1,368,162 $ 1,734,544 $ 2,605,219 $ 735,726 ============ ============ ============ ============ Shares outstanding 135,574 170,998 254,768 71,902 ============ ============ ============ ============ Net asset value $ 10.09 $ 10.14 $ 10.23 $ 10.23 ============ ============ ============ ============ Class B: Net assets $ 1,410,732 $ 4,108,454 $ 8,209,327 $ 5,134,207 ============ ============ ============ ============ Shares outstanding 139,786 404,782 802,714 501,850 ============ ============ ============ ============ Net asset value $ 10.09 $ 10.15 $ 10.23 $ 10.23 ============ ============ ============ ============ Class C: Net assets $ 1,231 $ 241,191 $ 67,418 $ 7,869 ============ ============ ============ ============ Shares outstanding 122 26,241 6,593 766 ============ ============ ============ ============ Net asset value $ 10.09 $ 9.19 $ 10.23 $ 10.27 ============ ============ ============ ============ Class D: Net assets $ 1,471,220 $ 238,412 $ 3,683,371 $ 1,860,855 ============ ============ ============ ============ Shares outstanding 145,888 23,497 360,094 181,770 ============ ============ ============ ============ Net asset value $ 10.08 $ 10.15 $ 10.23 $ 10.24 ============ ============ ============ ============ *Identified cost $ 3,952,546 $ 6,482,928 $ 13,800,699 $ 7,317,330 ============ ============ ============ ============
See Notes to Financial Statements. STATEMENTS OF OPERATIONS
Arizona California Florida Massachusetts Limited Limited Limited Limited For the Year Ended July 31, 1997 Maturity Maturity Maturity Maturity Investment Income Interest and amortization of premium (Note 1d): and discount earned $ 173,856 $ 704,598 $ 1,312,846 $ 312,359 Expenses: Accounting services (Note 2) 33,811 32,283 64,974 48,536 Investment advisory fees (Note 2) 13,268 51,013 90,513 22,132 Professional fees 34,098 35,408 39,407 44,247
Page 50 Account maintenance and distribution fees--Class B (Note 2) 8,883 30,557 42,610 13,723 Registration fees (Note 1e) 22,601 12,833 13,791 21,398 Printing and shareholder reports 5,160 18,633 32,385 6,388 Trustees' fees and expenses 2,403 7,290 13,411 3,557 Amortization of organization expenses (Note 1e) -- 3,643 12,130 1,984 Custodian fees 2,727 3,358 4,381 2,369 Pricing fees 2,247 4,169 3,044 2,512 Transfer agent fees--Class B (Note 2) 1,885 2,947 3,404 2,061 Account maintenance fees--Class D (Note 2) 373 2,646 6,193 717 Transfer agent fees--Class A (Note 2) 503 868 1,591 606 Transfer agent fees--Class D (Note 2) 239 710 1,334 307 Account maintenance and distribution fees--Class C (Note 2) 157 84 116 402 Transfer agent fees--Class C (Note 2) 81 28 29 130 Other 2,695 13,781 3,186 2,069 ------------ ------------ ------------ ------------ Total expenses before reimbursement 131,131 220,251 332,499 173,138 Reimbursement of expenses (Note 2) (85,705) (29,150) -- (95,062) ------------ ------------ ------------ ------------ Total expenses after reimbursement 45,426 191,101 332,499 78,076 ------------ ------------ ------------ ------------ Investment income--net 128,430 513,497 980,347 234,283 ------------ ------------ ------------ ------------ Realized & Realized gain on investments--net 87,712 57,005 101,611 51,279 Unrealized Change in unrealized appreciation on Gain (Loss) on investments--net (58,065) 206,716 180,208 (12,363) Investments--Net ------------ ------------ ------------ ------------ (Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $ 158,077 $ 777,218 $ 1,262,166 $ 273,199 ============ ============ ============ ============
Michigan New Jersey New York Pennsylvania Limited Limited Limited Limited For the Year Ended July 31, 1997 Maturity Maturity Maturity Maturity Investment Income Interest and amortization of premium (Note 1d): and discount earned $ 208,473 $ 347,105 $ 812,885 $ 402,719 Expenses: Professional fees 39,131 35,447 34,696 38,410 Accounting services (Note 2) 41,011 26,609 34,860 42,078 Investment advisory fees (Note 2) 14,977 25,494 57,645 29,758 Registration fees (Note 1e) 22,074 16,112 20,605 16,392
Page 51 Account maintenance and distribution fees--Class B (Note 2) 5,934 15,927 32,533 20,568 Printing and shareholder reports 5,905 -- 19,539 4,570 Trustees' fees and expenses 2,071 3,919 8,418 4,231 Pricing fees 3,369 1,913 3,925 2,379 Custodian fees 1,853 3,205 3,614 2,902 Amortization of organization expenses (Note 1e) 1,743 2,852 3,123 2,668 Transfer agent fees--Class B (Note 2) 952 2,147 3,545 2,641 Account maintenance fees--Class D (Note 2) 1,085 409 4,216 1,831 Transfer agent fees--Class A (Note 2) 634 805 848 280 Transfer agent fees--Class D (Note 2) 442 164 1,276 651 Account maintenance and distribution fees--Class C (Note 2) 1 402 234 7 Transfer agent fees--Class C (Note 2) 4 118 75 9 Other 14,366 1,694 -- 2,196 ------------ ------------ ------------ ------------ Total expenses before reimbursement 155,552 137,217 229,152 171,571 Reimbursement of expenses (Note 2) (107,880) (51,282) (76,880) (64,142) ------------ ------------ ------------ ------------ Total expenses after reimbursement 47,672 85,935 152,272 107,429 ------------ ------------ ------------ ------------ Investment income--net 160,801 261,170 660,613 295,290 ------------ ------------ ------------ ------------ Realized & Realized gain on investments--net 21,697 126,030 36,848 37,824 Unrealized Change in unrealized appreciation on Gain (Loss) on investments--net 38,238 (105,889) 214,688 56,086 Investments--Net ------------ ------------ ------------ ------------ (Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $ 220,736 $ 281,311 $ 912,149 $ 389,200 ============ ============ ============ ============
See Notes to Financial Statements. STATEMENTS OF CHANGES IN NET ASSETS
Arizona Limited Maturity California Limited Maturity For the Year For the Year Ended July 31, Ended July 31, Increase (Decrease) in Net Assets: 1997 1996 1997 1996 Operations: Investment income--net $ 128,430 $ 229,407 $ 513,497 $ 562,881 Realized gain (loss) on investments
Page 52 --net 87,712 (691) 57,005 (14,506) Change in unrealized appreciation on investments--net (58,065) (45,086) 206,716 102,333 ------------ ------------ ------------ ------------ Net increase in net assets resulting from operations 158,077 183,630 777,218 650,708 ------------ ------------ ------------ ------------ Dividends to Investment income--net: Shareholders Class A (28,232) (37,685) (117,926) (130,650) (Note 1f): Class B (83,293) (164,444) (295,984) (362,918) Class C (3,632) (1,762) (1,999) (2,149) Class D (13,273) (25,516) (97,588) (67,164) ------------ ------------ ------------ ------------ Net decrease in net assets resulting from dividends to shareholders (128,430) (229,407) (513,497) (562,881) ------------ ------------ ------------ ------------ Beneficial Interest Net decrease in net assets derived Transactions from beneficial interest transactions (1,124,280) (1,767,011) (1,455,816) (491,496) (Note 4): ------------ ------------ ------------ ------------ Net Assets: Total decrease in net assets (1,094,633) (1,812,788) (1,192,095) (403,669) Beginning of year 4,452,028 6,264,816 15,320,811 15,724,480 ------------ ------------ ------------ ------------ End of year $ 3,357,395 $ 4,452,028 $ 14,128,716 $ 15,320,811 ============ ============ ============ ============ See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS (concluded)
Florida Massachusetts Michigan Limited Maturity Limited Maturity Limited Maturity For the Year For the Year For the Year Increase (Decrease) Ended July 31, Ended July 31, Ended July 31, in Net Assets: 1997 1996 1997 1996 1997 1996 Operations: Investment income--net $ 980,347 $ 1,189,088 $ 234,283 $ 335,521 $ 160,801 $ 182,546 Realized gain (loss) on investments --net 101,611 (1,278) 51,279 18,219 21,697 10,083 Change in
Page 53 unrealized appreciation on investments --net 180,208 (174,866) (12,363) (13,084) 38,238 (23,665) ------------ ------------ ------------ ------------ ------------ ------------ Net increase in net assets resulting from operations 1,262,166 1,012,944 273,199 340,656 220,736 168,964 ------------ ------------ ------------ ------------ ------------ ------------ Dividends & Investment Distributions to income--net: Shareholders Class A (295,532) (361,872) (56,023) (118,129) (58,806) (85,288) (Note 1f): Class B (441,468) (557,931) (140,428) (180,877) (60,388) (80,829) Class C (2,960) (522) (10,189) (14,474) (43) (41) Class D (240,387) (268,763) (27,643) (22,041) (41,564) (16,388) In excess of realized gain on investments --net: Class A -- -- -- -- (568) -- Class B -- -- -- -- (668) -- Class C -- -- -- -- --++ -- Class D -- -- -- -- (543) -- ------------ ------------ ------------ ------------ ------------ ------------ Net decrease in net assets resulting from dividends and distributions to shareholders (980,347) (1,189,088) (234,283) (335,521) (162,580) (182,546) ------------ ------------ ------------ ------------ ------------ ------------ Beneficial Interest Net increase Transactions (decrease) in (Note 4): net assets derived from beneficial interest trans- actions (2,674,028) (5,075,030) (2,299,335) (2,526,578) 168,118 (1,013,383) ------------ ------------ ------------ ------------ ------------ ------------ Net Assets: Total increase (decrease) in net assets (2,392,209) (5,251,174) (2,260,419) (2,521,443) 226,274 (1,026,965) Beginning of year 28,022,085 33,273,259 7,396,170 9,917,613 4,025,071 5,052,036 ------------ ------------ ------------ ------------ ------------ ------------ End of year $ 25,629,876 $ 28,022,085 $ 5,135,751 $ 7,396,170 $ 4,251,345 $ 4,025,071 ============ ============ ============ ============ ============ ============
Page 54
New Jersey New York Pennsylvania Limited Maturity Limited Maturity Limited Maturity For the Year For the Year For the Year Increase (Decrease) Ended July 31, Ended July 31, Ended July 31, in Net Assets: 1997 1996 1997 1996 1997 1996 Operations: Investment income--net $ 261,170 $ 365,818 $ 660,613 $ 671,149 $ 295,290 $ 320,744 Realized gain (loss) on investments --net 126,030 (12,586) 36,848 27,501 37,824 364 Change in unrealized appreciation on investments --net (105,889) (41,469) 214,688 (22,206) 56,086 12,631 ------------ ------------ ------------ ------------ ------------ ------------ Net increase in net assets resulting from operations 281,311 311,763 912,149 676,444 389,200 333,739 ------------ ------------ ------------ ------------ ------------ ------------ Dividends to Investment Shareholders income--net: (Note 1f): Class A (78,571) (107,284) (118,733) (174,431) (29,558) (37,384) Class B (157,456) (241,855) (360,967) (381,150) (198,819) (254,375) Class C (9,799) (4,447) (6,313) (5,588) (181) (1,049) Class D (15,344) (12,232) (174,600) (109,980) (66,732) (27,936) ------------ ------------ ------------ ------------ ------------ ------------ Net decrease in net assets resulting from dividends to shareholders (261,170) (365,818) (660,613) (671,149) (295,290) (320,744) ------------ ------------ ------------ ------------ ------------ ------------ Beneficial Interest Net increase Transactions (decrease) in (Note 4): net assets derived from beneficial interest
Page 55 transactions (2,324,627) (1,750,465) (3,606,325) 1,937,339 (1,259,754) 150,949 ------------ ------------ ------------ ------------ ------------ ------------ Net Assets: Total increase (decrease) in net assets (2,304,486) (1,804,520) (3,354,789) 1,942,634 (1,165,844) 163,944 Beginning of year 8,627,087 10,431,607 17,920,124 15,977,490 8,904,501 8,740,557 ------------ ------------ ------------ ------------ ------------ ------------ End of year $ 6,322,601 $ 8,627,087 $ 14,565,335 $ 17,920,124 $ 7,738,657 $ 8,904,501 ============ ============ ============ ============ ============ ============ ++Amount is less than $1. See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
Arizona Limited Maturity Class A For the Period The following per share data and ratios have been derived Nov. 26, from information provided in the financial statements. For the Year 1993++ to Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 Per Share Net asset value, beginning of period $ 10.08 $ 10.17 $ 9.97 $ 10.00 Operating ------- ------- ------- ------- Performance: Investment income--net .37 .41 .43 .23 Realized and unrealized gain (loss) on investments--net .09 (.09) .20 (.03) ------- ------- ------- ------- Total from investment operations .46 .32 .63 .20 ------- ------- ------- ------- Less dividends from investment income--net (.37) (.41) (.43) (.23) ------- ------- ------- ------- Net asset value, end of period $ 10.17 $ 10.08 $ 10.17 $ 9.97 ======= ======= ======= ======= Total Investment Based on net asset value per share 4.62% 3.16% 6.47% 2.02%+++ Return:** ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement .94% .74% .35% .02%* Net Assets: ======= ======= ======= =======
Page 56 Expenses 3.21% 2.27% 2.05% 1.82%* ======= ======= ======= ======= Investment income--net 3.64% 4.01% 4.31% 3.37%* ======= ======= ======= ======= Supplemental Net assets, end of period (in thousands) $ 709 $ 813 $ 1,054 $ 2,103 Data: ======= ======= ======= ======= Portfolio turnover 38.21% 43.53% 182.58% 142.37% ======= ======= ======= =======
Arizona Limited Maturity Class B For the Period The following per share data and ratios have been derived Nov. 26, from information provided in the financial statements. For the Year 1993++ to Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 Per Share Net asset value, beginning of period $ 10.08 $ 10.16 $ 9.97 $ 10.00 Operating ------- ------- ------- ------- Performance: Investment income--net .33 .37 .39 .20 Realized and unrealized gain (loss) on investments--net .09 (.08) .19 (.03) ------- ------- ------- ------- Total from investment operations .42 .29 .58 .17 ------- ------- ------- ------- Less dividends from investment income--net (.33) (.37) (.39) (.20) ------- ------- ------- ------- Net asset value, end of period $ 10.17 $ 10.08 $ 10.16 $ 9.97 ======= ======= ======= ======= Total Investment Based on net asset value per share 4.25% 2.88% 5.99% 1.78%+++ Return:** ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement 1.30% 1.09% .72% .38%* Net Assets: ======= ======= ======= ======= Expenses 3.56% 2.61% 2.44% 2.18%* ======= ======= ======= ======= Investment income--net 3.28% 3.65% 3.95% 3.02%* ======= ======= ======= ======= Supplemental Net assets, end of period (in thousands) $ 2,135 $ 2,885 $ 5,191 $ 5,575 Data: ======= ======= ======= ======= Portfolio turnover 38.21% 43.53% 182.58% 142.37% ======= ======= ======= =======
Page 57 *Annualized. **Total investment returns exclude the effects of sales loads. ++Commencement of Operations. +++Aggregate total investment return. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS (continued)
Arizona Limited Maturity Class C Class D The following per share data For the For the and ratios have been derived Period Period from information provided in Oct. 21, Oct. 21, the financial statements. For the Year 1994++ to For the Year 1994++ to Ended July 31, July 31, Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995 Per Share Net asset value, beginning of period $ 10.08 $ 10.17 $ 9.89 $ 10.08 $ 10.17 $ 9.89 Operating ------- ------- ------- ------- ------- ------- Performance: Investment income--net .35 .37 .29 .36 .40 .33 Realized and unrealized gain (loss) on investments--net .10 (.09) .28 .10 (.09) .28 ------- ------- ------- ------- ------- ------- Total from investment operations .45 .28 .57 .46 .31 .61 ------- ------- ------- ------- ------- ------- Less dividends from investment income--net (.35) (.37) (.29) (.36) (.40) (.33) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 10.18 $ 10.08 $ 10.17 $ 10.18 $ 10.08 $ 10.17 ======= ======= ======= ======= ======= ======= Total Investment Based on net asset value per share 4.55% 2.78% 5.90%+++ 4.62% 3.05% 6.34%+++ Return:** ======= ======= ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement 1.11% 1.03% 1.05%* 1.04% .90% .55%* Net Assets: ======= ======= ======= ======= ======= ======= Expenses 3.35% 2.80% 2.79%* 3.29% 2.42% 2.39%* ======= ======= ======= ======= ======= ======= Investment income--net 3.48% 3.86% 3.80%* 3.56% 3.88% 4.31%* ======= ======= ======= ======= ======= ======= Supplemental Net assets, end of period Data: (in thousands) $ 36 $ 135 $ 1 $ 477 $ 619 $ 19 ======= ======= ======= ======= ======= ======= Portfolio turnover 38.21% 43.53% 182.58% 38.21% 43.53% 182.58% ======= ======= ======= ======= ======= =======
Page 58
California Limited Maturity Class A For the Period The following per share data and ratios have been derived Nov. 26, from information provided in the financial statements. For the Year 1993++ to Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 Per Share Net asset value, beginning of period $ 10.05 $ 9.99 $ 9.88 $ 10.00 Operating ------- ------- ------- ------- Performance: Investment income--net .38 .39 .42 .24 Realized and unrealized gain (loss) on investments--net .17 .06 .11 (.12) ------- ------- ------- ------- Total from investment operations .55 .45 .53 .12 ------- ------- ------- ------- Less dividends from investment income--net (.38) (.39) (.42) (.24) ------- ------- ------- ------- Net asset value, end of period $ 10.22 $ 10.05 $ 9.99 $ 9.88 ======= ======= ======= ======= Total Investment Based on net asset value per share 5.57% 4.56% 5.60% 1.23%+++ Return:** ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement 1.08% .94% .40% .02%* Net Assets: ======= ======= ======= ======= Expenses 1.28% 1.30% 1.44% 1.16%* ======= ======= ======= ======= Investment income--net 3.75% 3.89% 4.36% 3.54%* ======= ======= ======= ======= Supplemental Net assets, end of period (in thousands) $ 3,152 $ 3,162 $ 3,527 $ 3,804 Data: ======= ======= ======= ======= Portfolio turnover 26.86% 11.09% 124.72% 130.10% ======= ======= ======= =======
Page 59
California Limited Maturity Class B For the Period The following per share data and ratios have been derived Nov. 26, from information provided in the financial statements. For the Year 1993++ to Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 Per Share Net asset value, beginning of period $ 10.04 $ 9.99 $ 9.88 $ 10.00 Operating ------- ------- ------- ------- Performance: Investment income--net .34 .36 .39 .21 Realized and unrealized gain (loss) on investments--net .17 .05 .11 (.12) ------- ------- ------- ------- Total from investment operations .51 .41 .50 .09 ------- ------- ------- ------- Less dividends from investment income--net (.34) (.36) (.39) (.21) ------- ------- ------- ------- Net asset value, end of period $ 10.21 $ 10.04 $ 9.99 $ 9.88 ======= ======= ======= ======= Total Investment Based on net asset value per share 5.20% 4.08% 5.23% .99%+++ Return:** ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement 1.44% 1.30% .76% .38%* Net Assets: ======= ======= ======= ======= Expenses 1.64% 1.66% 1.80% 1.52%* ======= ======= ======= ======= Investment income--net 3.39% 3.53% 4.00% 3.19%* ======= ======= ======= ======= Supplemental Net assets, end of period (in thousands) $ 6,877 $ 9,919 $10,363 $11,430 Data: ======= ======= ======= ======= Portfolio turnover 26.86% 11.09% 124.72% 130.10% ======= ======= ======= ======= California Limited Maturity Class C Class D The following per share data For the For the and ratios have been derived Period Period from information provided in Oct. 21, Oct. 21, the financial statements. For the Year 1994++ to For the Year 1994++ to Ended July 31, July 31, Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995 Per Share Net asset value, beginning of period $ 10.05 $ 9.99 $ 9.76 $ 10.05 $ 9.99 $ 9.76 Operating ------- ------- ------- ------- ------- ------- Performance: Investment income--net .36 .37 .31 .37 .38 .33 Realized and unrealized gain on investments--net .17 .06 .23 .17 .06 .23
Page 60 ------- ------- ------- ------- ------- ------- Total from investment operations .53 .43 .54 .54 .44 .56 ------- ------- ------- ------- ------- ------- Less dividends from investment income--net (.36) (.37) (.31) (.37) (.38) (.33) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 10.22 $ 10.05 $ 9.99 $ 10.22 $ 10.05 $ 9.99 ======= ======= ======= ======= ======= ======= Total Investment Based on net asset value per share 5.39% 4.35% 5.60%+++ 5.47% 4.46% 5.85%+++ Return:** ======= ======= ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement 1.25% 1.14% .82%* 1.15% 1.06% .66%* Net Assets: ======= ======= ======= ======= ======= ======= Expenses 1.45% 1.50% 1.98%* 1.35% 1.40% 1.81%* ======= ======= ======= ======= ======= ======= Investment income--net 3.58% 3.69% 4.04%* 3.69% 3.77% 4.28%* ======= ======= ======= ======= ======= ======= Supplemental Net assets, end of period Data: (in thousands) $ 57 $ 55 $ 64 $ 4,043 $ 2,185 $ 1,771 ======= ======= ======= ======= ======= ======= Portfolio turnover 26.86% 11.09% 124.72% 26.86% 11.09% 124.72% ======= ======= ======= ======= ======= =======
*Annualized. **Total investment returns exclude the effects of sales loads. ++Commencement of Operations. +++Aggregate total investment return. See Notes to Financial Statements. Page 61 FINANCIAL HIGHLIGHTS (continued)
Florida Limited Maturity Class A For the Period The following per share data and ratios have been derived Nov. 26, from information provided in the financial statements. For the Year 1993++ to Ended July 31, July 31, Increase (Decrease in Net Asset Value: 1997 1996 1995 1994 Per Share Net asset value, beginning of period $ 9.96 $ 10.02 $ 9.87 $ 10.00 Operating ------- ------- ------- ------- Performance: Investment income--net .40 .40 .43 .24 Realized and unrealized gain (loss) on investments--net .11 (.06) .15 (.13) ------- ------- ------- ------- Total from investment operations .51 .34 .58 .11 ------- ------- ------- ------- Less dividends from investment income--net (.40) (.40) (.43) (.24) ------- ------- ------- ------- Net asset value, end of period $ 10.07 $ 9.96 $ 10.02 $ 9.87 ======= ======= ======= ======= Total Investment Based on net asset value per share 5.20% 3.45% 6.05% 1.12%+++ Return:** ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement 1.09% .89% .39% .02%* Net Assets: ======= ======= ======= ======= Expenses 1.09% .97% 1.03% .86%* ======= ======= ======= ======= Investment income--net 3.98% 4.01% 4.39% 3.54%* ======= ======= ======= ======= Supplemental Net assets, end of period (in thousands) $ 6,376 $ 7,874 $ 9,849 $14,868 Data: ======= ======= ======= ======= Portfolio turnover 35.67% 39.90% 138.97% 136.71% ======= ======= ======= ======= Florida Limited Maturity Class B For the Period The following per share data and ratios have been derived Nov. 26, from information provided in the financial statements. For the Year 1993++ to Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 Per Share Net asset value, beginning of period $ 9.96 $ 10.02 $ 9.88 $ 10.00 Operating ------- ------- ------- ------- Performance: Investment income--net .36 .37 .40 .21 Realized and unrealized gain (loss) on investments--net .11 (.06) .14 (.12) ------- ------- ------- ------- Total from investment operations .47 .31 .54 .09 ------- ------- ------- ------- Less dividends from investment income--net (.36) (.37) (.40) (.21) ------- ------- ------- ------- Net asset value, end of period $ 10.07 $ 9.96 $ 10.02 $ 9.88
Page 62 ======= ======= ======= ======= Total Investment Based on net asset value per share 4.83% 3.08% 5.57% .99%+++ Return:** ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement 1.45% 1.24% .75% .38%* Net Assets: ======= ======= ======= ======= Expenses 1.45% 1.32% 1.38% 1.23%* ======= ======= ======= ======= Investment income--net 3.63% 3.66% 4.05% 3.19%* ======= ======= ======= ======= Supplemental Net assets, end of period (in thousands) $11,461 $13,690 $16,213 $18,179 Data: ======= ======= ======= ======= Portfolio turnover 35.67% 39.90% 138.97% 136.71% ======= ======= ======= =======
Florida Limited Maturity Class C Class D The following per share data For the For the and ratios have been derived Period Period from information provided in Oct. 21, Oct. 21, the financial statements. For the Year 1994++ to For the Year 1994++ to Ended July 31, July 31, Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995 Per Share Net asset value, beginning of period $ 9.90 $ 10.01 $ 9.76 $ 9.95 $ 10.01 $ 9.76 Operating ------- ------- ------- ------- ------- ------- Performance: Investment income--net .38 .36 .29 .39 .39 .33 Realized and unrealized gain (loss) on investments--net .10 (.11) .25 .11 (.06) .25 ------- ------- ------- ------- ------- ------- Total from investment operations .48 .25 .54 .50 .33 .58 ------- ------- ------- ------- ------- ------- Less dividends from investment income--net (.38) (.36) (.29) (.39) (.39) (.33) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 10.00 $ 9.90 $ 10.01 $ 10.06 $ 9.95 $ 10.01 ======= ======= ======= ======= ======= ======= Total Investment Based on net asset value per share 4.93% 2.48% 5.65%+++ 5.10% 3.35% 6.07%+++ Return:** ======= ======= ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement 1.26% 1.21% 1.09%* 1.19% .99% .67%* Net Assets: ======= ======= ======= ======= ======= ======= Expenses 1.26% 1.23% 1.67%* 1.19% 1.07% 1.19%*
Page 63 ======= ======= ======= ======= ======= ======= Investment income--net 3.83% 3.75% 3.83%* 3.88% 3.91% 4.23%* ======= ======= ======= ======= ======= ======= Supplemental Net assets, end of period Data: (in thousands) $ 60 $ 52 $ 1 $ 7,733 $ 6,406 $ 7,210 ======= ======= ======= ======= ======= ======= Portfolio turnover 35.67% 39.90% 138.97% 35.67% 39.90% 138.97% ======= ======= ======= ======= ======= =======
Massachusetts Limited Maturity Class A For the Period The following per share data and ratios have been derived Nov. 26, from information provided in the financial statements. For the Year 1993++ to Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 Per Share Net asset value, beginning of period $ 9.96 $ 9.96 $ 9.95 $ 10.00 Operating ------- ------- ------- ------- Performance: Investment income--net .39 .40 .44 .25 Realized and unrealized gain (loss) on investments--net .08 --++++ .02 (.05) ------- ------- ------- ------- Total from investment operations .47 .40 .46 .20 ------- ------- ------- ------- Less dividends and distributions: Investment income--net (.39) (.40) (.44) (.25) Realized gain on investments--net -- -- (.01) -- ------- ------- ------- ------- Total dividends and distributions (.39) (.40) (.45) (.25) ------- ------- ------- ------- Net asset value, end of period $ 10.04 $ 9.96 $ 9.96 $ 9.95 ======= ======= ======= ======= Total Investment Based on net asset value per share 4.86% 4.08% 4.79% 2.01%+++ Return:** ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement .99% .77% .37% .03%* Net Assets: ======= ======= ======= ======= Expenses 2.52% 2.15% 1.71% 1.17%* ======= ======= ======= ======= Investment income--net 3.95% 4.04% 4.45% 3.69%* ======= ======= ======= ======= Supplemental Net assets, end of period (in thousands) $ 1,356 $ 1,719 $ 4,453 $ 8,097 Data: ======= ======= ======= ======= Portfolio turnover 22.93% 22.71% 89.96% 57.80% ======= ======= ======= =======
Page 64
Massachusetts Limited Maturity Class B For the Period The following per share data and ratios have been derived Nov. 26, from information provided in the financial statements. For the Year 1993++ to Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 Per Share Net asset value, beginning of period $ 9.96 $ 9.96 $ 9.95 $ 10.00 Operating ------- ------- ------- ------- Performance: Investment income--net .36 .37 .40 .22 Realized and unrealized gain (loss) on investments--net .08 --++++ .02 (.05) ------- ------- ------- ------- Total from investment operations .44 .37 .42 .17 ------- ------- ------- ------- Less dividends and distributions: Investment income--net (.36) (.37) (.40) (.22) Realized gain on investments--net -- -- (.01) -- ------- ------- ------- ------- Total dividends and distributions (.36) (.37) (.41) (.22) ------- ------- ------- ------- Net asset value, end of period $ 10.04 $ 9.96 $ 9.96 $ 9.95 ======= ======= ======= ======= Total Investment Based on net asset value per share 4.49% 3.70% 4.41% 1.77%+++ Return:** ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement 1.35% 1.16% .74% .38%* Net Assets: ======= ======= ======= ======= Expenses 2.84% 2.61% 2.08% 1.54%* ======= ======= ======= ======= Investment income--net 3.58% 3.66% 4.08% 3.28%* ======= ======= ======= ======= Supplemental Net assets, end of period (in thousands) $ 2,807 $ 4,577 $ 4,800 $ 8,046 Data: ======= ======= ======= ======= Portfolio turnover 22.93% 22.71% 89.96% 57.80% ======= ======= ======= =======
*Annualized. **Total investment returns exclude the effects of sales loads. ++Commencement of Operations. ++++Amount is less than $.01 per share. +++Aggregate total investment return. See Notes to Financial Statements. Page 65 FINANCIAL HIGHLIGHTS (continued)
Massachusetts Limited Maturity Class C Class D The following per share data For the For the and ratios have been derived Period Period from information provided in Oct. 21, Oct. 21, the financial statements. For the Year 1994++ to For the Year 1994++ to Ended July 31, July 31, Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995 Per Share Net asset value, beginning of period $ 9.95 $ 9.96 $ 9.82 $ 9.96 $ 9.96 $ 9.82 Operating ------- ------- ------- ------- ------- ------- Performance: Investment income--net .38 .39 .33 .38 .39 .34 Realized and unrealized gain (loss) on investments--net .08 (.01) .15 .08 --++++ .15 ------- ------- ------- ------- ------- ------- Total from investment operations .46 .38 .48 .46 .39 .49 ------- ------- ------- ------- ------- ------- Less dividends and distributions: Investment income--net (.38) (.39) (.33) (.38) (.39) (.34) Realized gain on investments--net -- -- (.01) -- -- (.01) ------- ------- ------- ------- ------- ------- Total dividends and distributions (.38) (.39) (.34) (.38) (.39) (.35) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 10.03 $ 9.95 $ 9.96 $ 10.04 $ 9.96 $ 9.96 ======= ======= ======= ======= ======= ======= Total Investment Based on net asset value per share 4.70% 3.81% 5.00%+++ 4.76% 3.97% 5.09%+++ Return:** ======= ======= ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement 1.15% .94% .67%* 1.09% .93% .70%* Net Assets: ======= ======= ======= ======= ======= ======= Expenses 2.69% 2.37% 2.23%* 2.62% 2.42% 2.31%* ======= ======= ======= ======= ======= ======= Investment income--net 3.80% 3.88% 4.32%* 3.85% 3.89% 4.21%* ======= ======= ======= ======= ======= ======= Supplemental Net assets, end of period Data: (in thousands) $ 275 $ 210 $ 413 $ 698 $ 890 $ 253 ======= ======= ======= ======= ======= ======= Portfolio turnover 22.93% 22.71% 89.96% 22.93% 22.71% 89.96% ======= ======= ======= ======= ======= =======
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Michigan Limited Maturity Class A For the Period The following per share data and ratios have been derived Nov. 26, from information provided in the financial statements. For the Year 1993++ to Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 Per Share Net asset value, beginning of period $ 9.94 $ 9.98 $ 9.92 $ 10.00 Operating ------- ------- ------- ------- Performance: Investment income--net .39 .41 .44 .24 Realized and unrealized gain (loss) on investments--net .15 (.04) .06 (.08) ------- ------- ------- ------- Total from investment operations .54 .37 .50 .16 ------- ------- ------- ------- Less dividends and distributions: Investment income--net (.39) (.41) (.44) (.24) In excess of realized gain on investments--net --++++ -- -- -- ------- ------- ------- ------- Total dividends and distributions (.39) (.41) (.44) (.24) ------- ------- ------- ------- Net asset value, end of period $ 10.09 $ 9.94 $ 9.98 $ 9.92 ======= ======= ======= ======= Total Investment Based on net asset value per share 5.61% 3.71% 5.16% 1.66%+++ Return:** ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement .94% .74% .27% .02%* Net Assets: ======= ======= ======= ======= Expenses 3.50% 2.78% 2.18% 2.01%* ======= ======= ======= ======= Investment income--net 3.93% 4.06% 4.42% 3.59%* ======= ======= ======= ======= Supplemental Net assets, end of period (in thousands) $ 1,368 $ 1,641 $ 2,302 $ 3,435 Data: ======= ======= ======= ======= Portfolio turnover 13.24% 32.92% 93.08% 204.15% ======= ======= ======= =======
Page 67
Michigan Limited Maturity Class B For the Period The following per share data and ratios have been derived Nov. 26, from information provided in the financial statements. For the Year 1993++ to Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 Per Share Net asset value, beginning of period $ 9.94 $ 9.98 $ 9.92 $ 10.00 Operating ------- ------- ------- ------- Performance: Investment income--net .36 .37 .40 .22 Realized and unrealized gain (loss) on investments--net .15 (.04) .06 (.08) ------- ------- ------- ------- Total from investment operations .51 .33 .46 .14 ------- ------- ------- ------- Less dividends and distributions: Investment income--net (.36) (.37) (.40) (.22) In excess of realized gain on investments--net --++++ -- -- -- ------- ------- ------- ------- Total dividends and distributions (.36) (.37) (.40) (.22) ------- ------- ------- ------- Net asset value, end of period $ 10.09 $ 9.94 $ 9.98 $ 9.92 ======= ======= ======= ======= Total Investment Based on net asset value per share 5.22% 3.32% 4.78% 1.42%+++ Return:** ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement 1.31% 1.10% .65% .38%* Net Assets: ======= ======= ======= ======= Expenses 3.86% 3.14% 2.56% 2.38%* ======= ======= ======= ======= Investment income--net 3.56% 3.70% 4.09% 3.21%* ======= ======= ======= ======= Supplemental Net assets, end of period (in thousands) $ 1,411 $ 1,842 $ 2,494 $ 2,411 Data: ======= ======= ======= ======= Portfolio turnover 13.24% 32.92% 93.08% 204.15% ======= ======= ======= =======
Page 68
Michigan Limited Maturity Class C Class D The following per share data For the For the and ratios have been derived Period Period from information provided in Oct. 21, Oct. 21, the financial statements. For the Year 1994++ to For the Year 1994++ to Ended July 31, July 31, Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995 Per Share Net asset value, beginning of period $ 9.94 $ 9.98 $ 9.76 $ 9.94 $ 9.97 $ 9.76 Operating ------- ------- ------- ------- ------- ------- Performance: Investment income--net .36 .36 .30 .38 .40 .34 Realized and unrealized gain (loss) on investments--net .15 (.04) .22 .14 (.03) .21 ------- ------- ------- ------- ------- ------- Total from investment operations .51 .32 .52 .52 .37 .55 ------- ------- ------- ------- ------- ------- Less dividends and distributions: Investment income--net (.36) (.36) (.30) (.38) (.40) (.34) In excess of realized gain on investments--net --++++ -- -- --++++ -- -- ------- ------- ------- ------- ------- ------- Total dividends and distributions (.36) (.36) (.30) (.38) (.40) (.34) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 10.09 $ 9.94 $ 9.98 $ 10.08 $ 9.94 $ 9.97 ======= ======= ======= ======= ======= ======= Total Investment Based on net asset value per share 5.22% 3.20% 5.40%+++ 5.40% 3.71% 5.72%+++ Return:** ======= ======= ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement 1.32% 1.24% .96%* 1.04% .87% .44%* Net Assets: ======= ======= ======= ======= ======= ======= Expenses 3.81% 3.31% 2.90%* 3.48% 3.06% 2.38%* ======= ======= ======= ======= ======= ======= Investment income--net 3.56% 3.57% 3.80%* 3.83% 3.94% 4.47%* ======= ======= ======= ======= ======= ======= Supplemental Net assets, end of period Data: (in thousands) $ 1 $ 1 $ 1 $ 1,471 $ 541 $ 254 ======= ======= ======= ======= ======= ======= Portfolio turnover 13.24% 32.92% 93.08% 13.24% 32.92% 93.08% ======= ======= ======= ======= ======= =======
*Annualized. **Total investment returns exclude the effects of sales loads. ++Commencement of Operations. ++++Amount is less than $.01 per share. +++Aggregate total investment return. See Notes to Financial Statements. Page 69 FINANCIAL HIGHLIGHTS (continued)
New Jersey Limited Maturity Class A For the Period The following per share data and ratios have been derived Nov. 26, from information provided in the financial statements. For the Year 1993++ to Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 Per Share Net asset value, beginning of period $ 10.11 $ 10.15 $ 9.94 $ 10.00 Operating ------- ------- ------- ------- Performance: Investment income--net .38 .41 .42 .23 Realized and unrealized gain (loss) on investments--net .03 (.04) .21 (.06) ------- ------- ------- ------- Total from investment operations .41 .37 .63 .17 ------- ------- ------- ------- Less dividends from investment income--net (.38) (.41) (.42) (.23) ------- ------- ------- ------- Net asset value, end of period $ 10.14 $ 10.11 $ 10.15 $ 9.94 ======= ======= ======= ======= Total Investment Based on net asset value per share 4.19% 3.68% 6.45% 1.73%+++ Return:** ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement .94% .76% .34% .03%* Net Assets: ======= ======= ======= ======= Expenses 1.65% 1.78% 1.69% 1.14%* ======= ======= ======= ======= Investment income--net 3.82% 4.02% 4.10% 3.45%* ======= ======= ======= ======= Supplemental Net assets, end of period (in thousands) $ 1,735 $ 2,663 $ 2,401 $ 5,933 Data: ======= ======= ======= ======= Portfolio turnover 32.89% 6.57% 131.56% 205.04% ======= ======= ======= =======
Page 70
New Jersey Limited Maturity Class B For the Period The following per share data and ratios have been derived Nov. 26, from information provided in the financial statements. For the Year 1993++ to Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 Per Share Net asset value, beginning of period $ 10.11 $ 10.16 $ 9.95 $ 10.00 Operating ------- ------- ------- ------- Performance: Investment income--net .35 .37 .38 .20 Realized and unrealized gain (loss) on investments--net .04 (.05) .21 (.05) ------- ------- ------- ------- Total from investment operations .39 .32 .59 .15 ------- ------- ------- ------- Less dividends from investment income--net (.35) (.37) (.38) (.20) ------- ------- ------- ------- Net asset value, end of period $ 10.15 $ 10.11 $ 10.16 $ 9.95 ======= ======= ======= ======= Total Investment Based on net asset value per share 3.92% 3.21% 6.07% 1.59%+++ Return:** ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement 1.30% 1.10% .73% .38%* Net Assets: ======= ======= ======= ======= Expenses 2.00% 2.12% 2.15% 1.52%* ======= ======= ======= ======= Investment income--net 3.46% 3.67% 3.80% 3.04%* ======= ======= ======= ======= Supplemental Net assets, end of period (in thousands) $ 4,109 $ 5,152 $ 7,593 $ 7,885 Data: ======= ======= ======= ======= Portfolio turnover 32.89% 6.57% 131.56% 205.04% ======= ======= ======= ======= New Jersey Limited Maturity Class C Class D The following per share data For the For the and ratios have been derived Period Period from information provided in Oct. 21, Oct. 21, the financial statements. For the Year 1994++ to For the Year 1994++ to Ended July 31, July 31, Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995 Per Share Net asset value, beginning of period $ 9.16 $ 9.20 $ 9.86 $ 10.11 $ 10.16 $ 9.85 Operating ------- ------- ------- ------- ------- ------- Performance: Investment income--net .33 .34 .26 .37 .40 .32 Realized and unrealized gain (loss) on investments--net .03 (.04) (.66) .04 (.05) .31 ------- ------- ------- ------- ------- ------- Total from investment operations .36 .30 (.40) .41 .35 .63 ------- ------- ------- ------- ------- ------- Less dividends from investment
Page 71 income--net (.33) (.34) (.26) (.37) (.40) (.32) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 9.19 $ 9.16 $ 9.20 $ 10.15 $ 10.11 $ 10.16 ======= ======= ======= ======= ======= ======= Total Investment Based on net asset value per share 4.06% 3.24% (4.01%)+++ 4.18% 3.48% 6.51%+++ Return:** ======= ======= ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement 1.10% 1.00% .55%* 1.04% .84% .62%* Net Assets: ======= ======= ======= ======= ======= ======= Expenses 1.80% 2.04% 2.22%* 1.78% 1.86% 2.07%* ======= ======= ======= ======= ======= ======= Investment income--net 3.66% 3.82% 4.06%* 3.75% 3.93% 4.17%* ======= ======= ======= ======= ======= ======= Supplemental Net assets, end of period Data: (in thousands) $ 241 $ 272 $ 1 $ 238 $ 540 $ 437 ======= ======= ======= ======= ======= ======= Portfolio turnover 32.89% 6.57% 131.56% 32.89% 6.57% 131.56% ======= ======= ======= ======= ======= =======
New York Limited Maturity Class A For the Period The following per share data and ratios have been derived Nov. 26, from information provided in the financial statements. For the Year 1993++ to Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 Per Share Net asset value, beginning of period $ 10.06 $ 10.05 $ 9.91 $ 10.00 Operating ------- ------- ------- ------- Performance: Investment income--net .43 .43 .44 .25 Realized and unrealized gain (loss) on investments--net .17 .01 .14 (.09) ------- ------- ------- ------- Total from investment operations .60 .44 .58 .16 ------- ------- ------- ------- Less dividends from investment income--net (.43) (.43) (.44) (.25) ------- ------- ------- ------- Net asset value, end of period $ 10.23 $ 10.06 $ 10.05 $ 9.91 ======= ======= ======= ======= Total Investment Based on net asset value per share 6.09% 4.46% 6.03% 1.61%+++ Return:** ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement .70% .50% .33% .03%* Net Assets: ======= ======= ======= ======= Expenses 1.16% 1.38% 1.30% 1.24%*
Page 72
======= ======= ======= ======= Investment income--net 4.24% 4.28% 4.49% 3.68%* ======= ======= ======= ======= Supplemental Net assets, end of period (in thousands) $ 2,605 $ 3,723 $ 4,811 $ 5,290 Data: ======= ======= ======= ======= Portfolio turnover 36.53% 51.47% 139.16% 152.73% ======= ======= ======= ======= New York Limited Maturity Class B For the Period The following per share data and ratios have been derived Nov. 26, from information provided in the financial statements. For the Year 1993++ to Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 Per Share Net asset value, beginning of period $ 10.06 $ 10.05 $ 9.91 $ 10.00 Operating ------- ------- ------- ------- Performance: Investment income--net .39 .40 .41 .22 Realized and unrealized gain (loss) on investments--net .17 .01 .14 (.09) ------- ------- ------- ------- Total from investment operations .56 .41 .55 .13 ------- ------- ------- ------- Less dividends from investment income--net (.39) (.40) (.41) (.22) ------- ------- ------- ------- Net asset value, end of period $ 10.23 $ 10.06 $ 10.05 $ 9.91 ======= ======= ======= ======= Total Investment Based on net asset value per share 5.71% 4.08% 5.66% 1.37%+++ Return:** ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement 1.05% .87% .69% .38%* Net Assets: ======= ======= ======= ======= Expenses 1.52% 1.75% 1.65% 1.60%* ======= ======= ======= ======= Investment income--net 3.88% 3.91% 4.11% 3.31%* ======= ======= ======= ======= Supplemental Net assets, end of period (in thousands) $ 8,209 $10,071 $ 8,822 $ 9,743 Data: ======= ======= ======= ======= Portfolio turnover 36.53% 51.47% 139.16% 152.73% ======= ======= ======= =======
*Annualized. Page 73 **Total investment returns exclude the effects of sales loads. ++Commencement of Operations. +++Aggregate total investment return. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS (concluded)
New York Limited Maturity Class C Class D The following per share data For the For the and ratios have been derived Period Period from information provided in Oct. 21, Oct. 21, the financial statements. For the Year 1994++ to For the Year 1994++ to Ended July 31, July 31, Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995 Per Share Net asset value, beginning of period $ 10.06 $ 10.05 $ 9.78 $ 10.06 $ 10.05 $ 9.78 Operating ------- ------- ------- ------- ------- ------- Performance: Investment income--net .41 .42 .30 .42 .42 .34 Realized and unrealized gain on investments--net .17 .01 .27 .17 .01 .27 ------- ------- ------- ------- ------- ------- Total from investment operations .58 .43 .57 .59 .43 .61 ------- ------- ------- ------- ------- ------- Less dividends from investment income--net (.41) (.42) (.30) (.42) (.42) (.34) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 10.23 $ 10.06 $ 10.05 $ 10.23 $ 10.06 $ 10.05 ======= ======= ======= ======= ======= ======= Total Investment Based on net asset value per share 5.91% 4.28% 5.97%+++ 5.98% 4.35% 6.37%+++ Return:** ======= ======= ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement .86% .71% .63%* .80% .62% .48%* Net Assets: ======= ======= ======= ======= ======= ======= Expenses 1.32% 1.59% 1.63%* 1.26% 1.49% 1.48%* ======= ======= ======= ======= ======= ======= Investment income--net 4.05% 4.06% 4.21%* 4.14% 4.16% 4.47%* ======= ======= ======= ======= ======= ======= Supplemental Net assets, end of period Data: (in thousands) $ 68 $ 214 $ 38 $ 3,683 $ 3,912 $ 2,306 ======= ======= ======= ======= ======= =======
Page 74 Portfolio turnover 36.53% 51.47% 139.16% 36.53% 51.47% 139.16% ======= ======= ======= ======= ======= =======
Pennsylvania Limited Maturity Class A For the Period The following per share data and ratios have been derived Nov. 26, from information provided in the financial statements. For the Year 1993++ to Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 Per Share Net asset value, beginning of period $ 10.11 $ 10.10 $ 9.95 $ 10.00 Operating ------- ------- ------- ------- Performance: Investment income--net .38 .41 .42 .23 Realized and unrealized gain (loss) on investments--net .12 .01 .15 (.05) ------- ------- ------- ------- Total from investment operations .50 .42 .57 .18 ------- ------- ------- ------- Less dividends from investment income--net (.38) (.41) (.42) (.23) ------- ------- ------- ------- Net asset value, end of period $ 10.23 $ 10.11 $ 10.10 $ 9.95 ======= ======= ======= ======= Total Investment Based on net asset value per share 5.04% 4.18% 5.89% 1.85%+++ Return:** ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement .99% .80% .38% .02%* Net Assets: ======= ======= ======= ======= Expenses 1.75% 1.63% 1.90% 1.48%* ======= ======= ======= ======= Investment income--net 3.74% 4.01% 4.25% 3.46%* ======= ======= ======= ======= Supplemental Net assets, end of period (in thousands) $ 736 $ 833 $ 943 $ 990 Data: ======= ======= ======= ======= Portfolio turnover 20.88% 30.90% 141.52% 237.47% ======= ======= ======= =======
Page 75
Pennsylvania Limited Maturity Class B For the Period The following per share data and ratios have been derived Nov. 26, from information provided in the financial statements. For the Year 1993++ to Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 Per Share Net asset value, beginning of period $ 10.11 $ 10.10 $ 9.95 $ 10.00 Operating ------- ------- ------- ------- Performance: Investment income--net .34 .37 .39 .21 Realized and unrealized gain (loss) on investments--net .12 .01 .15 (.05) ------- ------- ------- ------- Total from investment operations .46 .38 .54 .16 ------- ------- ------- ------- Less dividends from investment income--net (.34) (.37) (.39) (.21) ------- ------- ------- ------- Net asset value, end of period $ 10.23 $ 10.11 $ 10.10 $ 9.95 ======= ======= ======= ======= Total Investment Based on net asset value per share 4.66% 3.80% 5.51% 1.61%+++ Return:** ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement 1.35% 1.15% .73% .38%* Net Assets: ======= ======= ======= ======= Expenses 2.11% 1.99% 2.25% 1.83%* ======= ======= ======= ======= Investment income--net 3.38% 3.65% 3.87% 3.05%* ======= ======= ======= ======= Supplemental Net assets, end of period (in thousands) $ 5,134 $ 6,264 $ 7,414 $ 9,532 Data: ======= ======= ======= ======= Portfolio turnover 20.88% 30.90% 141.52% 237.47% ======= ======= ======= ======= Pennsylvania Limited Maturity Class C Class D The following per share data For the For the and ratios have been derived Period Period from information provided in Oct. 21, Oct. 21, the financial statements. For the Year 1994++ to For the Year 1994++ to Ended July 31, July 31, Ended July 31, July 31, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995 Per Share Net asset value, beginning of period $ 10.15 $ 10.10 $ 9.84 $ 10.11 $ 10.10 $ 9.84 Operating ------- ------- ------- ------- ------- ------- Performance: Investment income--net .35 .38 .29 .37 .40 .33 Realized and unrealized gain on investments--net .12 .05 .26 .13 .01 .26 ------- ------- ------- ------- ------- ------- Total from investment operations .47 .43 .55 .50 .41 .59 ------- ------- ------- ------- ------- -------
Page 76
Less dividends from investment income--net (.35) (.38) (.29) (.37) (.40) (.33) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 10.27 $ 10.15 $ 10.10 $ 10.24 $ 10.11 $ 10.10 ======= ======= ======= ======= ======= ======= Total Investment Based on net asset value per share 4.68% 4.28% 5.68%+++ 5.04% 4.07% 6.10%+++ Return:** ======= ======= ======= ======= ======= ======= Ratios to Average Expenses, net of reimbursement 1.28% .97% 1.05%* 1.09% .96% .57%* Net Assets: ======= ======= ======= ======= ======= ======= Expenses 2.02% 1.83% 2.55%* 1.85% 1.71% 2.08%* ======= ======= ======= ======= ======= ======= Investment income--net 3.46% 3.84% 3.77%* 3.64% 3.84% 4.30%* ======= ======= ======= ======= ======= ======= Supplemental Net assets, end of period Data: (in thousands) $ 8 $ 1 $ 1 $ 1,861 $ 1,807 $ 382 ======= ======= ======= ======= ======= ======= Portfolio turnover 20.88% 30.90% 141.52% 20.88% 30.90% 141.52% ======= ======= ======= ======= ======= =======
[FN] *Annualized. **Total investment returns exclude the effects of sales loads. ++Commencement of Operations. +++Aggregate total investment return. See Notes to Financial Statements. NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the "Trust") is registered under the Investment Company Act of 1940 as a non-diversified, open-end management investment company consisting of eight separate series: Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch California Limited Maturity Municipal Bond Fund, Merrill Lynch Florida Limited Maturity Municipal Bond Fund, Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund, Merrill Lynch Michigan Limited Maturity Municipal Bond Fund, Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund, Merrill Lynch New York Limited Maturity Municipal Bond Fund, and Merrill Lynch Pennsylvania Limited Maturity Page 77 Municipal Bond Fund. Each series of the Trust is referred to herein as a "Fund". The Trust offers four classes of shares under the Merrill Lynch Select Pricing SM System. Shares of Class A and Class D are sold with a front-end sales charge. Shares of Class B and Class C may be subject to a contingent deferred sales charge. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class B, Class C and Class D Shares bear certain expenses related to the account maintenance of such shares, and Class B and Class C Shares also bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to its account maintenance and distribution expenditures. The following is a summary of significant accounting policies followed by the Trust. (a) Valuation of investments--Municipal bonds and other portfolio securities in which the Funds invest are traded primarily in the over-the-counter municipal bond and money markets and are valued at the last available bid price in the over-the-counter market or on the basis of yield equivalents as obtained from one or more dealers that make markets in the securities. Financial futures contracts and options thereon, which are traded on exchanges, are valued at their settlement prices as of the close of such exchanges. Short-term investments with remaining maturities of sixty days or less are valued at amortized cost, which approximates market value. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Trustees of the Trust, including valuations furnished by a pricing service retained by the Trust, which may utilize a matrix system for valuations. The procedures of the pricing service and its valuations are reviewed by the officers of the Trust under the general supervision of the Trustees. (b) Derivative financial instruments--Each Fund may engage in various portfolio strategies to seek to increase its return by hedging its portfolio against adverse movements in the debt markets. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. * Financial futures contracts--The Funds may purchase or sell interest rate futures contracts and options on such futures contracts for the purpose of hedging the market risk on existing securities or the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Funds deposit and maintain as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Funds agree to receive from or pay to the broker an amount of cash equal to the daily Page 78 fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Funds as unrealized gains or losses. When the contract is closed, the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. (c) Income taxes--It is each Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. (d) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Interest income is recognized on the accrual basis. Discounts and market premiums are amortized into interest income. Realized gains and losses on security transactions are determined on the identified cost basis. (e) Deferred organization expenses and prepaid registration fees-- Deferred organization expenses are charged to expense on a straight- line basis over a five-year period beginning with commencement of operations. Prepaid registration fees are charged to expense as the related shares are issued. (f) Dividends and distributions--Dividends from net investment income are declared daily and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. Distributions in excess of realized capital gains are due primarily to differing tax treatments for post-October losses. 2. Investment Advisory Agreement and Transactions with Affiliates: The Trust has entered into an Investment Advisory Agreement with Fund Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The Trust has also entered into a Distribution Agreement and Distribution Plans with Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of Merrill Lynch Group, Inc. FAM is responsible for the management of each Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of each Fund. For such services, each Fund pays a monthly fee at the annual rate of 0.35% of that Fund's average daily net assets. Page 79 For the year ended July 31, 1997, FAM had voluntarily waived management fees and reimbursed each Fund for additional expenses as follows:
Arizona California Florida Limited Limited Limited Maturity Maturity Maturity Management fee $13,268 $29,150 -- Additional expenses $72,437 -- -- Massachusetts Michigan New Jersey Limited Limited Limited Maturity Maturity Maturity Management fee $22,132 $14,977 $25,494 Additional expenses $72,930 $92,903 $25,788 New York Pennsylvania Limited Limited Maturity Maturity Management fee $57,645 $29,758 Additional expenses $19,235 $34,384
Pursuant to the distribution plans (the "Distribution Plans") adopted by the Trust in accordance with Rule 12b-1 under the Investment Company Act of 1940, the Funds pay the Distributor ongoing account maintenance and distribution fees. The fees are accrued daily and paid monthly at annual rates based upon the average daily net assets of the shares as follows: Account Maintenance Fee Distribution Fee Class B 0.15% 0.20% Class C 0.15% 0.20% Class D 0.10% -- Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account maintenance and distribution services to the Trust. The ongoing account maintenance fee compensates the Distributor and MLPF&S for providing account maintenance services to Class B, Class C and Class D shareholders. The ongoing distribution fee compensates the Distributor and MLPF&S for providing shareholder and distribution-related services to Class B and Class C shareholders. Page 80 For the year ended July 31, 1997, MLFD earned underwriting discounts and MLPF&S earned dealer concessions on sales of the Funds' Class A and Class D Shares as follows:
Arizona California Florida Massachusetts Limited Limited Limited Limited Maturity Maturity Maturity Maturity Class A: MLFD $ 7 -- $ 68 -- MLPF&S $ 194 -- $563 -- Class D: MLFD $ 199 $ 224 $ 55 $ 9 MLPF&S $2,172 $2,155 $521 $205 Michigan New Jersey New York Pennsylvania Limited Limited Limited Limited Maturity Maturity Maturity Maturity Class A: MLFD $ 8 -- -- -- MLPF&S $ 68 -- $ 5 -- Class D: MLFD $ 46 $ 2 $ 70 $ 5 MLPF&S $ 350 $ 48 $767 $210 MLPF&S received contingent deferred sales charges relating to transactions in Class B Shares as follows: Class B Shares Arizona Limited Maturity $ 427 California Limited Maturity 6,833 Florida Limited Maturity 7,396 Massachusetts Limited Maturity 3,151 Michigan Limited Maturity 397 New Jersey Limited Maturity 4,461 New York Limited Maturity 18,743 Pennsylvania Limited Maturity 878
Furthermore, MLPF&S received contingent deferred sales charges of Page 81 $2,001 relating to transactions subject to front end sales charge waivers in Class D Shares. Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly- owned subsidiary of ML & Co., is the Trust's transfer agent. NOTES TO FINANCIAL STATEMENTS (continued) Accounting services are provided to the Trust by FAM at cost. Certain officers and/or trustees of the Trust are officers and/or directors of FAM, PSI, MLFD, MLFDS, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the year ended July 31, 1997 were as follows:
Purchases Sales Arizona Limited Maturity $ 1,019,574 $ 2,070,874 California Limited Maturity 3,276,869 3,471,729 Florida Limited Maturity 8,642,572 10,107,246 Massachusetts Limited Maturity 1,215,165 2,253,678 Michigan Limited Maturity 1,155,783 479,425 New Jersey Limited Maturity 1,661,522 3,793,860 New York Limited Maturity 5,241,711 6,943,659 Pennsylvania Limited Maturity 1,309,108 1,728,529 Net realized and unrealized gains (losses) as of July 31, 1997 were as follows: Realized Unrealized Arizona Limited Maturity Gains Gains Long-term investments $ 87,712 $ 86,566 --------- --------- Total $ 87,712 $ 86,566 ========= =========
Page 82 Realized Unrealized California Limited Maturity Gains Gains Long-term investments $ 57,005 $ 764,034 Short-term investments -- 529 --------- --------- Total $ 57,005 $ 764,563 ========= ========= Realized Unrealized Florida Limited Maturity Gains Gains Long-term investments $ 101,556 $ 777,279 Short-term investments 55 -- --------- --------- Total $ 101,611 $ 777,279 ========= ========= Realized Unrealized Massachusetts Limited Maturity Gains Gains Long-term investments $ 51,279 $ 167,141 --------- --------- Total $ 51,279 $ 167,141 ========= ========= Realized Unrealized Michigan Limited Maturity Gains Gains Long-term investments $ 21,697 $ 162,895 --------- --------- Total $ 21,697 $ 162,895 ========= ========= Unrealized Realized Gains New Jersey Limited Maturity Gains (Losses) Long-term investments $ 126,030 $ 186,033 Short-term investments -- (333) --------- --------- Total $ 126,030 $ 185,700 ========= =========
Page 83
Realized Unrealized New York Limited Maturity Gains Gains Long-term investments $ 36,848 $ 539,314 --------- --------- Total $ 36,848 $ 539,314 ========= ========= Realized Unrealized Pennsylvania Limited Maturity Gains Gains Long-term investments $ 37,824 $ 216,756 Short-term investments -- 152 --------- --------- Total $ 37,824 $ 216,908 ========= =========
As of July 31, 1997, net unrealized appreciation and the aggregate cost of investments for Federal income tax purposes were as follows:
Limited Gross Gross Net Aggregate Maturity Unrealized Unrealized Unrealized Cost of Fund Appreciation Depreciation Appreciation Investments Arizona $ 86,566 -- $ 86,566 $ 2,939,002 California 741,290 -- 741,290 13,161,474 Florida 815,581 $ (38,302) 777,279 24,754,969 Massachusetts 167,141 -- 167,141 5,005,999 Michigan 162,895 -- 162,895 3,952,546 New Jersey 186,033 (333) 185,700 6,482,928 New York 539,314 -- 539,314 13,800,699 Pennsylvania 216,908 -- 216,908 7,317,330
4. Beneficial Interest Transactions: Net increase (decrease) in net assets derived from beneficial interest transactions for the years ended July 31, 1997 and July 31, 1996 were as follows:
For the For the Year Ended Year Ended July 31, 1997 July 31, 1996 Arizona Limited Maturity $ (1,124,280) $(1,767,011) California Limited Maturity (1,455,816) (491,496) Florida Limited Maturity (2,674,028) (5,075,030) Massachusetts Limited Maturity (2,299,335) (2,526,578) Michigan Limited Maturity 168,118 (1,013,383) New Jersey Limited Maturity (2,324,627) (1,750,465)
Page 84 New York Limited Maturity (3,606,325) 1,937,339 Pennsylvania Limited Maturity (1,259,754) 150,949
Transactions in shares of beneficial interest for each class were as follows: Arizona Limited Maturity
Class A Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 2,059 $ 20,756 Shares issued to shareholders in reinvestment of dividends 898 9,047 ---------- ---------- Total issued 2,957 29,803 Shares redeemed (13,909) (139,681) ---------- ---------- Net decrease (10,952) $ (109,878) ========== ========== Arizona Limited Maturity Class A Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 5,200 $ 52,303 Shares issued to shareholders in reinvestment of dividends 1,441 14,637 ---------- ---------- Total issued 6,641 66,940 Shares redeemed (29,641) (304,005) ---------- ---------- Net decrease (23,000) $ (237,065) ========== ========== Arizona Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 20,264 $ 204,323 Shares issued to shareholders in reinvestment of dividends 4,028 40,606 ---------- ---------- Total issued 24,292 244,929 Automatic conversion of shares (1,018) (10,248)
Page 85 Shares redeemed (99,594) (1,001,882) ---------- ---------- Net decrease (76,320) $ (767,201) ========== ========== Arizona Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 43,937 $ 449,980 Shares issued to shareholders in reinvestment of dividends 7,003 66,184 ----------- ----------- Total issued 50,940 516,164 Shares redeemed (275,350) (2,797,058) ----------- ----------- Net decrease (224,410) $(2,280,894) =========== =========== Arizona Limited Maturity Class C Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 100 $ 1,008 Shares issued to shareholders in reinvestment of dividends 357 3,609 ---------- ---------- Total issued 457 4,617 Shares redeemed (10,307) (103,073) ---------- ---------- Net decrease (9,850) $ (98,456) ========== ========== Arizona Limited Maturity Class C Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 13,124 $ 132,973 Shares issued to shareholders in reinvestment of dividends 162 1,633 ----------- ----------- Total issued 13,286 134,606 Shares redeemed (4) (41) ----------- ----------- Net increase 13,282 $ 134,565 =========== ===========
Page 86
Arizona Limited Maturity Class D Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 27,128 $ 271,439 Automatic conversion of shares 1,018 10,248 Shares issued to shareholders in reinvestment of dividends 597 6,023 ---------- ---------- Total issued 28,743 287,710 Shares redeemed (43,319) (436,455) ---------- ---------- Net decrease (14,576) $ (148,745) ========== ========== Arizona Limited Maturity Class D Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 104,371 $ 1,066,013 Shares issued to shareholders in reinvestment of dividends 2,220 22,565 ----------- ----------- Total issued 106,591 1,088,578 Shares redeemed (47,001) (472,195) ----------- ----------- Net increase 59,590 $ 616,383 =========== =========== California Limited Maturity Class A Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 1,377 $ 13,897 Shares issued to shareholders in reinvestment of dividends 3,031 30,528 ---------- ---------- Total issued 4,408 44,425 Shares redeemed (10,568) (106,294) ---------- ---------- Net decrease (6,160) $ (61,869) ========== ==========
Page 87 NOTES TO FINANCIAL STATEMENTS (continued) California Limited Maturity
Class A Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 8,087 $ 80,919 Shares issued to shareholders in reinvestment of dividends 3,445 34,639 ---------- ---------- Total issued 11,532 115,558 Shares redeemed (49,796) (500,770) ---------- ---------- Net decrease (38,264) $ (385,212) ========== ========== California Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 204,154 $ 2,058,619 Shares issued to shareholders in reinvestment of dividends 13,782 138,778 ----------- ----------- Total issued 217,936 2,197,397 Automatic conversion of shares (28,044) (284,252) Shares redeemed (504,135) (5,083,745) ----------- ----------- Net decrease (314,243) $(3,170,600) =========== =========== California Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 210,376 $ 2,110,120 Shares issued to shareholders in reinvestment of dividends 15,717 158,020 ----------- ----------- Total issued 226,093 2,268,140 Automatic conversion of shares (7,895) (80,134) Shares redeemed (267,935) (2,686,717) ----------- ----------- Net decrease (49,737) $ (498,711) ========== ==========
Page 88 California Limited Maturity
Class C Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 115 $ 1,152 Shares issued to shareholders in reinvestment of dividends 6 62 ---------- ---------- Net increase 121 $ 1,214 ========== ========== California Limited Maturity Class C Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 24 $ 250 Shares issued to shareholders in reinvestment of dividends 8 78 ---------- ---------- Total issued 32 328 Shares redeemed (983) (9,913) ---------- ---------- Net decrease (951) $ (9,585) ========== ========== California Limited Maturity Class D Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 285,173 $ 2,849,538 Automatic conversion of shares 3,978 284,252 Shares issued to shareholders in reinvestment of dividends 28,044 40,114 ----------- ----------- Total issued 317,195 3,173,904 Shares redeemed (139,121) (1,398,465) ----------- ----------- Net increase 178,074 $ 1,775,439 =========== =========== California Limited Maturity Class D Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 105,834 $1,060,270
Page 89 Automatic conversion of shares 7,895 80,134 Shares issued to shareholders in reinvestment of dividends 1,093 10,986 ---------- ---------- Total issued 114,822 1,151,390 Shares redeemed (74,548) (749,378) ---------- ---------- Net increase 40,274 $ 402,012 ========== ========== Florida Limited Maturity Class A Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 70,813 $ 705,043 Shares issued to shareholders in reinvestment of dividends 6,542 65,182 ----------- ----------- Total issued 77,355 770,225 Shares redeemed (235,028) (2,340,687) ----------- ----------- Net decrease (157,673) $(1,570,462) =========== =========== Florida Limited Maturity Class A Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 91,796 $ 926,979 Shares issued to shareholders in reinvestment of dividends 11,780 118,180 ----------- ----------- Total issued 103,576 1,045,159 Shares redeemed (296,045) (2,960,805) ----------- ----------- Net decrease (192,469) $(1,915,646) =========== =========== Florida Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 344,717 $ 3,439,385 Shares issued to shareholders in reinvestment of dividends 20,341 202,648 ----------- -----------
Page 90 Total issued 365,058 3,642,033 Automatic conversion of shares (3,635) (36,364) Shares redeemed (598,033) (5,967,067) ----------- ----------- Net decrease (236,610) $(2,361,398) =========== =========== Florida Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 374,709 $ 3,773,344 Shares issued to shareholders in reinvestment of dividends 28,155 282,558 ----------- ----------- Total issued 402,864 4,055,902 Shares redeemed (646,498) (6,500,752) ----------- ----------- Net decrease (243,634) $(2,444,850) =========== =========== Florida Limited Maturity Class C Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 5,712 $ 56,834 Shares issued to shareholders in reinvestment of dividends 140 1,387 ----------- ----------- Total issued 5,852 58,221 Shares redeemed (5,087) (50,009) ----------- ----------- Net increase 765 $ 8,212 =========== =========== Florida Limited Maturity Class C Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 6,623 $ 65,559 Shares issued to shareholders in reinvestment of dividends 4 41 ----------- ----------- Total issued 6,627 65,600 Shares redeemed (1,536) (15,483) ----------- -----------
Page 91 Net increase 5,091 $ 50,117 =========== =========== Florida Limited Maturity Class D Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 362,564 $ 3,617,894 Automatic conversion of shares 3,635 36,364 Shares issued to shareholders in reinvestment of dividends 5,285 52,650 ----------- ----------- Total issued 371,484 3,706,908 Shares redeemed (246,834) (2,457,288) ----------- ----------- Net increase 124,650 $ 1,249,620 =========== =========== Florida Limited Maturity Class D Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 316,584 $3,192,506 Shares issued to shareholders in reinvestment of dividends 4,342 43,518 ---------- ---------- Total issued 320,926 3,236,024 Shares redeemed (397,363) (4,000,675) ---------- ---------- Net decrease (76,437) $ (764,651) ========== ========== Massachusetts Limited Maturity Class A Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 544 $ 5,403 Shares issued to shareholders in reinvestment of dividends 2,690 26,809 ---------- ---------- Total issued 3,234 32,212 Shares redeemed (40,800) (406,101) ---------- ---------- Net decrease (37,566) $ (373,889) ========== ==========
Page 92 Massachusetts Limited Maturity
Class A Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 22,851 $ 226,189 Shares issued to shareholders in reinvestment of dividends 7,410 74,223 ----------- ----------- Total issued 30,261 300,412 Shares redeemed (304,602) (3,055,529) ----------- ----------- Net decrease (274,341) $(2,755,117) =========== =========== Massachusetts Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 80,283 $ 797,169 Shares issued to shareholders in reinvestment of dividends 8,004 79,781 ----------- ----------- Total issued 88,287 876,950 Shares redeemed (268,214) (2,667,983) ----------- ----------- Net decrease (179,927) $(1,791,033) =========== =========== NOTES TO FINANCIAL STATEMENTS (continued) Massachusetts Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 163,902 $ 1,649,909 Shares issued to shareholders in reinvestment of dividends 9,837 98,401 ----------- ----------- Total issued 173,739 1,748,310 Shares redeemed (195,993) (1,955,850) ----------- ----------- Net decrease (22,254) $ (207,540) =========== ===========
Page 93 Massachusetts Limited Maturity
Class C Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 5,459 $ 54,530 Shares issued to shareholders in reinvestment of dividends 814 8,108 ----------- ----------- Total issued 6,273 62,638 Shares redeemed (1) (4) ----------- ----------- Net increase 6,272 $ 62,634 =========== =========== Massachusetts Limited Maturity Class C Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares issued to shareholders in reinvestment of dividends 1,201 $ 12,027 Shares redeemed (21,496) (212,811) ---------- ---------- Net decrease (20,295) $ (200,784) ========== ========== Massachusetts Limited Maturity Class D Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 2,377 $ 23,756 Shares issued to shareholders in reinvestment of dividends 1,383 13,787 ---------- ---------- Total issued 3,760 37,543 Shares redeemed (23,534) (234,590) ---------- ---------- Net decrease (19,774) $ (197,047) ========== ========== Massachusetts Limited Maturity Class D Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 101,394 $ 1,009,332 Shares issued to shareholders in
Page 94 reinvestment of dividends 1,553 15,510 ----------- ----------- Total issued 102,947 1,024,842 Shares redeemed (38,979) (387,979) ----------- ----------- Net increase 63,968 $ 636,863 =========== =========== Michigan Limited Maturity Class A Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 5,703 $ 56,930 Shares issued to shareholders in reinvestment of dividends and distributions 1,551 15,476 ----------- ----------- Total issued 7,254 72,406 Shares redeemed (36,666) (365,673) ----------- ----------- Net decrease (29,412) $ (293,267) =========== =========== Michigan Limited Maturity Class A Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 40,664 $ 405,188 Shares issued to shareholders in reinvestment of dividends 1,529 15,293 ----------- ----------- Total issued 42,193 420,481 Shares redeemed (107,949) (1,077,796) ----------- ----------- Net decrease (65,756) $ (657,315) =========== =========== Michigan Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 13,836 $ 138,203 Shares issued to shareholders in reinvestment of dividends and distributions 4,077 40,660 ----------- -----------
Page 95 Total issued 17,913 178,863 Automatic conversion of shares (68) (679) Shares redeemed (63,278) (630,594) ----------- ----------- Net decrease (45,433) $ (452,410) =========== =========== Michigan Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 36,451 $ 365,718 Shares issued to shareholders in reinvestment of dividends 5,013 50,143 ----------- ----------- Total issued 41,464 415,861 Shares redeemed (106,251) (1,063,510) ----------- ----------- Net decrease (64,787) $ (647,649) =========== =========== Michigan Limited Maturity Class C Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares issued to shareholders in reinvestment of dividends and distributions 5 $ 43 ---------- ---------- Net increase 5 $ 43 ========== ========== Michigan Limited Maturity Class C Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares issued to shareholders in reinvestment of dividends 4 $ 41 ---------- ---------- Net increase 4 $ 41 ========== ========== Michigan Limited Maturity Class D Shares for the Year Dollar
Page 96
Ended July 31, 1997 Shares Amount Shares sold 105,057 $ 1,052,902 Automatic conversion of shares 68 679 Shares issued to shareholders in reinvestment of dividends and distributions 2,967 26,287 ----------- ----------- Total issued 108,092 1,079,868 Shares redeemed (16,668) (166,116) ----------- ----------- Net increase 91,424 $ 913,752 =========== =========== Michigan Limited Maturity Class D Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 29,731 $ 298,909 Shares issued to shareholders in reinvestment of dividends 1,126 11,245 ----------- ----------- Total issued 30,857 310,154 Shares redeemed (1,878) (18,614) ----------- ----------- Net increase 28,979 $ 291,540 =========== =========== New Jersey Limited Maturity Class A Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 29,509 $ 298,665 Shares issued to shareholders in reinvestment of dividends 6,491 65,586 ----------- ----------- Total issued 36,000 364,251 Shares redeemed (128,438) (1,299,753) ----------- ----------- Net decrease (92,438) $ (935,502) =========== =========== New Jersey Limited Maturity
Page 97 Class A Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 102,101 $ 1,042,636 Shares issued to shareholders in reinvestment of dividends 8,892 90,367 ----------- ----------- Total issued 110,993 1,133,003 Shares redeemed (83,997) (856,193) ----------- ----------- Net decrease 26,996 $ 276,810 =========== =========== New Jersey Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 109,899 $ 1,202,983 Shares issued to shareholders in reinvestment of dividends 19,246 104,274 ----------- ----------- Total issued 129,145 1,307,257 Automatic conversion of shares (5,707) (57,581) Shares redeemed (228,080) (2,301,791) ----------- ----------- Net decrease (104,642) $(1,052,115) =========== =========== New Jersey Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 107,343 $ 1,095,824 Shares issued to shareholders in reinvestment of dividends 14,061 143,043 ----------- ----------- Total issued 121,404 1,238,867 Shares redeemed (359,338) (3,646,563) ----------- ----------- Net decrease (237,934) $(2,407,696) =========== =========== New Jersey Limited Maturity Class C Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares issued to shareholders in reinvestment of dividends 115 $ 1,052
Page 98 Shares redeemed (3,570) (32,559) ----------- ----------- Net decrease (3,455) $ (31,507) =========== =========== NOTES TO FINANCIAL STATEMENTS (continued) New Jersey Limited Maturity Class C Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 29,124 $ 272,904 Shares issued to shareholders in reinvestment of dividends 459 4,199 ----------- ----------- Net increase 29,583 $ 277,103 =========== =========== New Jersey Limited Maturity Class D Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 5,980 $ 60,387 Automatic conversion of shares 5,707 57,581 Shares issued to shareholders in reinvestment of dividends 1,286 13,017 ----------- ----------- Total issued 12,973 130,985 Shares redeemed (42,910) (436,488) ----------- ----------- Net decrease (29,937) $ (305,503) =========== =========== New Jersey Limited Maturity Class D Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 47,184 $ 477,087 Shares issued to shareholders in reinvestment of dividends 728 7,411 ----------- ----------- Total issued 47,912 484,498 Shares redeemed (37,500) (381,180) ----------- -----------
Page 99 Net increase 10,412 $ 103,318 =========== =========== New York Limited Maturity Class A Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 44,236 $ 449,232 Shares issued to shareholders in reinvestment of dividends 6,902 69,615 ----------- ----------- Total issued 51,138 518,847 Shares redeemed (166,532) (1,682,059) ----------- ----------- Net decrease (115,394) $(1,163,212) =========== =========== New York Limited Maturity Class A Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 44,189 $ 446,602 Shares issued to shareholders in reinvestment of dividends 11,547 116,691 ----------- ----------- Total issued 55,736 563,293 Shares redeemed (164,328) (1,659,912) ----------- ----------- Net decrease (108,592) $(1,096,619) =========== =========== New York Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 112,364 $ 1,134,351 Shares issued to shareholders in reinvestment of dividends 16,732 168,855 ----------- ----------- Total issued 129,096 1,303,206 Automatic conversion of shares (2,526) (25,482) Shares redeemed (324,970) (3,274,497) ----------- ----------- Net decrease (198,400) $(1,996,773) =========== ===========
Page 100
New York Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 465,594 $ 4,716,623 Shares issued to shareholders in reinvestment of dividends 17,959 181,459 ----------- ----------- Total issued 483,553 4,898,082 Automatic conversion of shares (3,459) (34,832) Shares redeemed (356,773) (3,612,208) ----------- ----------- Net increase 123,321 $ 1,251,042 =========== =========== New York Limited Maturity Class C Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 231 $ 2,324 Shares issued to shareholders in reinvestment of dividends 597 6,021 ----------- ----------- Total issued 828 8,345 Shares redeemed (15,531) (156,196) ----------- ----------- Net decrease (14,703) $ (147,851) =========== =========== New York Limited Maturity Class C Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 20,376 $ 206,729 Shares issued to shareholders in reinvestment of dividends 398 4,008 ----------- ----------- Total issued 20,774 210,737 Shares redeemed (3,295) (32,843) ----------- ----------- Net increase 17,479 $ 177,894 =========== ===========
Page 101
New York Limited Maturity Class D Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 115,750 $ 1,166,743 Automatic conversion of shares 2,525 25,482 Shares issued to shareholders in reinvestment of dividends 15,637 157,823 ----------- ----------- Total issued 133,912 1,350,048 Shares redeemed (162,655) (1,648,537) ----------- ----------- Net decrease (28,743) $ (298,489) =========== =========== New York Limited Maturity Class D Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 162,557 $ 1,636,956 Automatic conversion of shares 3,456 34,832 Shares issued to shareholders in reinvestment of dividends 6,809 68,734 ----------- ----------- Total issued 172,822 1,740,522 Shares redeemed (13,363) (135,500) ----------- ----------- Net increase 159,459 $ 1,605,022 =========== =========== Pennsylvania Limited Maturity Class A Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 43,588 $ 440,757 Shares issued to shareholders in reinvestment of dividends 1,049 10,642 ----------- ----------- Total issued 44,637 451,399 Shares redeemed (55,137) (556,742) ----------- ----------- Net decrease (10,500) $ (105,343) =========== ===========
Page 102 Pennsylvania Limited Maturity
Class A Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 5,556 $ 56,865 Shares issued to shareholders in reinvestment of dividends 1,095 11,133 ----------- ----------- Total issued 6,651 67,998 Shares redeemed (17,647) (179,041) ----------- ----------- Net decrease (10,996) $ (111,043) =========== =========== Pennsylvania Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 121,296 $ 1,230,117 Shares issued to shareholders in reinvestment of dividends 13,043 132,224 ----------- ----------- Total issued 134,339 1,362,341 Shares redeemed (252,143) (2,554,888) ----------- ----------- Net decrease (117,804) $(1,192,547) =========== =========== Pennsylvania Limited Maturity Class B Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 89,391 $ 910,583 Shares issued to shareholders in reinvestment of dividends 17,173 174,586 ----------- ----------- Total issued 106,564 1,085,169 Shares redeemed (220,973) (2,241,767) ----------- ----------- Net decrease (114,409) $(1,156,598) =========== =========== Pennsylvania Limited Maturity Class C Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 727 $ 7,411 Shares issued to shareholders in reinvestment of dividends 17 175
Page 103 ----------- ----------- Total issued 744 7,586 Shares redeemed (95) (974) ----------- ----------- Net increase 649 $ 6,612 =========== =========== Pennsylvania Limited Maturity Class C Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 7,571 $ 82,082 Shares issued to shareholders in reinvestment of dividends 83 850 ----------- ----------- Total issued 7,654 82,932 Shares redeemed (7,650) (82,673) ----------- ----------- Net increase 4 $ 259 =========== =========== Pennsylvania Limited Maturity Class D Shares for the Year Dollar Ended July 31, 1997 Shares Amount Shares sold 2,512 $ 25,556 Shares issued to shareholders in reinvestment of dividends 5,768 58,513 ----------- ----------- Total issued 8,280 84,069 Shares redeemed (5,160) (52,545) ----------- ----------- Net increase 3,120 $ 31,524 =========== =========== NOTES TO FINANCIAL STATEMENTS (concluded) Pennsylvania Limited Maturity Class D Shares for the Year Dollar Ended July 31, 1996 Shares Amount Shares sold 155,680 $ 1,569,272 Shares issued to shareholders in reinvestment of dividends 1,844 18,653
Page 104 ----------- ----------- Total issued 157,524 1,587,925 Shares redeemed (16,678) (169,594) ----------- ----------- Net increase 140,846 $ 1,418,331 =========== ===========
5. Capital Loss Carryforward: At July 31, 1997, each Fund of the Trust had an approximate net capital loss carryforward as follows: $400,000 in the California Limited Maturity Fund, of which $122,000 expires in 2003 and $278,000 expires in 2004; $687,000 in the Florida Limited Maturity Fund, of which $487,000 expires in 2003 and $200,000 expires in 2004; $298,000 in the Massachusetts Limited Maturity Fund, of which $28,000 expires in 2003 and $270,000 expires in 2004; $138,000 in the Michigan Limited Maturity Fund, of which $53,000 expires in 2003 and $85,000 expires in 2004; $167,000 in the New Jersey Limited Maturity Fund, all of which expires in 2004; $190,000 in the New York Limited Maturity Fund, of which $105,000 expires in 2002, $2,000 expires in 2003 and $83,000 expires in 2004; and $60,000 in the Pennsylvania Limited Maturity Fund, all of which expires in 2003. These amounts will be available to offset like amounts of any future taxable gains. INDEPENDENT AUDITORS' REPORT The Board of Trustees and Shareholders, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust: We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of Merrill Lynch Limited Maturity Municipal Bond Funds for Arizona, California, Florida, Massachusetts, Michigan, New Jersey, New York and Pennsylvania of the Merrill Lynch Multi-State Limited Maturity Municipal Series Trust (the "Trust") as of July 31, 1997, the related statements of operations for the year then ended and changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the three-year period then ended and the period November 26, 1993 (commencement of operations) to July 31, 1994. These financial statements and the financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on Page 105 our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at July 31, 1997 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of Merrill Lynch Limited Maturity Municipal Bond Funds for Arizona, California, Florida, Massachusetts, Michigan, New Jersey, New York and Pennsylvania of the Merrill Lynch Multi-State Limited Maturity Municipal Series Trust as of July 31, 1997, the results of their operations, the changes in their net assets, and the financial highlights for the respective stated periods in conformity with generally accepted accounting principles. Deloitte & Touche LLP Princeton, New Jersey September 12, 1997 IMPORTANT TAX INFORMATION (unaudited) All of the net investment income distributions paid monthly by Merrill Lynch Multi-State Limited Maturity Municipal Series Trust during its taxable year ended July 31, 1997 qualify as tax-exempt interest dividends for Federal income tax purposes. Additionally, there were no capital gains distributions made by any Fund of the Trust during the year. Please retain this information for your records. EX-17.(E) 8 A/R TO STOCKHOLDERS OF M/L MUNI BOND FUND EXHIBIT 17(e) Page 1 Page 2 MERRILL LYNCH MUNICIPAL BOND FUND, INC. FUND LOGO Annual Report June 30, 1997 This report is not authorized for use as an offer of sale or a solicitation of an offer to buy shares of the Fund unless accompanied or preceded by the Fund's current prospectus. Past performance results shown in this report should not be considered a representation of future performance. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Statements and other information herein are as dated and are subject to change. Merrill Lynch Municipal Bond Fund, Inc. Box 9011 Princeton, NJ 08543-9011 Page 3 Printed on post-consumer recycled paper MERRILL LYNCH MUNICIPAL BOND FUND, INC. Officers and Directors Arthur Zeikel, President and Director Ronald W. Forbes, Director Cynthia A. Montgomery, Director Charles C. Reilly, Director Kevin A. Ryan, Director Richard R. West, Director Terry K. Glenn, Executive Vice President Vincent R. Giordano, Senior Vice President Donald C. Burke, Vice President Peter J. Hayes, Vice President Kenneth A. Jacob, Vice President Gerald M. Richard, Treasurer Barbara G. Fraser, Secretary Custodian The Bank of New York 90 Washington Street, 12th Floor New York, NY 10286 Transfer Agent Merrill Lynch Financial Data Services, Inc. 4800 Deer Lake Drive East Jacksonville, FL 32246-6484 (800) 637-3863 Important Tax Information (unaudited) All of the net investment income distributions declared daily by Merrill Lynch Municipal Bond Fund, Inc. during its taxable year Page 4 ended June 30, 1997 qualify as tax-exempt interest dividends for Federal income tax purposes. Additionally, the following table summarizes the taxable ordinary income distributions declared by the Limited Maturity Portfolio's Class A, Class B, Class C and Class D Shares during the year.
Record Payable Ordinary Date Date Income Limited Maturity Portfolio 12/18/96 12/31/96 $.016908
There were no capital gains distributions declared during the year. Please retain this information for your records. DEAR SHAREHOLDER The Municipal Market Environment The combination of continued, if not diminishing, low inflation and economic growth that was clearly slowing from the rapid first quarter 1997 growth allowed long-term, fixed-income yields to gradually decline during the three months ended June 30, 1997. Yields slowly fell during April and early May as investor concerns regarding additional Federal Reserve Board (FRB) action in late May constrained significant price appreciation. However, with no FRB move in late May and weak employment growth in early June, bond yields fell sharply throughout most of June. US Treasury bond yields declined 35 basis points (0.35%) to 6.75% during the June 1997 quarter. As measured by the Bond Buyer Revenue Bond Index, yields on long-term uninsured municipal revenue bonds declined to their lowest level in a year by mid-June. They rose somewhat to end the June quarter at 5.82%, a decline of over 25 basis points. During the quarter ended June 30, 1997, the municipal bond market was outperformed by its taxable counterpart for the first time in more than a year. This was for the most part the result of a deterioration in the strong technical position that had supported the tax-exempt bond market's performance in recent quarters. During the three months ended June 30, 1997, approximately $55 billion long- term, tax-exempt securities were issued, an increase of almost 10% compared to the June 1996 quarter's supply. In recent past quarters, municipal supply volume was essentially stable or moderately Page 5 declining. Even with the significant increase in volume recorded during the June 1997 quarter, new-issue volume thus far in 1997 has totaled approximately $95 billion, an increase of 2% compared to the same period in 1996. The decline in bond yields during the June quarter has led many issuers to accelerate financing plans to take advantage of current low rates. Over $21 billion long-term tax- exempt bonds were issued in June, 1997 alone, an increase of over 15% compared to June 1996 issuance. Additionally, the State of New Jersey issued $2.8 billion in taxable municipal debt during June which further added to an already heavy supply position. Investor demand remained strong during the June quarter. Property and casualty insurance companies continued to be very active investors in the municipal bond market, particularly in the 15-year--20-year maturity range. Additionally, during June and July, municipal bond market investors are expected to receive over $50 billion in payment from tax-exempt bond maturities, coupon payments and the proceeds from advanced and current refundings. It is expected that, despite the continued allure of the US equity market, much of the assets will be reinvested in tax-advantage products suggesting that investor demand will remain strong in the coming months. Additionally, in recent months, much of the new bond issuance was dominated by a number of larger issues. These included $350 million in New York Municipal Assistance Corp. issues, $1 billion in New York City general obligation bonds, $930 million in Port Authority of New York and New Jersey issues, $565 million in Puerto Rico Building Authority issues, $600 million in State of California bonds, $256 million in Los Angeles Metropolitan Transportation Authority issues, $350 million in Orange County, Florida sales tax revenue bonds, and $300 million in State of Florida bonds. These and other bond issues were usually underwritten in states with high state income taxes and consequently were able to be issued at yields that were relatively unattractive to residents in other states. This tended to ameliorate the recent increase in supply as general market investors tended to ignore much of this specialty-state supply in favor of higher-yielding issues. The present economic situation remains nearly ideal. The domestic economy continues to grow steadily with little, if any, sign of a resurgence in inflation. Recent economic growth generated considerable unexpected tax revenues for the Federal government. Forecasts for the 1997 Federal fiscal deficit were reduced to under $100 billion, a level not seen since the early 1980s. Such a reduced Federal deficit enhances the prospect for balanced Federal budget. All of these factors support a scenario of steady, or even falling, interest rates in the coming years. Present annual estimates of future municipal bond issuance remain centered around $175 billion Page 6 indicating that the recent increase in supply should return to the levels seen earlier this year. This should ensure that tax-exempt products remain an attractive investment alternative throughout 1997. Fiscal Year in Review Insured Portfolio and National Portfolio During the 12 months ended June 30, 1997, the municipal market was characterized by enormous volatility within a tight trading range. Therefore, our investment strategy for the Insured and National Portfolios focused on capturing this range by purchasing long-term municipal securities as Treasury bond yields approached 7%, and selling these securities in rallies toward 6.50%. For the past 12 months, this formula served the Portfolios well on several occasions. The beginning of 1996 was a period of low interest rates with long-term Treasury yields at the 6% level. The Portfolios were defensively postured with a focus on yield, and this structure served the Fund well as interest rates rose into the middle of the fiscal year. From that time, quality municipal bonds backed up to yield of 6%, a point where strong retail demand has historically entered the market. The result was a subsequent market rally stemming from a picture of a slowing economy and reduced national budget deficit. The Portfolios were more aggressively positioned in anticipation of a stronger technical outlook for the municipal market. The beginning of 1997 saw another rise in long-term Treasury yields to just under 7%, and the process of buying long-term municipal bonds began again, although at relatively richer levels. The tighter technical position of the municipal market created a significant outperformance of municipal bonds over the US Treasury market. As we approach the second half of 1997, the municipal market is back down to levels where it normally loses retail support. Professional traders and arbitrageurs normally account for most activity at these prices. We intend to reduce the Fund's duration, as we focus on protecting net asset valuation until the FRB finishes its tightening phase and a more sustained drop in yields can be forecast. Limited Maturity Portfolio The Limited Maturity Portfolio's fiscal year ended June 30, 1997 was marked by investor confusion over the direction of FRB policy, thus creating considerable volatility in the market place. In view of this, our strategy consisted of a series of shifts in response to market volatility and economic data. We used periods of rising interest rates as a buying opportunity to lock in attractive yields. Page 7 Conversely, we used periods of falling interest rates to take advantage of market strength and book capital gains by increasing cash reserves and reducing average portfolio maturity. We took the opposite investment stance in periods of rising interest rates. In addition, quality spreads narrowed so much, especially in the last six months, that we concentrated purchases on higher-rated securities, since there was little yield advantage to purchasing lower-rated issues. This strategy served to enhance the performance of the Fund by maintaining an alternative yield while at the same time keeping the net asset values as stable as possible, especially when compared to longer-term bond funds. In Conclusion We appreciate your ongoing interest in Merrill Lynch Municipal Bond Fund, Inc., and we look forward to serving your investment needs in the months and years to come. Sincerely, (Arthur Zeikel) Arthur Zeikel President (Vincent R. Giordano) Vincent R. Giordano Senior Vice President (Kenneth A. Jacob) Kenneth A. Jacob Vice President and Portfolio Manager (Peter J. Hayes) Peter J. Hayes Vice President and Portfolio Manager August 15, 1997 Page 8 PERFORMANCE DATA About Fund Performance Investors are able to purchase shares of the Fund through the Merrill Lynch Select Pricing SM System, which offers four pricing alternatives: * Class A Shares incur a maximum initial sales charge (front-end load) of 4% and bear no ongoing distribution or account maintenance fees for Insured and National Portfolios. Limited Maturity Portfolio incurs a maximum initial sales charge (front-end load) of 1% and bears no ongoing distribution or account maintenance fees. * Class B Shares are subject to a maximum contingent deferred sales charge of 4% if redeemed during the first year, decreasing 1% each year thereafter to 0% after the fourth year for Insured and National Portfolios. Limited Maturity Portfolio is subject to a maximum contingent deferred sales charge of 1% if redeemed within one year of purchase. In addition, Insured and National Portfolios are subject to a distribution fee of 0.50% and an account maintenance fee of 0.25%. Limited Maturity Portfolio is subject to a distribution fee of 0.20% and an account maintenance fee of 0.15%. All three classes of shares automatically convert to Class D Shares after approximately 10 years. (There is no initial sales charge for automatic share conversions.) * Class C Shares are subject to a distribution fee of 0.55% and an account maintenance fee of 0.25% for Insured and National Portfolios. Limited Maturity Portfolio is subject to a distribution fee of 0.20% and an account maintenance fee of 0.15%. In addition, Class C Shares are subject to a 1% contingent deferred sales charge if redeemed within one year of purchase. * Class D Shares incur a maximum initial sales charge of 4% and an account maintenance fee of 0.25% (but no distribution fee) for Insured and National Portfolios. Limited Maturity Portfolio incurs a maximum initial sales charge of 1% and an account maintenance fee of 0.10% (but no distribution fee). Page 9 None of the past results shown should be considered a representation of future performance. Figures shown in the "Average Annual Total Return" tables as well as the total returns and cumulative total returns in the "Performance Summary" tables assume reinvestment of all dividends and capital gains distributions at net asset value on the payable date. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Dividends paid to each class of shares will vary because of the different levels of account maintenance, distribution and transfer agency fees applicable to each class, which are deducted from the income available to be paid to shareholders. Insured Portfolio's Class A and Class B Shares Total Return Based on a $10,000 Investment A line graph depicting the growth of an investment in the Fund's Class A and Class B Shares compared to the growth of an investment in the Lehman Brothers Municipal Bond Index. Beginning and ending values are:
6/87 6/97 Insured Portfolio++-- Class A Shares $ 9,600 $20,450 Lehman Brothers Municipal Bond Index++++ $10,000 $21,940 10/21/88** 6/97 Insured Portfolio++-- Class B Shares $10,000 $17,806 Lehman Brothers Municipal Bond Index++++ $10,000 $19,568
*Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. **Commencement of Operations. Page 10 ++The Insured Portfolio invests primarily in long-term, investment- grade municipal bonds (bonds rated Baa or better) covered by portfolio insurance guaranteeing the timely payment of principal at maturity and interest. ++++This unmanaged Index consists of revenue bonds, prerefunded bonds, general obligation bonds and insured bonds, all of which mature within 30 years. Past performance is not predictive of future performance. Insured Portfolio's Class A and Class B Shares Average Annual Total Return
% Return Without % Return With Class A Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +7.72% +3.41% Five Years Ended 6/30/97 +6.54 +5.67 Ten Years Ended 6/30/97 +7.86 +7.42
*Maximum sales charge is 4%. **Assuming maximum sales charge.
% Return % Return Class B Shares* Without CDSC With CDSC** Year Ended 6/30/97 +6.78% +2.78% Five Years Ended 6/30/97 +5.71 +5.71 Inception (10/21/88) through 6/30/97 +6.86 +6.86
*Maximum contingent deferred sales charge is 4% and is reduced to 0% after 4 years. **Assuming payment of applicable contingent deferred sales charge. Insured Portfolio's Class C and Class D Shares Page 11 Total Return Based on a $10,000 Investment A line graph depicting the growth of an investment in the Fund's Class C and Class D Shares compared to the growth of an investment in the Lehman Brothers Municipal Bond Index. Beginning and ending values are:
10/21/94 6/97 Insured Portfolio++-- Class C Shares* $10,000 $12,171 Insured Portfolio++-- Class D Shares* $ 9,600 $11,861 Lehman Brothers Municipal Bond Index++++ $10,000 $12,702
*Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. **Commencement of Operations. ++The Insured Portfolio invests primarily in long-term, investment- grade municipal bonds (bonds rated Baa or better) covered by portfolio insurance guaranteeing the timely payment of principal at maturity and interest. ++++This unmanaged Index consists of revenue bonds, prerefunded bonds, general obligation bonds and insured bonds, all of which mature within 30 years. Past performance is not predictive of future performance. Insured Portfolio's Class C and Class D Shares Average Annual Total Return
% Return % Return Class C Shares* Without CDSC With CDSC** Year Ended 6/30/97 +6.86% +5.86% Inception (10/21/94) through 6/30/97 +7.57 +7.57
Page 12 *Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1 year. **Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With Class D Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +7.46% +3.16% Inception (10/21/94) through 6/30/97 +8.18 +6.55
*Maximum sales charge is 4%. **Assuming maximum sales charge. PERFORMANCE DATA (continued) National Portfolio's Class A and Class B Shares Total Return Based on a $10,000 Investment A line graph depicting the growth of an investment in the Fund's Class A and Class B Shares compared to the growth of an investment in the Lehman Brothers Municipal Bond Index. Beginning and ending values are:
6/87 6/97 National Portfolio++-- Class A Shares* $ 9,600 $20,747 Lehman Brothers Municipal Bond Index++++ $10,000 $21,940 10/21/88** 6/97 National Portfolio++-- Class B Shares* $10,000 $18,119
Page 13 Lehman Brothers Municipal Bond Index++++ $10,000 $19,568
*Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. **Commencement of Operations. ++The National Portfolio invests primarily in long-term, medium- to lower-grade municipal bonds (bonds rated Baa, bonds rated below Baa and bonds unrated of comparable quality) offering higher yields but subject to greater risks than investment-grade municipal bonds. ++++This unmanaged Index consists of revenue bonds, prerefunded bonds, general obligation bonds and insured bonds, all of which mature within 30 years. Past performance is not predictive of future performance. National Portfolio's Class A and Class B Shares Average Annual Total Return
% Return Without % Return With Class A Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +8.84% +4.49% Five Years Ended 6/30/97 +7.00 +6.13 Ten Years Ended 6/30/97 +8.01 +7.57
*Maximum sales charge is 4%. **Assuming maximum sales charge.
% Return % Return Class B Shares* Without CDSC With CDSC** Year Ended 6/30/97 +7.92% +3.92% Five Years Ended 6/30/97 +6.20 +6.20 Inception (10/21/88) through 6/30/97 +7.08 +7.08
*Maximum contingent deferred sales charge is 4% and is reduced to 0% Page 14 after 4 years. **Assuming payments of applicable contingent deferred sales charge. National Portfolio's Class C and Class D Shares Total Return Based on a $10,000 Investment A line graph depicting the growth of an investment in the Fund's Class C and Class D Shares compared to the growth of an investment in the Lehman Brothers Municipal Bond Index. Beginning and ending values are:
10/21/94 6/97 National Portfolio++-- Class C Shares* $10,000 $12,358 National Portfolio++-- Class D Shares* $ 9,600 $12,053 Lehman Brothers Municipal Bond Index++++ $10,000 $12,702
*Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. **Commencement of Operations. ++The National Portfolio invests primarily in long-term, medium- to lower-grade municipal bonds (bonds rated Baa, bonds rated below Baa and bonds unrated of comparable quality) offering higher yields but subject to greater risks than investment-grade municipal bonds. ++++This unmanaged Index consists of revenue bonds, prerefunded bonds, general obligation bonds and insured bonds, all of which mature within 30 years. Past performance is not predictive of future performance. National Portfolio's Class C and Class D Shares Page 15 Average Annual Total Return
% Return % Return Class C Shares* Without CDSC With CDSC** Year Ended 6/30/97 +7.97% +6.97% Inception (10/21/94) through 6/30/97 +8.19 +8.19
*Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1 year. **Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With Class D Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +8.57% +4.23% Inception (10/21/94) through 6/30/97 +8.83 +7.19
*Maximum sales charge is 4%. **Assuming maximum sales charge. Limited Maturity Portfolio's Class A and Class B Shares Total Return Based on a $10,000 Investment A line graph depicting the growth of an investment in the Fund's Class A and Class B Shares compared to the growth of an investment in the Lehman Brothers Municipal Bond Index and the Lehman Brothers 3-Year General Obligation Bond Index. Beginning and ending values are:
6/87 6/97 Limited Maturity Portfolio++-- Class A Shares* $ 9,900 $16,204 Lehman Brothers Municipal Bond Index++++ $10,000 $21,940
Page 16 Lehman Brothers 3-Year General Obligation Bond Index++++++ $10,000 $17,871
11/02/92** 6/97 Limited Maturity Portfolio++-- Class B Shares* $10,000 $11,805 Lehman Brothers Municipal Bond Index++++ $10,000 $13,589 Lehman Brothers 3-Year General Obligation Bond Index++++++ $10,000 $12,615
*Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. **Commencement of Operations. ++The Limited Maturity Portfolio invests primarily in investment- grade municipal bonds (bonds rated Baa or better) with a maximum maturity not to exceed 4 years. ++++This unmanaged Index consists of revenue bonds, prerefunded bonds, general obligation bonds and insured bonds, all of which mature within 30 years. ++++++This unmanaged Index consists of state and local government obligation bonds that mature in 3 years--4 years, rated Baa or better. Past performance is not predictive of future performance. Limited Maturity Portfolio's Class A and Class B Shares Average Annual Total Return
% Return Without % Return With Class A Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +4.40% +3.35% Five Years Ended 6/30/97 +4.04 +3.84 Ten Years Ended 6/30/97 +5.05 +4.94
Page 17 *Maximum sales charge is 1%. **Assuming maximum sales charge.
% Return % Return Class B Shares* Without CDSC With CDSC** Year Ended 6/30/97 +4.13% +3.13% Inception (11/2/92) through 6/30/97 +3.63 +3.63
*Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1 year. **Assuming payment of applicable contingent deferred sales charge. PERFORMANCE DATA (continued) Limited Maturity Portfolio's Class C and Class D Shares Total Return Based on a $10,000 Investment A line graph depicting the growth of an investment in the Fund's Class C and Class D Shares compared to the growth of an investment in the Lehman Brothers Municipal Bond Index and the Lehman Brothers 3-Year General Obligation Bond Index. Beginning and ending values are:
10/21/94 6/97 Limited Maturity Portfolio++-- Class C Shares* $10,000 $11,097 Limited Maturity Portfolio++-- Class D Shares* $ 9,900 $11,102 Lehman Brothers Municipal Bond Index++++ $10,000 $12,702 Lehman Brothers 3-Year General Obligation Bond Index++++++ $10,000 $11,655
*Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. **Commencement of Operations. ++The Limited Maturity Portfolio invests primarily in investment- grade municipal bonds (bonds rated Baa or better) with a maximum maturity rate not to exceed 4 years. ++++This unmanaged Index consists of revenue bonds, prerefunded bonds, general obligation bonds and insured bonds, all of which mature within 30 years. ++++++This unmanaged Index consists of state and local government obligation bonds that mature in 3 years--4 years, rated Baa or better. Past performance is not predictive of future performance. Limited Maturity Portfolio's Class C and Class D Shares Average Annual Total Return
% Return % Return Class C Shares* Without CDSC With CDSC** Year Ended 6/30/97 +4.11% +3.11% Inception (10/21/94) through 6/30/97 +3.95 +3.95
*Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1 year. **Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With Class D Shares* Sales Charge Sales Charge** Year Ended 6/30/97 +4.40% +3.35% Inception (10/21/94) through 6/30/97 +4.35 +3.96
*Maximum sales charge is 1%. **Assuming maximum sales charge. Recent Performance Results*
12 Month 3 Month Standardized 6/30/97 3/31/97 6/30/96 % Change % Change 30-Day Yield Insured Portfolio Class A Shares $ 8.06 $ 7.88 $ 7.91 +1.90% +2.28% 4.91% Insured Portfolio Class B Shares 8.05 7.87 7.91 +1.77 +2.29 4.36 Insured Portfolio Class C Shares 8.06 7.88 7.91 +1.90 +2.28 4.30 Insured Portfolio Class D Shares 8.06 7.88 7.91 +1.90 +2.28 4.66 National Portfolio Class A Shares 10.38 10.16 10.11 +2.67 +2.17 4.92 National Portfolio Class B Shares 10.37 10.16 10.11 +2.57 +2.07 4.37 National Portfolio Class C Shares 10.38 10.16 10.11 +2.67 +2.17 4.32 National Portfolio Class D Shares 10.39 10.17 10.12 +2.67 +2.16 4.68 Limited Maturity Portfolio Class A Shares 9.93 9.90 9.91 +0.20 +0.30 3.90 Limited Maturity Portfolio Class B Shares 9.94 9.90 9.91 +0.30 +0.40 3.58 Limited Maturity Portfolio Class C Shares 9.91 9.87 9.88 +0.30 +0.41 3.56 Limited Maturity Portfolio Class D Shares 9.94 9.90 9.91 +0.30 +0.40 3.80 Insured Portfolio Class A Shares--Total Return +7.72(1) +3.71(2) Insured Portfolio Class B Shares--Total Return +6.78(3) +3.52(4) Insured Portfolio Class C Shares--Total Return +6.86(5) +3.50(6) Insured Portfolio Class D Shares--Total Return +7.46(7) +3.64(8) National Portfolio Class A Shares--Total Return +8.84(9) +3.65(10) National Portfolio Class B Shares--Total Return +7.92(11) +3.36(12) National Portfolio Class C Shares--Total Return +7.97(13) +3.45(14) National Portfolio Class D Shares--Total Return +8.57(15) +3.59(16) Limited Maturity Portfolio Class A Shares--Total Return +4.40(17) +1.30(18) Limited Maturity Portfolio Class B Shares--Total Return +4.13(19) +1.31(20) Limited Maturity Portfolio Class C Shares--Total Return +4.11(21) +1.31(22) Limited Maturity Portfolio Class D Shares--Total Return +4.40(23) +1.38(4)
*Investment results shown do not reflect sales charges; results shown would be lower if a sales charge was included. (1)Percent change includes reinvestment of $0.445 per share ordinary income dividends. (2)Percent change includes reinvestment of $0.111 per share ordinary income dividends. (3)Percent change includes reinvestment of $0.384 per share ordinary income dividends. (4)Percent change includes reinvestment of $0.096 per share ordinary income dividends. (5)Percent change includes reinvestment of $0.380 per share ordinary income dividends. (6)Percent change includes reinvestment of $0.095 per share Page 20 ordinary income dividends. (7)Percent change includes reinvestment of $0.425 per share ordinary income dividends. (8)Percent change includes reinvestment of $0.106 per share ordinary income dividends. (9)Percent change includes reinvestment of $0.599 per share ordinary income dividends. (10)Percent change includes reinvestment of $0.149 per share ordinary income dividends. (11)Percent change includes reinvestment of $0.521 per share ordinary income dividends. (12)Percent change includes reinvestment of $0.130 per share ordinary income dividends. (13)Percent change includes reinvestment of $0.516 per share ordinary income dividends. (14)Percent change includes reinvestment of $0.129 per share ordinary income dividends. (15)Percent change includes reinvestment of $0.574 per share ordinary income dividends. (16)Percent change includes reinvestment of $0.143 per share ordinary income dividends. (17)Percent change includes reinvestment of $0.407 per share ordinary income dividends. (18)Percent change includes reinvestment of $0.098 per share ordinary income dividends. (19)Percent change includes reinvestment of $0.371 per share ordinary income dividends. (20)Percent change includes reinvestment of $0.090 per share ordinary income dividends. (21)Percent change includes reinvestment of $0.369 per share ordinary income dividends. (22)Percent change includes reinvestment of $0.089 per share ordinary income dividends. (23)Percent change includes reinvestment of $0.397 per share ordinary income dividends. Page 21 PERFORMANCE DATA (concluded) Performance Summary-- Class A Shares
Beginning/Ending Net Asset Value Dividends Paid* % Change** Period Limited Limited Limited Covered Insured National Maturity Insured National Maturity Insured National Maturity 10/21/77-12/31/77 $9.80/9.80 -- -- $ 0.09 -- -- + 0.94% -- -- 1978 9.80/8.97 -- -- 0.48 -- -- - 3.69 -- -- 1979++ 8.97/8.39 $ 9.60/9.60 $ 9.90/9.88 0.53 $ 0.11 $0.10 - 0.77 + 1.17% +0.86% 1980 8.39/6.86 9.60/8.54 9.88/9.74 0.60 0.79 0.64 -11.46 - 3.00 +5.14 1981 6.86/5.66 8.54/7.34 9.74/9.78 0.65 0.90 0.77 - 8.49 - 3.82 +8.64 1982 5.66/6.81 7.34/8.71 9.78/9.89 0.67 0.93 0.80 +33.96 +33.16 +9.67 1983 6.81/6.97 8.71/9.01 9.89/9.76 0.65 0.89 0.67 +12.20 +14.04 +5.57 1984 6.97/6.88 9.01/8.96 9.76/9.74 0.65 0.90 0.67 + 8.49 +10.00 +6.91 1985 6.88/7.53 8.96/9.86 9.74/9.75 0.64 0.88 0.63 +19.56 +20.76 +6.71 1986 7.53/8.18 9.86/10.67 9.75/9.90 0.61(1) 1.01(1) 0.56 +17.24 +19.08 +7.47 1987 8.18/7.56 10.67/9.76 9.90/9.68 0.68(2) 0.86(2) 0.53(2) + 0.86 - 0.40 +3.18 1988 7.56/7.79 9.76/10.11 9.68/9.68 0.57 0.76 0.56 +10.92 +11.71 +5.90 1989 7.79/7.94 10.11/10.25 9.68/9.74 0.57 0.75 0.59 + 9.49 + 9.11 +6.93 1990 7.94/7.86 10.25/10.09 9.74/9.72 0.61(3) 0.73 0.60 + 7.07 + 5.85 +6.11 1991 7.86/8.18 10.09/10.49 9.72/9.88 0.60(4) 0.82(4) 0.54 +12.07 +12.58 +7.39 1992 8.18/8.27 10.49/10.55 9.88/9.97 0.63(5) 0.89(5) 0.45 + 9.04 + 9.35 +5.62 1993 8.27/8.60 10.55/10.91 9.97/10.01 0.71(6) 0.94(6) 0.38 +12.85 +12.59 +4.30 1994 8.60/7.43 10.91/9.40 10.01/9.77 0.60(7) 0.81(7) 0.37 - 6.76 - 6.55 +1.35 1995 7.43/8.25 9.40/10.44 9.77/9.98 0.45 0.60 0.38 +17.43 +17.83 +6.13 1996 8.25/8.07 10.44/10.33 9.98/9.94 0.45 0.60 0.40 + 3.43 + 4.93 +3.72 1/1/97-6/30/97 8.07/8.06 10.33/10.38 9.94/9.93 0.21 0.28 0.19 + 2.66 + 3.41 +1.88 ------ ------ ----- Total $11.65 $14.45 $9.83 Cumulative total return as of 6/30/97: +275.65%** +382.46%** +172.64%**
Performance Summary-- Class B Shares
Beginning/Ending Net Asset Value Dividends Paid* % Change*** Period Limited Limited Limited Covered Insured National Maturity**** Insured National Maturity**** Insured National Maturity**** 10/21/88--12/31/88 $7.81/7.78 $10.14/10.11 -- $0.11 $0.14 -- + 0.97% + 1.08% -- 1989 7.78/7.94 10.11/10.25 -- 0.51 0.67 -- + 8.81 + 8.29 -- 1990 7.94/7.86 10.25/10.09 -- 0.55(3) 0.66 -- + 6.28 + 5.05 -- 1991 7.86/8.17 10.09/10.49 -- 0.54(4) 0.75(4) -- +11.10 +11.74 -- 1992 8.17/8.27 10.49/10.55 $ 9.93/9.97 0.56(5) 0.81(5) $0.06 + 8.35 + 8.53 +1.05% 1993 8.27/8.59 10.55/10.90 9.97/10.01 0.64(6) 0.85(6) 0.35 +11.88 +11.65 +3.93 1994 8.59/7.43 10.90/9.39 10.01/9.77 0.53(7) 0.73(7) 0.34 - 7.36 - 7.27 +1.03 1995 7.43/8.24 9.39/10.44 9.77/9.98 0.39 0.52 0.34 +16.41 +17.07 +5.75 1996 8.24/8.07 10.44/10.33 9.98/9.94 0.39 0.52 0.37 + 2.77 + 4.14 +3.35 1/1/97-6/30/97 8.07/8.05 10.33/10.37 9.94/9.94 0.18 0.25 0.17 + 2.15 + 2.93 +1.81
Page 22 ----- ----- ----- Total $4.40 $5.90 $1.63 Cumulative total return as of 6/30/97: +78.06%*** +81.19%*** +18.05%***
Performance Summary-- Class C Shares
Beginning/Ending Net Asset Value Dividends Paid* % Change*** Period Limited Limited Limited Covered Insured National Maturity Insured National Maturity Insured National Maturity 10/21/94-12/31/94 $7.68/7.43 $ 9.85/9.40 $ 9.83/9.77 $0.22(7) $0.31(7) $0.07 - 0.41% - 1.39% +0.11% 1995 7.43/8.25 9.40/10.44 9.77/10.00 0.38 0.52 0.34 +16.50 +16.89 +5.92 1996 8.25/8.07 10.44/10.33 10.00/9.91 0.38 0.52 0.36 + 2.59 + 4.09 +2.80 1/1/97-6/30/97 8.07/8.06 10.33/10.38 9.91/9.91 0.18 0.25 0.17 + 2.25 + 3.00 +1.80 ----- ----- ----- Total $1.16 $1.60 $0.94 Cumulative total return as of 6/30/97: +21.71%*** +23.58%*** +10.97%***
Performance Summary-- Class D Shares
Beginning/Ending Net Asset Value Dividends Paid* % Change** Period Limited Limited Limited Covered Insured National Maturity Insured National Maturity Insured National Maturity 10/21/94--12/31/94 $7.68/7.43 $ 9.85/9.40 $9.83/9.77 $0.23(7) $0.32(7) $0.07 - 0.30% - 1.29% +0.13% 1995 7.43/8.25 9.40/10.45 9.77/9.98 0.43 0.57 0.37 +17.14 +17.65 +6.03 1996 8.25/8.07 10.45/10.34 9.98/9.94 0.43 0.58 0.39 + 3.17 + 4.67 +3.62 1/1/97-6/30/97 8.07/8.06 10.34/10.39 9.94/9.94 0.20 0.27 0.18 + 2.53 + 3.29 +1.93 ----- ----- ----- Total $1.29 $1.74 $1.01 Cumulative total return as of 6/30/97: +23.55%** +25.56%** +12.13%**
*Figures may include short-term capital gains distributions. **Figures do not include sales charges; results would be lower if sales charge was included. Page 23 ***Figures do not reflect deduction of any sales charges; results would be lower if sales charge was deducted. ****Limited Maturity Portfolio commenced operations on 11/02/92. ++For National and Limited Maturity Portfolios, period covered is from 11/02/79 to 12/31/79. (1)Includes capital gains of $0.011 and $0.178 for the Insured and National Portfolios, respectively. (2)Includes capital gains of $0.098, $0.073 and $0.012 for the Insured, National and Limited Maturity Portfolios, respectively. (3)Includes capital gains of $0.064 for the Insured Portfolio. (4)Includes capital gains of $0.058 and $0.060 for the Insured and National Portfolios, respectively. (5)Includes capital gains of $0.084 and $0.130 for the Insured and National Portfolios, respectively. (6)Includes capital gains of $0.181 and $0.157 for the Insured and National Portfolios, respectively. (7)Includes capital gains of $0.141 and $ 0.209 for the Insured and National Portfolios, respectively. Portfolio Abbreviations To simplify the listings of Merrill Lynch Municipal Bond Fund, Inc.'s portfolio holdings in the Schedule of Investments, we have abbreviated the names of many of the securities according to the list at right. AMT Alternative Minimum Tax (subject to) BAN Bond Anticipation Notes COP Certificates of Participation EDA Economic Development Authority GAN Grant Anticipation Notes GO General Obligation Bonds HDA Housing Development Authority HFA Housing Finance Agency IDA Industrial Development Authority IDR Industrial Development Revenue Bonds INFLOS Inverse Floating Rate Municipal Bonds IRS Inverse Rate Securities LEVRRS Leveraged Reverse Rate Securities Page 24 M/F Multi-Family PCR Pollution Control Revenue Bonds RIB Residual Interest Bonds RITR Residual Interest Tax Receipts S/F Single-Family TAN Tax Anticipation Notes TRAN Tax Revenue Anticipation Notes UT Unlimited Tax VRDN Variable Rate Demand Notes SCHEDULE OF INVESTMENTS
(in Thousands) Municipal Bonds Insured Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Alabama--0.2% AAA Aaa $ 1,625 Alabama Water Pollution Control Authority, Revolving Fund Loan, Series A, 6.75% due 8/15/2017 (b) $ 1,789 AAA Aaa 1,250 Mobile, Alabama, GO, Refunding and Capital Improvement Bonds, 10.875% due 11/01/2007 (c) 1,697 Alaska--0.8% Kenai Peninsula Borough, Alaska, GO (b): AAA Aaa 6,450 8.40% due 1/01/2000 7,059 AAA Aaa 8,460 8.40% due 1/01/2001 9,526 Arizona--1.5% AAA Aaa 6,750 Arizona State Municipal Financing Program, COP, Series 34, 7.25% due 8/01/2009 (g) 8,091 AAA Aaa 3,800 Maricopa County, Arizona, IDA, Health Facilities Revenue Bonds (Saint Joseph's Care Center Project), Series A, 7.75% due 7/01/2020 (e) 4,170 AAA Aaa 4,000 Maricopa County, Arizona, IDA, Hospital Facility Revenue Refunding Bonds (Samaritan Health Services), Series A, 7% due 12/01/2013 (e) 4,336 AAA Aaa 7,000 Maricopa County, Arizona, Unified School District No.097 (Deer Valley Project), UT, 1986 Series E, 10% due 7/01/2000 (h) 8,109 AAA Aaa 6,000 Mesa, Arizona, Utility System Revenue Bonds, 5.375% due 7/01/2017 (h) 5,975 California--1.6% AAA Aaa 5,245 Los Angeles, California, Metropolitan Transportation Authority, Revenue Refunding Bonds (General Union Station), Series A, 5.25% due 7/01/2013 (i) 5,217 AAA Aaa 5,000 Los Angeles County, California, Public Works Finance Authority (Lease Revenue Multiple Capital Facility Project), Series V-B, 5.125% due 12/01/2017 (b) 4,754
Page 25 AAA Aaa 8,800 Northern California Power Agency, Multiple Capital Facilities Revenue Bonds, RIB, 8.837% due 9/02/2025 (d) (e) 10,296 AAA Aaa 5,900 Oakland, California, Redevelopment Agency, Refunding Bonds, INFLOS, 7.966% due 9/01/2019 (d) (e) 6,114 AAA Aaa 5,000 University of California Revenue Bonds (Multiple Purpose Projects), Series D, 6.375% due 9/01/2024 (e) 5,399 Colorado--0.9% AAA Aaa 590 La Plata County, Colorado, School District Number 9, GO (R Durango), UT, 6.60% due 11/01/2017 (h) 643 A1+ VMIG1++ 2,000 Moffat County, Colorado, PCR, Refunding (Pacificorp Projects), VRDN, 5.50% due 5/01/2013 (b) (f) 2,000 Municipal Subdistrict Northern Colorado, Water Conservancy District, Revenue Refunding Bonds, Series F (b): Aaa Aaa 4,470 6.15% due 12/01/2005 4,893 Aaa Aaa 4,250 6.25% due 12/01/2006 4,706 Aaa Aaa 5,055 6.35% due 12/01/2007 5,660 Delaware--0.2% AAA Aaa 3,750 Delaware State Health Facilities Authority, Crossover Revenue Refunding Bonds (Medical Center of Delaware), 7% due 10/01/2015 (e) 4,004 Florida--3.9% Florida State Division, Board of Finance, Department of General Services Revenue Bonds, Series 2000-A (b): AAA Aaa 23,490 (Department of Enviromental Preservation), 5% due 7/01/2012 22,743 AAA Aaa 14,630 (Department of Enviromental Preservation), 5% due 7/01/2013 14,069 AAA Aaa 5,000 (Department of Natural Resource Preservation), 6.75% due 7/01/2013 5,423 AAA Aaa 1,000 Florida State Turnpike Authority, Turnpike Revenue Bonds, Series A, 7.125% due 7/01/2001 (a) (b) 1,118 AAA Aaa 500 Jacksonville, Florida, Health Facilities Authority, Hospital Revenue Refunding and Improvement Bonds (Baptist Medical Center Project), 11.50% due 10/01/2012 (c) 819 AAA Aaa 10,000 Lee County, Florida, Hospital Board of Directors, Hospital Revenue, INFLOS, 9.063% due 4/01/2020 (d) (e) 11,400 AAA Aaa 3,950 Orange County, Florida, HFA, Mortgage Revenue Refunding Bonds, Series A, 7.60% due 1/01/2024 (h) (j) 4,191 AAA Aaa 5,790 Orange County, Florida, Health Facilities Authority Revenue Bonds (Hospital--Orlando Regional Healthcare), Series A, 6.25% due 10/01/2006 (e) 6,379 AAA Aaa 2,000 Port Saint Lucie, Florida, Special Assessment Revenue Bonds, Assessment District No. 1, Phase II, 5.40% due 10/01/2016 (e) 1,979 AAA Aaa 4,900 Saint John's River, Florida, Water Management District, Revenue Refunding Bonds (Land Acquisition), 5.125% due 7/01/2016 (i) 4,685 AAA Aaa 2,850 South Broward Hospital District, Florida, Hospital Revenue Bonds, RIB, Series C, 9.034% due 5/01/2001 (a) (b) (d) 3,384 AAA Aaa 2,240 West Coast Regional Water Supply Authority, Florida,
Page 26 Capital Improvement Revenue Bonds (Hillsborough County Project), 10.40% due 10/01/2010 (a) (b) 3,185 Georgia--2.2% A1+ VMIG1++ 6,200 Burke County, Georgia, Development Authority, PCR (Oglethorpe Power Corporation), VRDN, Series A, 4.15% due 1/01/2016 (f) (h) 6,200 AAA Aaa 4,000 Chatam County, Georgia, School District, UT, 6.75% due 8/01/2003 (a) (e) 4,526 AAA Aaa 20,000 Georgia Municipal Electric Authority, Power Revenue Bonds, Series EE, 7% due 1/01/2025 (b) 24,293 AAA Aaa 9,000 Georgia Municipal Electric Authority, Special Obligation Bonds (Fifth Crossover Series, Project One), 6.40% due 1/01/2013 (b) 10,007 Hawaii--3.7% Hawaii State Airport System Revenue Bonds: AAA Aaa 21,795 AMT, 7.30% due 7/01/2020 (b) 23,591 AAA Aaa 23,200 AMT, Second Series, 7.50% due 7/01/2020 (h) 25,240 AAA Aaa 10,000 Refunding, Series 1993, 6.45% due 7/01/2013 (e) 10,909 AAA Aaa 5,000 Hawaii State Department of Budget and Finance, Special Purpose Mortgage Revenue Bonds (Hawaiian Electric Company, AMT, Series C, 7.375% due 12/01/2020 (e) 5,463 Hawaii State, GO (h): AAA Aaa 2,920 Series CH, UT, 6% due 11/01/2005 3,146 AAA Aaa 2,000 Series CN, 5.25% due 3/01/2017 1,938 AAA Aaa 4,500 Hawaii State Harbor Capital Improvement Revenue Bonds, AMT, 7% due 7/01/2017 (e) 4,833 Illinois--11.6% AAA Aaa 28,200 Chicago, Illinois, GO, Series A-1, 5.125% due 1/01/2025 (b) 26,257 AAA Aaa 48,835 Chicago, Illinois, Refunding, Series B, 5.125% due 1/01/2025 (h) 45,406 AAA Aaa 24,000 Chicago, Illinois, Wastewater Transmission Revenue Refunding Bonds, 5.125% due 1/01/2025 (h) 22,315 AAA Aaa 3,000 Chicago, Illinois, Water Revenue Bonds, 5% due 11/01/2015 (h) 2,818 AAA Aaa 7,000 Cleveland, Ohio, Public Power System, Revenue Refunding Bonds (First Mortgage, Series 1), 5.25% due 11/15/2016 (e) 6,825 Illinois Health Facilities Authority Revenue Bonds: AAA Aaa 3,250 (Elmhurst Memorial Hospital), 6.625% due 1/01/2022 (h) 3,498 AAA Aaa 2,000 (Methodist Health Project), RIB, 9.628% due 5/01/2021 (b) (d) 2,303 AAA Aaa 28,900 Refunding (Sinai Health System), 6% due 2/15/2024 (b) 29,397 AAA Aaa 10,000 (Rush Presbyterian-Saint Luke's Medical Center), INFLOS, 9.615% due 10/01/2024 (d) (e) 11,550 Illinois State, GO, Refunding Bonds, UT (h): AAA Aaa 5,000 5.125% due 12/01/2013 4,862 AAA Aaa 5,750 5.125% due 12/01/2016 5,461 AAA Aaa 4,520 Illinois State Sales Tax Revenue Bonds, Series W, 5% due 6/15/2016 (h) 4,266
Page 27 SCHEDULE OF INVESTMENTS (continued)
(in Thousands) Municipal Bonds Insured Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Illinois Metropolitan Pier and Exposition Authority, Illinois, (concluded) Dedicated State Tax Revenue Bonds (McCormick Place Expansion Project): AAA Aaa $ 6,070 Refunding, Series A, 6% due 12/15/2006 (b) $ 6,556 AAA Aaa 16,660 Refunding, Series A, 6.10% due 12/15/2015 (e) (k) 5,851 AAA Aaa 8,330 Refunding, Series A, 6.10% due 12/15/2016 (e) (k) 2,764 AAA Aaa 9,400 Refunding, Series A, 6.05% due 12/15/2018 (e) (k) 2,756 AAA Aaa 13,550 Refunding, Series A, 6.03% due 12/15/2022 (e) (k) 3,120 AAA Aaa 49,575 Refunding, Series A, 6.09% due 12/15/2023 (e) (k) 10,740 AAA Aaa 14,305 Refunding, Series A, 6.24% due 6/15/2024 (e) (k) 3,006 AAA Aaa 6,260 Refunding, Series A, 6.02% due 6/15/2025 (e) (k) 1,238 AAA Aaa 5,000 Refunding, Series B, 5.867% due 6/15/2018 (e) (k) 1,509 AAA Aaa 6,600 Series A, 6.50% due 6/15/2003 (a) (b) 7,366 AAA Aaa 3,000 Series A, 5.87% due 6/15/2020 (h) (k) 802 AAA Aaa 26,000 Regional Transportation Authority, Illinois, Series A, 6.25% due 6/01/2024 (b) 27,565 Indiana--1.6% AAA Aaa 2,470 Indiana State Employment Development Commission, Environmental Revenue Bonds (Public Service Company of Indiana, Inc.), AMT, 7.50% due 3/15/2015 (e) 2,671 AAA Aaa 4,040 Indianapolis, Indiana, Local Public Improvement Bond Bank, Series A, 7.90% due 2/01/2002 (a) (g) 4,607 AAA Aaa 4,340 Jasper County, Indiana, PCR, Refunding (Northern Indiana Public Service), 7.10% due 7/01/2017 (e) 4,758 AAA Aaa 4,510 Munster, Indiana, School Building Corp. (First Mortgage), 5.75% due 1/15/2021 (e) 4,516 AAA Aaa 5,000 Penn, Indiana, High School Building Corp. (First Mortgage), 6.125% due 1/15/2016 (e) 5,223 Rockport, Indiana, PCR, Refunding: A1 Aaa 4,200 (AEP Generating Co. Project), VRDN, Series A, 5.50% due 7/01/2025 (b) (f) 4,200 AAA Aaa 5,800 (Indiana--Michigan Power), Series B, 7.60% due 3/01/2016 (h) 6,421 Iowa--0.3% AAA Aaa 5,000 Des Moines, Iowa, Parking Facilities Revenue Refunding Bonds, Series A, 7.25% due 7/01/2015 (h) 5,361 Kentucky--0.6% AAA Aaa 11,470 Kentucky Development Finance Authority, Hospital Revenue Refunding and Improvement Bonds (Saint Elizabeth Medical Center), Series A, 9% due 11/01/2000 (h) 13,101
Page 28 Louisiana--0.4% A1 VMIG1++ 10,000 Louisiana Public Facilities Authority, Hospital Revenue Bonds (Willis-Knighton Medical Center Project), VRDN, 4.15% due 9/01/2025 (b) (f) 10,000 Maryland--0.4% Maryland State Health and Higher Educational Facilities Authority Revenue Bonds (University of Maryland Medical Systems) (h): AAA Aaa 2,250 Series A, 7% due 7/01/2001 (a) 2,504 AAA Aaa 4,400 Series B, 7% due 7/01/2022 5,284 Massachusetts AAA Aaa 13,000 Massachusetts Bay Transportation Authority, COP, - --5.3% Series A, 7.65% due 8/01/2000 (a) (i) 14,477 Massachusetts Bay Transportation Authority (Massachusetts General Transportation), Series A (h): AAA Aaa 4,325 6% due 3/01/2006 4,670 AAA Aaa 4,610 6% due 3/01/2007 4,993 AAA Aaa 4,690 Massachusetts Educational Loan Authority, Education Loan Revenue Bonds, AMT, Issue D, Series A, 7.25% due 1/01/2009 (e) 5,027 Massachusetts State Consolidated Loan (b): AAA Aaa 5,110 Series A, 5% due 3/01/2010 5,002 AAA Aaa 5,420 Series D, 5% due 11/01/2016 5,093 Massachusetts State Health and Educational Facilities Authority Revenue Bonds: AAA Aaa 10,000 (Beth Israel), INFLOS, 8.319% due 7/01/2025 (b) (d) 10,400 A1+ VMIG1++ 500 (Capital Assets Program), VRDN, Series D, 5.35% due 1/01/2035 (e) (f) 500 AAA Aaa 3,100 (Saint Elizabeth's Hospital), LEVRRS, Series E, 9.37% due 8/12/2021 (d) (i) 3,565 AAA Aaa 19,755 Massachusetts State, HFA, Housing Revenue Refunding Bonds (Insured Rental), AMT, Series A, 6.75% due 7/01/2028 (b) 20,648 AAA Aaa 12,250 Massachusetts State, HFA, M/F Housing Refunding Bonds, Series A, 6.15% due 7/01/2018 (e) 12,591 AAA Aaa 4,020 Massachusetts State Insured Revenue Refunding Bonds, Series B, 5.40% due 11/01/2007 (e) 4,184 AAA Aaa 3,250 Massachusetts State Port Authority Revenue Bonds, 13% due 7/01/2013 (c) 5,448 Massachusetts State Water Resources Authority Revenue Bonds, Series B (e): AAA Aaa 2,730 5% due 12/01/2016 2,574 AAA Aaa 10,000 5% due 12/01/2025 9,112 Michigan--2.5% AAA Aaa 5,000 Michigan State Building Authority, Revenue Refunding Bonds, Series I, 6.25% due 10/01/2020 (e) 5,351 Aaa Aaa 6,915 Michigan State, HDA, Rental Housing Revenue Bonds, Series B, 6.15% due 10/01/2015 (e) 7,090 AAA Aaa 10,000 Michigan State Strategic Fund Limited Obligation, Revenue
Page 29 Refunding Bonds (Detroit Edison Co.) Series AA, 6.40% due 9/01/2025 (e) 10,757 Monroe County, Michigan, PCR (Detroit Edison Company Project), AMT: AAA Aaa 16,500 (Monroe and Fermi Plants), Series 1, 7.65% due 9/01/2020 (h) 18,078 AAA Aaa 9,745 Series I-B, 7.50% due 9/01/2019 (b) 10,556 Mississippi--0.1% AAA Aaa 1,320 Harrison County, Mississippi, Wastewater Management District, Revenue Refunding Bonds (Wastewater Treatment Facilities), Series A, 8.50% due 2/01/2013 (h) 1,751 Missouri--0.2% AAA Aaa 3,500 Sikeston, Missouri, Electric Revenue Refunding Bonds, 6.25% due 6/01/2002 (a) (e) 3,830 Nebraska--0.4% AAA Aaa 9,000 Nebraska Public Power District Revenue Refunding Bonds, 6.125% due 1/01/2015 (e) 9,387 Nevada--2.5% AAA Aaa 3,450 Clark County, Nevada, Airport Revenue Bonds, 6.90% due 6/01/2001 (a) (h) 3,757 AAA Aaa 45,000 Washoe County, Nevada, Water Facility Revenue Bonds (Sierra Pacific Power), AMT, 6.65% due 6/01/2017 (e) 48,527 New Jersey--7.1% AAA Aaa 3,350 Cape May County, New Jersey, Industrial Pollution Control Financing Authority, Revenue Refunding Bonds (Atlantic City Electric Company Project), Series A, 6.80% due 3/01/2021 (e) 3,957 Casino Reinvestment Development Authority, New Jersey, Parking Fee Revenue Bonds, Series A (i): AAA Aaa 3,730 6% due 10/01/2005 4,013 AAA Aaa 3,955 6% due 10/01/2006 4,263 AAA Aaa 4,190 6% due 10/01/2007 4,519 AAA Aaa 28,750 New Jersey EDA, Natural Gas Facilities, Revenue Refunding Bonds (NUI Corp.), Series A, 6.35% due 10/01/2022 (b) 31,029 A1+ VMIG1++ 1,100 New Jersey Sports and Exposition Authority Revenue Bonds (State Contract), VRDN, Series C, 3.95% due 9/01/2024 (e) (f) 1,100 New Jersey State Housing and Mortgage Finance Agency Revenue Bonds (Home Buyer), AMT (e): AAA Aaa 8,790 Series D, 7.70% due 10/01/2029 9,204 AAA Aaa 23,890 Series M, 7% due 10/01/2026 25,442 New Jersey State Transit Corp., Capital, GAN, Series A (i): AAA Aaa 15,000 5% due 9/01/2000 15,265 AAA Aaa 35,000 5.25% due 9/01/2001 36,008 New Jersey State Turnpike Authority, Turnpike Revenue Refunding Bonds: AAA Aaa 4,215 Series C, 6.50% due 1/01/2008 (b) 4,738 AAA VMIG1++ 6,100 VRDN, Series D, 3.80% due 1/01/2018 (f) (h) 6,100
Page 30 SCHEDULE OF INVESTMENTS (continued)
(in Thousands) Municipal Bonds Insured Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) New York--10.7% Nassau County, New York, General Improvement, UT, Series V (b): AAA Aaa $ 5,305 5.25% due 3/01/2015 $ 5,197 AAA Aaa 2,845 5.25% due 3/01/2016 2,769 New York City, New York, GO, UT: AAA Aaa 15,000 Series B, 6.25% due 8/15/2008 (b) 16,376 AAA Aaa 8,175 Series E, 6% due 8/01/2007 (h) 8,809 AAA Aaa 13,770 Series G, 6% due 10/15/2007 (b) 14,855 AAA Aaa 31,000 Series I, 6% due 4/15/2012 (i) 32,509 AAA Aaa 2,500 Series L, 5.20% due 8/01/2008 (e) 2,515 AAA Aaa 10,095 Series M, 5.30% due 6/01/2012 (b) 10,006 AAA Aaa 15,000 Series M, 5.50% due 6/01/2017 (b) 14,874 New York City, New York, GO, UT, Series I (b): AAA Aaa 2,825 7.25% due 8/15/1999 (a) 3,043 AAA Aaa 7,150 7.25% due 8/15/2013 7,636 AAA Aaa 4,385 7.25% due 8/15/2016 4,693 New York City, New York, Municipal Water Finance Authority, Water and Sewer System Revenue Bonds: AAA Aaa 28,510 RITR, 6.945% due 6/15/2026 (d) (e) 29,294 AAA Aaa 5,010 Series C, 6.20% due 6/15/2021 (b) 5,282 A1+ VMIG1++ 1,000 Series C, VRDN, 5.50% due 6/15/2023 (f) (h) 1,000 AAA Aaa 1,500 New York City, New York, Refunding, UT, Series E, 6.20% due 8/01/2008 (e) 1,637 AAA Aaa 2,500 New York State Dormitory Authority Revenue Bonds (City University), Third Generation Reserves, Series 2, 6.25% due 7/01/2019 (e) 2,639 AAA Aaa 1,650 New York State Environmental Facilities Corporation, Special Obligation Revenue Refunding Bonds (Riverbank State Park), 5.50% due 4/01/2016 (b) 1,647 AAA Aaa 2,015 New York State Medical Care Facilities Finance Agency, Revenue Improvement Bonds (Mental Health Services), Series C, 7.375% due 8/15/2019 (e) 2,161 Aaa Aaa 9,125 New York State Medical Care Facilities Financial Agency Revenue Bonds (Mental Health Services), Series E, 6.25% due 8/15/2019 (h) 9,650 AAA VMIG1++ 13,700 New York State Thruway Authority, General Revenue Bonds, VRDN, 5.45% due 1/01/2024 (f) (h) 13,700
Page 31 AAA Aaa 12,000 New York State Thruway Authority, Highway and Bridge Trust Fund, Series B, 5.125% due 4/01/2015 (e) 11,585 Niagara Falls, New York, Public Improvement Bonds, UT (e): AAA Aaa 2,975 6.90% due 3/01/2023 3,313 AAA Aaa 3,190 6.90% due 3/01/2024 3,553 AAA Aaa 11,940 Suffolk County, New York, Water Authority, Water Works Revenue Bonds, 5% due 6/01/2011 (e) 11,613 Ohio--1.1% AAA Aaa 2,710 Clermont County, Ohio, Hospital Facilities Revenue Refunding Bonds (Mercy Health Systems), Series A, 7.50% due 9/01/2001 (a) (b) 3,028 AAA Aaa 12,000 Cleveland, Ohio, Public Power System Revenue Bonds, First Mortgage, Series A, 7% due 11/15/2004 (a) (e) 13,930 AAA Aaa 1,550 Cleveland, Ohio, Water Works Revenue Bonds (First Mortgage), Series F-92 A, 6.50% due 1/01/2002 (a) (b) 1,704 AAA Aaa 3,500 Ohio State Building Authority, State Facilities (Adult Correctional), Series A, 6% due 4/01/2004 (b) 3,762 Oklahoma--1.3% AAA Aaa 10,500 Central Oklahoma, Transportation and Packaging Authority, Packaging Systems Revenue Refunding, 5.25% due 7/01/2016 (i) 10,169 AAA Aaa 9,280 Grand River Dam Authority, Oklahoma, Revenue Refunding Bonds, 5.50% due 6/01/2009 (b) 9,718 AAA Aaa 7,500 Oklahoma State Industrial Authority, Hospital Revenue Bonds (Baptist Medical Center), Series A, 7% due 8/15/2000 (a) (b) 8,212 Oregon--0.2% Port Portland, Oregon, International Airport Revenue Bonds (Portland International Airport), Series Seven-B, AMT (e): AAA Aaa 3,865 7.10% due 1/01/2012 (a) 4,511 AAA Aaa 135 7.10% due 7/01/2021 146 Pennsylvania AAA Aaa 2,000 Allegheny County, Pennsylvania, Higher Education Building - --5.4% Authority Revenue Bonds (Duquesne University Project), 5% due 3/01/2016 (b) 1,882 AAA Aaa 1,750 Allegheny County, Pennsylvania, Hospital Development Authority Revenue Bonds (Mercy Hospital of Pittsburgh), 6.75% due 4/01/2001 (a) (b) 1,922 AAA Aaa 6,900 Beaver County, Pennsylvania, Hospital Authority Revenue Bonds (Medical Center of Beaver, Pennsylvania Inc.), Series A, 6.25% due 7/01/2022 (b) 7,218 AAA Aaa 3,365 Beaver County, Pennsylvania, IDA, PCR, Refunding (Ohio Edison Company/Mansfield), Series A, 7% due 6/01/2021 (h) 3,675 AAA Aaa 7,590 Erie County, Pennsylvania, Prison Authority, Lease Revenue Bonds, 6.25% due 11/01/2001 (a) (e) 8,144 AAA Aaa 1,155 Exeter Township Pennsylvania School District, UT, 6.65% due 5/15/2002 (a) (h) 1,265 Pennsylvania State Higher Educational Assistance Agency, Student Loan Revenue Bonds, AMT, RIB (d):
Page 32 AAA Aaa 15,000 9.317% due 9/03/2026 (b) 16,856 AAA Aaa 8,000 Series B, 10.749% due 3/01/2020 (e) 9,160 AAA Aaa 18,600 Series B, 7.955% due 3/01/2022 (b) 19,321 Pennsylvania State Higher Educational Facilities Authority, College and University Revenue Bonds: AAA Aaa 1,500 (Bryn Mawr College), 6.50% due 12/01/1999 (a) (h) 1,607 AAA Aaa 4,250 (Temple University), First Series, 6.50% due 4/01/2021 (e) 4,566 AAA Aaa 10,000 Pennsylvania State Higher Educational Facilities Authority, Health Services Revenue Refunding (Allegheny Delaware Valley), Series A, 5.875% due 11/15/2016 (e) 10,228 Pennsylvania State Second Series, GO, UT (b): AAA Aaa 8,875 5% due 11/15/2014 8,468 AAA Aaa 1,000 5% due 11/15/2015 950 AAA Aaa 6,000 Philadelphia, Pennsylvania, Gas Works Revenue Bonds, 12th Series B, 7% due 5/15/2020 (c) (e) 7,013 AAA Aaa 5,000 Philadelphia, Pennsylvania, School District, Series B, 5.50% due 9/01/2015 (b) 4,977 AAA Aaa 4,020 Philadelphia, Pennsylvania, Water and Sewer Authority, Water and Wastewater Revenue Bonds, 5.60% due 8/01/2018 (e) 3,976 Rhode Island AAA Aaa 6,100 Rhode Island Depositors Economic Protection Corporation, - --1.4% Special Obligation Bonds, Series A, 6.625% due 8/01/2002 (a) (i) 6,792 AAA Aaa 3,775 Rhode Island State Consolidated Capital Development Loan, Series A, 6% due 8/01/2007 (e) 4,096 Rhode Island State Health and Educational Building Corporation Revenue Bonds: AAA Aaa 1,500 Higher Education Facility, Refunding (Rhode Island School Design), 5.625% due 6/01/2026 (e) 1,472 AAA Aaa 12,800 (Rhode Island Hospital), INFLOS, 9.487% due 8/15/2021 (d) (h) 15,568 South AAA Aaa 5,000 Florence County, South Carolina, Hospital Revenue Carolina--1.6% Bonds (McLeod Regional Medical Center Project), 6.75% due 11/01/2020 (h) 5,374 AAA Aaa 4,000 Piedmont, South Carolina, Municipal Power Agency, Electric Revenue Refunding Bonds, 6.30% due 1/01/2022 (e) 4,263 South Carolina State Public Service Authority, Revenue Refunding Bonds, Series A (b): AAA Aaa 17,090 6.375% due 7/01/2021 18,425 AAA Aaa 4,200 6.25% due 1/01/2022 4,452 Texas--14.3% Austin, Texas, Utility System, Combined Revenue Bonds, Prior Lien (e): AAA Aaa 11,190 9.25% due 5/15/2004 (a) 14,160 AAA Aaa 5,000 6.25% due 11/15/2019 5,273 AAA Aaa 20,000 Austin, Texas, Utility System, Combined Revenue Refunding Bonds, Series A, 5.25% due 5/15/2016 (i) 19,348 Brazos River Authority, Texas, PCR (Texas Utilities
Page 33 Electric Company Project), AMT: AAA Aaa 6,000 Refunding, 6.50% due 12/01/2027 (b) 6,422 AAA Aaa 12,000 Series B, 6.625% due 6/01/2022 (h) 12,882 AAA Aaa 12,400 Brazos River Authority, Texas, Revenue Refunding Bonds (Houston Light and Power Co.), Series B, 7.20% due 12/01/2018 (h) 13,387 Brownsville, Texas, Utility System, Revenue Refunding Bonds: AAA Aaa 20,000 6.25% due 9/01/2014 (e) 21,862 AAA Aaa 2,000 5.25% due 9/01/2015 (b) 1,952
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
Municipal Bonds Insured Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Texas AAA Aaa $ 5,000 Harris County, Texas, Hospital District Mortgage, (concluded) Revenue Refunding Bonds, 7.40% due 2/15/2010 (b) $ 5,974 Harris County, Texas, Toll Road Revenue Bonds, Senior Lien: AAA Aaa 11,455 Senior Lien, Refunding, 5% due 8/15/2016 (h) 10,756 AAA Aaa 20,430 Senior Lien, Refunding, Series A, 6.50% due 8/15/2002 (a) (b) 22,645 AAA Aaa 10,305 Senior Lien, Refunding, Series A, 6.50% due 8/15/2002 (a) (h) 11,422 AAA Aaa 1,000 Senior Lien, Series A, 6.25% due 8/15/2015 (e) 1,069 AAA Aaa 2,750 Senior Lien, Series A, 6.50% due 8/15/2017 (b) 2,994 AAA Aaa 11,100 Senior Lien, Series A, 6.375% due 8/15/2024 (e) 11,953 AAA Aaa 1,695 Series A, 6.50% due 8/15/2011 (h) 1,845 Houston, Texas, Water and Sewer System Revenue Bonds, Junior Lien, Series A (e): AAA Aaa 7,615 6.375% due 12/01/2022 8,242 AAA Aaa 19,770 Refunding, 6.125% due 12/01/2015 20,708 AAA Aaa 8,000 Refunding, 6.20% due 12/01/2023 8,400 AAA Aaa 3,500 Houston, Texas, Water Conveyance System Contract, COP, Series J, 6.25% due 12/15/2013 (b) 3,854 AAA Aaa 5,000 Matagorda County, Texas, Navigation District No. 1, PCR (Central Power and Light Company Project), AMT, 7.50% due 3/01/2020 (b) 5,404 AAA Aaa 11,800 Matagorda County, Texas, Navigation District No. 1, Revenue Refunding Bonds (Houston Light and Power Co.), Series A, 6.70% due 3/01/2027 (b) 12,838 A1 Aaa 15,400 North Central, Texas, Health Facility Development Corp.
Page 34 Revenue Bonds (Methodist Hospital, Dallas), VRDN, Series B, 5.50% due 10/01/2015 (f) (g) 15,400 Nueces River Authority, Texas, Water Supply Facilities Revenue (Corpus Christi Lake Project) (i): AAA Aaa 3,705 5.25% due 7/15/2013 3,642 AAA Aaa 3,900 5.25% due 7/15/2014 3,814 A1 VMIG1++ 16,500 Sabine River Authority, Texas, PCR, Refunding (Texas Utilities Project), VRDN, Series A, 5.50% due 3/01/2026 (b) (f) 16,500 AAA Aaa 3,000 San Antonio, Texas, Electric and Gas Revenue Bonds, Series 95, 5.375% due 2/01/2016 (e) 2,943 AAA Aaa 15,000 Southwest Higher Education Authority Incorporated, Texas, Revenue Refunding Bonds (Southern Methodist University), Series B, 6.25% due 10/01/2022 (h) 15,931 Texas State Municipal Power Agency, Revenue Refunding Bonds: AAA Aaa 3,520 5.25% due 9/01/2007 (e) 3,643 AAA Aaa 3,150 Series A, 6.75% due 9/01/2012 (b) 3,424 AAA Aaa 5,095 Texas State Public Finance Authority, Building Revenue Bonds, Series A, 5% due 8/01/2016 (b) 4,790 Utah--1.7% AAA Aaa 12,855 Intermountain Power Agency, Utah, Power Supply Revenue Refunding Bonds, Series B, 6% due 7/01/2006 (e) 13,836 AAA Aaa 14,000 Salt Lake City, Utah, Hospital Revenue Refunding Bonds (IHC Hospitals, Inc.), INFLOS, 9.491% due 5/15/2020 (b) (d) 16,327 AA- Aaa 1,000 Uintah County, Utah, PCR (Desert Generation and Transmission Cooperative--National Rural Utilities Company), Series 1984 F-2, 10.50% due 6/15/2001 (a) 1,218 AAA Aaa 2,650 Utah State Board of Regents, Student Loan Revenue Bonds, AMT, Series F, 7.45% due 11/01/2008 (b) 2,773 Vermont--1.0% AAA Aaa 18,950 Vermont, HFA, Home Mortgage Purchase Bonds, AMT, Series B, 7.60% due 12/01/2024 (e) 19,986 Virginia--3.1% AAA Aaa 5,000 Danville, Virginia, IDA, Hospital Revenue Refunding Bonds (Danville Regional Medical Center), 6.50% due 10/01/2019 (h) 5,394 AAA Aaa 4,000 Loudoun County, Virginia, Sanitation Authority, Water and Sewer Revenue Refunding Bonds, 5.125% due 1/01/2026 (h) 3,769 AAA Aaa 20,000 Upper Occoquan, Virginia, Sewer Authority Regional, Revenue Bonds, Series A, 4.75% due 7/01/2029 (e) 17,429 Virginia State, HDA, Commonwealth Mortgage, AMT, Series A, Sub-Series A-4 (e): AAA Aaa 5,000 6.30% due 7/01/2014 5,195 AAA Aaa 11,215 6.35% due 7/01/2018 11,535 AAA Aaa 19,000 6.45% due 7/01/2028 19,584 Washington--2.9% Seattle, Washington, Metropolitan Seattle Municipality,
Page 35 Sewer Revenue Bonds, Series W (e): AAA Aaa 3,730 6.25% due 1/01/2020 3,949 AAA Aaa 2,465 6.25% due 1/01/2022 2,610 AAA Aaa 4,485 6.25% due 1/01/2023 4,749 AAA Aaa 33,535 Seattle, Washington, Municipal Light and Power Revenue Bonds, 6.625% due 7/01/2020 (h) 36,944 University of Washington, University Revenue Bonds (Housing and Dining) (e): AAA Aaa 2,785 7% due 12/01/2001 (a) 3,121 AAA Aaa 465 7% due 12/01/2021 512 AAA Aaa 7,000 Washington State Health Care Facilities Authority Revenue Bonds (Southwest Washington Hospital--Vancouver), 7.125% due 10/01/2019 (g) 7,492 West AAA Aaa 23,150 Marshall County, West Virginia, PCR, Refunding Virginia--2.4% (Ohio Power Company--Kammer Plant Project), Series B, 5.45% due 7/01/2014 (e) 23,197 AAA Aaa 11,465 Mason County, West Virginia, PCR, Refunding (Appalachian Power Co.), Series I, 6.85% due 6/01/2022 (e) 12,570 AAA Aaa 12,250 Pleasants County, West Virginia, PCR (Potomac Pleasants), Series 95-C, 6.15% due 5/01/2015 (b) 12,930 Wisconsin--3.5% Milwaukee County, Wisconsin, GO, UT, Series A (e): AAA Aaa 2,975 5.25% due 10/01/2011 2,969 AAA Aaa 2,975 5.25% due 10/01/2012 2,956 AAA Aaa 9,000 Superior, Wisconsin, Limited Obligation Revenue Refunding Bonds (Midwest Energy Resources), Series E, 6.90% due 8/01/2021 (h) 10,630 AAA Aaa 6,500 Wisconsin Public Power System Inc., Power Supply System Revenue Bonds, Series A, 6.875% due 7/01/2001 (a) (b) 7,199 Wisconsin State Health and Educational Facilities Authority Revenue Bonds: AAA Aaa 6,520 Refunding (Sister's Sorrowful Mother), Series A, 6.125% due 8/15/2022 (e) 6,657 AAA Aaa 8,545 Refunding (Waukesha Memorial Hospital), Series A, 5.50% due 8/15/2015 (b) 8,448 AAA Aaa 1,500 (Saint Luke's Medical Center Project), 7.10% due 8/15/2019 (e) 1,638 AAA Aaa 5,655 (Waukesha Memorial Hospital), Series B, 7.25% due 8/15/2000 (a) (b) 6,233 Wisconsin State Veteran's Housing Loans, AMT, Series B (e): AAA Aaa 7,920 6.50% due 5/01/2020 8,330 AAA Aaa 17,130 6.50% due 5/01/2025 17,908 Wyoming--0.0% A1 VMIG1++ 400 Sweetwater County, Wyoming, PCR, Refunding (PacificCorp. Projects), VRDN, 5.50% due 11/01/2024 (b) (f) 400
Page 36 Total Investments (Cost--$1,910,410)--98.6% 2,023,013 Other Assets Less Liabilities--1.4% 29,221 ----------- Net Assets--100.0% $ 2,052,234 ===========
(a)Prerefunded. (b)AMBAC Insured. (c)Escrowed to maturity. (d)The interest rate is subject to change periodically and inversely based upon prevailing market rates. The interest rate shown is the rate in effect at June 30, 1997. (e)MBIA Insured. (f)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at June 30, 1997. (g)BIG Insured. (h)FGIC Insured. (i)FSA Insured. (j)GNMA Collateralized. (k)Represents a zero coupon bond; the interest rate shown is the effective yield at the time of purchase by the Portfolio. ++Highest short-term rating issued by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements.
SCHEDULE OF INVESTMENTS (in Thousands) Municipal Bonds National Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Alaska--2.5% Valdez, Alaska, Marine Terminal Revenue Refunding Bonds: AA Aa2 $ 6,000 (British Petroleum Pipeline), Series B, 7% due 12/01/2025 $ 6,584 AA Aa3 27,150 (Sohio Pipeline--British Petroleum Oil), 7.125% due 12/01/2025 30,123
Page 37 California--3.7% NR* NR* 6,000 Antioch, California, Improvement Bond Act of 1915 (Assessment District No.27--Lone Tree), Series E, 7.125% due 9/02/2016 6,189 A Aaa 10,350 California State Public Works Board, Lease Revenue Bonds (Department of Corrections--Monterey County, Soledad II), Series A, 7% due 11/01/2004 (j) 12,143 NR* NR* 4,000 Long Beach, California, Special Tax Community Facilities (District No.3--Pine Avenue), 6.375% due 9/01/2023 4,001 A NR* 8,975 Palmdale, California, Civic Authority, Revenue Refunding Bonds (Merged Redevelopment Project), Series A, 6.60% due 9/01/2034 9,800 AAA Aaa 18,755 Riverside County, California, Asset Leasing Corp., Leasehold Revenue Bonds (Riverside County Hospital Project), 6%** due 6/01/2023 (f) 4,151 AAA Aaa 20,000 San Diego, California, Public Facilities Financing Authority, Sewer Revenue Bonds, 5% due 5/15/2020 (e) 18,510 Colorado--2.8% Denver, Colorado, City and County Airport Revenue Bonds, AMT: BBB Baa1 3,000 Series A, 7.50% due 11/15/2023 3,410 BBB Baa1 8,570 Series A, 8% due 11/15/2025 9,507 BBB Baa1 13,000 Series B, 7.25% due 11/15/2023 14,335 BBB Baa1 13,150 Series D, 7.75% due 11/15/2021 14,678 Connecticut--0.3% AA- Baa1 4,550 Connecticut State Resource Recovery Authority, Resource Recovery Revenue Bonds (American Refunding Fuel), AMT, Series A, 8% due 11/15/2015 4,875 Delaware--0.6% AAA NR* 7,500 Delaware State Health Facilities Authority, Revenue Refunding Bonds (Beebe Medical Center Project), 8.50% due 6/01/2000 (j) 8,481 District of District of Columbia General Fund Recovery Bonds, VRDN, UT (a): Columbia--1.3% A1+ VMIG1++ 6,300 Series B-1, 5.25% due 6/01/2003 6,300 A1+ VMIG1++ 8,200 Series B-3, 5.25% due 6/01/2003 8,200 A+ A1 3,750 District of Columbia Revenue Bonds (Georgetown University), RIB, 8.683% due 4/25/2022 (k) 4,186 Florida--4.3% AAA Aaa 16,070 Dade County, Florida, Refunding, Seaport, UT, 5.125% due 10/01/2026 (f) 15,130 AAA Aaa 8,140 Dade County, Florida, Special Obligation Refunding Bonds, Series B, 5% due 10/01/2035 (c) 7,432 AAA Aaa 6,330 Florida HFA (Antigua Club Apartments), AMT, Series A-1, 7% due 2/01/2035 (c) 6,791 NR* Aaa 8,860 Florida HFA, Home Ownership Revenue Bonds, AMT, Series G1, 7.90% due 3/01/2022 (i) 9,333 NR* NR* 5,000 Grand Haven Community Development District, Florida, Special Assessment, Series A, 6.30% due 5/01/2002 4,995 AA Aa3 5,000 Hillsborough County, Florida, IDA, PCR, Refunding (Tampa Electric Company Project), Series 91, 7.875%
Page 38 due 8/01/2021 5,703 A- NR* 2,700 Leesburg, Florida, Hospital Revenue Capital Improvement Bonds (Leesburg Regional Medical Center Project), Series 91-A, 7.50% due 7/01/2002 (j) 3,109 AAA NR* 4,345 Orange County, Florida, HFA, Mortgage Revenue Bonds, AMT, Series A, 8.375% due 3/01/2021 (i) 4,587 AAA Aaa 5,850 South Broward, Florida, Hospital District, RIB, Series C, 9.034% due 5/01/2001 (c) (j) (k) 6,947 Georgia--1.8% A1 VMIG1++ 3,580 Floyd County, Georgia, Development Authority, PCR, Georgia Power Co. (Plt Hammond Project), VRDN, 5.60% due 9/01/2026 (a) 3,580 AAA Aaa 20,000 Metropolitan Atlanta, Georgia, Rapid Transit Authority, Sales Tax Revenue Bonds, Second Indenture, Series A, 6.90% due 7/01/2004 (f) (j) 22,966 Idaho--0.1% AA NR* 1,675 Idaho Housing Agency, S/F Mortgage, AMT, Series E, 7.875% due 7/01/2024 (b) 1,803 Illinois--5.1% AA- Aa3 8,000 Chicago, Illinois, Gas Supply Revenue Bonds (Peoples Gas, Light & Coke Company Project), AMT, Series A, 8.10% due 5/01/2020 8,785 Chicago, Illinois, O'Hare International Airport, Special Facilities Revenue Bonds (United Airlines, Inc.): BB+ Baa2 4,675 AMT, Series B, 8.95% due 5/01/2018 5,295 BB+ Baa2 13,565 Series 1984-B, 8.85% due 5/01/2018 15,346 AAA Aaa 16,000 Chicago, Illinois, Water Revenue Bonds, 5% due 11/01/2025 (e) 14,580 BBB NR* 3,500 Illinois Development Finance Authority, Revenue Refunding Bonds (Community Rehabilitation Providers), Series A, 6% due 7/01/2015 3,477 A+ Aa2 5,100 Illinois HDA, Residential Mortgage Revenue Bonds, RIB, AMT, Series C-2, 9.471% due 2/01/2018 (k) 5,514 Illinois Health Facilities Authority Revenue Bonds: AAA Aaa 1,500 (Methodist Health Project), RIB, 9.628% due 5/01/2021 (c) (k) 1,727 BBB NR* 2,625 Refunding (Saint Elizabeth's Hospital--Chicago), 7.75% due 7/01/2016 2,907 AAA Aaa 11,000 (Rush Presbyterian--Saint Luke's Medical Center), INFLOS, 9.615% due 10/01/2024 (f) (k) 12,705 NR* A1 4,400 Southwestern Illinois Development Authority, Sewer Facilities Revenue Bonds (Monsanto Company Project), AMT, 7.30% due 7/15/2015 4,871 Indiana--1.8% NR* Aaa 9,500 Indiana State Educational Facilities Authority Revenue Bonds (University of Notre Dame Project), 6.70% due 3/01/2025 10,519 A+ NR* 9,100 Indianapolis, Indiana, Local Public Improvement Bond Bank, Refunding, Series D, 6.75% due 2/01/2020 9,931 AA- Aa2 5,700 Petersburg, Indiana, PCR, Refunding (Indianapolis
Page 39 Power & Light Company Project), 6.625% due 12/01/2024 6,144 Iowa--0.7% NR* NR* 9,000 Iowa Finance Authority, Health Care Facilities, Revenue Refunding Bonds (Care Initiatives Project), 9.25% due 7/01/2025 10,652 Kansas--1.7% Wichita, Kansas, Hospital Revenue Bonds, RIB (f) (k): AAA Aaa 12,000 Series III-A, 8.702% due 10/01/2017 13,740 AAA Aaa 10,000 Series III-B, 8.691% due 10/21/2022 11,450 Kentucky--2.0% AAA Aaa 18,500 Louisville and Jefferson County, Kentucky, Metropolitan Sewer District, Sewer and Drain System Revenue Refunding Bonds, Series A, 5.25% due 5/15/2027 (f) 17,642 NR* NR* 4,500 Perry County, Kentucky, Solid Waste Disposal Revenue Bonds (TJ International Project), AMT, 7% due 6/01/2024 4,725 AA- Aa2 6,345 Trimble County, Kentucky, PCR (Louisville Gas and Electric Company), AMT, Series A, 7.625% due 11/01/2020 6,949 Louisiana--4.1% NR* Baa2 37,850 Lake Charles, Louisiana, Harbor and Terminal District Port Facilities, Revenue Refunding Bonds (Trunkline LNG Company Project), 7.75% due 8/15/2022 43,018 Port New Orleans, Louisiana, IDR, Refunding (Continental Grain Company Project): BB NR* 10,000 7.50% due 7/01/2013 10,785 BB NR* 5,000 6.50% due 1/01/2017 5,101 BBB Baa2 1,100 Saint Charles Parish, Louisiana, PCR (Union Carbide Project), AMT, 7.35% due 11/01/2022 1,183 Maine--0.3% NR* Aa2 3,815 Maine State Housing Authority, Mortgage Purchase, AMT, Series B-4, 6.90% due 11/15/2026 3,990 Maryland--0.5% AA- Aa 7,000 Maryland State Stadium Authority, Sports Facilities Lease Revenue Bonds, AMT, Series D, 7.60% due 12/15/2019 7,618 Massachusetts AAA Aaa 6,000 Massachusetts Bay Transportation Authority, - --5.0% Series B, 7.875% due 3/01/2001 (j) 6,811 AAA Aaa 7,500 Massachusetts State, HFA, Revenue Bonds (Residential Development) Series C, 6.90% due 11/15/2021 (d) 8,015 Massachusetts State Health and Educational Facilities Authority Revenue Bonds: AAA NR* 6,900 (North Adams Regional Hospital), Series A, 9.625% due 7/01/1999 (j) 7,736 NR* B2 12,350 Refunding (New England Memorial Hospital), Series B, 6.25% due 7/01/2023 9,880 Massachusetts State Water Resources Authority: AAA Aaa 12,500 Series A, 6.50% due 12/01/2001 (j) 13,766 AAA Aaa 30,000 Series B, 5% due 12/01/2025 (f) 27,335
Page 40
SCHEDULE OF INVESTMENTS (continued) (in Thousands) Municipal Bonds National Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Michigan--2.1% A A $ 3,500 Michigan State Hospital Finance Authority, Hospital Revenue Bonds (Detroit Medical Center), Series A, 7.50% due 8/15/2011 $ 3,848 AAA Aaa 15,000 Michigan State Hospital Finance Authority (Sisters of Mercy), INFLOS, 8.514% due 2/15/2022 (h) (k) 16,275 BBB Baa1 9,350 Monroe County, Michigan, PCR (Detroit Edison Company Project), AMT, Series A, 7.75% due 12/01/2019 10,100 Minnesota--1.5% Minnesota State, HFA, S/F Mortgage: AA+ Aa 6,080 AMT, Series A, 7.45% due 7/01/2022 (b) 6,402 AA+ Aa2 4,250 Series F, 6.30% due 7/01/2025 4,397 AA+ NR* 3,000 Rochester, Minnesota, Health Care Facilities Revenue Bonds (Mayo Foundation), IRS, Series H, 7.875% due 11/15/2015 (k) 3,229 AAA NR* 8,070 Saint Paul, Minnesota, Housing and Redevelopment Authority, S/F Mortgage Revenue Refunding Bonds, Series C, 6.95% due 12/01/2031 8,403 Mississippi--0.7% BBB Baa 5,950 Lowndes County, Mississippi, Hospital Revenue Refunding Bonds (Golden Triangle Medical Center), 8.50% due 2/01/2010 6,552 NR* Aaa 4,195 Mississippi Home Corporation, S/F Mortgage Revenue Bonds (Access Program), AMT, Final Tranche, Series A, 6.90% due 6/01/2024 (i) 4,423 Missouri & BBB NR* 11,400 Bi-State Development Agency, Missouri and Illinois, Illinois-- Metropolitan No. 5, Refunding (American Commonwealth 0.8% Lines, Inc.), 7.75% due 6/01/2010 12,457 Nebraska--0.3% AAA Aaa 3,400 Nebraska Investment Finance Authority, S/F Mortgage Revenue Bonds, AMT, Series 2, RIB, 11.177% due 9/10/2030 (i) (k) 3,787 New Hampshire-- A+ Aa 2,685 New Hampshire State, HFA, S/F Residential Mortgage, 0.2% AMT, 7.90% due 7/01/2022 2,840 New Jersey--1.2% NR* NR* 6,495 New Jersey Health Care Facilities Financing Authority Revenue Bonds (Riverwood Center), Series A, 9.90% due 7/01/2001 (j) 7,852 AA- A3 9,500 University of Medicine and Dentistry of New Jersey,
Page 41 Series C, 7.20% due 12/01/1999 (j) 10,332 New York--14.6% Metropolitan Transportation Authority, New York, Service Contract Refunding Bonds (Commuter Facilities), Series 5: BBB Baa1 2,145 6.90% due 7/01/2006 2,330 BBB Baa1 5,000 7% due 7/01/2012 5,399 New York City, New York, GO, UT: AAA Aaa 7,240 Series A, 7.75% due 8/15/2001 (j) 8,254 BBB+ Aaa 9,385 Series A, 7.75% due 8/15/2001 (j) 10,699 BBB+ Baa1 280 Series A, 7.75% due 8/15/2017 311 BBB+ Baa1 4,000 Series B, 8.25% due 6/01/2006 4,803 BBB+ Baa1 10,000 Series B, Fiscal 92, 7.75% due 2/01/2011 11,177 BBB+ Baa1 4,500 Series B, Fiscal 92, 7.75% due 2/01/2012 5,030 BBB+ Baa1 2,875 Series B, Fiscal 92, 7.75% due 2/01/2013 3,213 BBB+ Baa1 1,650 Series B, Fiscal 92, 7.75% due 2/01/2014 1,844 AAA Aaa 1,865 Series D, 7.70% due 2/01/2002 (j) 2,140 BBB+ Aaa 3,495 Series D, Group C, 8% due 8/01/2001 (j) 4,009 AAA Aaa 5,495 Series F, 8.25% due 11/15/2001 (j) 6,402 New York City, New York, Municipal Water Finance Authority, Water and Sewer System Revenue Bonds: A- Aaa 11,685 Series 93-B, 6.50% due 6/15/2002 (j) 12,856 A- Aaa 10,000 Series A, 6.75% due 6/15/2001 (j) 10,952 AAA Aaa 10,000 Series B, 5.875% due 6/15/2026 (h) 10,185 A1 VMIG1++ 3,000 Series RI-2, RITR, 7.025% due 6/15/2025 (k) 3,150 New York State Dormitory Authority Revenue Bonds (State University Educational Facilities): BBB+ Baa1 6,735 Refunding, Series B, 7.375% due 5/15/2014 7,318 BBB+ Baa1 2,000 Refunding, Series B, 7% due 5/15/2016 2,135 BBB+ Baa1 5,000 Series A, 7.50% due 5/15/2013 5,978 New York State Local Government Assistance Corporation: A Aaa 6,000 Series A, 7% due 4/01/2002 (j) 6,757 A Aaa 10,000 Series B, 7.25% due 4/01/2001 (j) 11,182 A A3 10,000 Series C, 6.25% due 4/01/2018 10,475 A A3 18,810 Series D, 5% due 4/01/2023 17,065 New York State Medical Care Facilities, Finance Agency Revenue Bonds (New York Hospital Mortgage), Series A (b) (c): AAA Aaa 8,400 6.75% due 8/15/2014 9,223 AAA Aaa 9,100 6.80% due 8/15/2024 10,020 BBB Aaa 10,000 New York State Urban Development Corporation Revenue Bonds (State Facilities), 7.50% due 4/01/2001 (j) 11,268 AAA Aaa 4,000 Niagara Falls, New York, Commission Toll Bridge, Revenue Refunding Bonds, Series B, 5.25% due 10/01/2021 (e) 3,775 AAA Aaa 6,800 Port Authority of New York and New Jersey, Consolidated Revenue Bonds, 104th Series, 3rd Installment, 4.75% due 1/15/2026 6,007 A+ Aa 12,750 Triborough Bridge and Tunnel Authority, New York, General Purpose Revenue Bonds, Series B, 5.20% due
Page 42 1/01/2027 12,035 North A1+ NR* 5,000 Raleigh-Durham, North Carolina, Airport Authority, Carolina--0.3% Special Facilities Revenue Refunding Bonds (American Airlines), VRDN, Series B, 5.50% due 11/01/2015 (a) 5,000 Ohio--2.7% AAA Aaa 20,300 Cleveland, Ohio, Public Power System Revenue Bonds (First Mortgage), Series A, 7% due 11/15/2004 (f) (j) 23,565 Ohio, HFA, S/F Mortgage Revenue Bonds, AMT (i): AAA Aaa 9,100 RIB, Series B-4, 9.578% due 3/31/2031 (k) 9,942 AAA NR* 1,895 Series B, 8.25% due 12/15/2019 2,003 AAA NR* 4,295 Series C, 7.85% due 9/01/2021 4,565 Pennsylvania BBB Baa 10,000 Pennsylvania Convention Center Authority, Revenue - --3.8% Refunding Bonds, Series A, 6.75% due 9/01/2019 10,787 Pennsylvania HFA, Refunding: AA Aa2 8,800 RIB, AMT, Series 1991-31C, 9.68% due 10/01/2023 (k) 9,647 AAA Aaa 7,850 (Rental Housing), 6.50% due 7/01/2023 (d) 8,122 AAA A1 5,000 Pennsylvania State, 3rd Series A, UT, 6.50% due 11/15/2001 (j) 5,473 AAA Aaa 10,000 Pennsylvania State Higher Educational Assistance Agency, Student Loan Revenue Bonds, RIB, AMT, 9.317% due 9/03/2026 (c) (k) 11,238 NR* NR* 2,000 Pennsylvania State Higher Educational Facilities Authority, College and University Revenue Bonds (Eastern College), Series B, 8% due 10/15/2025 2,139 AAA Aaa 4,800 Pittsburgh, Pennsylvania, Water and Sewer Authority, Water and Sewer System, Revenue Refunding Bonds, Series A, 6.75% due 9/01/2001 (e) (j) 5,309 AAA Aaa 2,500 York County, Pennsylvania, Hospital Authority Revenue Bonds (York Hospital), 7% due 1/01/2001 (c) (j) 2,754 Rhode AAA Aaa 5,250 Rhode Island Depositors Economic Protection Corporation, Island--0.4% Special Obligation Bonds, Series A, 6.95% due 8/01/2002 (j) 5,923 South AAA Aaa 2,500 Spartanburg County, South Carolina, Hospital Revenue Carolina--0.2% Bonds (Health Services District Inc.), Series A, 5.50% due 4/15/2027 (f) 2,439
Page 43 SCHEDULE OF INVESTMENTS (concluded)
(In Thousands) Municipal Bonds National Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) South AAA Aa1 $ 9,085 South Dakota HDA, Homeownership Mortgage, Series A, Dakota--0.7% 7.15% due 5/01/2027 $ 9,551 Tennessee--1.9% NR* Aaa 10,000 Knox County, Tennessee, Health, Educational and Housing Facilities Board, Hospital Facilities Revenue Bonds (Baptist Health System of East Tennessee), 8.60% due 4/15/1999 (j) 10,916 AAA Aaa 14,750 Metropolitan Government, Nashville and Davidson County, Tennessee (Meharry Medical College Project), 6.875% due 12/01/2004 (j) 16,999 Texas--16.8% AAA Aaa 10,000 Bexar County, Texas, Health Facilities Development Corporation, Revenue Refunding Bonds (Baptist Health Systems), Series A, 5.25% due 11/15/2027 (f) 9,326 Brazos River Authority, Texas, PCR (Texas Utilities Electric Company Project), AMT, Series A: BBB+ Baa1 2,095 8.25% due 1/01/2019 2,230 BBB+ Baa1 18,150 7.875% due 3/01/2021 19,958 A- A2 12,350 Brazos River Authority, Texas, Revenue Refunding Bonds (Houston Light and Power), Series 1989-A, 7.625% due 5/01/2019 13,175 BBB Baa1 7,250 Gulf Coast Waste Disposal Authority, Texas, Revenue Bonds (Champion International Corporation), AMT, 7.45% due 5/01/2026 7,890 AA Aa3 19,000 Harris County, Texas, Health Facilities Development Corporation, Health Care System Revenue Bonds (Sisters of Charity), 7.10% due 7/01/2001 (j) 21,183 Harris County, Texas, Health Facilities Development Corporation, Hospital Revenue Bonds: A1+ NR* 200 (Methodist Hospital), 5.50% due 12/01/2025 (a) 200 AAA Aaa 10,150 RITR, Series 12, 8.07% due 10/01/2024 (k) 11,317 AAA Aaa 10,000 Refunding (Memorial Hospital System Project), Series A, 5.50% due 6/01/2024 (f) 9,766 AAA Aa3 12,470 (Saint Luke's Episcopal Hospital Project), Series A, 6.75% due 2/15/2001 (j) 13,667 AAA Aaa 11,100 Harris County, Texas, Toll Road Revenue Bonds, Senior Lien, Series A, 6.375% due 8/15/2024 (f) 11,953 Houston, Texas, Water and Sewer System, Revenue Refunding Bonds, Junior Lien, Series A: AAA Aaa 10,000 6.20% due 12/01/2023 (f) 10,501 AAA Aaa 10,000 5.25% due 12/01/2025 (e) 9,518 BB Ba1 8,095 Jefferson County, Texas, Health Facilities Development Corporation, Hospital Revenue Bonds (Baptist Healthcare System Project), 8.875% due 6/01/2021 8,523 AA Aa 12,000 North Central Texas, Health Facilities Development Corporation Revenue Bonds (Baylor University Medical Center), INFLOS, Series A, 9.715% due 5/15/2001 (j) (k) 14,415 BB Ba 3,000 Odessa, Texas, Junior College District, Revenue Refunding Bonds, Series A, 8.125% due 12/01/2018 3,258 A+ Aa 5,195 Texas Housing Agency, Residential Development Mortgage
Page 44 Revenue Bonds, Series A, 7.50% due 7/01/2015 (i) 5,538 Texas State Turnpike Authority, Dallas North Thruway Revenue Bonds (President George Bush Turnpike) (e): AAA Aaa 15,000 5.25% due 1/01/2023 14,311 AAA Aaa 30,000 5% due 1/01/2025 27,608 AA Aa 4,440 Texas State Veteran's Housing Assistance (Fund II), AMT, UT, Series A, 7% due 12/01/2025 4,713 AA Aa 16,000 Texas State Water Development, Series A, B, and C, 5.25% due 8/01/2028 15,338 AAA Aa1 15,000 Texas Water Development Revenue Board, State Revolving Fund, Senior-Lien, Series B, 5.125% due 7/15/2018 14,321 Utah--3.6% A1+ VMIG1++ 10,300 Emery County, Utah, PCR, Refunding (Pacificorp Projects), VRDN, 4.10% due 11/01/2024 (a) (c) 10,300 A+ A1 20,000 Intermountain Power Agency, Utah, Power Supply Revenue Refunding Bonds, Series D, 5% due 7/01/2021 18,254 AAA Aaa 5,000 Murray City, Utah, Hospital Revenue Bonds (IHC Health Services Inc.), 4.75% due 5/15/2020 (f) 4,351 AAA Aaa 5,500 Utah County, Utah, Hospital Revenue Bonds (IHC Health Services, Inc.), 5.25% due 8/15/2026 5,120 AAA Aaa 13,250 Weber County, Utah, Municipal Building Authority, Lease Revenue Bonds, 7.50% due 12/15/2004 (j) 15,795 Virginia--1.5% AAA Aaa 20,000 Prince William County, Virginia, Service Authority, Water and Sewer System, Revenue Refunding Bonds, 5% due 7/01/2021 (e) 18,328 AA+ Aa1 4,000 Virginia State, HDA, Commonwealth Mortgage, Series A, 7.15% due 1/01/2033 4,183 Washington--3.3% AA Aaa 10,000 Washington State, GO, Series B, UT, 6.75% due 6/01/2001 (j) 10,845 AAA Aaa 13,860 Washington State, GO, Series C, 5% due 1/01/2022 (e) 12,863 AAA NR* 18,070 Washington State Housing Finance Commission, S/F Mortgage Revenue Refunding Bonds, AMT, Series E, 7.10% due 7/01/2022 (g) 18,878 AA- Aaa 5,000 Washington State Public Power Supply System, Revenue Refunding Bonds (Nuclear Project No. 1), Series A, 6.875% due 7/01/2001 (j) 5,538 West NR* NR* 4,000 Upshur County, West Virginia, Solid Waste Disposal Virginia--0.9% Revenue Bonds (TJ International Project), AMT, 7% due 7/15/2025 4,218 AAA Aaa 8,400 West Virginia State, Housing Development Fund, Housing Finance, Series D, 7.05% due 11/01/2024 8,854 Wisconsin--1.9% AA Aa 4,925 Wisconsin Housing and EDA, Home Ownership Revenue Bonds, Series A, 7.10% due 3/01/2023 5,186 Wisconsin Housing and EDA, Housing Revenue Bonds: A A1 5,400 Series B, 7.05% due 11/01/2022 5,716 A A1 5,105 Series C, 7% due 5/01/2015 5,405
Page 45 AAA Aaa 11,400 Wisconsin State Health and Educational Facilities Authority Revenue Bonds (Wausau Hospitals Inc.), Series B, 6.70% due 8/15/2020 (c) 12,205 Total Investments (Cost--$1,357,588)--98.0% 1,448,055 Other Assets Less Liabilities--2.0% 29,832 ---------- Net Assets--100.0% $1,477,887 ==========
(a)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at June 30, 1997. (b)FHA Insured. (c)AMBAC Insured. (d)FNMA Collateralized. (e)FGIC Insured. (f)MBIA Insured. (g)GNMA/FNMA Collateralized. (h)FSA Insured. (i)GNMA Collateralized. (j)Prerefunded. (k)The interest rate is subject to change periodically and inversely based upon prevailing market rates. The interest rate shown is the rate in effect at June 30, 1997. *Not Rated. **Represents a zero coupon bond; the interest rate shown is the effective yield at the time of purchase by the Portfolio. ++Highest short-term rating issued by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements. SCHEDULE OF INVESTMENTS
(in Thousands) Municipal Bonds Limited Maturity Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Alabama--1.0% A1+ NR* $ 4,100 Birmingham, Alabama, Medical Clinic Board Revenue Bonds (U.A.H.S.F.), VRDN, 5.50% due 12/01/2026 (b) $ 4,100
Page 46 Arizona--1.2% AAA Aaa 5,000 Phoenix, Arizona, Airport Revenue Refunding Bonds, Series A, 5.55% due 7/01/2000 (d) 5,174 Arkansas--0.1% NR* Aa 460 Arkansas State Student Loan Authority Revenue Bonds, AMT, Senior Series A-1, 5.50% due 12/01/1998 467 California--2.4% SP1+ VMIG1++ 5,000 Los Angeles County, California, Local Educational Agencies, COP, TRAN, Series B, 4.50% due 9/30/1998 (e) 5,026 SP1+ NR* 5,000 Santa Barbara County, California, TRAN, Series A, 4.50% due 10/01/1998 5,029 Connecticut--2.7% AAA Aaa 2,160 Bridgeport, Connecticut, Refunding, GO, UT, Series A, 4.40% due 9/01/1998 (c) 2,171 AAA Aaa 8,900 Connecticut State Special Assessment (Unemployment Compensation Advance Fund), Revenue Refunding Bonds, Series A, 5.50% due 5/15/2001 (c) 9,255 District of A1+ VMIG1++ 10,000 District of Columbia, General Fund Recovery Columbia-- Bonds, VRDN, UT, Series B-2, 5.25% due 6/01/2003 (b) 10,000 2.4% Florida--1.4% AAA Aaa 4,000 Florida School Boards Association Incorporated, Lease Revenue Bonds (Orange County School Board Project), 6.80% due 7/01/1998 (c) 4,116 A1+ VMIG1++ 1,500 Hillsborough County, Florida, IDA, PCR, Refunding (Tampa Electric Company Project), VRDN, 4% due 5/15/2018 (b) 1,500 Georgia--2.5% A NR* 6,410 Burke County, Georgia, Development Authority, PCR, Refunding (Oglethorpe Power Corporation) (Plant Vogtle Project), Series B, 3.95% due 1/01/1999 6,375 AAA Aaa 4,000 Georgia Municipal Electric Authority, General Power Revenue Refunding Bonds, Series D, 6% due 1/01/2000 (c) 4,157 Hawaii--2.1% AAA Aaa 3,200 Hawaii State, GO, Refunding, Series CO, 6% due 3/01/2001 (f) 3,366 A+ Aa3 5,250 Hawaii State, GO, UT, Series CH, 4.75% due 11/01/1999 5,311 Illinois--7.8% AA- NR* 10,000 Chicago, Illinois, Board of Education, COP (School Reform Equipment Acquisition), 4.60% due 12/01/1999 10,038 AA- Baa1 5,000 Chicago, Illinois, School Finance Authority, 7.25% due 6/01/1998 5,116 AAA Aaa 3,000 Cook County, Illinois, High School District No. 205, Revenue Refunding Bonds (Thorton Township), UT, 5.60% due 6/01/1998 (f) (g) 3,048 AA Aa1 6,425 Cook County, Illinois, Township High School District No. 211 (Palatine and Schaumb), 4.25% due 12/01/1998 6,444 Illinois State Refunding, GO, UT:
Page 47 AA- Aa3 4,600 3.90% due 12/01/1998 4,587 AAA Aaa 3,500 5.125% due 12/01/1999 (f) 3,576 Kentucky--2.2% Kentucky State Property and Buildings Commission, Revenue Refunding Bonds: A+ A 5,000 (Project No. 55), 4.10% due 9/01/1998 5,004 A+ A 4,000 (Project No. 59), 5% due 11/01/1998 4,048 Louisiana--5.9% A1+ VMIG1++ 5,000 Louisiana State Recovery District, Sales Tax Revenue Bonds, 4.25% due 7/01/1998 (d) (g) 5,021 AAA Aaa 19,230 Louisiana State Refunding, GO, Series A, 5.50% due 8/01/1998 (f) 19,546 Massachusetts AAA Aaa 2,005 Massachusetts State Health and Educational - --2.9% Facilities Authority Revenue Bonds (New England Medical Center Hospitals), Series G, 3.80% due 7/01/1997 (d) 2,005 A- A1 10,160 New England Education Loan Marketing Corporation Refunding Bonds (Massachusetts Student Loan), Series D, 4.75% due 7/01/1998 10,231 Michigan--3.8% AAA Aaa 8,000 Detroit, Michigan, Distributable State Aid, 7.20% due 5/01/1999 (a) (c) 8,576 AA- A1 6,000 Michigan State Building Authority, Revenue Refunding Bonds, Series I, 5.80% due 10/01/1998 6,127 NR* VMIG1++ 800 Michigan State Strategic Fund, Solid Waste Disposal Revenue Bonds (Grayling Generating Project), VRDN, AMT, 4.25% due 1/01/2014 (b) 800 Minnesota--1.3% AAA Aaa 2,385 Metropolitan Council, Minnesota, St. Paul Metropolitan Area Transit, UT, Series C, 4.75% due 2/01/2000 2,414 AAA Aaa 2,965 Minnesota State, HFA (Rental Housing), Refunding, Series D, 4.50% due 8/01/1999 (d) 2,983 Mississippi--2.4% NR* Aaa 10,000 Mississippi Higher Education Assistance Corporation, Student Loan Revenue Bonds, AMT, Series B, 4.80% due 9/01/1998 10,061 Nebraska--1.5% A+ A1 6,250 Nebraska Public Power District Revenue Bonds (Consumer Public Power District), 4.90% due 7/01/1998 6,309 New Jersey--3.6% A A1 2,000 Camden County, New Jersey, Improvement Authority, Solid Waste Disposal, Revenue Refunding Bonds (Landfill Project), 4% due 7/01/1997 2,000 NR* NR* 3,000 New Jersey State, EDA, Economic Growth Revenue Bonds (Greater Mercer County), VRDN, Series C, 4.25% due 11/01/2011 (b) 3,000 AAA Aaa 5,715 New Jersey State Educational Facilities Authority Revenue Bonds (Higher Education Facilities Trust Fund), Series A, 5.125% due 9/01/1999 (c) 5,829
Page 48 AA+ Aa1 4,250 New Jersey State Refunding, UT, Series O, 5.10% due 2/15/2000 4,341 New York--10.4% AA- Aa2 4,550 Municipal Assistance Corporation, Refunding, Series E, 5.50% due 7/01/2000 4,700 A1+ VMIG1++ 100 New York City, New York, Municipal Water Finance Authority, Water and Sewer System Revenue Bonds, VRDN, Series G, 5.50% due 6/15/2024 (b) (f) 100 New York State Dormitory Authority Revenue Bonds (Consolidated City University System), Series A: BBB Baa1 6,675 4.50% due 7/01/1998 6,711 BBB Baa1 10,885 4.75% due 7/01/1999 10,945 AAA Aaa 3,000 New York State Dormitory Authority Revenue Bonds (State University Educational), Series A, 7.125% due 5/15/1999 (a) 3,218 A- A2 11,820 New York State GO, Refunding, 7.80% due 11/15/1998 12,397 BBB Aaa 5,000 New York State Urban Development Corporation Revenue Bonds (State Facilities), 7.50% due 4/01/2001 (a) 5,634 Ohio--12.4% AAA Aaa 2,000 Cincinnati, Ohio, City School District, TAN, Series B, 5% due 12/01/1998 (c) 2,026 NR* Aa1 6,000 Franklin County, Ohio, Hospital Revenue Refunding Bonds (US Health Corp.), Series B, 4.50% due 6/01/2000 6,005 Ohio State Air Quality Development Authority, Revenue Refunding Bonds (Ohio Edison Project), Series A: A1+ VMIG1++ 7,500 3.95% due 2/01/1998 7,502 A1+ VMIG1++ 7,000 4.35% due 8/01/1998 7,003 NR* Aaa 6,700 Ohio State Buillding Authority, Correctional Facilities, Series A, 7.35% due 8/01/1999 (a) 7,251 AAA Aa1 12,400 Ohio State Highway, GO, Series V, 4.70% due 5/15/2000 12,556 AAA Aaa 3,500 Ohio State Public Facilities Commission, Higher Education Capital Facilities, Series II-A, 4.375% due 11/01/1999 (d) 3,516 NR* Aaa 6,000 Student Loan Funding Corporation, Cincinnati, Ohio, Student Loan Revenue Refunding Bonds, AMT, Series C, 5.70% due 7/01/1999 6,123 Oklahoma--0.6% AA Aa 2,400 Tulsa, Oklahoma, GO, UT, 5.125% due 5/01/1999 2,443
Page 49
SCHEDULE OF INVESTMENTS (concluded) (in Thousands) Municipal Bonds Limited Maturity Portfolio S&P Moody's Face Value STATE Ratings Ratings Amount Issue (Note 1a) Oregon--0.7% A1+ VMIG1++ $ 3,000 Port Saint Helens, Oregon, PCR (Portland General Electric Company Project), VRDN, Series A, 5.40% due 4/01/2010 (b) $ 3,000 Pennsylvania A1+ P1 4,000 Beaver County, Pennsylvania, IDA, PCR, Refunding - --4.1% (Ohio Edison Co.), Series A, 4.30% due 10/01/1997 4,006 AAA Aaa 8,675 Pennsylvania State Refunding Bonds, GO, UT, 5.25% due 11/15/1998 (f) 8,818 AAA Aaa 4,145 Pittsburgh, Pennsylvania, Refunding, UT, Series A, 5% due 3/01/2000 (d) 4,214 South Carolina-- AA- A1 8,250 Greenville County, South Carolina, School District, 2.0% UT, 4% due 3/01/1999 8,235 Tennessee--2.9% AA NR* 11,885 Clarksville, Tennessee, Public Building Authority, Revenue Refunding Bonds (Pooled Loan Program), 4.40% due 12/01/1998 11,926 Texas--6.6% Brazos, Texas, Higher Education Authority Incorporated, Student Loan Revenue Refunding Bonds, AMT: NR* Aaa 2,200 Senior Lien, Series A-2, 5.45% due 6/01/1998 2,228 NR* Aa 5,135 Series C-1, 5.60% due 11/01/1997 5,163 Harris County, Texas, Health Facilities Development Corporation, Hospital Revenue Bonds, VRDN (b): A1+ NR* 5,900 (Methodist Hospital), 5.50% due 12/01/2025 5,900 AAA NR* 1,000 (Saint Luke's Episcopal Hospital), Series B, 5.50% due 9/15/1997 (a) 1,000 AAA NR* 100 (Saint Luke's Episcopal Hospital), Series D, 5.50% due 9/15/1997 (a) 100 AA+ Aa3 6,700 Houston, Texas, Independent School District, Public Property Financial Contractual Obligation, 5% due 7/15/1999 6,816 AAA Aaa 2,600 Houston, Texas, Water and Sewer Systems, Revenue Refunding Bonds, Junior Lien, Series C, 5.90% due 12/01/1999 (c) 2,701 NR* Aaa 2,455 Panhandle-Plains, Texas, Higher Education Authority Incorporated, Student Loan Revenue Refunding Bonds, Series C, 4.15% due 9/01/1997 2,456 A+ A2 2,000 Texas Municipal Power Agency, Revenue Refunding Bonds, GO, Series A, 4.25% due 9/01/1997 2,001 Utah--1.1% AAA Aaa 4,700 Utah State Building and Highway, GO, UT, 4.40% due 7/01/1999 4,730 Virginia--0.6% AA Aa 2,555 Virginia State Transportation Board, Transportation Contract Revenue Bonds (US Route 58 Corridor), Series B, 5% due 5/15/2000 2,604 Washington--4.7% AAA Aaa 5,000 Seattle, Washington, Municipality Metropolitan Seattle Sewer Revenue Bonds, Series U, 6.60% due 1/01/2001 (a) (f) 5,448 AA- Aa1 4,890 Washington State Public Power Supply System, Revenue
Page 50 Refunding Bonds (Nuclear Project No. 2), Series A, 3.75% due 7/01/1997 4,890 AA Aa1 4,655 Washington State Refunding Bonds, GO, Series R-96B, 5% due 7/01/1998 4,705 Washington State Refunding Bonds, Motor Vehicle Fuel Tax: AA Aa1 2,000 Series R-94B, 4.20% due 9/01/1998 2,005 AA Aa1 2,285 Series R-96A, 5% due 7/01/1998 2,310 Wisconsin--8.0% NR* NR* 4,500 Ashland County, Wisconsin, Promissary Notes, GO, 4.25% due 9/01/1997 4,502 NR* VMIG1++ 4,000 Mequon, Wisconsin, BAN, 4.10% due 11/01/1998 3,999 A A1 2,795 Wisconsin Housing and Economic Development Authority, Housing Revenue Refunding Bonds, Series C, 4.30% due 11/01/1997 2,801 AA Aa2 11,000 Wisconsin State, GO, Refunding, UT, Series 3, 4.25% due 11/01/1999 11,026 AA Aa2 4,385 Wisconsin State, GO, Series C, 5.50% due 5/01/2000 4,527 AAA NR* 5,720 Wisconsin State Health and Educational Facilities Authority Revenue Bonds (Medical College of Wisconsin), Series D, 7.35% due 12/01/2000 (a) 6,339 Wyoming--0.1% NR* P1 500 Uinta County, Wyoming, PCR, Refunding (Chevron USA Inc. Project), VRDN, 5.50% due 8/15/2020 (b) 500 Total Investments (Cost--$422,830)--101.4% 424,231 Liabilities in Excess of Other Assets--(1.4%) (5,824) ---------- Net Assets--100.0% $ 418,407 ==========
(a)Prerefunded. (b)The interest rate is subject to change periodically based upon prevailing market rates. The interest rate shown is the rate in effect at June 30, 1997. (c)AMBAC Insured. (d)MBIA Insured. (e)FSA Insured. (f)FGIC Insured. (g)Escrowed to maturity. *Not Rated. ++Highest short-term rating issued by Moody's Investors Service, Inc. Ratings of issues shown have not been audited by Deloitte & Touche LLP. See Notes to Financial Statements. Page 51 STATEMENTS OF ASSETS AND LIABILITIES
Limited Insured National Maturity As of June 30, 1997 Portfolio Portfolio Portfolio Assets: Investments, at value* (Note 1a) $2,023,013,288 $1,448,054,588 $ 424,230,840 Cash 341,447 27,022 8,214 Receivables: Interest 33,075,339 24,381,071 5,787,339 Securities sold 790,557 32,781,265 -- Capital shares sold 495,726 2,646,269 150,322 Prepaid registration fees and other assets (Note 1e) 62,244 45,650 35,641 -------------- -------------- -------------- Total assets 2,057,778,601 1,507,935,865 430,212,356 -------------- -------------- -------------- Liabilities: Payables: Securities purchased -- 25,674,754 10,052,250 Capital shares redeemed 2,061,664 1,683,390 1,193,090 Dividends to shareholders (Note 1f) 2,087,176 1,569,055 319,585 Investment adviser (Note 2) 594,019 563,269 113,098 Distributor (Note 2) 352,997 276,962 17,801 Accrued expenses and other liabilities 448,645 281,479 109,734 -------------- -------------- -------------- Total liabilities 5,544,501 30,048,909 11,805,558 -------------- -------------- -------------- Net Assets: Net assets $2,052,234,100 $1,477,886,956 $ 418,406,798 ============== ============== ============== Net Assets Class A Common Stock, $0.10 Consist of: par value++ $ 17,887,640 $ 9,478,498 $ 3,459,447 Class B Common Stock, $0.10 par value++++ 6,953,748 4,001,411 546,268 Class C Common Stock, $0.10 par value++++++ 147,978 270,686 1,085 Class D Common Stock, $0.10 par value++++++++ 476,701 491,440 205,079 Paid-in capital in excess of par 1,918,211,598 1,431,757,690 417,358,735 Accumulated realized capital losses on investments--net (Note 5) (4,046,911) (58,579,321) (4,564,588) Unrealized appreciation on investments--net 112,603,346 90,466,552 1,400,772 -------------- -------------- -------------- Net assets $2,052,234,100 $1,477,886,956 $ 418,406,798 ============== ============== ==============
Page 52 Net Asset Class A: Value: Net assets $1,441,784,905 $ 983,649,868 $ 343,640,605 ============== ============== ============== Shares outstanding 178,876,402 94,784,980 34,594,470 ============== ============== ============== Net asset value and redemption price per share $ 8.06 $ 10.38 $ 9.93 ============== ============== ============== Class B: Net assets $ 560,105,263 $ 415,103,109 $ 54,275,249 ============== ============== ============== Shares outstanding 69,537,481 40,014,114 5,462,680 ============== ============== ============== Net asset value and redemption price per share $ 8.05 $ 10.37 $ 9.94 ============== ============== ============== Class C: Net assets $ 11,922,182 $ 28,095,834 $ 107,551 ============== ============== ============== Shares outstanding 1,479,783 2,706,856 10,849 ============== ============== ============== Net asset value and redemption price per share $ 8.06 $ 10.38 $ 9.91 ============== ============== ============== Class D: Net assets $ 38,421,750 $ 51,038,145 $ 20,383,393 ============== ============== ============== Shares outstanding 4,767,006 4,914,399 2,050,790 ============== ============== ============== Net asset value and redemption price per share $ 8.06 $ 10.39 $ 9.94 ============== ============== ============== *Identified cost $1,910,409,942 $1,357,588,036 $ 422,830,068 ============== ============== ============== ++Authorized shares--Class A 500,000,000 375,000,000 150,000,000 ============== ============== ============== ++++Authorized shares--Class B 375,000,000 375,000,000 150,000,000 ============== ============== ============== ++++++Authorized shares--Class C 375,000,000 375,000,000 150,000,000 ============== ============== ============== ++++++++Authorized shares--Class D 500,000,000 375,000,000 150,000,000 ============== ============== ==============
See Notes to Financial Statements. Page 53 STATEMENTS OF OPERATIONS
Limited Insured National Maturity For the Year Ended June 30, 1997 Portfolio Portfolio Portfolio Investment Interest and amortization of premium Income (Note 1d): and discount earned $ 134,133,814 $ 93,607,495 $ 20,199,235 -------------- -------------- -------------- Expenses: Investment advisory fees (Note 2) 8,042,098 6,961,453 1,552,369 Account maintenance and distribution fees--Class B (Note 2) 4,901,030 3,073,016 222,614 Transfer agent fees--Class A (Note 2) 497,705 353,478 82,086 Transfer agent fees--Class B (Note 2) 275,141 186,850 18,726 Accounting services (Note 2) 249,511 142,298 41,718 Custodian fees 186,028 130,167 43,968 Account maintenance and distribution fees--Class C (Note 2) 134,437 162,696 634 Registration fees (Note 1e) 184,229 94,978 1,102 Account maintenance fees--Class D (Note 2) 116,523 126,564 17,810 Printing and shareholder reports 115,250 66,878 28,907 Professional fees 93,805 67,598 21,232 Pricing services 30,251 27,987 11,936 Directors' fees and expenses 25,803 21,508 5,615 Transfer agent fees--Class D (Note 2) 15,283 18,048 3,561 Transfer agent fees--Class C (Note 2) 7,771 9,161 69 Other 51,012 22,915 5,612 -------------- -------------- -------------- Total expenses 14,925,877 11,465,595 2,057,959 -------------- -------------- -------------- Investment income--net 119,207,937 82,141,900 18,141,276 -------------- -------------- -------------- Realized & Realized gain on investments--net 37,935,579 18,687,317 1,870,059 Unrealized Gain on Change in unrealized appreciation on Investments--Net investments--net 5,465,463 18,217,116 104,267 (Notes 1b, 1d -------------- -------------- -------------- & 3): Net Increase in Net Assets Resulting from Operations $ 162,608,979 $ 119,046,333 $ 20,115,602 ============== ============== ============== See Notes to Financial Statements.
Page 54 STATEMENTS OF CHANGES IN NET ASSETS
Insured Portfolio National Portfolio For the Year For the Year Ended June 30, Ended June 30, Increase (Decrease) in Net Assets: 1997 1996 1997 1996 Operations: Investment income--net $ 119,207,937 $ 131,085,773 $ 82,141,900 $ 83,697,410 Realized gain (loss) on investments--net 37,935,579 (3,897,219) 18,687,317 3,774,748 Change in unrealized appreciation/depreciation on investments--net 5,465,463 3,149,618 18,217,116 10,373,235 -------------- -------------- -------------- -------------- Net increase in net assets resulting from operations 162,608,979 130,338,172 119,046,333 97,845,393 -------------- -------------- -------------- -------------- Dividends & Investment income--net: Distributions to Class A (84,438,105) (92,116,281) (57,401,862) (60,489,070) Shareholders Class B (31,486,251) (36,347,050) (20,879,493) (20,995,504) (Note 1f): Class C (800,743) (626,972) (1,024,766) (462,078) Class D (2,482,838) (1,995,470) (2,835,779) (1,750,758) Realized gain on investments--net: Class A -- -- -- -- Class B -- -- -- -- Class C -- -- -- -- Class D -- -- -- -- -------------- -------------- -------------- -------------- Net decrease in net assets resulting from dividends and distributions to shareholders. (119,207,937) (131,085,773) (82,141,900) (83,697,410) -------------- -------------- -------------- -------------- Capital Share Net increase (decrease) in net Transactions assets derived from capital (Note 4): share transactions (357,799,862) (155,203,186) 916,838 (78,305,357) -------------- -------------- -------------- -------------- Net Assets: Total increase (decrease) in net assets (314,398,820) (155,950,787) 37,821,271 (64,157,374) Beginning of year 2,366,632,920 2,522,583,707 1,440,065,685 1,504,223,059 -------------- -------------- -------------- -------------- End of year $2,052,234,100 $2,366,632,920 $1,477,886,956 $1,440,065,685 ============== ============== ============== ==============
See Notes to Financial Statements. Page 55 STATEMENTS OF CHANGES IN NET ASSETS
Limited Maturity Portfolio For the Year Ended June 30, Increase (Decrease) in Net Assets: 1997 1996 Operations: Investment income--net $ 18,141,276 $ 21,711,132 Realized gain (loss) on investments--net 1,870,059 1,322,566 Change in unrealized appreciation/depreciation on investments--net 104,267 (1,526,762) -------------- -------------- Net increase in net assets resulting from operations 20,115,602 21,506,936 -------------- -------------- Dividends & Investment income--net: Distributions to Class A (15,176,552) (18,019,083) Shareholders Class B (2,274,531) (3,055,609) (Note 1f): Class C (6,456) (25,939) Class D (683,737) (610,501) Realized gain on investments--net: Class A (666,000) -- Class B (108,061) -- Class C (293) -- Class D (28,170) -- -------------- -------------- Net decrease in net assets resulting from dividends and distributions to shareholders. (18,943,800) (21,711,132) -------------- -------------- Capital Share Net increase (decrease) in net Transactions assets derived from capital (Note 4): share transactions (86,916,618) (176,922,554) -------------- -------------- Net Assets: Total increase (decrease) in net assets (85,744,816) (177,126,750) Beginning of year 504,151,614 681,278,364 -------------- -------------- End of year $ 418,406,798 $ 504,151,614 ============== ==============
See Notes to Financial Statements. Page 56 FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived from information Insured Portfolio provided in the financial statements. Class A For the Year Ended June 30, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993 Per Share Net asset value, Operating beginning of year $ 7.91 $ 7.92 $ 7.88 $ 8.64 $ 8.26 Performance: ------------ ------------ ------------ ------------ ------------ Investment income--net .45 .44 .46 .47 .50 Realized and unrealized gain (loss) on investments--net .15 (.01) .18 (.53) .49 ------------ ------------ ------------ ------------ ------------ Total from investment operations .60 .43 .64 (.06) .99 ------------ ------------ ------------ ------------ ------------ Less dividends and distributions: Investment income--net (.45) (.44) (.46) (.47) (.50) Realized gain on investments--net -- -- (.14) (.23) (.11) ------------ ------------ ------------ ------------ ------------ Total dividends and distributions (.45) (.44) (.60) (.70) (.61) ------------ ------------ ------------ ------------ ------------ Net asset value, end of year $ 8.06 $ 7.91 $ 7.92 $ 7.88 $ 8.64 ============ ============ ============ ============ ============ Total Investment Based on net asset Return:* value per share 7.72% 5.51% 8.60% (1.08%) 12.41% ============ ============ ============ ============ ============ Ratios to Average Expenses .44% .43% .43% .42% .42% Net Assets: ============ ============ ============ ============ ============ Investment income--net 5.58% 5.55% 5.78% 5.53% 5.94% ============ ============ ============ ============ ============
Page 57 Supplemental Net assets, end of Data: year (in thousands) $ 1,441,785 $ 1,572,835 $ 1,706,064 $ 1,941,741 $ 2,225,188 ============ ============ ============ ============ ============ Portfolio turnover 74.40% 78.49% 35.61% 28.34% 43.86% ============ ============ ============ ============ ============
The following per share data and ratios have been derived from information Insured Portfolio provided in the financial statements. Class B For the Year Ended June 30, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993 Per Share Net asset value, Operating beginning of year $ 7.91 $ 7.92 $ 7.87 $ 8.63 $ 8.26 Performance: ------------ ------------ ------------ ------------ ------------ Investment income--net .39 .38 .40 .40 .44 Realized and unrealized gain (loss) on investments--net .14 (.01) .19 (.53) .48 ------------ ------------ ------------ ------------ ------------ Total from investment operations .53 .37 .59 (.13) .92 ------------ ------------ ------------ ------------ ------------ Less dividends and distributions: Investment income--net (.39) (.38) (.40) (.40) (.44) Realized gain on investments--net -- -- (.14) (.23) (.11) ------------ ------------ ------------ ------------ ------------ Total dividends and distributions (.39) (.38) (.54) (.63) (.55) ------------ ------------ ------------ ------------ ------------ Net asset value, end of year $ 8.05 $ 7.91 $ 7.92 $ 7.87 $ 8.63 ============ ============ ============ ============ ============ Total Investment Based on net asset Return:* value per share 6.78% 4.71% 7.91% (1.81%) 11.44% ============ ============ ============ ============ ============ Ratios to Average Expenses 1.19% 1.19% 1.19% 1.17% 1.18% Net Assets: ============ ============ ============ ============ ============ Investment income--net 4.82% 4.80% 5.03% 4.78% 5.17% ============ ============ ============ ============ ============ Supplemental Net assets, end of Data: year (in thousands) $ 560,105 $ 723,090 $ 782,748 $ 866,193 $ 911,307
Page 58 ============ ============ ============ ============ ============ Portfolio turnover 74.40% 78.49% 35.61% 28.34% 43.86% ============ ============ ============ ============ ============
*Total investment returns exclude the effects of sales loads. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS (continued)
The following per share data and ratios have been Insured Portfolio derived from information Class C Class D provided in the financial For the Period For the Period statements. For the Year Oct 21, 1994++ For the Year Oct 21, 1994++ Ended June 30, to June 30, Ended June 30, to June 30, Increase (Decrease) in -------------------------------- --------------------------------- Net Asset Value: 1997 1996 1995 1997 1996 1995 Per Share Net asset value, Operating beginning of period $ 7.91 $ 7.92 $ 7.68 $ 7.91 $ 7.92 $ 7.68 Performance: ---------- ---------- ---------- ---------- ---------- ---------- Investment income--net .38 .38 .27 .43 .42 .29 Realized and unrealized gain (loss) on investments--net .15 (.01) .38 .15 (.01) .38 ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations .53 .37 .65 .58 .41 .67 ---------- ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net (.38) (.38) (.27) (.43) (.42) (.29) Realized gain on investments--net -- -- (.14) -- -- (.14) ---------- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (.38) (.38) (.41) (.43) (.42) (.43) ---------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 8.06 $ 7.91 $ 7.92 $ 8.06 $ 7.91 $ 7.92 ========== ========== ========== ========== ========== ========== Total Investment Based on net asset Return:** value per share 6.86% 4.65% 8.83%+++ 7.46% 5.25% 9.24%+++
Page 59 ========== ========== ========== ========== ========== ========== Ratios to Average Expenses 1.25% 1.24% 1.23%* .69% .68% .68%* Net Assets: ========== ========== ========== ========== ========== ========== Investment income--net 4.77% 4.75% 4.93%* 5.33% 5.31% 5.50%* ========== ========== ========== ========== ========== ========== Supplemental Net assets, end of Data: period (in thousands) $ 11,922 $ 18,936 $ 7,756 $ 38,422 $ 51,772 $ 26,015 ========== ========== ========== ========== ========== ========== Portfolio turnover 74.40% 78.49% 35.61% 74.40% 78.49% 35.61% ========== ========== ========== ========== ========== ==========
The following per share data and ratios have been derived from information National Portfolio provided in the financial statements. Class A For the Year Ended June 30, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993 Per Share Net asset value, Operating beginning of year $ 10.11 $ 10.02 $ 10.08 $ 11.02 $ 10.64 Performance: ------------ ------------ ------------ ------------ ------------ Investment income--net .60 .60 .60 .62 .67 Realized and unrealized gain (loss) on investments--net .27 .09 .15 (.64) .57 ------------ ------------ ------------ ------------ ------------ Total from investment operations .87 .69 .75 (.02) 1.24 ------------ ------------ ------------ ------------ ------------ Less dividends and distributions: Investment income--net (.60) (.60) (.60) (.62) (.67) Realized gain on investments--net -- -- (.19) (.30) (.19) In excess of realized gain on investments--net -- -- (.02) -- -- ------------ ------------ ------------ ------------ ------------ Total dividends and distributions (.60) (.60) (.81) (.92) (.86) ------------ ------------ ------------ ------------ ------------ Net asset value, end of year $ 10.38 $ 10.11 $ 10.02 $ 10.08 $ 11.02 ============ ============ ============ ============ ============
Page 60 Total Investment Based on net asset Return:** value per share 8.84% 6.98% 7.89% (.47%) 12.19% ============ ============ ============ ============ ============ Ratios to Average Expenses .55% .56% .56% .55% .55% Net Assets: ============ ============ ============ ============ ============ Investment income--net 5.86% 5.89% 6.01% 5.72% 6.23% ============ ============ ============ ============ ============ Supplemental Net assets, end of Data: year (in thousands) $ 983,650 $ 983,550 $ 1,059,440 $ 1,203,181 $ 1,353,805 ============ ============ ============ ============ ============ Portfolio turnover 99.52% 95.09% 103.65% 73.33% 65.43% ============ ============ ============ ============ ============
The following per share data and ratios have been derived from information National Portfolio provided in the financial statements. Class B For the Year Ended June 30, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993 Per Share Net asset value, Operating beginning of year $ 10.11 $ 10.02 $ 10.07 $ 11.02 $ 10.63 Performance: ------------ ------------ ------------ ------------ ------------ Investment income--net .52 .52 .52 .54 .59 Realized and unrealized gain (loss) on investments--net .26 .09 .16 (.65) .58 ------------ ------------ ------------ ------------ ------------ Total from investment operations .78 .61 .68 (.11) 1.17 ------------ ------------ ------------ ------------ ------------ Less dividends and distributions: Investment income--net (.52) (.52) (.52) (.54) (.59) Realized gain on investments--net -- -- (.19) (.30) (.19) In excess of realized gain on investments--net -- -- (.02) -- -- ------------ ------------ ------------ ------------ ------------ Total dividends and distributions (.52) (.52) (.73) (.84) (.78) ------------ ------------ ------------ ------------ ------------ Net asset value, end of year $ 10.37 $ 0.11 $ 10.02 $ 10.07 $ 11.02 ============ ============ ============ ============ ============
Page 61 Total Investment Based on net asset Return:** value per share 7.92% 6.17% 7.28% (1.39%) 11.45% ============ ============ ============ ============ ============ Ratios to Average Expenses 1.31% 1.32% 1.32% 1.30% 1.31% Net Assets: ============ ============ ============ ============ ============ Investment income--net 5.10% 5.13% 5.25% 4.97% 5.46% ============ ============ ============ ============ ============ Supplemental Net assets, end of Data: year (in thousands) $ 415,103 $ 399,341 $ 419,933 $ 459,169 $ 424,071 ============ ============ ============ ============ ============ Portfolio turnover 99.52% 95.09% 103.65% 73.33% 65.43% ============ ============ ============ ============ ============
The following per share data and ratios have been National Portfolio derived from information Class C Class D provided in the financial For the Period For the Period statements. For the Year Oct 21, 1994++ For the Year Oct 21, 1994++ Ended June 30, to June 30, Ended June 30, to June 30, Increase (Decrease) in -------------------------------- --------------------------------- Net Asset Value: 1997 1996 1995 1997 1996 1995 Per Share Net asset value, Operating beginning of period $ 10.11 $ 10.03 $ 9.85 $ 10.12 $ 10.03 $ 9.85 Performance: ---------- ---------- ---------- ---------- ---------- ---------- Investment income--net .52 .52 .36 .58 .57 .40 Realized and unrealized gain on investments--net .27 .08 .39 .27 .09 .39 ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations .79 .60 .75 .85 .66 .79 ---------- ---------- ---------- ---------- ---------- ---------- Less dividends and distributions: Investment income--net (.52) (.52) (.36) (.58) (.57) (.40) Realized gain on investments--net -- -- (.19) -- -- (.19) In excess of realized gain on investments--net -- -- (.02) -- -- (.02) ---------- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (.52) (.52) (.57) (.58) (.57) (.61) ---------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 10.38 $ 10.11 $ 10.03 $ 10.39 $ 10.12 $ 10.03 ========== ========== ========== ========== ========== ==========
Page 62 Total Investment Based on net asset Return:** value per share 7.97% 6.01% 7.97%+++ 8.57% 6.71% 8.37%+++ ========== ========== ========== ========== ========== ========== Ratios to Average Expenses 1.36% 1.37% 1.37%* .80% .81% .81%* Net Assets: ========== ========== ========== ========== ========== ========== Investment income--net 5.04% 5.08% 5.21%* 5.60% 5.64% 5.78%* ========== ========== ========== ========== ========== ========== Supplemental Net assets, end of Data: period (in thousands) $ 28,096 $ 13,291 $ 5,195 $ 51,038 $ 43,884 $ 19,656 ========== ========== ========== ========== ========== ========== Portfolio turnover 99.52% 95.09% 103.65% 99.52% 95.09% 103.65% ========== ========== ========== ========== ========== ==========
*Annualized. **Total investment returns exclude the effects of sales loads. ++Commencement of Operations +++Aggregate total investment return. See Notes to Financial Statements. FINANCIAL HIGHLIGHTS (concluded)
The following per share data and ratios have been derived from information Limited Maturity Portfolio provided in the financial statements. Class A For the Year Ended June 30, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993 Per Share Net asset value, Operating beginning of year $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.91 Performance: ------------ ----------- ------------ ------------ ------------ Investment income--net .39 .38 .38 .37 .41 Realized and unrealized gain (loss) on investments--net .04 (.01) .05 (.14) .10 ------------ ----------- ------------ ------------ ------------ Total from investment operations .43 .37 .43 .23 .51 ------------ ----------- ------------ ------------ ------------
Page 63 Less dividends and distributions: Investment income--net (.39) (.38) (.38) (.37) (.41) Realized gain on investments--net (.02) -- -- -- -- ------------ ----------- ------------ ------------ ------------ Total dividends and distributions (.41) (.38) (.38) (.37) (.41) ------------ ----------- ------------ ------------ ------------ Net asset value, end of year $ 9.93 $ 9.91 $ 9.92 $ 9.87 $ 10.01 ============ =========== ============ ============ ============ Total Investment Based on net asset Return:** value per share 4.40% 3.75% 4.53% 2.30% 5.28% ============ =========== ============ ============ ============ Ratios to Average Expenses .39% .44% .41% .40% .41% Net Assets: ============ =========== ============ ============ ============ Investment income--net 3.93% 3.83% 3.86% 3.68% 4.13% ============ =========== ============ ============ ============ Supplemental Net assets, end of Data: year (in thousands) $ 343,641 $ 417,097 $ 536,474 $ 790,142 $ 846,736 ============ =========== ============ ============ ============ Portfolio turnover 61.90% 88.32% 37.33% 45.67% 65.43% ============ =========== ============ ============ ============
The following per share data and ratios have been derived from information Limited Maturity Portfolio provided in the financial statements. Class B For the Year Ended June 30, Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993 Per Share Net asset value, Operating beginning of period $ 9.91 $ 9.92 $ 9.87 $ 10.01 $ 9.93 Performance: ------------ ----------- ------------ ------------- ------------ Investment income--net .36 .35 .35 .33 .24 Realized and unrealized gain (loss) on investments--net .05 (.01) .05 (.14) .08 ------------ ----------- ------------ ------------- ------------ Total from investment operations .41 .34 .40 .19 .32 ------------ ----------- ------------ ------------- ------------
Page 64 Less dividends and distributions: Investment income--net (.36) (.35) (.35) (.33) (.24) Realized gain on investments--net (.02) -- -- -- -- ------------ ----------- ------------ ------------- ------------ Total dividends and distributions (.38) (.35) (.35) (.33) (.24) ------------ ----------- ------------ ------------- ------------ Net asset value, end of period $ 9.94 $ 9.91 $ 9.92 $ 9.87 $ 10.01 ============ =========== ============ ============ ============ Total Investment Based on net asset Return:** value per share 4.13% 3.37% 4.14% 1.98% 3.26%+++ ============ =========== ============ ============ ============ Ratios to Average Expenses .75% .80% .78% .76% .76%* Net Assets: ============ =========== ============ ============ ============ Investment income--net 3.58% 3.46% 3.50% 3.33% 3.60%* ============ =========== ============ ============ ============ Supplemental Net assets, end of Data: period (in thousands) $ 54,275 $ 71,075 $ 129,581 $ 145,534 $ 95,179 ============ =========== ============ ============ ============ Portfolio turnover 61.90% 88.32% 37.33% 45.67% 65.43% ============ =========== ============ ============ ============
The following per share data and ratios have been Limited Maturity Portfolio derived from information Class C Class D provided in the financial For the Period For the Period statements. For the Year Oct 21, 1994++ For the Year Oct 21, 1994++ Ended June 30, to June 30, Ended June 30, to June 30, Increase (Decrease) in -------------------------------- ----------------------------------- Net Asset Value: 1997 1996 1995 1997 1996 1995 Per Share Net asset value, Operating beginning of period $ 9.88 $ 9.92 $ 9.83 $ 9.91 $ 9.93 $ 9.83 Performance: ---------- ---------- ---------- ---------- ---------- ---------- Investment income--net .35 .34 .25 .38 .37 .26 Realized and unrealized gain (loss) on investments--net .05 (.04) .09 .05 (.02) .10 ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations .40 .30 .34 .43 .35 .36 ---------- ---------- ---------- ---------- ---------- ----------
Page 65 Less dividends and distributions: Investment income--net (.35) (.34) (.25) (.38) (.37) (.26) Realized gain on investments--net (.02) -- -- (.02) -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (.37) (.34) (.25) (.40) (.37) (.26) ---------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 9.91 $ 9.88 $ 9.92 $ 9.94 $ 9.91 $ 9.93 ========== ========== ========== ========== ========== ========== Total Investment Based on net asset Return:** value per share 4.11% 2.97% 3.52%+++ 4.40% 3.55% 3.73%+++ ========== ========== ========== ========== ========== ========== Ratios to Average Expenses .75% .80% .70%* .48% .54% .53%* Net Assets: ========== ========== ========== ========== ========== ========== Investment income--net 3.57% 3.41% 3.61%* 3.84% 3.71% 3.78%* ========== ========== ========== ========== ========== ========== Supplemental Net assets, end of Data: period (in thousands) $ 108 $ 94 $ 3,965 $ 20,383 $ 15,886 $ 11,258 ========== ========== ========== ========== ========== ========== Portfolio turnover 61.90% 88.32% 37.33% 61.90% 88.32% 37.33% ========== ========== ========== ========== ========== ==========
*Annualized. **Total investment returns exclude the effects of sales loads. ++Commencement of Operations. +++Aggregate total investment return. See Notes to Financial Statements. NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Merrill Lynch Municipal Bond Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. The Fund's Portfolios offer four classes of shares under the Merrill Lynch Select Pricing SM System. Shares of Class A and Class D are sold with a front-end sales Page 66 charge. Shares of Class B and Class C may be subject to a contingent deferred sales charge. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class B, Class C and Class D Shares bear certain expenses related to the account maintenance of such shares, and Class B and Class C Shares also bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to its account maintenance and distribution expenditures. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Insured Portfolio: Where bonds in the Portfolio have not been insured pursuant to policies obtained by the issuer, the Fund has obtained insurance with respect to the payment of interest and principal of each bond. Such insurance is valid as long as the bonds are held by the Fund. All Portfolios: Municipal bonds and money market securities are traded primarily in the over-the-counter markets and are valued at the most recent bid price or yield equivalent as obtained from dealers that make markets in such securities. Positions in futures contracts and options thereon, which are traded on exchanges, are valued at closing prices as of the close of such exchanges. Assets for which market quotations are not readily available are valued at fair value on a consistent basis using methods determined in good faith by the Fund's Board of Directors, including valuations furnished by a pricing service retained by the Fund, which may utilize a matrix system for valuations. The procedures of the pricing service and its valuations are reviewed by the officers of the Fund under the general supervision of the Board of Directors. (b) Derivative financial instruments--The Fund may engage in various portfolio strategies to seek to increase its return by hedging its portfolio against adverse movements in the debt markets. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. * Financial futures contracts--The National and Limited Maturity Portfolios (the "Portfolios") may purchase or sell interest rate futures contracts and options on such futures contracts for the purpose of hedging the market risk on existing securities or the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Portfolios deposit and maintain as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Portfolios agree to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as Page 67 variation margin and are recorded by the Portfolios as unrealized gains or losses. When the contract is closed, the Portfolios record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. (c) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. (d) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Interest income is recognized on the accrual basis. Discounts and market premiums are amortized into interest income. Realized gains and losses on security transactions are determined on the identified cost basis. (e) Prepaid registration fees--Prepaid registration fees are charged to expenses as the related shares are issued. (f) Dividends and distributions--Dividends from net investment income are declared daily and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has entered into an Investment Advisory Agreement with Fund Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also entered into a Distribution Agreement and Distribution Plans with Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of Merrill Lynch Group, Inc. FAM is responsible for the management of the Fund's portfolios and provides the necessary personnel, facilities, equipment and certain other services necessary to the operation of the Fund. For such services, FAM receives at the end of each month a fee with respect to each Portfolio at the annual rates set forth below which are based upon the average daily value of the Fund's net assets. Page 68
Rate of Advisory Fee Aggregate of Average Daily Limited Net Assets of the Three Insured National Maturity Combined Portfolios Portfolio Portfolio Portfolio Not exceeding $250 million .40 % .50 % .40 % In excess of $250 million but not exceeding $400 million .375 .475 .375 In excess of $400 million but not exceeding $550 million .375 .475 .35 In excess of $550 million but not exceeding $1.5 billion .375 .475 .325 In excess of $1.5 billion .35 .475 .325
Pursuant to the distribution plans (the "Distribution Plans") adopted by the Fund in accordance with Rule 12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor ongoing account maintenance and distribution fees. The fees are accrued daily and paid monthly at annual rates based upon the average daily net assets of the shares as follows:
Account Maintenance Fees Distribution Fees Limited Limited Insured National Maturity Insured National Maturity Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Class B .25% .25% .15% .50% .50% .20% Class C .25% .25% .15% .55% .55% .20% Class D .25% .25% .10% -- -- --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account maintenance and distribution services to the Fund. The ongoing account maintenance fee compensates the Distributor and MLPF&S for providing account maintenance services to Class B, Class C and Class D shareholders. The ongoing distribution fee compensates the Distributor and MLPF&S for providing shareholder and distribution-related services to Class B and Class C shareholders. For the year ended June 30, 1997, MLFD earned underwriting discounts and direct commissions and MLPF&S earned dealer concessions on sales of the Fund's Class A and Class D Shares follows: Page 69
Limited Insured National Maturity Portfolio Portfolio Portfolio Class A Shares: MLFD $ 24,532 $ 16,659 $ 1,139 MLPF&S 168,171 149,402 11,295 Class D Shares: MLFD 7,722 11,866 1,634 MLPF&S 69,053 98,975 20,019
For the year ended June 30, 1997, MLPF&S received contingent deferred sales charges of $1,906,615 relating to transactions in Class B Shares, amounting to $979,435, $868,705 and $58,475 in the Insured, National and Limited Maturity Portfolios, respectively, and $17,583, relating to transactions in Class C Shares, amounting to $6,915, $10,273 and $395 in the Insured, National and Limited Maturity Portfolios, respectively, and $358,940 relating to transactions in Class D Shares, amounting to $180,983 and $177,957 in the Insured and National Portfolios, respectively. Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly- owned subsidiary of ML & Co., is the Fund's transfer agent. Accounting services are provided to the Fund by FAM at cost. Certain officers and/or directors of the Fund are officers and/or directors of FAM, PSI, MLFD, MLFDS, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the year ended June 30, 1997 were as follows:
Purchases Sales Insured Portfolio $1,539,869,960 $1,795,948,640 National Portfolio 1,385,982,904 1,395,027,690 Limited Maturity Portfolio 259,616,429 327,912,199
Net realized and unrealized gains (losses) as of June 30, 1997 were as follows: Page 70
Realized Unrealized Insured Portfolio Gains Gains Long-term investments $ 37,935,579 $ 112,603,346 -------------- -------------- Total $ 37,935,579 $ 112,603,346 ============== ============== Realized Unrealized National Portfolio Gains (Losses) Gains Long-term investments $ 22,647,030 $ 90,466,552 Financial futures contracts (3,959,713) -- -------------- -------------- Total $ 18,687,317 $ 90,466,552 ============== ==============
NOTES TO FINANCIAL STATEMENTS (continued)
Realized Unrealized Limited Maturity Portfolio Gains Gains Long-term investments $ 1,870,059 $ 1,388,965 Short-term investments -- 11,807 -------------- -------------- Total $ 1,870,059 $ 1,400,772 ============== ==============
As of June 30, 1997 net unrealized appreciation/depreciation for Federal income tax purposes were as follows:
Gross Gross Net Unrealized Unrealized Unrealized Appreciation Depreciation Appreciation Insured Portfolio $114,126,818 $ (1,772,618) $112,354,200 National Portfolio 92,758,314 (2,333,380) 90,424,934 Limited Maturity Portfolio 1,811,320 (410,548) 1,400,772
The aggregate cost of investments at June 30, 1997 for Federal income tax purposes was $1,910,659,088 for the Insured Portfolio, $1,357,629,654 for the National Portfolio, and $422,830,068 for the Limited Maturity Portfolio. 4. Capital Share Transactions: Net increase (decrease) on net assets derived from capital share Page 71 transactions for years ended June 30, 1997 and June 30, 1996 were $(357,799,862) and $(155,203,186), respectively, for the Insured Portfolio; $916,838 and $(78,305,357), respectively for the National Portfolio and $(86,916,618) and $(176,922,554), respectively, for the Limited Maturity Portfolio. Transactions in capital shares for each class were as follows: Insured Portfolio
Class A Shares for the Year Dollar Ended June 30, 1997 Shares Amount Shares sold 4,575,281 $ 36,693,201 Shares issued to shareholders in reinvestment of dividends 4,476,285 35,809,346 -------------- -------------- Total issued 9,051,566 72,502,547 Shares redeemed (28,976,583) (232,180,607) -------------- -------------- Net decrease (19,925,017) $ (159,678,060) ============== ============== Insured Portfolio Class A Shares for the Year Dollar Ended June 30, 1996 Shares Amount Shares sold 5,469,354 $ 44,001,252 Shares issued to shareholders in reinvestment of dividends 4,986,858 40,042,330 -------------- -------------- Total issued 10,456,212 84,043,582 Shares redeemed (27,028,706) (217,178,396) -------------- -------------- Net decrease (16,572,494) $ (133,134,814) ============== ============== Insured Portfolio Class B Shares for the Year Dollar Ended June 30, 1997 Shares Amount Shares sold 5,729,555 $ 45,791,612 Shares issued to shareholders in reinvestment of dividends 2,004,591 16,028,058 -------------- -------------- Total issued 7,734,146 61,819,670
Page 72 Automatic conversion of shares (654,971) (5,237,060) Shares redeemed (29,004,786) (232,763,104) -------------- -------------- Net decrease (21,925,611) $ (176,180,494) ============== ============== Insured Portfolio
Class B Shares for the Year Dollar Ended June 30, 1996 Shares Amount Shares sold 13,419,351 $ 107,963,983 Shares issued to shareholders in reinvestment of dividends 2,346,122 18,823,418 -------------- -------------- Total issued 15,765,473 126,787,401 Automatic conversion of shares (355,991) (2,835,885) Shares redeemed (22,831,309) (183,110,029) -------------- -------------- Net decrease (7,421,827) $ (59,158,513) ============== ============== Insured Portfolio Class C Shares for the Year Dollar Ended June 30, 1997 Shares Amount Shares issued to shareholders in reinvestment of dividends 65,517 524,081 -------------- -------------- Total issued 808,127 6,478,705 Shares redeemed (1,722,393) (13,923,454) -------------- -------------- Net decrease (914,266) $ (7,444,749) ============== ============== Insured Portfolio Class C Shares for the Year Dollar Ended June 30, 1996 Shares Amount Shares sold 1,893,607 $ 15,225,385 Shares issued to shareholders in reinvestment of dividends 53,775 431,720 -------------- -------------- Total issued 1,947,382 15,657,105 Shares redeemed (532,614) (4,266,135) -------------- --------------
Page 73 Net increase 1,414,768 $ 11,390,970 ============== ============== Insured Portfolio
Class D Shares for the Year Dollar Ended June 30, 1997 Shares Amount Shares sold 12,779,520 $ 101,973,172 Automatic conversion of shares 654,971 5,237,060 Shares issued to shareholders in reinvestment of dividends 147,570 1,180,790 -------------- -------------- Total issued 13,582,061 108,391,022 Shares redeemed (15,359,300) (122,887,581) -------------- -------------- Net decrease (1,777,239) $ (14,496,559) ============== ============== Insured Portfolio Class D Shares for the Year Dollar Ended June 30, 1996 Shares Amount Shares sold 14,968,451 $ 120,849,832 Automatic conversion of shares 355,872 2,835,885 Shares issued to shareholders in reinvestment of dividends 118,797 953,911 -------------- -------------- Total issued 15,443,120 124,639,628 Shares redeemed (12,181,923) (98,940,457) -------------- -------------- Net increase 3,261,197 $ 25,699,171 ============== ============== National Portfolio Class A Shares for the Year Dollar Ended June 30, 1997 Shares Amount Shares sold 7,233,788 $ 74,396,433 Shares issued to shareholders in reinvestment of dividends 2,685,525 27,558,310 -------------- -------------- Total issued 9,919,313 101,954,743 Shares redeemed (12,395,672) (127,128,438) -------------- -------------- Net decrease (2,476,359) $ (25,173,695) ============== ==============
Page 74 National Portfolio
Class A Shares for the Year Dollar Ended June 30, 1996 Shares Amount Shares sold 1,874,548 $ 19,100,358 Shares issued to shareholders in reinvestment of dividends 2,851,242 29,021,298 -------------- -------------- Total issued 4,725,790 48,121,656 Shares redeemed (13,151,450) (133,904,005) -------------- -------------- Net decrease (8,425,660) $ (85,782,349) ============== ============== National Portfolio Class B Shares for the Year Dollar Ended June 30, 1997 Shares Amount Shares sold 11,777,487 $ 121,489,230 Shares issued to shareholders in reinvestment of dividends 975,743 10,006,225 -------------- -------------- Total issued 12,753,230 131,495,455 Automatic conversion of shares (495,542) (5,075,762) Shares redeemed (11,745,518) (120,476,972) -------------- -------------- Net increase 512,170 $ 5,942,721 ============== ============== National Portfolio Class B Shares for the Year Dollar Ended June 30, 1996 Shares Amount Shares sold 6,798,097 $ 69,266,670 Shares issued to shareholders in reinvestment of dividends 964,834 9,817,408 -------------- -------------- Total issued 7,762,931 79,084,078 Automatic conversion of shares (175,462) (1,776,371) Shares redeemed (9,989,397) (101,634,492) -------------- -------------- Net decrease (2,401,928) $ (24,326,785) ============== ==============
National Portfolio Page 75
Class C Shares for the Year Dollar Ended June 30, 1997 Shares Amount Shares sold 2,182,254 $ 22,508,694 Shares issued to shareholders in reinvestment of dividends 56,394 579,121 -------------- -------------- Total issued 2,238,648 23,087,815 Shares redeemed (845,937) (8,691,227) -------------- -------------- Net increase 1,392,711 $ 14,396,588 ============== ============== National Portfolio Class C Shares for the Year Dollar Ended June 30, 1996 Shares Amount Shares sold 1,026,234 $ 10,483,940 Shares issued to shareholders in reinvestment of dividends 22,712 231,247 -------------- -------------- Total issued 1,048,946 10,715,187 Shares redeemed (252,941) (2,580,645) -------------- -------------- Net increase 796,005 $ 8,134,542 ============== ============== National Portfolio Class D Shares for the Year Dollar Ended June 30, 1997 Shares Amount Shares sold 10,536,060 $ 108,053,333 Automatic conversion of shares 495,032 5,075,762 Shares issued to shareholders in reinvestment of dividends 114,893 1,179,969 -------------- -------------- Total issued 11,145,985 114,309,064 Shares redeemed (10,568,675) (108,557,840) -------------- -------------- Net increase 577,310 $ 5,751,224 ============== ==============
NOTES TO FINANCIAL STATEMENTS (concluded) National Portfolio Page 76
Class D Shares for the Year Dollar Ended June 30, 1996 Shares Amount Shares sold 13,624,624 $ 139,439,739 Automatic conversion of shares 175,315 1,776,371 Shares issued to shareholders in reinvestment of dividends 74,448 759,889 -------------- -------------- Total issued 13,874,387 141,975,999 Shares redeemed (11,497,765) (118,306,764) -------------- -------------- Net increase 2,376,622 $ 23,669,235 ============== ============== Limited Maturity Portfolio Class A Shares for the Year Dollar Ended June 30, 1997 Shares Amount Shares sold 2,507,909 $ 24,924,435 Shares issued to shareholders in reinvestment of dividends and distributions 920,017 9,134,741 -------------- -------------- Total issued 3,427,926 34,059,176 Shares redeemed (10,923,304) (108,467,108) -------------- -------------- Net decrease (7,495,378) $ (74,407,932) ============== ============== Limited Maturity Portfolio Class A Shares for the Year Dollar Ended June 30, 1996 Shares Amount Shares sold 2,286,543 $ 22,746,544 Shares issued to shareholders in reinvestment of dividends 1,098,806 10,929,822 -------------- -------------- Total issued 3,385,349 33,676,366 Shares redeemed (15,364,211) (152,811,221) -------------- -------------- Net decrease (11,978,862) $ (119,134,855) ============== ==============
Limited Maturity Portfolio Page 77
Class B Shares for the Year Dollar Ended June 30, 1997 Shares Amount Shares sold 1,746,766 $ 17,337,114 Shares issued to shareholders in reinvestment of dividends and distributions 156,709 1,556,287 -------------- -------------- Total issued 1,903,475 18,893,401 Automatic conversion of shares (11,559) (114,986) Shares redeemed (3,599,880) (35,740,926) -------------- -------------- Net decrease (1,707,964) $ (16,962,511) ============== ============== Limited Maturity Portfolio Class B Shares for the Year Dollar Ended June 30, 1996 Shares Amount Shares sold 1,855,378 $ 18,448,441 Shares issued to shareholders in reinvestment of dividends 196,945 1,959,129 -------------- -------------- Total issued 2,052,323 20,407,570 Automatic conversion of shares (1,991) (19,792) Shares redeemed (7,937,046) (78,947,865) -------------- -------------- Net decrease (5,886,714) $ (58,560,087) ============== ============== Limited Maturity Portfolio Class C Shares for the Year Dollar Ended June 30, 1997 Shares Amount Shares sold 125,730 $ 1,243,007 Shares issued to shareholders in reinvestment of dividends and distributions 526 5,211 -------------- -------------- Total issued 126,256 1,248,218 Shares redeemed (124,926) (1,236,530) -------------- -------------- Net increase 1,330 $ 11,688 ============== ==============
Limited Maturity Portfolio Page 78
Class C Shares for the Year Dollar Ended June 30, 1996 Shares Amount Shares sold 1,035,202 $ 10,296,541 Shares issued to shareholders in reinvestment of dividends 1,535 15,247 -------------- -------------- Total issued 1,036,737 10,311,788 Shares redeemed (1,426,909) (14,189,010) -------------- -------------- Net decrease (390,172) $ (3,877,222) ============== ============== Limited Maturity Portfolio Class D Shares for the Year Dollar Ended June 30, 1997 Shares Amount Shares sold 3,468,693 $ 34,441,741 Automatic conversion of shares 11,555 114,986 Shares issued to shareholders in reinvestment of dividends and distributions 40,524 402,564 -------------- -------------- Total issued 3,520,772 34,959,291 Shares redeemed (3,072,180) (30,517,154) -------------- -------------- Net increase 448,592 $ 4,442,137 ============== ============== Limited Maturity Portfolio Class D Shares for the Year Dollar Ended June 30, 1996 Shares Amount Shares sold 5,319,786 $ 52,931,793 Automatic conversion of shares 1,989 19,792 Shares issued to shareholders in reinvestment of dividends 32,445 322,874 -------------- -------------- Total issued 5,354,220 53,274,459 Shares redeemed (4,886,241) (48,624,849) -------------- -------------- Net increase 467,979 $ 4,649,610 ============== ==============
5. Capital Loss Carryforward: At June 30, 1997, the Fund had a net capital loss carryforward as follows: Approximately $4,620,000 in the Insured Portfolio, of which $1,981,000 expires in 2003 and $2,639,000 expires in 2004; Page 79 approximately $48,141,000 in the National Portfolio, of which $19,665,000 expires in 2003 and $28,476,000 expires in 2004; and approximately $4,658,000 in the Limited Maturity Portfolio, of which $2,590,000 expires in 1998, $22,000 expires in 1999, $25,000 expires in 2002, and $2,021,000 expires in 2003. These amounts will be available to offset like amounts of any future taxable gains. INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, Merrill Lynch Municipal Bond Fund, Inc.: We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of the Insured, National and Limited Maturity Portfolios of Merrill Lynch Municipal Bond Fund, Inc. as of June 30, 1997, the related statements of operations for the year then ended and changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and the financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at June 30, 1997 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of the Insured, National and Limited Maturity Portfolios of Merrill Lynch Municipal Bond Fund, Inc. as of June 30, 1997, the results of their operations, the changes in their net assets, and the financial highlights for the respective stated periods in conformity with generally accepted accounting principles. Deloitte & Touche LLP Princeton, New Jersey August 15, 1997 -----END PRIVACY-ENHANCED MESSAGE-----