<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 21, 1995.
SECURITIES ACT FILE NO. 2-92366
INVESTMENT COMPANY ACT FILE NO. 811-4077
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 12 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 [X]
AMENDMENT NO. 13 [X]
(CHECK APPROPRIATE BOX OR BOXES)
----------------
MERRILL LYNCH FEDERAL SECURITIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD 08536
PLAINSBORO, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH FEDERAL SECURITIES TRUST
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
Counsel for the Fund: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD FUND ASSET
ONE WORLD TRADE CENTER MANAGEMENT, L.P.
NEW YORK, NEW YORK 10048 P.O. BOX 9011
ATTENTION: THOMAS R. SMITH, JR. PRINCETON, NEW JERSEY 08543-9011
----------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF
BENEFICIAL INTEREST UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24f-2
UNDER THE INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR
THE REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON OCTOBER 20, 1995.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT OF MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES SHARES BEING OFFERING PRICE OFFERING REGISTRATION
BEING REGISTERED REGISTERED PER UNIT PRICE(1) FEE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Beneficial Interest
(par value $.10 per share)...... 113,269,709 $9.72 $289,996 $100
- ---------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) The calculation of the maximum aggregate offering price is made pursuant
to Rule 24e-2 under the Investment Company Act of 1940.
(2) The total amount of securities redeemed or repurchased during Registrant's
previous fiscal year was 113,239,874 Shares of Beneficial Interest.
(3) None of the Shares described in (2) above have been used for reduction
pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment Company
Act of 1940 in previous filings during Registrant's current fiscal year.
(4) 113,239,874 of the Shares redeemed during Registrant's previous fiscal
year are being used for the reduction of the registration fee in this
amendment to the Registration Statement.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH FEDERAL SECURITIES TRUST
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------- --------
PART A
<C> <S> <C>
Item 1. Cover Page.............. Cover Page
Item 2. Synopsis................ Not Applicable
Item 3. Condensed Financial
Information............ Financial Highlights
Item 4. General Description of
Registrant............. Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund.. Fee Table; Management of the Fund;
Portfolio Transactions;
Inside Back Cover Page
Item 5A. Management's Discussion
of Fund Performance.... Not Applicable
Item 6. Capital Stock and Other
Securities............. Cover Page; Additional Information
Item 7. Purchase of Securities
Being Offered.......... Cover Page; Fee Table; Merrill Lynch Select
Pricing/SM/ System; Purchase of Shares;
Shareholder Services; Additional
Information; Inside Back Cover Page
Item 8. Redemption or
Repurchase............. Fee Table; Merrill Lynch Select Pricing/SM/
System; Purchase of Shares; Redemption of
Shares
Item 9. Pending Legal
Proceedings............ Not Applicable
PART B
Item 10. Cover Page.............. Cover Page
Item 11. Table of Contents....... Back Cover Page
Item 12. General Information and
History................ Not Applicable
Item 13. Investment Objectives
and Policies........... Investment Objective and Policies
Item 14. Management of the Fund.. Management of the Fund
Item 15. Control Persons and
Principal Holders of
Securities............. Management of the Fund
Item 16. Investment Advisory and
Other Services......... Management of the Fund; Purchase of Shares;
General Information
Item 17. Brokerage Allocation and
Other Services......... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other
Securities............. General Information
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered.......... Purchase of Shares; Redemption of Shares;
Determination of Net Asset Value;
Shareholder Services
Item 20. Tax Status.............. Dividends, Distributions and Taxes
Item 21. Underwriters............ Purchase of Shares
Item 22. Calculation of
Performance Data....... Performance Data
Item 23. Financial Statements.... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
- ----------
DECEMBER 21, 1995
MERRILL LYNCH FEDERAL SECURITIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
---------------
Merrill Lynch Federal Securities Trust (the "Fund") is a mutual fund seeking
a high current return through investments in U.S. Government and Government
agency securities, including Government National Mortgage Association ("GNMA")
mortgage-backed certificates and other mortgage-backed government securities.
The Fund may seek to enhance its return through the use of certain portfolio
strategies involving options and to hedge its portfolio through the use of
options and futures transactions. The Fund will declare dividends daily and pay
them monthly from its net investment income. The Fund's current return consists
of interest, premiums from expired call and put options, any short-term gains
from sales of portfolio securities on exercise of options or otherwise, and any
gains from closing purchase or sale transactions. There can be no assurance
that the investment objective of the Fund will be realized. For more
information on the Fund's investment objective and policies, please see
"Investment Objective and Policies" on page 10.
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM 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. As a
result of the implementation of the Merrill Lynch Select PricingSM System,
Class A shares of the Fund outstanding prior to October 21, 1994, have been
redesignated Class D shares. The Class A shares offered by this Prospectus
differ from the Class A shares offered prior to October 21, 1994, in many
respects, including sales charges, exchange privilege and the classes of
persons to whom such shares are offered. See "Merrill Lynch Select PricingSM
System" on page 4.
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, except that for retirement plans the
minimum initial purchase is $100 and the minimum subsequent purchase is $1.
Merrill Lynch may charge its customers a processing fee (presently $4.85) for
confirming purchases and repurchases. Purchases and redemptions directly
through the Fund's transfer agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares".
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated December 21, 1995 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission and
is available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
---------------
FUND ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ------------------------------- -------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)....... 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 4.00% during the first year,
price or redemption decreasing 1.0% annually
proceeds, whichever thereafter to 0.0% after the 1% for
is lower)............. None(d) fourth year one year None(d)
Exchange Fee........... None None None None
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF AVERAGE
NET ASSETS)(E)
Management Fees(f)..... 0.44% 0.44% 0.44% 0.44%
12b-1 Fees(g):
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....... 0.02% 0.02% 0.02% 0.02%
Shareholder Servicing
Costs(h)............ 0.13% 0.15% 0.16% 0.13%
Other................ 0.05% 0.05% 0.05% 0.05%
---- ---- ---- ----
Total Other 0.20% 0.22% 0.22% 0.20%
Expenses.......... ---- ---- ---- ----
TOTAL FUND OPERATING 0.64% 1.41% 1.47% 0.89%
EXPENSES.............. ==== ==== ==== ====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including certain
retirement plans and certain investment programs. See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D Shares"--
page 23.
(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 25.
2
<PAGE>
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment 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 23.
(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
may not be subject to an initial sales charge will instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year after purchase.
(e) Information for Class B and Class D shares is stated for the fiscal year
ended August 31, 1995 and for Class A and Class C shares for the period
October 21, 1994 (commencement of operations) to August 31, 1995.
(f) See "Management of the Fund--Management and Advisory Arrangements"--page
20.
(g) See "Purchase of Shares--Distribution Plans"--page 29.
(h) See "Management of the Fund--Transfer Agency Services"--page 21.
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
-------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment including the maximum
$40.00 initial sales charge (Class A and
Class D shares only) and assuming (1) the To-
tal Fund Operating Expenses for each class
set forth above, (2) a 5% annual return
throughout the periods and (3) redemption at
the end of the period:
Class A..................................... $46 $60 $74 $117
Class B..................................... $54 $65 $77 $169
Class C..................................... $25 $46 $80 $176
Class D..................................... $49 $67 $87 $145
An investor would pay the following expenses
on the same $1,000 investment assuming no re-
demption at the end of the period:
Class A..................................... $46 $60 $74 $117
Class B..................................... $14 $45 $77 $169
Class C..................................... $15 $46 $80 $176
Class D..................................... $49 $67 $87 $145
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund 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
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF
RETURN AND ACTUAL EXPENSES AND 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 charges permitted under Rules of Fair Practice 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 Fund's transfer
agent are not subject to the processing fee. See "Purchase of Shares" and
"Redemption of Shares".
3
<PAGE>
MERRILL LYNCH SELECT PRICING/SM/ SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM 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 Class C are sold to investors choosing the deferred
sales charge alternatives. The Merrill Lynch Select Pricing SM System is used
by more than 50 mutual funds advised by Merrill Lynch Asset Management, L.P.
("MLAM") or its affiliate, Fund Asset Management, L.P. ("FAM" or the
"Manager"). Funds advised by MLAM or FAM which use the Merrill Lynch Select
Pricing SM System are referred to herein as "MLAM-advised mutual funds".
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the 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 deferred sales charges 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 the Class D shares, are imposed directly against those classes and
not against all assets of the Fund and, accordingly, such charges do not
affect the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each
class of shares are calculated in the same manner at the same time and will
differ only to the extent that account maintenance and distribution fees and
any incremental transfer agency costs relating to a particular class are borne
exclusively by that class. 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 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".
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE/1/ FEE FEE FEATURE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge/2/, /3/
- ---------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.50% B shares convert to D
years, at a rate of 4.0% during shares automatically
the first year, decreasing 1.0% after approximately ten
annually to 0.0% years/4/
- ---------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
- ---------------------------------------------------------------------------------------------
D Maximum 4.00% initial sales
charge/3/ 0.25% No No
- ---------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. Contingent deferred sales charges ("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 and waived for purchases of Class
A shares by certain retirement plans in connection with certain investment
programs. Class A and Class D share purchases of $1,000,000 or more may
not be subject to an initial sales charge but, if the initial sales charge
is waived, will be subject to a 1.0% CDSC for one year. See "Class A" and
"Class D" below.
(4) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans are 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.
Class A:
Class A shares of the Fund incur an initial sales charge when they
are purchased and bear no ongoing distribution or account
maintenance fees. Class A shares of the Fund are offered to a
limited group of investors and also will be issued upon
reinvestment of dividends on outstanding Class A shares of the
Fund. Eligible investors include certain retirement plans and
participants in certain investment programs. In addition, Class A
shares of the Fund will be offered to directors and employees of
Merrill Lynch & Co., Inc. ("ML & Co.") and its subsidiaries (the
term "subsidiaries", when used herein with respect to ML & Co.,
includes FAM, MLAM 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%,
which is reduced for purchases of $25,000 and over and waived for
purchases by certain retirement plans in connection with certain
investment programs. Purchases of $1,000,000 or more may not be
subject to an initial sales charge but if the initial sales charge
is waived, such purchases will be subject to a 1.0% CDSC if the
shares are redeemed within one year after purchase. 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 0.25%, an ongoing distribution fee of 0.50% of the Fund's
average net assets attributable to the Class B shares and a CDSC
if they are redeemed within four years of purchase. Approximately
ten years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, 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. 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
5
<PAGE>
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, and the conversion and holding
periods for certain retirement plans are 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 do not incur a sales charge when they are
purchased, but they are subject to an ongoing account maintenance
fee of 0.25% and an ongoing distribution fee of 0.55% of the
Fund's average net assets attributable to Class C shares. Class C
shares are also subject to a CDSC if they are redeemed within one
year of purchase. Although Class C shares are subject to a 1.0%
CDSC for only one year (as compared to four years for Class B),
Class C shares have no conversion feature and, accordingly, an
investor that purchases Class C shares will be subject to
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 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% 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 purchases will be subject to
a CDSC of 1.0% if the shares are redeemed within one year after
purchase. 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 by retirement plans
in connection with certain investment 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 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 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 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. Class A, Class B,
Class C and Class D share holdings will count toward a right of
6
<PAGE>
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 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 will be converted into Class D
shares of the Fund after a conversion period of approximately eight 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 the most advantageous to have all of 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 of 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".
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements and the independent
auditors' report thereon for the fiscal year ended August 31, 1995, are
included in the Statement of Additional Information. Class A shares of the Fund
outstanding as of October 21, 1994 were redesignated Class D shares on such
date, and the Fund commenced offering shares of a new Class A having different
characteristics. Financial information prior to October 21, 1994 is not
presented for the new Class A or for Class C shares since no shares of those
classes were publicly issued before that date. 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 Company 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.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
----------- ------------------------------------------------- -----------
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
OCTOBER 21, DECEMBER 23, OCTOBER 21,
1994+ TO 1991+ TO 1994+ TO
AUGUST 31, FOR THE YEAR ENDED AUGUST 31, AUGUST 31, AUGUST 31,
----------- ----------------------------------- ------------ -----------
1995++ 1995++ 1994 1993 1992 1995++
----------- ---------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $ 9.16 $ 9.41 $ 10.14 $ 9.92 $ 9.92 $ 9.16
-------- ---------- ---------- ---------- ---------- -------
Investment income--net.. .58 .60 .48 .52 .44 .51
Realized and unrealized
gain (loss) on
investments--net....... .45 .20 (.73) .22 -- .45
-------- ---------- ---------- ---------- ---------- -------
Total from investment
operations............. 1.03 .80 (.25) .74 .44 .96
-------- ---------- ---------- ---------- ---------- -------
Less dividends and dis-
tributions:
Investment income--net.. (.58) (.60) (.48) (.52) (.44) (.51)
Realized gain on invest-
ments--net............. -- -- -- -- -- --
-------- ---------- ---------- ---------- ---------- -------
Total dividends and dis-
tributions............. (.58) (.60) (.48) (.52) (.44) (.51)
-------- ---------- ---------- ---------- ---------- -------
Net asset value, end of
period................. $ 9.61 $ 9.61 $ 9.41 $ 10.14 $ 9.92 $ 9.61
======== ========== ========== ========== ========== =======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share.............. 11.56%# 8.91% (2.55)% 7.80% 4.54%# 10.80%#
======== ========== ========== ========== ========== =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
account maintenance and
distribution fees...... .64%* .66% .58 % .55% .58%* .67%*
-------- ---------- ---------- ---------- ---------- -------
Expenses................ .64%* 1.41% 1.33 % 1.30% 1.33%* 1.47%*
-------- ---------- ---------- ---------- ---------- -------
Investment income--net.. 7.21%* 6.39% 4.90 % 5.27% 6.45%* 6.28%*
-------- ---------- ---------- ---------- ---------- -------
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands).... $223,237 $1,262,985 $1,497,358 $2,151,917 $1,921,893 $15,621
======== ========== ========== ========== ========== =======
Portfolio turnover...... 260.34% 260.34% 322.68 % 224.35% 230.83% 260.34%
======== ========== ========== ========== ========== =======
</TABLE>
- --------
+ Commencement of Operations.
++ Based on average outstanding shares for the period.
# Aggregate total investment return.
* Annualized.
** Total investment returns exclude the effects of sales loads.
8
<PAGE>
<TABLE>
<CAPTION>
CLASS D
- ---------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED AUGUST 31,
- ---------------------------------------------------------------------------------------------------------------------
1995++ 1994 1993 1992 1991 1990 1989 1988 1987 1986
- -------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 9.41 $ 10.14 $ 9.92 $ 9.66 $ 9.28 $ 9.28 $ 9.15 $ 9.27 $ 10.19 $ 9.84
- -------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
.64 .52 .57 .70 .81 .86 .87 .84 .80 .91
.20 (.73) .22 .26 .38 -- .13 (.12) (.56) .70
- -------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
.84 (.21) .79 .96 1.19 .86 1.00 .72 .24 1.61
- -------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(.64) (.52) (.57) (.70) (.81) (.86) (.87) (.84) (.80) (.91)
-- -- -- -- -- -- -- -- (.36) (.35)
- -------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(.64) (.52) (.57) (.70) (.81) (.86) (.87) (.84) (1.16) (1.26)
- -------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 9.61 $ 9.41 $ 10.14 $ 9.92 $ 9.66 $ 9.28 $ 9.28 $ 9.15 $ 9.27 $ 10.19
======== ========== ========== ========== ========== ========== ========== ========== ========== ==========
9.48% (2.06)% 8.35% 10.16% 13.40% 9.61% 11.48% 8.02% 2.83% 17.39%
======== ========== ========== ========== ========== ========== ========== ========== ========== ==========
.64% .58 % .54% .57% .60% .59% .58% .53% .47% .50%
- -------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
.89% .83 % .79% .80% .78% .77% .74% .69% .61% .65%
- -------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
6.91% 5.41 % 5.80% 7.17% 8.62% 9.19% 9.49% 9.18% 8.26% 8.97%
- -------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$976,161 $1,356,979 $1,836,100 $2,048,037 $2,230,619 $2,353,328 $2,751,814 $3,533,843 $5,717,570 $6,663,952
======== ========== ========== ========== ========== ========== ========== ========== ========== ==========
260.34% 322.68 % 224.35% 230.83% 311.04% 324.74% 363.53% 292.68% 205.21% 299.33%
======== ========== ========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
9
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek a high current return through
investments in U.S. Government and Government agency securities, including GNMA
mortgage-backed certificates and other mortgage-backed government securities.
This investment objective 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. The
Fund may seek to enhance its return through the use of certain portfolio
strategies involving options and to hedge its portfolio through the use of
options and futures transactions. The hedging strategies are intended to reduce
volatility in the net asset value of Fund shares. The Fund's portfolio
strategies are not fundamental policies and may be modified by the Trustees of
the Fund without the approval of the Fund's shareholders.
The portfolio securities in which the Fund may invest are marketable
securities issued or guaranteed by the United States Government, by various
agencies of the United States Government and by various instrumentalities which
have been established or sponsored by the United States Government ("U.S.
Government securities"). Certain of these obligations, including U.S. Treasury
bills, notes and bonds and securities of GNMA and the Federal Housing
Administration ("FHA"), are issued or guaranteed by the U.S. Government and
supported by the full faith and credit of the United States. Other U.S.
Government securities are issued or guaranteed by Federal agencies or
government-sponsored enterprises and are not direct obligations of the United
States but involve sponsorship or guarantees by Government agencies or
enterprises. These obligations include securities that are supported by the
right of the issuer to borrow from the Treasury, such as obligations of Federal
Home Loan Banks, and securities that are supported only by the credit of the
instrumentality, such as Federal National Mortgage Association ("FNMA") bonds.
Because the U.S. Government is not obligated to provide support to its
instrumentalities, the Fund will invest in obligations issued by these
instrumentalities where the Fund is satisfied that the credit risk with respect
to the issuers is minimal. In addition, the Fund may invest up to 5% of its
assets in obligations issued or guaranteed by the International Bank for
Reconstruction and Development, an international organization of which the
United States is a member country.
The Fund has authority to invest in all U.S. Government securities. It is
anticipated that under certain circumstances as described below, a significant
portion of its portfolio of U.S. Government securities may consist of GNMA
mortgage-backed certificates ("GNMA Certificates") and other U.S. Government
securities representing ownership interests in mortgage pools. For a
description of GNMA Certificates and other eligible securities representing
interests in mortgage pools, see "GNMA Certificates and Other Mortgage-Backed
Government Securities" below. Determinations as to the types of U.S. Government
securities held by the Fund will be made by the Manager. The Manager's
decisions will be based on, among other factors, the relative yields of the
various types of U.S. Government securities, its assessment of future interest
rate patterns and the desirability of holding U.S. Government securities on
which it may write covered options, as described below.
The Fund is not limited as to the maturities of its portfolio investments and
may take full advantage of the entire range of maturities offered by U.S.
Government securities. The Manager may adjust the average maturity of the
Fund's portfolio from time to time, depending on its assessment of the relative
yields available on securities of different maturities and its assessment of
future interest rate patterns. Thus, at various times the average maturity of
the portfolio may be relatively short (from under one year to five years, for
example) and at other times may be relatively long (over 10 years, for
example).
10
<PAGE>
In as much as the Fund invests in fixed-income securities, it is important to
note that the Fund's net asset value may fall when interest rates rise and rise
when interest rates fall. In general, fixed-income securities with longer
maturities will be subject to greater volatility resulting from interest rate
fluctuations than will fixed-income securities with shorter maturities. In as
much as the Fund invests in mortgage-backed securities, however, it is also
important to note that the Fund's net asset value may also fall when interest
rates fall to the extent the Fund's holdings expose the Fund to prepayment
risk. See "GNMA Certificates and Other Mortgage-Backed Government Securities"
below.
GNMA CERTIFICATES AND OTHER MORTGAGE-BACKED GOVERNMENT SECURITIES
GNMA Certificates are mortgage-backed securities of the modified pass-through
type, which means that both interest and principal payments (including
prepayments) are passed through monthly to the holder of the Certificate. The
National Housing Act provides that the full faith and credit of the United
States is pledged to the timely payment of principal and interest by GNMA of
amounts due on these GNMA Certificates. Each Certificate evidences an interest
in a specific pool of mortgage loans insured by the FHA or the Farmers Home
Administration or guaranteed by the Veterans Administration ("VA"). GNMA is a
wholly-owned corporate instrumentality of the United States within the
Department of Housing and Urban Development.
The average life of GNMA Certificates varies with the maturities of the
underlying mortgage instruments which have maximum maturities of 30 years. The
average life is likely to be substantially less than the original maturity of
the mortgage pools underlying the securities as a result of prepayments or
refinancing of such mortgages. Such prepayments are passed through to the
registered holder with the regular monthly payments of principal and interest.
In addition, GNMA offers a pass-through security backed by adjustable-rate
mortgages. As prepayment rates vary widely, it is not possible to predict
accurately the average life of a particular pool. The actual yield of each GNMA
Certificate is influenced by the prepayment experience of the mortgage pool
underlying the certificate.
In addition to GNMA Certificates, the Fund may invest in mortgage-backed
securities issued by FNMA and by the Federal Home Loan Mortgage Corporation
("FHLMC"). FNMA, a federally-chartered and privately-owned corporation, issues
pass-through securities and certificates representing an interest in a pool of
FNMA pass-through securities which are guaranteed as to payment of principal
and interest by FNMA. FHLMC, a corporate instrumentality of the United States,
issues participation certificates which represent an interest in mortgages from
FHLMC's portfolio and securities representing an interest in a pool of FHLMC
participation certificates. FHLMC guarantees the timely payment of interest and
the ultimate collection of principal. As is the case with GNMA Certificates,
the actual maturity of and realized yield on particular FNMA and FHLMC
mortgage-backed securities will vary based on the prepayment experience of the
underlying pool of mortgages. Securities guaranteed by FNMA and FHLMC are not
backed by the full faith and credit of the United States.
Mortgage-backed U.S. Government securities typically provide a higher
potential for current income than other types of U.S. Government securities;
however, U.S. Treasury bills, notes and bonds typically provide a higher
potential for capital appreciation than mortgage-backed securities.
Payments of principal of and interest on mortgage-backed securities are made
more frequently than are payments on conventional debt securities. In addition,
holders of mortgage-backed securities may receive unscheduled payments of
principal at any time representing prepayments on the underlying mortgage loans
or financial assets. Such prepayments may usually be made by the related
obligor without penalty.
11
<PAGE>
Prepayment rates are affected by changes in prevailing interest rates and
numerous other economic, geographic, social and other factors. Changes in the
rate of prepayments will generally affect the yield to maturity of the
security. Moreover, when the holder of the security attempts to reinvest
prepayments or even the scheduled payments of principal and interest, it may
receive a rate of interest which is higher or lower than the rate on the
mortgage-backed securities originally held. To the extent that mortgage-backed
securities are purchased at a premium, mortgage foreclosures and principal
prepayments may result in a loss to the extent of the premium paid. If such
securities are bought at a discount, both scheduled payments of principal and
unscheduled prepayments will increase current and total returns and will
accelerate the recognition of income which, when distributed to shareholders,
will be taxable as ordinary income.
OPTIONS AND FUTURES PORTFOLIO STRATEGIES
The Fund may seek to increase its return through the use of options on the
underlying securities and may hedge all or a portion of its portfolio
investments against fluctuations in interest rates through the use of options,
interest rate futures and options on interest rate futures. While the Fund's
use of hedging strategies is intended to reduce the volatility of the net asset
value of Fund shares, the Fund's net asset value will fluctuate. The Fund may
only engage in hedging activities from time to time and may not necessarily be
engaging in hedging activities when movements in interest rates occur.
Reference is made to the Statement of Additional Information for further
information concerning these strategies. There can be no assurance that the
Fund's hedging transactions will be effective.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options and Futures Transactions"), the
Manager believes that, because the Fund will write only covered options on
portfolio securities and engage in other options and futures transactions only
for hedging purposes, the options and futures portfolio strategies of the Fund
will not subject the Fund to the risks frequently associated with the
speculative use of options and futures transactions. Tax requirements may limit
the Fund's ability to engage in the hedging transactions and strategies
described below. See "Additional Information--Taxes".
The Fund has undertaken with two state securities authorities that, so long
as its securities are registered for sale in those states, the Fund will not
(i) purchase put or call options on U.S. Government securities or (ii) purchase
or sell interest rate futures contracts or related options if, as a result of
such transactions, the sum of premiums paid for options currently outstanding
which are held by the Fund and margin deposits on the Fund's existing futures
contracts and related options would exceed 5% of the total assets of the Fund.
The Fund has also undertaken to one of such authorities that it will not write
covered put options on U.S. Government securities if as a result it would have
more than 50% of its total assets subject to being invested upon the exercise
of such put options.
The Fund has adopted a policy pursuant to which it will not write any covered
put options on U.S. Government securities if as a result the Fund would then
have more than 50% of its total assets (taken at market value) subject to being
invested upon the exercise of put options. This policy may be amended without
the approval of the Fund's shareholders.
The following is a description of the options and futures transactions in
which the Fund may engage, limitations on the use of such transactions and
risks associated therewith.
12
<PAGE>
Writing Covered Options. The Fund is authorized to write (i.e., sell) covered
call options on the securities in which it may invest and enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund in return for a premium gives another party
a right to buy specified securities owned by the Fund at a specified future
date and price set at the time of contract. The principal reason for writing
call options is to attempt to realize, through the receipt of premiums, a
greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects
a closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase
of an identical option prior to the expiration of the option it has written.
Covered call options serve as a partial hedge against the price of the
underlying security declining.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options, which means that so
long as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other high grade liquid debt securities denominated in
U.S. dollars or non-U.S. currencies with a securities depository with a value
equal to or greater than the exercise price of the underlying securities. By
writing a put, the Fund will be obligated to purchase the underlying security
at a price that may be higher than the market value of that security at the
time of exercise for as long as the option is outstanding. The Fund may engage
in closing transactions in order to terminate put options that it has written.
The Fund will not write put options if the aggregate value of the obligations
underlying the put shall exceed 50% of the Fund's net assets.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not
covered) that may be written by a single investor, whether acting alone or in
concert with others (regardless of whether such options are written on the same
or different exchanges or are held or written on one or more accounts or
through one or more brokers). "Trading limits" are imposed on the maximum
number of contracts that any person may trade on a particular trading day. The
Manager does not believe that these trading and position limits will have any
adverse impact on the portfolio strategies for hedging the Fund's portfolio.
Purchase of Options. The Fund is authorized to purchase put options to hedge
against a decline in the market value of its securities. By buying a put the
Fund has a right to sell the underlying security at the exercise price, thus
limiting the Fund's risk of loss through a decline in the market value of the
security until the put expires. The amount of any appreciation in the value of
the underlying security will be partially offset by the amount of the premium
paid for the put option and any related transaction costs. Prior to its
expiration, a put option may be sold in a closing sale transaction and profit
or loss from the sale will depend on whether the amount received is more or
less than the premium paid for the put option plus the related transaction
costs. A closing sale transaction cancels out the Fund's position as the
purchaser of an option by means of any offsetting sale of an identical option
proper to the expiration of the option it has purchased.
In certain circumstances, the Fund may purchase call options on securities
held in its portfolio or which it intends to purchase and on which it has
written call options.
13
<PAGE>
Options on GNMA Certificates. The following information relates to unique
characteristics of options on GNMA Certificates. Since the remaining principal
balance of GNMA Certificates declines each month as a result of mortgage
payments, the Fund, as a writer of a GNMA call holding GNMA Certificates as
"cover" to satisfy its delivery obligation in the event of exercise, may find
that the GNMA Certificates it holds no longer have a sufficient remaining
principal balance for this purpose. Should this occur, the Fund will purchase
additional GNMA Certificates from the same pool (if obtainable) or other GNMA
Certificates in the cash market in order to maintain its "cover".
A GNMA Certificate held by the Fund to cover an option position in any but
the nearest expiration month may cease to represent cover for the option in the
event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. If this should
occur, the Fund will no longer be covered, and the Fund will either enter into
a closing purchase transaction or replace such Certificate with a certificate
which represents cover. When the Fund closes its position or replaces such
Certificate, it may realize an unanticipated loss and incur transaction costs.
Over-the-Counter Options. The Fund may engage in options transactions on
exchanges and in the over-the-counter markets. Exchange-traded options are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) which, in general, have
standardized strike prices and expiration dates. Over-the-counter options
transactions ("OTC options") are two-party contracts with price and terms
negotiated by the buyer and seller. The Fund will acquire only those OTC
options for which management believes the Fund can receive on each business day
at least two independent bids or offers (one of which will be from an entity
other than a party to the option). The Fund will engage in OTC options only
with member banks of the Federal Reserve System and primary dealers in U.S.
Government securities or their affiliates which have capital of at least $50
million or whose obligations are guaranteed by an entity having capital of at
least $50 million.
The staff of the Securities and Exchange Commission (the "Commission") has
taken the position that purchased OTC options and the assets used as cover for
written OTC options are illiquid securities. Therefore, the Fund has adopted an
investment policy pursuant to which it will not purchase or sell OTC options
(including OTC options on futures contracts) if, as a result of such
transaction, the sum of the market value of OTC options currently outstanding
which are held by the Fund, the market value of the underlying securities
covered by OTC call options currently outstanding which were sold by the Fund
(except as provided below) and the market value of all other assets of the Fund
which are illiquid or are not otherwise readily marketable exceed 10% of the
total assets of the Fund, taken at market value. However, if the OTC option is
sold by the Fund to a primary U.S. Government securities dealer recognized by
the Federal Reserve Bank of New York and the Fund has the unconditional
contractual right to repurchase such OTC option from the dealer at a
predetermined price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the amount by
which the option is "in-the-money" (i.e., current market value of the
underlying security minus the option's strike price). The repurchase price with
the primary dealers is typically a formula price which is generally based on a
multiple of the premium received for the option, plus the amount by which the
option is "in-the-money". This policy is not a fundamental policy of the Fund
and may be amended by the Trustees of the Fund without the approval of the
Fund's shareholders. However, the Fund will not change or modify this policy
prior to the change or modification by the Commission staff of its position.
14
<PAGE>
Interest Rate Futures Contracts. The Fund may purchase and sell interest rate
futures contracts ("futures contracts") as a hedge against adverse changes in
interest rates as described below. A futures contract is an agreement between
two parties which obligates the purchaser of the futures contract to buy and
the seller of a futures contract to sell a specified amount of a commodity,
such as a type of securities contract for a set price on a future date. The
specific securities bought or sold, respectively, at the settlement date, are
not determined until at or near that date. The determination is in accordance
with the rules of the exchange on which the futures contract sale or purchase
was made. With respect to U.S. Government securities, currently there are
futures contracts based on long-term U.S. Treasury bonds, U.S. Treasury notes,
GNMA Certificates and three-month U.S. Treasury bills.
The Fund may sell futures contracts in anticipation of or during an increase
in the general level of interest rates in the U.S. economy. Generally, as
interest rates rise, the market value of the U.S. Government securities held by
the Fund will fall, thus reducing the net asset value of the Fund. As interest
rates rise, however, the value of the Fund's short position in the futures
contract will also tend to increase, thus offsetting all or a portion of the
depreciation in the market value of the Fund's investments that are being
hedged. While the Fund will incur commission expenses in selling and closing
out futures positions, these commissions are generally less than the
transaction expenses which the Fund would have incurred had the Fund sold
portfolio securities in order to reduce its exposure to increases in interest
rates. The Fund also may purchase financial futures contracts in anticipation
of a decline in interest rates when it is not fully invested in the U.S.
Government securities market to gain market exposure that may in part or
entirely offset an increase in the cost of U.S. Government securities it
intends to purchase.
The Manager does not consider purchases of futures contracts to be a
speculative practice under these circumstances. It is anticipated that in a
substantial majority of these transactions, the Fund will purchase such
securities upon termination of the long futures position, whether the long
position is the purchase of a futures contract or the purchase of a call option
or the writing of a put option on a future, but under certain circumstances
(e.g., the Fund experiences a significant amount of redemptions or market
conditions change), a long futures position may be terminated without the
corresponding purchase of securities.
Options on Futures Transactions. The Fund may purchase and write call and put
options on futures contracts in connection with its hedging strategies.
Generally, hedging strategies would be employed under the same market
conditions in which the Fund enters into futures contracts. The Fund may
purchase put options or write call options on futures contracts rather than
selling the underlying futures contract in anticipation of an increase in
interest rates. Similarly, the Fund may purchase call options or write put
options on futures contracts as a substitute for the purchase of such futures
to hedge against the increased cost resulting from a decline in interest rates
of U.S. Government securities which the Fund intends to purchase. In a
substantial majority of transactions in which the Fund purchases call options
or writes put options, the Fund will purchase an equivalent amount of U.S.
Government securities on the termination of the options positions but such
positions may be terminated without corresponding purchases when, in the
judgment of the Manager, changing market conditions warrant.
Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts and movements in the price of the securities that
are the subject of the hedge. If the price of the futures contract moves more
or less than the price of the security, the Fund will experience a gain or loss
which will not be completely offset by movements
15
<PAGE>
of the price of the debt securities that are the subject of the hedge. There is
also a risk of imperfect correlation where the securities underlying futures
contracts have different maturities than the portfolio securities being hedged.
Transactions in options and options on futures contracts involve similar risks.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures or, in the case of over-
the-counter transactions, management believes the Fund can receive on each
business day at least two independent bids or offers. 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 an options or futures transaction.
The inability to close options and futures positions also could have an adverse
impact on the Fund's ability to hedge effectively its portfolio. There is also
the risk of loss by the Fund of margin deposits or collateral in the event of
bankruptcy of a broker with whom the Fund had an open position in an option, a
futures contract or related option.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity exchanges
which limit the amount of fluctuation in a 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 have in the past moved the daily
limit on a number of consecutive trading days.
Reference is made to the Statement of Additional Information concerning
additional risk factors with respect to the Fund's options and futures
strategies.
Restrictions on Use of Futures Transactions. Under regulations of the
Commodity Futures Trading Commission ("CFTC"), the futures trading activity
described herein will not result in the Fund 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 the Fund purchases an interest rate futures contract, or writes a put
option or purchases a call option thereon, an amount of cash and cash
equivalents will be deposited in a segregated account with the Fund's custodian
so that the amounts so segregated, plus the amount of initial and variation
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.
The Fund has obtained an order from the Commission exempting it from certain
provisions of the Investment Company Act in connection with transactions
involving futures contracts and options thereon. For further information
concerning such regulatory relief, see the Statement of Additional Information.
OTHER INVESTMENT PRACTICES
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase U.S. Government securities on a when-issued basis, and it may purchase
or sell U.S. Government securities for delayed delivery. These transactions
occur when securities are purchased or sold by the Fund with payment and
delivery taking
16
<PAGE>
place in the future to secure what is considered an advantageous yield and
price to the Fund at the time of entering into the transaction. The Fund will
maintain a segregated account with its custodian of cash or liquid U.S.
Government obligations in an aggregate amount equal to the amount of its
commitments in connection with such purchase transactions.
Stripped Mortgage-Backed Securities. The Fund may invest in stripped
mortgage-backed securities ("SMBSs") issued by agencies or instrumentalities of
the United States. SMBSs are derivative multiclass mortgage-backed securities.
SMBS arrangements commonly involve two classes of securities that receive
different proportions of the interest and principal distributions on a pool of
mortgage assets. A common variety of SMBS is where one class (the principal-
only or PO class) receives some of the interest and most of the principal from
the underlying assets, while the other class (the interest-only or IO class)
receives most of the interest and the remainder of the principal. In the most
extreme case, the IO class receives all of the interest, while the PO class
receives all of the principal. While the Fund may purchase securities of a PO
class, it is more likely to purchase the securities of an IO class. The yield
to maturity of an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying assets, and a rapid
rate of principal payments in excess of that considered in pricing the
securities will have a material adverse effect on an IO security's yield to
maturity. If the underlying mortgage assets experience greater than anticipated
payments of principal, the Fund may fail to recoup fully its initial investment
in IOs. In addition, there are certain types of IOs which represent the
interest portion of a particular class as opposed to the interest portion of
the entire pool. The sensitivity of this type of IO to interest rate
fluctuations may be increased because of the characteristics of the principal
portion to which they relate. As a result of the above factors, the Fund
generally will purchase IOs only as a component of so-called "synthetic"
securities. This means that purchases of IOs will be matched with certain
purchases of other securities, such as POs, inverse floating rate CMOs or fixed
rate securities; as interest rates fall, presenting a greater risk of
unanticipated prepayments of principal, the negative effect on the Fund because
of its holdings of IOs should be diminished somewhat because of the increased
yield on the inverse floating rate CMOs or the increased appreciation on the
POs or fixed rate securities. IOs and POs are considered by the staff of the
Securities and Exchange Commission to be illiquid securities and, consequently,
the Fund will not invest in IOs or POs in an amount which, taken together with
the Fund's other investments in illiquid securities, exceeds 5% of the Fund's
net assets.
Short Sales. The Fund may from time to time make short sales. These
transactions will involve either short sales of securities retained in the
Fund's portfolio or securities which it has the right to acquire without the
payment of further consideration (a short sale "against the box").
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in
U.S. Government securities pursuant to repurchase agreements or purchase and
sale contracts. Repurchase agreements and purchase and sale contracts may be
entered into only with a member bank of the Federal Reserve System or 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. The Fund may not invest
in repurchase agreements maturing in more than seven days if, as a result, more
than 10% of the Fund's net assets would be invested in illiquid securities,
including such repurchase agreements. In the event of default by the seller
under a repurchase agreement, the Fund may suffer time delays and incur costs
or possible losses in connection with the disposal of the collateral.
17
<PAGE>
Lending of Portfolio Securities. The Fund may lend portfolio securities, with
a value not in excess of 33 1/3% of its total assets, to brokers, dealers and
financial institutions and receive collateral in cash or U.S. Government
securities which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. During the period of
the loan, the Fund receives the income on loaned securities and a loan fee and
thereby increases its yield.
Borrowing of Money. The Fund may not borrow money to purchase portfolio
securities. However, the Fund may borrow from banks as a temporary measure for
extraordinary or emergency purposes or to meet redemptions in amounts not
exceeding 10% (taken at market value) of its total assets and pledge its assets
to secure such borrowings. The Fund will not purchase portfolio securities
while any borrowings are outstanding.
PORTFOLIO TRANSACTIONS
The U.S. Government securities in which the Fund invests are traded primarily
in the over-the-counter market. Where possible, the Fund will deal directly
with the dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. Such
dealers usually are acting as principal for their own account. On occasion,
securities may be purchased directly from the issuer. Such portfolio securities
are generally traded on a net basis and do not normally involve either
brokerage commissions or transfer taxes. Securities firms may receive brokerage
commissions on certain portfolio transactions, including options, futures and
options on futures transactions and the purchase and sale of underlying
securities upon exercise of options. The Fund has no obligation to deal with
any broker in the execution of transactions in portfolio securities. 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 a permissive order allowing such transactions is obtained from the
Commission. Affiliated persons of the Fund may serve as its broker in
transactions conducted on an exchange and in over-the-counter transactions
conducted on an agency basis.
INVESTMENT RESTRICTIONS
In addition to the investment policies described in this section, the Fund's
investment activities are subject to further restrictions that are described in
the Statement of Additional Information. Investment restrictions and policies
which are fundamental policies may not be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities (which for
this purpose and under the Investment Company Act means the lesser of (a) 67%
of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (b) more than 50% of the outstanding
shares). Among its fundamental policies, the Fund may not invest more than 25%
of its total 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).
Investment restrictions and policies that are non-fundamental policies may be
changed by the Board of Trustees without shareholder approval. As a non-
fundamental restriction, the Fund may not borrow amounts in excess of 10% of
its total assets, 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. As a non-fundamental policy, the Fund will not
invest in securities which cannot readily be resold because of legal or
contractual
18
<PAGE>
restrictions or which are not otherwise readily marketable, including
repurchase agreements and purchase and sale contracts maturing in more than
seven days, if, regarding all such securities, more than 15% of its total
assets (or 10% of its total assets as presently required by certain state laws)
taken at market value would be invested in such securities. Notwithstanding the
foregoing, the Fund may purchase without regard to this limitation securities
that are not registered under the Securities Act, but that can be offered and
sold to "qualified institutional buyers" under Rule 144A under the Securities
Act, provided that the Fund's Board of Trustees continuously determines, based
on the trading markets for the specific Rule 144A security, that it is liquid.
PORTFOLIO TURNOVER
The Manager will effect portfolio transactions without regard to holding
period, if, in its judgment, such transactions are advisable in light of a
change in circumstances in general market, economic or financial conditions. As
a result of its investment policies, the Fund may engage in a substantial
number of portfolio transactions. High portfolio turnover involves
correspondingly greater transaction costs in the form of dealer spreads and
brokerage commissions, which are borne directly by the Fund. See "Additional
Information--Taxes" and "Portfolio Transactions and Brokerage" in the Statement
of Additional Information.
MANAGEMENT OF THE FUND
TRUSTEES
The Trustees of the Fund consist of six individuals, five of whom are not
"interested persons" of the Fund as defined in the Investment Company Act. The
Trustees 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.
The Trustees of the Fund are:
Arthur Zeikel*--President of the Manager and MLAM; President and Director
of Princeton Services, Inc. ("Princeton Services"); Executive Vice
President of ML&Co.; Director of the Distributor.
Joe Grills--Member of the Committee of Investment of Employee Benefit
Assets of the Financial Executives Institute ("CIEBA"); Member of CIEBA's
Executive Committee; Member of the Investment Advisory Committee of the
State of New York Common Retirement Fund; Director, Duke Management Company
and LaSalle Street Fund.
Walter Mintz--Special Limited Partner of Cumberland Associates
(investment partnership).
Melvin R. Seiden--President of Silbanc Properties, Ltd. (real estate,
investment and consulting).
Stephen B. Swensrud--Principal of Fernwood Associates (financial
consultants).
Harry Woolf**--Member of the editorial board of Interdisciplinary Science
Reviews; Director, Alex. Brown Mutual Funds, Advanced Technology
Laboratories, Family Health International and SpaceLabs Medical (medical
equipment manufacturing and marketing).
- --------
*Interested person, as defined in the Investment Company Act, of the Fund.
**Mr. Woolf is retiring from the Board of Trustees as of December 31, 1995
pursuant to the Fund's retirement policy.
19
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager acts as the investment adviser for the Fund and provides the Fund
with management services pursuant to an investment management agreement (the
"Management Agreement"). The Manager is owned and controlled by ML&Co., a
financial services holding company and the parent of Merrill Lynch. The Manager
or an affiliate, MLAM, acts as the investment adviser for more than 125
registered investment companies and provides investment advisory advice to
individuals and institutions. As of November 30, 1995, the Manager and MLAM had
a total of approximately $194.2 billion in investment company and other
portfolio assets under management.
Subject to the direction of the Trustees, the Manager is responsible for the
actual management of the Fund's portfolio and constantly reviews the 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 other
administrative services and provides all the office space, facilities,
equipment and necessary personnel for management of the Fund.
As compensation for its services, the Manager receives from the Fund at the
end of each month a fee at the annual rate of 0.50% of the portion of the
Fund's average daily net assets not exceeding $500 million, with a fee
reduction at several breakpoints for net assets in excess of $500 million.
Effective November 1, 1986, the Manager agreed to a further reduction in the
management fee by lowering the net asset level at which the minimum fee rate
would be charged, and effective November 22, 1991, the Management Agreement was
amended to incorporate this reduction in the management fee. For the fiscal
year ended August 31, 1995, the fee paid by the Fund to the Manager was
$11,490,071 (based upon average net assets of approximately $2.6 billion) and
the effective fee rate was .44%. At November 30, 1995, the Fund had net assets
of approximately $2.4 billion. At this asset level, the effective fee rate
under the Management Agreement is .40% of the Fund's average daily net assets,
and the annual management fee would aggregate approximately $9.8 million.
The Management Agreement obligates the Fund to pay certain expenses incurred
in its 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
Fund by the Manager and the Fund reimburses the Manager for its costs in
connection with such services. For the fiscal year ended August 31, 1995, the
reimbursement for such services aggregated $410,006. For the fiscal year ended
August 31, 1995, the ratio of total expenses to average net assets was 1.41%
for the Class B shares and .89% for the Class D shares. For the period
October 21, 1994 (commencement of operations) to August 31, 1995, the
annualized ratio of total expenses to average net assets was .64% for the Class
A shares and 1.47% for the Class C shares.
Gregory Mark Maunz is primarily responsible for the day-to-day management of
the Fund's portfolio. Mr. Maunz is a Vice President of the Fund and has been a
Vice President of the Manager since 1985.
CODE OF ETHICS
The Board of Trustees of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the Investment Company Act which incorporates the Code of
Ethics of the Manager (together, the "Codes").
20
<PAGE>
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 Fund within periods of trading
by the Fund in the same (or equivalent) security (15 or 30 days depending upon
the transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (formerly known as Financial Data
Services, Inc.) (the "Transfer Agent"), which is a wholly-owned 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 Fund pays the Transfer Agent a fee of $11.00 per
Class A or Class D shareholder account and $14.00 per Class B or Class C
shareholder account and is entitled to reimbursement for out-of-pocket expenses
incurred by the Transfer Agent under the Transfer Agency Agreement. For the
fiscal year ended August 31, 1995, the total fee paid by the Fund to the
Transfer Agent pursuant to the Transfer Agency Agreement was $3,516,358. At
November 30, 1995, the Fund had 30,342 Class A shareholder accounts, 77,828
Class B shareholder accounts, 976 Class C shareholder accounts and 60,973 Class
D shareholder accounts. At this level of accounts, the annual fee payable to
the Transfer Agent would aggregate approximately $2,107,721 plus out-of-pocket
expenses.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
both the Manager and Merrill Lynch, acts as the distributor of the shares of
the Fund. Shares of the Fund are offered continuously for sale by the
Distributor and other eligible securities dealers (including Merrill Lynch).
Shares of the Fund may be purchased from securities dealers or by mailing a
purchase order directly to the Transfer Agent. The minimum initial purchase is
$1,000 and the minimum subsequent purchase is $50, except that for retirement
plans the minimum initial purchase is $100 and the minimum subsequent purchase
is $1. Different minimums may apply to purchases through the Merrill Lynch
BlueprintSM Program. See "Purchase of Shares--Merrill Lynch BlueprintSM
Program" in the Statement of Additional Information.
The Fund offers its shares in four classes 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
21
<PAGE>
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 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 (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 as of 15
minutes after the close of business on the New York Stock Exchange, on the day
the orders are placed with the Distributor, provided the orders are received
by the Distributor prior to 30 minutes after the close of business on the New
York Stock Exchange on that day. If the purchase orders are not received prior
to 30 minutes after the close of business on the New York Stock Exchange on
that day, such orders shall be deemed received on the next business day. The
Fund or the Distributor may suspend the continuous offering of the 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 Fund. Neither the
Distributor nor the dealers are permitted to withhold placing orders to
benefit themselves by a price change. Merrill Lynch may charge its customers a
processing fee (presently $4.85) to confirm a sale of shares to such
customers. Purchases directly through the Transfer Agent are not subject to
the processing fee.
The Fund 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 and Class C are sold to investors choosing the deferred sales
charge alternatives. 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 contingent deferred sales charge 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 "Merrill Lynch Select
Pricing SM System" on page 4.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the 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 deferred sales charges and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on Class D shares, are imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges do not affect
the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each
class of shares are calculated in the same manner at the same time and 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".
22
<PAGE>
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 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, which are eligible to sell
shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing SM System.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE/1/ FEE FEE FEATURE
- ---------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge/2/, /3/
- ---------------------------------------------------------------------------------------
B CDSC for periods of 4 years, 0.25% 0.50% B shares convert to D
at a rate of 4.0% during the shares automatically
first year, decreasing 1.0% after approximately ten
annually to 0.0% years/4/
- ---------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.55% No
- ---------------------------------------------------------------------------------------
D Maximum 4.00% initial sales 0.25% No No
charge/3/
- ---------------------------------------------------------------------------------------
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be 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 $25,000 or more and waived for purchases of Class
A shares by certain retirement plans in connection with certain investment
programs. Class A and Class D share purchases of $1,000,000 or more may
not be subject to an initial sales charge but, if the initial sales charge
is waived, will be subject to a 1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans are 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.
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.
23
<PAGE>
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternative is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE AS DISCOUNT TO
AS PERCENTAGE PERCENTAGE* OF SELECTED DEALERS
OF OFFERING THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED THE OFFERING PRICE
- ------------------ ------------- --------------- ------------------
<S> <C> <C> <C>
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
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D share
purchases of $1,000,000 or more and on Class A share purchases by certain
retirement plan investors in connection with certain investment programs. If
the sales charge is waived in connection with a purchase of $1,000,000 or
more, such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Class A share purchases made prior
to October 21, 1994 may be subject to a CDSC if the shares are redeemed
within one year of purchase at the following annual rates: 1.00% on
purchases of $1,000,000 to $2,500,000; 0.75% on purchases of $2,500,001 to
$3,500,000; 0.40% on purchases of $3,500,001 to $5,000,000; and 0.20% on
purchases of more than $5,000,000 in lieu of paying an additional sales
charge. 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. A sales
charge of 0.75% will be charged on purchases of $1,000,000 or more of Class
A or Class D shares by certain 401(k) plans.
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 the 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 "Securities Act").
During the period October 21, 1994 (commencement of operations) to August
31, 1995, the Fund sold 30,530,411 Class A shares for aggregate net proceeds
of $282,054,026. The gross sales charges for the sale of these shares were
$19,143, of which $1,123 was received by the Distributor and $18,020 was
received by Merrill Lynch. During such period, the Distributor received no
CDSCs with respect to the early redemption of Class A shares purchased subject
to front-end sales charge waivers. During the fiscal year ended August 31,
1995, the Fund sold 4,559,726 Class D shares for aggregate net proceeds of
$42,599,935. The gross sales charges for the sale of Class D shares of the
Fund for period were $271,995, of which $23,539 and $248,456 were received by
the Distributor and Merrill Lynch, respectively. During such fiscal year, the
Distributor received CDSCs of approximately $9,578, all of which was paid to
Merrill Lynch, with respect to redemptions within one year after purchase of
Class D shares purchased subject to front-end sales charge waivers.
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. Certain employer sponsored retirement or savings
plans, including eligible 401(k) plans, may purchase Class A shares at net
asset value provided such plans meet the required minimum number of eligible
employees or required amount of assets advised by MLAM or any of its
affiliates. 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
24
<PAGE>
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 and
certain purchases made in connection with the Merrill Lynch Mutual Fund
Adviser program. In addition, Class A shares will be offered at net asset
value to Merrill Lynch & Co., Inc. and its subsidiaries and their directors
and employees and to members of the Boards of MLAM-advised investment
companies, including the Fund. Certain persons who acquired shares of certain
MLAM-advised closed-end funds 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). For example, 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.
who wish to reinvest the net proceeds from a sale of certain of their shares
of common stock of Merrill Lynch Senior Floating Rate Fund, Inc. in shares of
such 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".
Class A and Class D shares are offered at net asset value to certain
employer sponsored retirement or savings plans and to Employee Access
Accounts SM available through employers which provide such plans.
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 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 the net proceeds from a sale of certain
of their shares of common stock of those funds in shares of the Fund.
Additional information concerning these reduced initial sales charges
including information regarding investments by Employer Sponsored Retirement
or Savings Plans is set forth in the Statement of Additional Information.
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 are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% 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
25
<PAGE>
shares, are automatically converted into Class D shares of the 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 0.25% of net assets and Class B shares are
subject to a distribution fee of 0.50% of net assets and Class C shares are
subject to a distribution fee of 0.55% of net assets as discussed below under
"Distribution Plans".
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 the dealer's 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 will convert automatically into Class D shares of the
Fund, 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. The proceeds from the ongoing account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities. Class B shareholders of the Fund exercising the
exchange privilege described under "Shareholder Services--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 as a
result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares which are
redeemed within four years 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 shares derived from reinvestment of
dividends or capital gains distributions. For the fiscal year ended August 31,
1995, the Distributor received CDSCs of $2,992,727 with respect to redemption
of Class B shares, all of which was paid to Merrill Lynch.
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<PAGE>
The following table sets forth rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC AS A
PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------------- -----------------
<S> <C>
0-1..................................................... 4.00%
1-2..................................................... 3.00%
2-3..................................................... 2.00%
3-4..................................................... 1.00%
4 and thereafter........................................ 0.00%
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined 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 four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-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 will be assumed to be made in
the same order as a redemption.
To provide an example, assume an investor purchased 100 shares 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 through dividend reinvestment. If at such time the investor
makes his first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to the CDSC 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 to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase) for shares purchased on or
after October 21, 1994.
In the event that Class B shares are exchanged by certain retirement plans
for Class A shares in connection with a transfer to the Merrill Lynch Mutual
Fund Adviser ("MFA") program, the time period that such Class A shares are held
in the MFA program will be included in determining the holding period of Class
B shares reacquired upon termination of participation in the MFA program. See
"Shareholder Services--Exchange Privilege".
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from Individual Retirement Account ("IRA")
or other retirement plans or following the death or disability (as defined in
the Internal Revenue Code) of a shareholder. The Class B CDSC also is waived on
redemptions of shares by certain eligible 401(a) and eligible 401(k) plans and
in connection with certain group plans placing orders through the Merrill Lynch
BlueprintSM Program. The CDSC is also waived for any Class B shares which are
purchased by an eligible 401(k) or eligible 401(a) plan and are rolled over
into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in
such account at the time of redemption and for any Class B shares that were
acquired and held at the time of redemption in an Employee Access AccountSM
available through employers providing eligible 401(k) plans. The Class B CDSC
also is waived for any Class B shares which are purchased by a Merrill Lynch
rollover IRA that was funded by a rollover from a terminated 401(k) plan
managed by the MLAM Private Portfolio Group and held in such account at the
time of redemption. 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 which are
redeemed within one year after purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto.
27
<PAGE>
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.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined 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.
During the period October 21, 1994 (commencement of operations) to August 31,
1995, the Distributor received CDSCs of $6,138 with respect to redemption of
Class C shares, all of which was paid to Merrill Lynch.
Conversion of Class B Shares to Class D Shares. After approximately ten years
(the "Conversion Period"), Class B shares will be converted automatically into
Class D shares of the Fund. Class D shares are subject to an ongoing account
maintenance fee of 0.25% 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.
28
<PAGE>
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the
CDSC normally imposed on purchases of Class B shares ("Class B Retirement
Plans"). When the first share of any MLAM-advised mutual fund purchased by a
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised mutual
funds held in that Class B Retirement Plan will be converted into Class D
shares of the appropriate funds. Subsequent to such conversion, that Class B
Retirement Plan will be sold Class D shares of the appropriate funds at net
asset value.
The Conversion Period also is modified for retirement plan investors who
participate in the MFA program. While participating in the MFA program, such
investors will hold Class A shares. If these Class A shares were acquired
through exchange of Class B shares (see "Shareholder Services--Exchange
Privilege"), then the holding period for such Class A shares will be "tacked"
to the holding period of the Class B shares originally held for purposes of
calculating the Conversion Period on Class B shares acquired upon termination
of participations in the MFA program.
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, accrued daily and paid monthly, at the annual
rate of 0.25% 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 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 rates of 0.50%
and 0.55%, respectively, 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 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% of average
daily net assets of the Class B shares of the Fund under a
29
<PAGE>
distribution plan previously adopted by the Fund (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 Class B
Distribution Plan, the difference being that the account maintenance and
distribution services have been unbundled.
For the fiscal year ended August 31, 1995, the Fund paid the Distributor
$9,900,024 pursuant to the Class B Distribution Plan (based on average net
assets subject to the Class B Distribution Plan of approximately $1.3 billion),
all of which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class B shares.
For the period October 21, 1994 (commencement of operations) to August 31,
1995, the Fund paid the Distributor $44,545 pursuant to the Class C
Distribution Plan (based on average net assets subject to the Class C
Distribution Plan of approximately $6.5 million), all of which was 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 August 31, 1995, the Fund paid the Distributor $2,666,871 pursuant to the
Class D Distribution Plan (based on average net assets subject to the Class D
Distribution Plan of approximately $1.1 billion), all of which was paid to
Merrill Lynch for providing account maintenance services in connection with
Class D shares.
At November 30, 1995, the net assets of the Fund subject to the Class B
Distribution Plan aggregated approximately $1.2 billion. At this asset level,
the annual fee payable pursuant to the Class B Distribution Plan would
aggregate approximately $9.2 million. At November 30, 1995, the net assets of
the Fund subject to the Class C Distribution Plan aggregated approximately
$17.8 million. At this asset level, the annual fee payable pursuant to the
Class C Distribution Plan would aggregate $142,512. At November 30, 1995, the
net assets of the Fund subject to the Class D Distribution Plan aggregated
approximately $963.3 million. At this asset level, the annual fee payable
pursuant to the Class D Distribution Plan would aggregate approximately $2.4
million.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares 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 Distributor on-related revenues and expenses 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 the fully allocated accrual basis, revenues consist of
the account maintenance fees, 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 processing
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 CDSCs,
and the expenses consist of financial consultant compensation.
As of August 31, 1995, direct cash revenues for the period since commencement
of operations of Class B shares exceeded direct cash expenses by $95,736,955
(7.58% of Class B net assets at that date). As of December 31, 1994, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch with
30
<PAGE>
respect to Class B shares for the period since commencement of operations
exceeded fully allocated accrual revenues for such period by approximately
$243,000 (.02% of Class B net assets at that date). As of August 31, 1994,
direct cash expenses for the period since commencement of operations of Class C
shares exceeded direct cash revenues by $41,212 (.26% of Class C net assets at
that date).
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice 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 and Class C shares
but not the account maintenance fee. The maximum sales charge rule is applied
separately to each class. As applicable to the Fund, 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
(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). 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 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 the
Class B shares and any CDSC 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 payments in excess of the amount payable under the NASD formula
will not be made.
----------------
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 Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund 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 Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not
be used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those
Class B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class
D Shares".
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund 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
31
<PAGE>
redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive on 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 the Fund at such time.
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 written 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
certificates for the shares to be redeemed. Redemption requests should not be
sent to the Fund. A redemption request requires the signature(s) of all persons
in whose name(s) the shares are registered, signed exactly as his (their)
name(s) appear(s) on the Transfer Agent's register or on the certificate, as
the case may be. The signature(s) on the redemption request must be guaranteed
by an "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. 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 Fund may be requested to redeem shares 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 good payment (e.g., cash or
certified check drawn on a United States bank) has been collected for the
purchase of such shares. Normally, this delay will not exceed 10 days.
REPURCHASE
The Fund also will repurchase shares 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 (generally, 4:00 P.M., New York time) on the day
received and is received by the Fund from such dealer not later than 30 minutes
after the close of business on the New York Stock Exchange on the same day.
Dealers have the responsibility of submitting such repurchase requests to the
Fund not later than 30 minutes after the close of business on the New York
Stock Exchange 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 Fund (other than any applicable CDSC).
Securities firms that do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
32
<PAGE>
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently, $4.85) to confirm a repurchase of
shares. Redemptions directly through the Transfer Agent are not subject to the
processing fee. The Fund 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 Fund may redeem shares as set forth above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D 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 Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor. The
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds. The reinstatement privilege is a one-time privilege
and may be exercised by the Class A or Class D shareholder only the first time
such shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Fund. Certain of such services are not available to investors who place
purchase orders for the Fund through the Merrill Lynch BlueprintSM Program.
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 Fund
by calling the telephone number on the cover page hereof or from the
Distributor or Merrill Lynch. Certain of these services are available only to
U.S. investors. Included in the Fund's shareholder 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 gain 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
reinvestments of ordinary income dividends and long-term capital gain
distributions. Shareholders may make additions to their Investment Account at
any time by mailing a check directly to the Transfer Agent. Shareholders may
also 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, without charge,
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
33
<PAGE>
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. Shareholders considering transferring a tax-deferred
retirement account such as an individual retirement account from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if
the firm to which the retirement account is to be transferred will not take
delivery of shares of the Fund, a shareholder must either redeem the shares
(paying any applicable contingent deferred sales charge) so that the cash
proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch
for those shares.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund 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 Securities and Exchange Commission.
Under the Merrill Lynch Select Pricing SM System, Class A shareholders may
exchange Class A shares of the 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.
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 Fund 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
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<PAGE>
the 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" to the holding period of 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 the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange is treated as a sale of the exchanged shares and a
purchase of the acquired shares for Federal income tax purposes. For further
information, see "Shareholder Services--Exchange Privilege" in the Statement of
Additional Information.
The exchange privilege is modified with respect to certain retirement plans
which participate in the MFA program. Such retirement plans may exchange Class
B, Class C or Class D shares that have been held for at least one year for
Class A shares of the same fund on the basis of relative net asset values in
connection with the commencement of participation in the MFA program, i.e., no
CDSC will apply. The one-year holding period does not apply to shares
reacquired through reinvestment of dividends. Upon termination of participation
in the MFA program, Class A shares will be re-exchanged for the class of shares
originally held. For purposes of computing any CDSC that may be payable upon
redemption of Class B or Class C shares so reacquired, or the Conversion Period
for Class B shares so reacquired, the holding period for the Class A shares
will be "tacked" to the holding period for the Class B or Class C shares
originally held. The Fund's exchange privilege also is modified with respect to
purchases of Class A and Class D shares by non-retirement plan investors under
the MFA program. First, the initial allocation of assets is made under the MFA
program. Then, any subsequent exchange under the MFA program of Class A or
Class D shares of a MLAM-advised mutual fund for Class A or Class D shares of
the Fund will be made solely on the basis of the relative net asset values of
the shares being exchanged. Therefore, there will not be a charge for any
difference between the sales charge previously paid on the shares of the other
MLAM-advised mutual fund and the sales charge payable on the shares of the Fund
being acquired in the exchange under the MFA program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically in
full and fractional shares of the Fund at the net asset value per share next
determined on the payable date of such dividends or distributions. A
shareholder may at any time, by written notification or by telephone call (1-
800-MER-FUND) to the Transfer Agent, elect to have subsequent dividends or both
dividends and capital gains
35
<PAGE>
distributions, paid in cash, rather than reinvested, in which event payment
will be mailed on or about the payment date. Cash payments can also be directly
deposited to the shareholder's bank account. No CDSC will be imposed on
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 may elect to receive systematic withdrawal
payments from his Investment Account in the form of payments by check or
through automatic payment by direct deposit to his bank account on either a
monthly or quarterly basis. A Class A or Class D shareholder whose shares are
held within a CMA(R), CBA(R) or Retirement Account may elect to have shares
redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through
the Systematic Redemption Program, subject to certain conditions.
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C or 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. Investors who maintain CMA(R) or CBA(R)
accounts may arrange to have periodic investments made in the Fund in their
CMA(R) or CBA(R) accounts or in certain related accounts in amounts of $100 or
more through the CMA(R) or CBA(R) Automated Investment Program.
PORTFOLIO TRANSACTIONS
The Fund has no obligation to deal with any dealer or group of dealers in the
execution of transactions in portfolio securities of the Fund. The securities
in which the Fund invests are normally purchased directly from the issuer or
from an underwriter or dealer in such securities. Where possible, the Fund
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 in
conducting portfolio transactions, 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 Fund will not necessarily be paying the
lowest spread or commission available. The portfolio securities of the Fund
generally are traded on a net basis and normally do not involve either
brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Fund primarily consists 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 unless such trading is permitted by an
exemptive order issued by the Commission. In addition, the Fund may not
purchase securities for the Fund from any underwriting syndicate of which
Merrill Lynch is a member except pursuant to procedures approved by the
Trustees of the Fund which comply with rules adopted by the Commission.
Affiliated persons of the Fund may serve as its broker in over-the-counter
transactions conducted for the Fund on an agency basis only.
36
<PAGE>
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
yield, for various specified time periods, in advertisements or information
furnished to present or prospective shareholders. Average annual total return
and yield are computed 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 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 by the 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. The Fund may include performance data for all
classes of shares of the Fund in any advertisement or information including
performance data of the Fund.
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
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the effect 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;
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 (such as investors in certain retirement plans) or to reduced sales load
in the case of Class A and Class D shares, the performance data may take into
account the reduced, and not the maximum, sales charges or may not take into
account the CDSC and therefore may reflect greater total return since, due to
the reduced sales charges, a lower amount of expenses may be deducted. 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 $1,000 investment in the Fund at the beginning of each specified
period.
Yield quotations for each class 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 in each class
during the period that were entitled to receive dividends multiplied by the
maximum offering price/net asset value per share of that class on the last day
of the period. The yield for the 30-day period ended August 31, 1995 was 6.53%
for the Class A shares (based on a maximum applicable sales charge of 4.00%),
6.03% for the Class B shares, 5.97% for the Class C shares and 6.29% for the
Class D shares (based on a maximum applicable sales charge of 4.00%).
37
<PAGE>
Total return and yield figures are based on the Fund's historical performance
and are not intended to indicate future performance. The Fund's total return
and yield will vary depending on market conditions, the securities comprising
the Fund's portfolio, the Fund's operating expenses and the amount of realized
and unrealized net capital gains or losses during the period. The value of an
investment in the Fund 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 the Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average or
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, U.S. News & World Report, Business Week,
CDA Investment Technology, Inc., Forbes Magazine, Fortune Magazine or other
industry publications. In addition, from time to time the Fund may include the
Fund's risk adjusted performance ratings assigned by Morningstar Publications,
Inc. in advertising or supplemental sales literature. As with other performance
data, performance comparisons should not be considered representative of the
Fund's relative performance for any future period. In addition, from time to
time the Fund may include its risk-adjusted performance ratings assigned by
Morningstar Publications, Inc. in advertising or supplemental sales literature.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains which it distributes to
Class A, Class B, Class C and Class D shareholders ("shareholders"). The Fund
intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in futures and options) ("capital gain dividends") are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six months or less, however, will be treated as long-
term capital loss to the extent of any capital gain dividends received by the
shareholder. 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).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income or capital gain dividends.
Distributions by the Fund, whether from ordinary income or capital gains,
generally will not be eligible for the dividends received deduction allowed to
corporations under the Code. If the 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.
38
<PAGE>
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 provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, 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 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 investor 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.
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 the sales charge paid to the Fund
reduces any sales charge such shareholder would have owed upon the 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 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.
The Fund may make investments that produce taxable income which is not
matched by a corresponding receipt of cash or an offsetting loss deduction.
Such investments would include obligations that have original issue discount,
accrue negative amortization or are subordinated in the mortgage-backed
securities structure. Such taxable income would be treated as income earned by
the Fund and would be subject to the distribution requirements of the Code.
Because such income may not be matched by a corresponding receipt of cash by
the Fund or an offsetting loss deduction, the Fund may be required to dispose
of other securities to be able to make distributions to shareholders. The Fund
intends to make sufficient and timely distributions to shareholders so as to
qualify for the special tax treatment afforded RICs at all times.
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.
39
<PAGE>
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax. In general, state law does not consider income
derived from mortgage-backed securities to be income attributable to U.S.
Government obligations.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all its net investment income.
Dividends from such net investment income will be declared daily prior to the
determination of net asset value on that day and paid monthly. 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. All net realized long-term capital gains and short-
term capital gains, if any, will be distributed to the Fund's shareholders at
least annually.
The per share dividends and distributions on each class of shares 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" below.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined by
the Manager once daily as of 15 minutes after the close of business on the New
York Stock Exchange (generally, 4:00 P.M., New York time) on each day during
which the New York Stock Exchange is open for trading. The net asset value is
computed by dividing the sum of the value of the securities held by the Fund
plus any cash or other assets (including interest accrued but not yet received)
minus all liabilities (including accrued expenses) by the total number of
shares outstanding at such time rounded to the nearest cent. Expenses,
including the fees payable to the Manager and any account maintenance and/or
distribution fees payable to the Distributor, are accrued daily. The per share
net asset value of Class A shares generally 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 and
higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net
40
<PAGE>
asset value of the two 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.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price as of the close of business on the day the securities are being
valued, or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last available bid
prices obtained from one or more dealers in the over-the-counter market prior
to the time of valuation. Portfolio securities which are traded both in the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market. Other investments, including futures
contracts and related options, are stated at 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 Fund. The Fund employs Merrill Lynch Securities Pricing Service ("MLSPS"),
an affiliate of the Manager, to provide securities prices for the Fund. During
the fiscal year ended August 31, 1995, the Fund made payments of $2,386 to
MLSPS for such service.
ORGANIZATION OF THE FUND
The Fund was organized on July 20, 1984 under the laws of the Commonwealth of
Massachusetts and is a business entity commonly known as a "Massachusetts
business trust." It is a diversified, open-end investment company. The Fund is
authorized to issue an unlimited number of shares of beneficial interest of
different classes, par value $.10 per share. As of the date of this Prospectus,
the shares of the Fund are divided into four classes, designated Class A, Class
B, Class C and Class D shares. All shares represent an interest in the same
assets of the Fund and are identical in all respects except that Class B, Class
C and Class D shares bear certain expenses related to the account maintenance
fee relating to 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 account maintenance and
distribution expenditures, as applicable. See "Purchase of Shares". The Fund
has received an order from the Commission permitting the issuance and sale of
multiple classes of shares of beneficial interest. The Trustees of the Fund may
classify and reclassify the shares of the Fund into additional classes of
shares of beneficial interest at a future date.
The Declaration of Trust does not require that the Fund hold an annual
meeting of shareholders. However, the Fund will be required to call special
meetings of shareholders in accordance with the requirements of the Investment
Company Act to seek approval of new management and advisory arrange-ments, of a
material increase in distribution fees or of a change in the fundamental
policies, objectives or restrictions of the Fund. The Fund also would be
required to hold a special shareholders' meeting to elect new Trustees at such
time as less than a majority of the Trustees holding office have been elected
by shareholders. The Declaration of Trust provides that a shareholders' meeting
may be called for any reason at the request of 10% of the outstanding shares of
the Fund or by a majority of the Trustees.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
41
<PAGE>
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, 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.
----------------
The Declaration of Trust establishing the Fund, dated July 20, 1984, 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 Federal Securities Trust" refers to the Trustees
under the Declaration collectively as Trustees, but not as individuals or
personally; and no Trustee, shareholder, officer, employer or agent of the Fund
shall be held to any personal liability, nor shall resort be had to their
private property for the satisfaction of any obligation or claim of the Fund
but the "Trust Property" only shall be liable.
42
<PAGE>
MERRILL LYNCH FEDERAL SECURITIES TRUST--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)
[_] Class A shares [_] Class B shares [_] Class
C shares [_] Class D shares
of Merrill Lynch Federal Securities Trust 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........................... Name and Address of Employer ........
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owner, a joint tenancy with rights of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
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 Federal Securities 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.
- -------------------------------------------------------------------------------
43
<PAGE>
MERRILL LYNCH FEDERAL SECURITIES TRUST--AUTHORIZATION FORM (PART 1) --
(CONTINUED)
3. SOCIAL SECURITY 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 under "Additional
Information--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)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
Dear Sir/Madam:
..................., 19......
Date of Initial Purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Federal Securities Trust or any other investment company with an initial
sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13 month period which will
equal or exceed:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $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 Federal Securities
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 Federal Securities 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. We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as
- - - our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases made under a Letter of
Intention or Systematic Withdrawal
Plan. We guarantee the shareholder's
signature.
- - -
This form when completed should be .................................
mailed to: Dealer Name and Address
Merrill Lynch Federal Securities Trust By ..............................
Authorized Signature of Dealer
c/o Merrill Lynch Financial Data
Services, Inc. [_][_][_] [_][_][_][_].............
P.O. Box 45289 Branch-Code F/C No. F/C Last Name
Jacksonville, FL 32232-5289
[_][_][_] [_][_][_][_][_]
Dealer's Customer A/C No.
44
<PAGE>
MERRILL LYNCH FEDERAL SECURITIES TRUST--AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL PLAN OR THE
AUTOMATIC INVESTMENT PLAN ONLY.
- -------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
Name of Owner...................... [_][_][_][_][_][_][_][_][_]
Name of Co-Owner (if any).......... Social Security No. or
Taxpayer Identification
Number
Address............................ Account Number ....................
(if existing account)
...................................
- -------------------------------------------------------------------------------
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 Merrill Lynch Federal
Securities Trust, 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 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.
45
<PAGE>
- -------------------------------------------------------------------------------
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 Federal Securities Trust, 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 AUTHORIZATION TO HONOR CHECKS OR ACH
SERVICES, INC. DEBITS DRAWN BY MERRILL LYNCH
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw
checks an ACH debit each month on my To...............................Bank
bank account for investment in (Investor's Bank)
Merrill Lynch Federal Securities
Trust, as indicated below: Bank Address.........................
Amount of each check or ACH debit
City...... State...... Zip Code......
$.................................
As a convenience to me, I hereby
Account Number ................... request and authorize you to pay and
charge to my account ACH debits
drawn on my account by and payable
Please date and invest ACH debits on to Merrill Lynch Financial Data
the 20th of each month beginning 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
................(month) personally by me. This authority is
to remain in effect until revoked by
or as soon as possible thereafter. me in writing. Until you receive
such notice, you shall be fully
I agree that you are drawing these protected in honoring any such
ACH debits voluntarily at my request debit. I further agree that if any
and that you shall not be liable for such debit be dishonored, whether
any loss arising from any delay in with or without cause and whether
preparing or failure to prepare any intentionally or inadvertently, you
such debit. If I change banks or shall be under no liability.
desire to terminate or suspend this
program, I agree to notify you ............ .....................
promptly in writing. I hereby Date Signature of
authorize you to take any action to Depositor
correct erroneous ACH debits of my
bank account or purchases of fund ............ .....................
shares including liquidating shares Bank Signature of Depositor
of the Fund and credit my bank Account (If joint account,
account. I further agree that if a Number both must sign)
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)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
46
<PAGE>
MANAGER
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
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 10286
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMA-
TION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Merrill Lynch Select PricingSM System...................................... 4
Financial Highlights....................................................... 8
Investment Objective and Policies.......................................... 10
GNMA Certificates and Other Mortgage-Backed Government Securities......... 11
Options and Futures Portfolio Strategies.................................. 12
Other Investment Practices................................................ 16
Portfolio Transactions.................................................... 18
Investment Restrictions................................................... 18
Portfolio Turnover........................................................ 19
Management of the Fund..................................................... 19
Trustees.................................................................. 19
Management and Advisory Arrangements...................................... 20
Code of Ethics............................................................ 20
Transfer Agency Services.................................................. 21
Purchase of Shares......................................................... 21
Initial Sales Charge Alternatives--
Class A and Class D Shares.............................................. 23
Deferred Sales Charge Alternatives--
Class B and Class C Shares.............................................. 25
Distribution Plans........................................................ 29
Limitations on the Payment of Deferred
Sales Charges........................................................... 31
Redemption of Shares....................................................... 31
Redemption................................................................ 32
Repurchase................................................................ 32
Reinstatement Privilege--
Class A and Class D Shares.............................................. 33
Shareholder Services....................................................... 33
Investment Account........................................................ 33
Exchange Privilege........................................................ 34
Automatic Reinvestment of Dividends and Distributions..................... 35
Systematic Withdrawal Plans............................................... 36
Automatic Investment Plans................................................ 36
Portfolio Transactions..................................................... 36
Performance Data........................................................... 37
Taxes...................................................................... 38
Additional Information..................................................... 40
Dividends and Distributions............................................... 40
Determination of Net Asset Value.......................................... 40
Organization of the Fund.................................................. 41
Shareholder Inquiries..................................................... 41
Shareholder Reports....................................................... 42
Authorization Form......................................................... 43
</TABLE>
Code #10259-1295
[LOGO] MERRILL LYNCH
MERRILL LYNCH
FEDERAL SECURITIES TRUST
[ART]
PROSPECTUS
DECEMBER 21, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This propsectus should be retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
- -----------------------------------
MERRILL LYNCH FEDERAL SECURITIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Federal Securities Trust (the "Fund") is a mutual fund seeking
a high current return through investments in U.S. Government and Government
agency securities, including Government National Mortgage Association ("GNMA")
mortgage-backed certificates and other mortgage-backed government securities.
The Fund may seek to enhance its return through the use of certain portfolio
strategies involving options and to hedge its portfolio through the use of
options and futures transactions. The Fund will declare dividends daily and pay
them monthly from its net investment income. The Fund's current return consists
of interest, premiums from its expired call and put options, any short-term
gains from sales of portfolio securities on exercise of options or otherwise,
and any gains from closing purchase or sale transactions. There can be no
assurance that the investment objective of the Fund will be realized.
----------------
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM 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, dated December
21, 1995 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling or by
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--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
----------------
The date of this Statement of Additional Information is December 21, 1995
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek a high current return through
investments in U.S. Government and Government agency securities ("U.S.
Government securities"), including GNMA mortgage-backed certificates, and other
mortgage-backed government securities. Reference is made to "Investment
Objective and Policies" in the Prospectus for a discussion of the investment
objective and policies of the Fund.
While the Fund has authority to invest in all U.S. Government securities, it
is anticipated that under certain market conditions, a significant portion of
its portfolio of U.S. Government securities may consist of GNMA mortgage-backed
certificates ("GNMA Certificates") and other U.S. Government securities
representing ownership interests in mortgage pools. The Fund is authorized to
acquire all types of U.S. Government securities representing ownership
interests in mortgage pools which are presently issued or which may be issued
in the future. In this regard, GNMA recently began offering a pass-through
security backed by adjustable-rate mortgages. These securities bear interest at
a rate which is adjusted either quarterly or annually. The prepayment
experience of the mortgages underlying these securities may vary from that for
fixed-rate mortgages. These securities are eligible for purchase by the Fund.
Portfolio Turnover. Fund Asset Management, L.P. (the "Manager" or "FAM" )
will effect portfolio transactions without regard to any holding period if, in
its judgment, such transactions are advisable in light of a change in general
market, economic or financial conditions. For the years ended August 31, 1993,
1994 and 1995, the Fund's portfolio turnover rates were 224.35%, 322.68% and
260.34%, respectively. A high rate of portfolio turnover results in
correspondingly greater transaction costs in the form of dealer spreads and
brokerage commissions which are borne directly by the Fund. The Fund is subject
to the Federal income tax requirement that less than 30% of the Fund's gross
income be derived from gains from the sale or other disposition of securities
held for less than three months. See "Dividends, Distributions and Taxes--
Taxes".
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion concerning options and futures portfolio
strategies under "Investment Objective and Policies" in the Prospectus. Set
forth below is additional information concerning these transactions.
Writing Covered Options. The Fund is authorized to write (i.e., sell) covered
call options on the securities in which it may invest and enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of contract. The principal reason for
writing call options on U.S. Government securities is to attempt to realize,
through the receipt of premiums, a greater return than would be realized on the
securities alone. By writing covered call options, the Fund gives up the
opportunity, while the option is in effect, to profit from any price increase
in the underlying security above the option price. In addition, the Fund's
ability to sell the underlying security will be limited while the option is in
effect unless the Fund effects a closing purchase transaction. A closing
purchase transaction cancels out the Fund's position as the writer of an option
by means of an offsetting purchase of an identical option prior to the
expiration of the option it has written. Covered call options serve as a
particular hedge against the price of the underlying security declining.
2
<PAGE>
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised,
the writer realizes a gain or loss from the sale of the underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options, which means that so
long as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S.
Government securities or other high grade liquid debt securities with a
securities depository with a value equal to or greater than the exercise price
of the underlying securities. By writing a put, the Fund will be obligated to
purchase the underlying security at a price that may be higher than the market
value of that security at the time of exercise for as long as the option is
outstanding. The Fund may engage in closing transactions in order to terminate
put options that it has written.
The Fund may also enter into over-the-counter options transactions ("OTC
options"), which are two-party contracts with prices and terms negotiated
between the buyer and seller. The staff of the Commission has taken the
position that OTC options and the assets used as cover for written OTC options
are illiquid securities.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its portfolio securities. By buying a put, the
Fund has a right to sell the underlying security at the exercise price, thus
limiting the Fund's risk of loss through a decline in the market value of the
security until the put option expires. The amount of any appreciation in the
value of the underlying security will be offset partially by the amount of the
premium paid for the put option and any related transaction costs. Prior to its
expiration, a put option may be sold in a closing sale transaction and profit
or loss from the sale will depend on whether the amount received is more or
less than the premium paid for the put option plus the related transaction
cost. A closing sale transaction cancels out the Fund's position as the
purchaser of an option by means of an offsetting sale of an identical option
prior to the expiration of the option it has purchased. In certain
circumstances, the Fund may purchase call options on securities held in its
portfolio on which it has written call options. The Fund may purchase either
exchange-traded options or OTC options.
Interest Rate Futures Contracts. A futures contract is an agreement between
two parties to buy and sell a security. A majority of transactions in 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.
The purchase or sale of a 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 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 futures contract fluctuates, making the long and
short positions in the futures contract more or less valuable, a
3
<PAGE>
process known as "mark to the market". At any time 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 broker, and the purchaser realizes a
loss or gain. In addition, a nominal commission is paid on each completed sale
transaction.
Call Options on Futures Contracts. The purchase of a call option on a 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 upon which it is based, or upon the price of the underlying debt
securities, it may or may not be less risky than ownership of the futures
contract or underlying debt securities. Like the purchase of a futures
contract, the Fund will purchase a call option on a futures contract to hedge
against a market advance when the Fund is not fully invested.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is below
the exercise price, the Fund will retain the full amount of the option premium
which provides a partial hedge against any decline that may have occurred in
the Fund's portfolio holdings.
Put Options on Futures Contracts. The purchase of put options on a futures
contract is analogous to the purchase of protective put options on portfolio
securities. The Fund will purchase a put option on a futures contract to hedge
the Fund's portfolio against the risk of rising interest rates.
The writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the securities which are deliverable upon exercise
of the futures contract. If the futures price at expiration is higher than the
exercise price, the Fund will retain the full amount of the option premium
which provides a partial hedge against any increase in the price of U.S.
Government securities which the Fund intends to purchase.
The writer of an option on a futures contract is required to deposit initial
and variation margin pursuant to requirements similar to those applicable to
futures contracts. Premiums received from the writing of an option will be
included in initial margin. The writing of an option on a futures contract
involves risks similar to those relating to futures contracts.
----------------
The Fund has obtained an order from the Securities and Exchange Commission
(the "Commission") exempting it from the provisions of Section 17(f) and
Section 18(f) of the Investment Company Act of 1940 as amended (the "Investment
Company Act") in connection with its strategy of investing in interest rate
futures and related options. 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 Fund and commodities brokers with respect to initial
and variation margin. Section 18(f) prohibits an open-end investment company
such as the Fund from issuing a "senior security" other than a borrowing from a
bank. The staff of the Commission has in the past indicated that a futures
contract may be a "senior security" under the Investment Company Act.
Risk Factors in Options and Futures Transactions. Utilization of options and
futures transactions involves the risk of imperfect correlation in movements in
the prices of options and futures and movements
4
<PAGE>
in the prices of the U.S. Government securities which are the subject of the
hedge. If the prices of the options and futures move more or less than the
prices of the hedged securities, the Fund will experience a gain or loss which
will not be completely offset by movements in the prices of the securities
which are the subject of the hedge. The successful use of options and futures
transactions also depends on the Manager's ability to predict correctly price
movements in the U.S. Government securities market.
Prior to exercise or expiration, an exchange-traded option or futures
position can only be terminated by entering into a closing purchase or sale
transaction. This requires a secondary market on an exchange for call or put
options of the same series. The Fund will enter into options or futures
transactions on an exchange only if there appears to be a liquid secondary
market for such options or futures. However, there can be no assurance that a
liquid secondary market will exist for any particular call or put option or
futures contract at any specific time. Thus, it may not be possible to close an
option or futures position. The Fund will acquire only OTC options for which
management believes the Fund can receive on each business day at least two
independent bids or offers. In the case of a futures position or an option on a
futures position written by the Fund in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation
margin. In such situations, 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. In addition, the Fund may be required
to take or make delivery of the security underlying futures contracts it holds.
The inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively hedge its portfolio. There is also
the risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option. The risk of loss from investing in futures transactions is
theoretically unlimited.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security (whether or not covered) which may
be written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). "Trading limits" are imposed on the maximum number of contracts which
any person may trade on a particular trading day. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Manager does not believe that these
trading and positions limits will have any adverse impact on the portfolio
strategies for hedging the Fund's portfolio.
OTHER PORTFOLIO STRATEGIES
Lending of Portfolio Securities. In order to generate additional income, the
Fund may from time to time lend securities from its portfolio to brokers,
dealers and financial institutions such as banks and trust companies and
receive collateral in cash or U.S. Government securities which will be
maintained in an amount equal to at least 100% of the current market value of
the loaned securities. Cash collateral will be invested in short-term
securities, which will increase the current income of the Fund. Such loans will
not be for more than 60 days and will be terminable at any time. The Fund will
have the right to regain record ownership of loaned securities to exercise
beneficial rights such as rights to interest or other distributions. The Fund
may pay reasonable fees to persons unaffiliated with the Fund for services in
arranging such loans. With respect to lending of portfolio securities, there is
the risk of failure by the borrower to return the securities involved in such
transactions, in which event the Fund may incur a loss.
5
<PAGE>
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest
in securities pursuant to repurchase agreements or purchase and sale
contracts. Repurchase agreements and purchase and sale contracts may be
entered into only with a member bank of the Federal Reserve System or a
primary dealer in U.S. Government securities 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
the case of repurchase agreements, the prices at which the trades are
conducted do not reflect accrued interest on the underlying obligation;
whereas, in the case of purchase and sale contracts, the prices take into
account accrued interest. Such agreements usually cover short periods, such as
under one week. Repurchase agreements may be construed to be collateralized
loans by the purchaser to the seller secured by the securities transferred to
the purchaser. In the case of a repurchase agreement, the 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; the Fund does not have the right to seek additional
collateral in the case of purchase and sale contracts. In the event of a
default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with the disposition of the collateral. A purchase and
sale contract differs from a repurchase agreement in that the contract
arrangements stipulate that the securities are owned by the Fund. In the event
of a default under such a repurchase agreement or under a purchase and sale
contract, instead of the contractual fixed rate of return, the rate of return
to the Fund shall be dependent upon intervening fluctuations of the market
value of such security and the accrued interest on the security. In such
event, the 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.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental investment
policies and restrictions. The fundamental policies and restrictions set forth
below may not be changed without the approval of the holders of a majority of
the Fund's outstanding voting securities (which for this purpose means the
lesser of (a) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (b) more than 50%of the
outstanding shares). Unless otherwise provided, all references to the assets
of the fund below are in terms of current market value. The Fund may not:
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, 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.
6
<PAGE>
5. 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 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) 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) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) 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. Underwriter securities of other issuers except insofar as 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 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.
Under the non-fundamental investment restrictions, the 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. 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 Trustees of the Fund has otherwise determined
to be liquid pursuant to applicable law. Notwithstanding the 15% limitation
herein, to the extent the laws of any state in which the Fund's shares are
registered or qualified for sale require a lower limitation, the Fund will
observe such limitation. As of the date hereof, therefore, the Fund will
not invest more than 10% of its total assets in securities which are
subject to this investment restriction (c). Securities purchased in
accordance with Rule 144A under the Securities Act (each a "Rule 144A
security") and determined to be liquid by the Fund's Board of Trustees are
not subject to the limitations set forth in this investment restriction
(c). Notwithstanding the fact that the
7
<PAGE>
Board may determine that a Rule 144A security is liquid and not subject to
limitations set forth in this investment restriction (c), the State of Ohio
does not recognize Rule 144A securities as securities that are free or
restrictions as to resale. To the extent required by Ohio law, the Fund
will not invest more than 50% of its total assets in securities of issuers
that are restricted as to disposition, including Rule 144A securities or in
securities of issuers described in (e) below.
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
the Fund's net assets; included within such limitation, but not to exceed
2% of the Fund's net assets, are warrants which are not listed on the New
York Stock Exchange or American Stock Exchange or a major foreign exchange.
For purposes of this restriction, warrants acquired by the 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 the 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 Fund, 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 the 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 Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental investment restriction (7) above, borrow
money or pledge its assets except that the Fund may borrow from a bank as a
temporary measure for extraordinary or emergency purposes or to meet
redemptions in amounts not exceeding 10% (taken at the market value) of its
total assets and pledge its assets to secure such borrowings. (For the
purpose of this restriction, collateral arrangements with respect to the
writing of options, interest rate futures contracts, options on interest
rate futures contracts, and collateral arrangements with respect to initial
and variation margin are not deemed to be a pledge of assets and neither
such arrangements nor the purchase or sale of futures or related options
are deemed to be the issuance of a senior security.)
The Fund has undertaken with certain state securities authorities that, so
long as its securities are registered for sale in those states, the Fund will
not (i) purchase put or call options on U.S. Government securities or (ii)
purchase or sell interest rate futures contracts or related options if, as a
result of such transaction, the sum of premiums paid for options currently
outstanding which are held by the Fund and margin deposits on the Fund's
existing futures contracts and related options would exceed 5% of the total
assets of the Fund. The Fund has also undertaken to one of such authorities
that it will not write covered put options on U.S. Government securities if as
a result it would have more than 50% of its total assets subject to being
invested upon the exercise of such put options.
8
<PAGE>
The staff of the Commission has taken the position that purchased over-the-
counter ("OTC") options and the assets used as cover for written OTC options
are illiquid securities to the extent set forth under "Investment Objective and
Policies--Options and Futures Portfolio Strategies" in the Prospectus.
Because of the affiliation of the Manager with the Fund, the Fund is
prohibited from engaging in certain transactions involving the Manager's
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
or its affiliates except for brokerage transactions permitted under the
Investment Company Act involving only usual and customary commissions or
transactions pursuant to an exemptive order under the Investment Company Act.
See "Portfolio Transactions and Brokerage". Without such an exemptive order,
the Fund is prohibited from engaging in portfolio transactions with Merrill
Lynch or its affiliates acting as principal and from purchasing securities in
public offerings which are not registered under the Securities Act of 1933 in
which such firm or any of its affiliates participate as an underwriter or
dealer.
The Trustees have established the policy that the Fund will not purchase or
retain the securities of any issuer, if those individual officers, directors
and Trustees of the Fund, Merrill Lynch Asset Management, L.P. ("MLAM") or any
affiliate thereof each owning beneficially more than one-half of 1% of the
securities of such issuer own in the aggregate more than 5% of the securities
of such issuer. Portfolio securities of the Fund may not be purchased from,
sold or loaned to the Manager or its affiliates or any of their directors,
general partners, officers or employees, acting as principal.
The Fund has adopted a policy pursuant to which it will not write any covered
put options on U.S. Government securities if as a result the Fund would then
have more than 50% of its total assets (taken at market value) subject to being
invested upon the exercise of put options. This policy may be amended without
the approval of the Fund's shareholders.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Trustees 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 executive officer and Trustee is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel(63)--President and Trustee(1)(2)--President of the Manager
(which term as used herein includes its corporate predecessors) since 1977;
President of MLAM (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; Executive Vice President of Merrill Lynch from
1990 to 1995 and Senior Vice President thereof from 1985 to 1990; and Director
of Merrill Lynch Funds Distributor, Inc. (the "Distributor").
Joe Grills(60)--Trustee(2)--183 Soundview Lane, New Canaan, Connecticut
06840. Member of the Committee of Investment of Employee Benefit Assets of the
Financial Executives Institute ("CIEBA") since 1986; member of CIEBA's
Executive Committee since 1988 and its Chairman from 1991 to 1992; Assistant
Treasurer of International Business Machines Incorporated ("IBM") and Chief
Investment Officer of IBM
9
<PAGE>
Retirement Funds from 1986 until 1993; Member of the Investment Advisory
Committee of the State of New York Common Retirement Fund; Director, Duke
Management Company and LaSalle Street Fund.
Walter Mintz(66)--Trustee(2)--1114 Avenue of the Americas, New York, New York
10036. Special Limited Partner of Cumberland Associates (investment
partnership) since 1982.
Melvin R. Seiden(64)--Trustee(2)--780 Third Avenue, Suite 2502, New York, New
York 10017. President of Silbanc Properties, Ltd. (real estate, investment and
consulting) since 1987; Chairman and President of Seiden & de Cuevas, Inc.
(private investment firm) from 1964 to 1987.
Stephen B. Swensrud(62)--Trustee(2)--24 Federal Street, Boston, Massachusetts
02110. Principal of Fernwood Associates (financial consultants).
Harry Woolf(72)--Trustee(2)(3)--The Institute for Advanced Study, Olden Lane,
Princeton, New Jersey 08540. Member of the editorial board of Interdisciplinary
Science Reviews; Director, Alex. Brown Mutual Funds, Advanced Technology
Laboratories, Family Health International and SpaceLabs Medical (medical
equipment manufacturing and marketing).
Terry K. Glenn(55)--Executive Vice President(1)(2)--Executive Vice President
of the Manager and MLAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President of the Distributor since 1986 and
Director thereof since 1991; Director of Financial Data Services, Inc. since
1985.
Jeffrey B. Hewson(44)--Vice President(1)(2)--Vice President of MLAM since
1989 and Portfolio Manager of the Manager since 1985; Senior Consultant, Price
Waterhouse from 1981 to 1985.
Gregory Mark Maunz(43)--Vice President(1)(2)--Vice President of MLAM since
1985 and Portfolio Manager since 1984.
Donald C. Burke(35)--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(46)--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; Vice President and Treasurer of the Distributor
since 1981 and 1984, respectively.
Michael J. Hennewinkel(43)--Secretary(1)(2)--Vice President of MLAM since
1985.
- --------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Trustee or officer is a director, officer or member of the advisory
board of one or more investment companies for which the Manager or MLAM
acts as investment adviser or manager.
(3) Mr. Woolf is retiring from the Board of Trustees as of December 31, 1995
pursuant to the Fund's retirement policy.
As of November 30, 1995, the officers and Trustees of the Fund as a group (12
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 the Fund.
The Fund pays each Trustee not affiliated with the Manager a fee of $4,000
per year plus $1,000 per board meeting attended together with such Trustee's
actual out-of-pocket expenses relating to attendance at board meetings, and
each member of its Audit Committee, which consists of all of the non-affiliated
Trustees, $4,000 per year plus $750 per meeting attended. Fees and expenses
paid to the unaffiliated Trustees aggregated $35,336 for the fiscal year ended
August 31, 1995.
10
<PAGE>
The following table sets forth for the fiscal year ended August 31, 1995
compensation paid by the Fund to the non-interested Trustees and for the
calendar year ended December 31, 1994, the aggregate compensation paid by all
investment companies (including the Fund) advised by the Manager and its
affiliate, MLAM ("MLAM/FAM-Advised Funds") to the non-interested Trustees:
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT AGGREGATE
BENEFITS COMPENSATION
ACCRUED FROM FUND AND
COMPENSATION AS PART OF MLAM/FAM-ADVISED
FROM THE FUND FUNDS PAID TO
TRUSTEE FUND EXPENSE TRUSTEE/DIRECTOR(a)
- ------- ------------ ---------- -------------------
<S> <C> <C> <C>
Joe Grills.......................... $15,500 None $156,150
Walter Mintz........................ 15,500 None 156,150
Melvin R. Seiden.................... 15,500 None 156,150
Stephen B. Swensrud................. 15,500 None 164,150
Harry Woolf......................... 15,500 None 156,150
</TABLE>
- --------
(1) In addition to the Fund, the Trustees serve on the boards of other
MLAM/FAM-Advised Funds as follows: Joe Grills (36 funds and portfolios),
Walter Mintz (36 funds and portfolios), Melvin R. Seiden (36 funds and
portfolios), Stephen B. Swensrud (46 funds and portfolios), and Harry Woolf
(36 funds and portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by other funds or investment
advisory clients for which the Manager or MLAM acts as an adviser. Securities
may be held by, or be appropriate investments for, the Fund as well as other
clients of the Manager or MLAM. 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 purchases or sales of
securities for the Fund or other funds for which they act 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 Manager 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.
11
<PAGE>
The Fund has entered into an investment management agreement (the "Management
Agreement") with the Manager. Under the Management Agreement, the Manager
receives from the Fund at the end of each month a fee at the following annual
rates:
<TABLE>
<S> <C>
MANAGEMENT
FEE
----------
Portion of average daily value of net assets:
Not exceeding $500 million.................................... 0.500%
$500 million to $1 billion.................................... 0.475%
$1 billion to $1.5 billion.................................... 0.450%
$1.5 billion to $2 billion.................................... 0.425%
$2 billion to $2.5 billion.................................... 0.400%
$2.5 billion to $3.5 billion.................................. 0.375%
$3.5 billion to $5 billion.................................... 0.350%
$5 billion to $6.5 billion.................................... 0.325%
Exceeding $6.5 billion........................................ 0.300%
</TABLE>
For the year ended August 31, 1993, the fee paid by the Fund to the Manager
was $17,119,697 (based upon average net assets of approximately $4.1 billion),
and the effective fee rate was .42%. For the year ended August 31, 1994, the
fee paid by the Fund to the Manager was $14,571,755 (based upon average net
assets of approximately $3.4 billion) and the effective fee rate was .43%. For
the year ended August 31, 1995, the fee paid by the Fund to the Manager was
$11,490,071 (based upon average net assets of approximately $2.6 billion) and
the effective fee rate was .44%.
The State of California imposes limitations on the expenses of the Fund.
These limitations require that the Manager reimburse the Fund if, during the
Fund's fiscal year, ordinary operating expenses 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 remaining average daily net assets.
Expenses not covered by the limitations are interest, taxes, distribution fees,
brokerage fees and commissions and extraordinary charges such as litigation
costs. Such reimbursement, if any, will be subtracted from the monthly
management fee. The Manager's obligation to reimburse the Fund is limited to
the amount of the management fee. No fee payment will be made to the Manager
during any fiscal year which will cause such expenses to exceed the pro rata
expense limitation at the time of such payment. Prior to September 21, 1989,
California's expense limitation requirements were more restrictive than those
set forth above. For the years ended August 31, 1993, 1994 and 1995, no
reimbursement was required pursuant to the applicable expense limitations.
The Management Agreement obligates the Manager to provide investment advisory
services and to pay all compensation of and furnish office space for officers
and employees of the Fund connected with investment and economic research,
trading and investment management of the Fund, as well as the fees of all
Trustees of the Fund who are affiliated persons of ML&Co. The Fund pays all
other expenses incurred in the operation of the Fund, including, among other
things, taxes, expenses for legal and auditing services, costs of printing
proxies, shareholder reports, prospectuses and statements of additional
information (except to the extent paid by the Distributor), charges of the
Fund's custodian and transfer agent, expenses of redemption of shares,
Commission fees, expenses of registering the shares under Federal or state
laws, fees and expenses of
12
<PAGE>
unaffiliated Trustees, accounting and pricing costs (including the daily
calculation of net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or nonrecurring expenses, and other expenses
properly payable by the Fund. The Distributor will pay the promotional expenses
of the Fund incurred in connection with the offering of shares of the Fund.
Certain expenses of the Distributor will be financed by the Fund pursuant to
Distribution Plans in compliance with Rule 12b-1 under the Investment Company
Act. See "Purchase of Shares--Distribution Plans".
The Manager is a limited partnership, the partners of which are ML&Co. and
Princeton Services, Inc. ML&Co. and Princeton Services are "controlling
persons" of the Manager 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
Management Agreement will remain in effect from year to year if approved
annually (a) by the Trustees of the Fund or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Trustees who are not parties to
such contract or interested persons (as defined in the Investment Company Act)
of any such party. Such agreement is not assignable 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.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class
A, Class B, Class C and Class D share of the Fund represents an identical
interest in the investment portfolio of the 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.
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 PricingSM System is used by more than 50 mutual
funds advised by the Manager or its affiliate, MLAM. Funds advised by the
Manager or MLAM which use the Merrill Lynch Select Pricing SM System are
referred to herein as "MLAM-advised mutual funds".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have
13
<PAGE>
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 Management Agreement described above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
As a result of the implementation of the Merrill Lynch Select Pricing SM
System, Class A shares of the Fund outstanding prior to October 21, 1994, have
been redesignated Class D shares. The Class A shares currently being offered
differ from the Class A shares offered prior to October 21, 1994 in many
respects, including sales charges, exchange privilege and the classes of
persons to whom such shares are offered. For the fiscal year ended August 31,
1993, the Fund sold 17,415,517 of its Class A shares for aggregate net
proceeds to the Fund of $173,299,062. The gross sales charges for the sale of
shares of the Fund during that year were $1,589,874, of which $102,426 and
$1,187,448 were received by the Distributor and Merrill Lynch, respectively.
During the fiscal year ended August 31, 1994, the Fund sold 14,555,924 of its
Class A shares for aggregate net proceeds to the Fund of $141,925,143. The
gross sales charges for the sale of shares of the Fund for that period was
$711,103, of which $51,423 and $659,680 were received by the Distributor and
Merrill Lynch, respectively. For the period October 21, 1994 (commencement of
operations) to August 31, 1995, the Fund sold 30,530,411 of its new Class A
shares for aggregate net proceeds of $282,054,026. The gross sales charges for
the sale of those shares during that period was $19,143, of which $1,123 and
$18,020 were received by the Distributor and Merrill Lynch, respectively.
During the fiscal year ended August 31, 1995, the Fund sold 4,559,726 of its
Class D shares (including redesignated Class A shares) for aggregate net
proceeds to the Fund of $42,599,935. The gross sales charges for the sale of
those shares during that year was $271,995, of which $23,539 and $248,456 were
received by the Distributor and Merrill Lynch, respectively.
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 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 single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or
other employee benefit trust created pursuant to a plan qualified under
Section 401 of the Internal Revenue Code of 1986, as amended (the "Code"))
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 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. The term "purchase" also includes purchases by
employee benefit plans not qualified under Section 401 of the Code, including
purchases by employees or by employers on behalf of employees, by means of a
payroll deduction plan or otherwise, of shares of the Fund. Purchases by such
a company or non-qualified employee benefit plan will qualify for the quantity
discounts discussed above only if the Fund and the Distributor are able to
realize economies of scale in sales effort and sales related expense by means
of the company, employer or plan making the Fund's
14
<PAGE>
Prospectus available to individual investors or employees and forwarding
investments by such persons to the Fund and by any such employer or plan
bearing the expense of any payroll deduction plan.
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 (the date the Merrill Lynch Select Pricing SM System
commenced operations) and wish to reinvest the net proceeds from a sale of
their closed-end fund shares of common stock in Eligible Class A or Class D
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 buy 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. Class A shares of the Fund are offered at net asset value
to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. ("Senior
Floating Rate Fund") who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock of Senior Floating Rate Fund in shares
of the Fund. In order to exercise this investment option, Senior Floating Rate
Fund shareholders must sell their Senior Floating Rate Fund shares to the
Senior Floating Rate Fund in connection with a tender offer conducted by the
Senior Floating Rate Fund and reinvest the proceeds immediately in the Fund.
This investment option is available only with respect to the proceeds of
Senior Floating Rate Fund shares as to which no Early Withdrawal Charge (as
defined in the Senior Floating Rate Fund prospectus) is applicable. Purchase
orders from Senior Floating Rate Fund shareholders wishing to exercise this
investment option will be accepted only on the day that the related Senior
Floating Rate Fund tender offer terminates and will be effected at the net
asset value of the Fund at such day. Similarly, Class D shares of the Fund are
offered at net asset value to shareholders of Merrill Lynch Municipal Strategy
Fund, Inc. ("Municipal Strategy Fund") and Merrill Lynch High Income Municipal
Bond Fund, Inc. ("High Income Municipal Bond Fund") who wish to purchase
shares of the Fund with the net proceeds from a sale of certain of their
shares of common stock of those funds pursuant to a tender offer by Municipal
Strategy Fund or by High Income Municipal Bond Fund. This investment option is
available only with respect to the proceeds of Municipal Strategy Fund shares
as to which no CDSC (as defined in the Municipal Strategy Fund prospectus) is
applicable and to the proceeds of High Income Municipal Bond Fund shares as to
which no Early Withdrawal Charge (as defined in the High Income Municipal Bond
Fund prospectus) is applicable.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. The reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the 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 the 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,
15
<PAGE>
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 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 $25,000 or more of Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a thirteen-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 Fund's transfer agent. The Letter of
Intention is not available to employee benefit plans for which Merrill Lynch
provides plan--participant recordkeeping services. The Letter of Intention is
not a binding obligation to purchase any amount of Class A or Class D shares;
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 or Class D shares of the 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. If the total amount of
shares purchased does not equal the amount stated in the Letter of Intention
(minimum of $25,000), 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 purchased at the reduced rate and the sales
charge applicable to the shares actually purchased through the Letter. Class A
or Class D shares equal to five percent of the intended amount will be held in
escrow during the thirteen-month period (while 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 a
purchase during the term of such Letter would otherwise be subject to a
further reduced sales charge based on the right of accumulation, the purchaser
will be entitled on that purchase and subsequent purchases to that further
reduced percentage sales charge, 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 the
Fund that creates a sales charge will count toward completing a new or
existing Letter of Intention from the Fund.
Merrill Lynch Blueprint SM Program. Class A and Class D shares of the Fund
are offered to participants in the Merrill Lynch Blueprint SM Program
("Blueprint"). Blueprint is directed to small investors, group IRAs and
participants in certain affinity groups such as credit unions, trade
associations and benefit plans. Investors placing orders to purchase Class A
or Class D shares of the Fund through Blueprint will acquire the Class A or
Class D shares at net asset value plus a sales charge calculated in accordance
with the Blueprint sales charge schedule (i.e., up to $5,000 at 3.5% and
$5,000.01 or more at the standard sales charge rates disclosed in the
Prospectus). Class A and Class D shares of the Fund are offered at net asset
value plus a sales charge of 1/2 of 1% for corporate or group IRA programs
placing orders to purchase their Class A or Class D shares through Blueprint.
Services available to investors placing orders for Class A or Class D shares
through Blueprint, including exchange privileges, may differ from those
available to other investors in Class A or Class D shares.
16
<PAGE>
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. The IRA Rollover Program is available to
custodian rollover assets from Employer Sponsored Retirement and Savings Plans
(as defined below) whose Trustee and/or Plan Sponsor has entered into a Merrill
Lynch Directed IRA Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the Fund
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 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 BlueprintSM Program, P.O. Box
30441, New Brunswick, New Jersey 08989-0441.
Employee Access Accounts SM. 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 for such accounts
is $500, except that the initial minimum for shares purchased for such accounts
pursuant to the Automatic Investment Program is $50.
Employer Sponsored Retirement and Savings Plans. Class A and Class D shares
are offered at net asset value to employer sponsored retirement or savings
plans, such as tax qualified retirement plans within the meaning of Section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), deferred
compensation plans within the meaning of Sections 403(b) and 457 of the Code,
other deferred compensation arrangements, Voluntary Employee Benefits
Association ("VEBA") plans, and non-qualified After Tax Savings and Investment
programs, maintained on the Merrill Lynch Group Employee Services system,
herein referred to as "Employer Sponsored Retirement or Savings Plans",
provided the plan has accumulated $20 million or more in MLAM-advised mutual
funds (in the case of Class A shares) or $5 million or more in MLAM-advised
mutual funds (in the case of Class D shares). Class D shares may be offered at
net asset value to new Employer Sponsored Retirement or Savings Plans, provided
the plan has $3 million or more initially invested in MLAM-advised mutual
funds. Assets of Employer Sponsored Retirement or Savings Plans sponsored by
the same sponsor or an affiliated sponsor may be aggregated. Class A shares and
Class D shares also are offered at net asset value to Employer Sponsored
Retirement or Savings Plans that have at least 1,000 employees eligible to
participate in the plan (in the case of Class A shares) or between 500 and 999
employees eligible to participate in the plan (in the case of Class D shares).
Employees eligible to participate in Employer Sponsored Retirement or Savings
Plans of the same sponsoring employer or its affiliates may be aggregated. Tax
qualified retirement plans within the meaning of Section 401(a) of the Code
meeting any of the foregoing requirements and which are provided specialized
services (e.g., plans whose participants may direct on a daily basis their plan
allocations among a wide range of investments including individual corporate
equities and other securities in addition to mutual fund shares) by the Merrill
Lynch BlueprintSM Program, are offered Class A and Class D shares at a price
equal to net asset value per share plus a reduced sales charge of 0.50%. Any
Employer Sponsored Retirement or Savings Plan which does not meet the above
described qualifications to purchase Class A or Class D shares at net asset
value has the option
17
<PAGE>
of (i) purchasing Class A shares at the initial sales charge schedule and
possible CDSC schedule disclosed in the Prospectus if it is otherwise eligible
to purchase Class A shares, (ii) purchasing Class D shares at the initial
sales charge and possible CDSC schedule disclosed in the Prospectus, (iii) if
the Employer Sponsored Retirement or Savings Plan meets the specified
requirements, purchasing Class B shares with a waiver of the CDSC upon
redemption, or if the Employer Sponsored Retirement or Savings Plan does not
qualify to purchase Class B shares with a waiver of the CDSC upon redemption,
purchasing Class C shares at the CDSC schedule disclosed in the Prospectus.
The minimum initial and subsequent purchase requirements are waived in
connection with all the above referenced Employer Sponsored Retirement or
Savings Plans.
Purchase Privilege of Certain Persons. Directors of the Fund, members of the
Boards of other MLAM-advised investment companies, directors and employees of
Merrill Lynch & Co., Inc. and its subsidiaries, (the term "subsidiaries", when
used herein with respect to Merrill Lynch & Co., Inc., includes FAM, MLAM and
certain other entities directly or indirectly wholly-owned and controlled by
Merrill Lynch & Co., Inc.), 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 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
he or she will purchase Class D shares of the Fund with proceeds from a
redemption of a mutual fund that was sponsored by the financial consultant's
previous firm and was subject to a sales charge either at the time of purchase
or on a deferred basis; and second, the investor also must establish that such
redemption had been made within 60 days prior to the investment in the Fund,
and the proceeds from the redemption had been maintained in the interim in
cash or a money market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund 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 notice.
Class D shares of the Fund are 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 such shares of
other mutual funds 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.
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.
18
<PAGE>
Acquisition of Certain Investment Companies. The public offering price of
Class D shares of the Fund may be reduced to the net asset value per Class D
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 be adjusted in appropriate cases to reduce possible adverse tax
consequences to the 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 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 which (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 liquidity 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).
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 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.
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 fees 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 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 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 a
reasonable likelihood that such Distribution Plan will benefit the Fund and its
related class of shareholders. 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 class of
voting securities of the Fund. A Distribution Plan cannot be amended to
increase materially the amount to be spent by the Fund without the approval of
the related class of shareholders, and all material amendments are required to
be approved by the vote of the 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 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.
19
<PAGE>
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("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. As
applicable to the Fund, 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, 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). 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 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, 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
fee. In certain circumstances the amount payable pursuant to the voluntary
maximum may exceed the amount payable under the NASD formula. In such
circumstances payment in excess of the amount payable under the NASD formula
will not be made.
The following table sets forth comparative information as of August 31,
1995, 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, with respect to Class B shares, the Distributor's voluntary
maximum for the fiscal period December 23, 1991 (commencement of operations)
to August 31, 1995.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF AUGUST 31, 1995
-------------------------------------------------------------------------------
ANNUAL
DISTRIBUTION
ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
----------- --------- ---------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class B
(In Thousands):
Under NASD Rule As
Adopted................ $4,582,089 $286,381 $172,147 $458,528 $133,997 $324,531 $6,315
Under Distributor's Vol-
untary Waiver.......... $4,582,089 $286,381 $22,910 $309,291 $133,997 $175,294 $6,315
Class C
(Not In thousands):
Under NASD Rule As
Adopted................ $15,323,668 $957,729 $32,668 $990,397 $36,763 $953,634 $85,913
</TABLE>
- --------
(1) Purchase price of all eligible Class B shares sold since December 23, 1991
(commencement of operations) and all eligible Class C shares sold since
October 21, 1994 (commencement of operations) other than shares acquired
through dividend reinvestment and the exchange privilege.
20
<PAGE>
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made with respect to Class B shares prior to
July 6, 1993, under a prior plan at a 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. 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 contingent deferred sales
charge payments) is amortizing the unpaid balance. No assurance can be
given that payments of the distribution fee will reach either the NASD
maximum or, with respect to the Class B shares, the voluntary maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the
New York Stock Exchange is restricted as determined by the Commission or such
Exchange is closed (other than customary weekend and holiday closings), for
any period during which an emergency exists, as defined by the Commission, as
a result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.
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 Fund at such time.
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 Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in
connection with certain post-retirement withdrawals from IRA or other
retirement plans or on redemptions of Class B shares following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies
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
years ended August 31, 1993, 1994 and 1995, the Distributor received CDSCs of
$3,679,565, $4,398,541 and $2,992,727, respectively, with respect to
redemptions of Class B shares, all of which was paid to Merrill Lynch. For the
period October 21, 1994 (commencement of operations) to August 31, 1995, the
Distributor received CDSCs of $6,138 with respect to redemptions of Class C
shares, all of which was paid to Merrill Lynch.
Merrill Lynch BlueprintSM Program. Class B shares are offered to certain
participants in the BlueprintSM program. Blueprint is directed to small
investors, group IRAs and participants in certain affinity
21
<PAGE>
groups such as trade associations and credit unions. Class B shares of the Fund
are offered through Blueprint only to members of certain affinity groups. The
CDSC is waived in connection with purchase orders placed through Blueprint by
members of such affinity groups. Services, including the exchange privilege,
available to Class B investors through Blueprint, however, may differ from
those available to other investors in Class B shares. Orders for purchases and
redemptions of Class B shares of the Fund will 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 is $100, with a $50 minimum for subsequent purchases through
Blueprint. There is no minimum initial or subsequent purchase requirement for
investors who are part of a Blueprint automatic investment plan. Additional
information concerning these Blueprint programs, including any annual fees or
transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith
Incorporated, The BlueprintSM Program, P.O. Box 30441, New Brunswick, New
Jersey 08989-0441.
Retirement Plans. Any Retirement Plan which does not meet the qualifications
to purchase Class A or Class D shares at net asset value has the option of
purchasing Class A or Class D shares at the sales charge schedule disclosed in
the Prospectus, or if the Retirement Plan meets the following requirements,
then it may purchase Class B shares with a waiver of the CDSC upon redemption.
The CDSC is waived for any Eligible 401(k) Plan redeeming Class B shares.
"Eligible 401(k) Plan" is defined as a retirement plan qualified under Section
401(k) of the Code with a salary reduction feature offering a menu of
investments to plan participants. The CDSC is also waived for redemptions from
a 401(a) plan qualified under the Code, provided, however, that each such plan
has the same or an affiliated sponsoring employer as an Eligible 401(k) Plan
purchasing Class B shares of MLAM-advised mutual funds ("Eligible 401(a)
Plan"). Other tax qualified retirement plans within the meaning of Section
401(a) and 403(b) of the Code which are provided specialized services (e.g.,
plans whose participants may direct on a daily basis their plan allocations
among a menu of investments) by independent administration firms contracted
through Merrill Lynch also may purchase Class B shares with a waiver of the
CDSC. The CDSC is waived for any Class B shares which are purchased by an
Eligible 401(k) Plan or Eligible 401(a) Plan and are rolled over into a Merrill
Lynch or Merrill Lynch Trust Company custodied IRA and held in such account at
the time of redemption. The Class B CDSC is also waived for any Class B shares
which are purchased by a Merrill Lynch rollover IRA that was funded by a
rollover from a terminated 401(k) plan managed by the MLAM Private Portfolio
Group and held in such account at the time of redemption. The minimum initial
and subsequent purchase requirements are waived in connection with all the
above referenced Retirement Plans. The CDSC is also waived for any Class B
shares that were acquired and held at the time of redemption by Employee Access
Accounts available through employers that provide Eligible 401(k) Plans. 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.
PORTFOLIO TRANSACTIONS
Reference is made to "Investment Objective and Policies--Other Investment
Policies and Practices--Portfolio Transactions" in the Prospectus.
Subject to policies established by the Trustees of the Fund, the Manager is
responsible for the execution of the Fund's portfolio transactions. The Fund
has no obligation to deal with any broker or group of brokers in the execution
of transactions in portfolio securities. Orders for transactions in portfolio
securities are placed
22
<PAGE>
for the Fund with a number of brokers and dealers, including Merrill Lynch. In
placing orders, it is the policy of the Fund to obtain the most favorable net
results, taking into account various factors, including price (including the
applicable brokerage commissions or dealer spread), size of the transaction and
difficulty of execution. Where practicable, the Manager surveys a number of
brokers and dealers in connection with proposed portfolio transactions and
selects the broker or dealer which offers the Fund best price and execution or
other services which are of benefit to the Fund. Securities firms also may
receive brokerage commissions on transactions including covered call options
written by the Fund and the sale of underlying securities upon the exercise of
such options. In addition, consistent with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. and the policies established
by the Fund's Trustees, the Manager may consider sales of shares of the Fund as
a factor in the selection of brokers or dealers to execute portfolio
transactions for the Fund.
The Fund does not use any particular broker or dealer, and brokers who
provide supplemental investment research to the Manager may receive orders for
transactions by the Fund. Such supplemental research services ordinarily
consist of assessments and analyses of the business or prospects of a company,
industry or economic sector. Information so received will be in addition to and
not in lieu of the services required to be performed by the Manager under the
Management Agreement with the Fund. The expenses of the Manager will not
necessarily be reduced as a result of the receipt of such supplemental
information, and the Manager may use such information in servicing its other
accounts. Whether or not a particular broker-dealer sells shares of the Fund
neither qualifies nor disqualifies such broker-dealer to execute transactions
for the Fund.
The U.S. Government securities in which the Fund invests are traded primarily
in the OTC market. Transactions in the OTC market are generally principal
transactions with dealers and the costs of such transactions involve dealer
spreads rather than brokerage commissions. With respect to OTC transactions,
the Fund, where possible, 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. 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. Since transactions in the OTC
market usually involve transactions with dealers acting as principals for their
own account, affiliated persons of the Fund, including Merrill Lynch, may not
serve as the Fund's dealer in connection with such transactions. However,
affiliated persons of the Fund may serve as its broker in transactions
conducted on an exchange or OTC transactions conducted on an agency basis. The
Fund may not purchase securities from any underwriting syndicate of which
Merrill Lynch is a member, except pursuant to procedures adopted by the
Trustees of the Fund which comply with rules adopted by the Commission.
The Trustees of the Fund have considered the possibility of recapturing for
the benefit of the Fund brokerage commissions, dealer spreads and other
expenses of possible portfolio transactions, such as underwriting commissions,
by conducting such portfolio transactions through affiliated entities,
including Merrill Lynch. For example, brokerage commissions received by Merrill
Lynch could be offset against the management fee paid by the Fund to the
Manager. After considering all factors deemed relevant, the Trustees made a
determination not to seek such recapture. The Trustees will reconsider this
matter from time to time.
For the fiscal years ended August 31, 1993, 1994 and 1995, respectively, the
Fund paid no brokerage commissions.
23
<PAGE>
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the national securities exchanges from executing exchange
transactions for their affiliates and institutional accounts which they manage
unless the member (i) has obtained prior express authorization from the account
to effect such transactions, (ii) at least annually furnishes the account with
the aggregate compensation received by the member in effecting such
transactions, and (iii) complies with any rules the Commission has prescribed
with respect to the requirements of clauses (i) and (ii). To the extent Section
11(a) would apply to Merrill Lynch acting as a broker for the Fund in any of
its portfolio transactions executed on any such securities exchange of which it
is a member, appropriate consents have been obtained from the Fund and annual
statements as to aggregate compensation will be provided to the Fund.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information--Determination of Net Asset
Value" in the Prospectus concerning the determination of net asset value.
The net asset value of the shares of all classes of the Fund is determined by
the Manager once daily, Monday through Friday, as of 15 minutes after the close
of business on the New York Stock Exchange (generally, 4:00 P.M., New York
time), on each day the New York Stock Exchange is open for trading. The New
York Stock Exchange is not open on New Year's 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 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 management fees 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 generally will be
lower than the per share net asset value of the Class A shares reflecting the
daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to the Class B and Class C shares
and the daily expense accruals of the account maintenance fees applicable with
respect to the Class D shares; moreover, 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 Class D shares, reflecting the daily expense accruals of the distribution
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 or distributions, which will
differ by approximately the amount of the expense accrual differential between
the classes.
Securities traded in the market are valued at the last available bid price in
the market or on the basis of yield equivalents as obtained from one or more
dealers that make markets in the U.S. Government securities traded in the
market. The Fund employs Merrill Lynch Securities Pricing Service, an affiliate
of the Manager, to provide mortgage-backed securities prices for the Fund.
Options on U.S. Government securities, which are traded on exchanges, are
valued at their last bid price in the case of options purchased by the Fund and
their last asked price in the case of options written by the Fund. An option
traded on the OTC market is valued at its last bid price or asked price as
obtained from at least two independent entities (one of which is not a party to
the option). Interest rate futures contracts and options thereon, which are
traded on exchanges, are valued at their last sale price as of the close of
such exchanges. Securities with a remaining maturity of 60 days or less are
valued on an amortized cost basis, which approximates market value.
24
<PAGE>
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 Fund. Such variations and procedures will be reviewed
periodically by the Trustees.
Generally, trading in U.S. Government securities is substantially completed
each day at various times prior to 4:15 P.M., New York time. The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Occasionally, events affecting the values of such
securities may occur between the times at which they are determined and the
time the Fund determines its net asset value which will not be reflected in the
computation of the Fund's net asset value. If events materially affecting the
value of such securities occur during such period, then these securities will
be valued at their fair value as determined in good faith by the Trustees.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services summarized below which are
designed to facilitate investment in its shares. Certain of such services are
not available to investors who place orders for the Company's shares through
the Merrill Lynch BlueprintSM Program. Full details as to each of such services
and copies of the various plans described below and instructions as to how to
participate in the various services or plans, or how to change options with
respect thereto, can be obtained from the Fund, the Distributor or Merrill
Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and capital gain 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 gain distributions. A
shareholder may make additions to his or her Investment Account at any time by
mailing a check directly to the Transfer Agent.
Share certificates are issued only for full shares and only upon the specific
request of a 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 (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.
Shareholders considering transferring a tax-deferred
25
<PAGE>
retirement account such as an individual retirement account from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the retirement account is to be transferred will not take
delivery of shares of the Fund, a shareholder must either redeem the 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 a
retirement account at Merrill Lynch for those shares.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if (s)he 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 from the Transfer Agent, acting as agent for such
securities dealer. Voluntary accumulation can also 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.
Investors whose shares of the Fund are held within a CMA (R) or CBA (R) account
may arrange to have periodic investments made in the Fund, in their CMA (R) or
CBA (R) accounts or in certain related accounts in the amount of $100 or more
($1 for retirement accounts) through the CMA (R) or CBA (R) Automated
Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will
automatically be reinvested in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund, as of the close of
business on the payment date of the dividend or distribution. Shareholders may
elect in writing to receive either their 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 (1-800-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.
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 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 quarterly basis as provided below. Quarterly withdrawals
are available for shareholders who have acquired Class A or Class D shares of
the Fund having a value, based on cost or the current offering price, of $5,000
or more, and monthly withdrawals for shareholders with Class A 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
26
<PAGE>
shareholder may specify either a dollar amount or a percentage of the value of
his Class A or Class D shares. Redemptions will be made at net asset value as
determined as of 15 minutes after the close of business of the New York Stock
Exchange (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
Exchange 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 of 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 Fund Class A or Class D shares. A shareholder's
systematic withdrawal plan may be terminated at any time, without 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
correspondingly reduced. 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 Fund will not knowingly
accept purchase orders for Class A 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.
A Class A or Class D 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)/CBA (R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$25. The proceeds of systematic redemptions will be posted to the shareholder's
account five business days after the date the shares are redeemed. Monthly
systematic redemptions will be made at net asset value on the first Monday of
each month, bimonthly systematic 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
CMA (R)/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)/CBA (R) Systematic Redemption
Program, eligible shareholders should contact their Financial Consultant.
RETIREMENT PLANS
Self-directed IRA's and other retirement plans are available from Merrill
Lynch. Under these plans, investments may be made in the Fund and certain of
the other mutual funds sponsored by Merrill Lynch as well as in other
securities. Merrill Lynch charges an initial establishment fee and an annual
custodial fee for each account. Information with respect to these plans is
available upon request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $250 and the minimum subsequent purchase is $1
(except that the minimum initial purchase through Blueprint is $100).
Capital gains and ordinary income received in each of the plans referred to
above are exempt from Federal taxation until distributed from the plans.
Investors considering participation in any such plan should review specific tax
laws relating thereto and should consult their attorneys or tax advisors with
respect to the establishment and maintenance of any such plan.
27
<PAGE>
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
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 the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his account in
which the exchange is made at the time of the exchange or is otherwise
eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund but does not hold Class A shares of the second fund in his
or her account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class
D shares of the second fund as a result of the exchange. Class D shares also
may be exchanged for Class A shares of a second MLAM-advised mutual fund at
any time as long as, at the time of the exchange, the shareholder holds Class
A shares of the second fund in the account in which the exchange is made or is
otherwise eligible to purchase Class A shares of the second fund. Class B,
Class C and Class D shares are exchangeable with shares of the same class of
other MLAM-advised mutual funds. For purposes of computing the CDSC that may
be payable upon a disposition of the shares acquired in the exchange, the
holding period for the previously owned shares of the Fund is "tacked" to the
holding period of 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
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, and any shares
utilized in an exchange must have been held by the shareholder for at least 15
days. It is contemplated that the exchange privilege may be applicable to
other new mutual funds whose shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("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 charge 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 and Class D shares acquired through dividend reinvestment
shall be deemed to have been sold with a sales charge equal to the sales
charge previously paid on the Class A or Class D shares on which the dividend
was paid. Based on this formula, Class A and Class D shares of the Fund
generally may be exchanged into the Class A or Class D shares of the other
funds or into shares of the Class A and Class D money market funds with a
reduced or without a sales charge.
In addition, each of the funds with Class B and 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 the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule
28
<PAGE>
relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund's CDSC schedule if such schedule
is higher than the CDSC schedule relating to the Class B shares of the fund
from which the exchange has been made. For purposes of computing the 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 the Fund for those of
Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having held
the Fund Class B shares for two and a half years. The 2% CDSC that generally
would apply to a redemption would not apply to the exchange. Three years later
the investor may decide to redeem the Class B shares of Special Value Fund and
receive cash. There will be no CDSC due on this redemption, since by "tacking"
the two and a half year holding period of Fund Class B shares to the three year
holding period for the Special Value Fund Class B shares, the investor will be
deemed to have held the new Class B shares for more than five years.
The exchange privilege is modified with respect to certain retirement plans
which participate in the Merrill Lynch Mutual Fund Adviser ("MFA") program.
Such retirement plans may exchange Class B, Class C or Class D shares that have
been held for at least one year for Class A shares of the same fund on the
basis of relative net asset values in connection with the commencement of
participation in the MFA program, i.e., no CDSC will apply. The one-year
holding period does not apply to shares acquired through reinvestment of
dividends. Upon termination of participation in the MFA program, Class A shares
will be re-exchanged for the class of shares originally held. For purposes of
computing any CDSC that may be payable upon redemption of Class B or Class C
shares so reacquired, or the Conversion Period for Class B shares so
reacquired, the holding period for the Class A shares will be "tacked" to the
holding period for the Class B or class C shares originally held.
Shareholders also may exchange shares of the Fund into shares of a money
market fund 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 the 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 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 Fund for shares of Merrill Lynch Institutional Fund
("Institutional Fund") after having held the Fund Class B shares for two and a
half years and three 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 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
which the shareholder continued to hold for an additional two and a half years,
any subsequent redemption will not incur a CDSC.
29
<PAGE>
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
Funds issuing Class A, Class B, Class C and Class D Shares:
Merrill Lynch Adjustable Rate
Securities Fund, Inc.......... High current income consistent with a policy
of limiting the degree of fluctuation in net
asset value by investing primarily in a
portfolio of adjustable rate securities,
consisting principally of mortgage-backed
and asset-backed securities.
Merrill Lynch Americas Income
Fund, Inc. ................... A high level of current income, consistent
with prudent investment risk, by investing
primarily in debt securities denominated in
a currency of a country located in the West-
ern Hemisphere (i.e., North and South Amer-
ica and the surrounding waters).
Merrill Lynch Arizona Limited
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Ma-
turity Municipal Series Trust, a series
fund, whose objective is to provide share-
holders with as high a level of income ex-
empt from Federal and Arizona income taxes
as is consistent with prudent investment
management through investment in a portfolio
primarily of intermediate term investment
grade Arizona Municipal Bonds.
Merrill Lynch Arizona
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
and Arizona income taxes as is consistent
with prudent investment management.
Merrill Lynch Arkansas
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
and Arkansas income taxes as is consistent
with prudent investment management.
Merrill Lynch Asset Growth
Fund, Inc. ................... High total investment return, consistent with
prudent risk, from investment in United
States and foreign equity, debt and money
market securities the combination of which
will be varied both with respect to types of
securities and markets in response to chang-
ing market and economic trends.
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<PAGE>
Merrill Lynch Asset Income
Fund, Inc. ................... A high level of current income through in-
vestment primarily in United States fixed
income securities.
Merrill Lynch Balanced Fund
for Investment and
Retirement, Inc. ........ As high a level of total investment return as
is consistent with reasonable risk by in-
vesting in common stock and other types of
securities, including fixed income securi-
ties and convertible securities.
Merrill Lynch Basic Value
Fund, Inc..................... Capital appreciation and, secondarily, income
through investment in securities, primarily
equities, that are undervalued and therefore
represent basic investment value.
Merrill Lynch California
Insured Municipal Bond Fund... A portfolio of Merrill Lynch California Mu-
nicipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
and California income taxes as is consistent
with prudent investment management through
investment in a portfolio primarily of in-
sured California Municipal Bonds.
Merrill Lynch California
Limited Maturity Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is to provide
shareholders with as high a level of income
exempt from Federal and California income
taxes as is consistent with prudent invest-
ment management through investment in a
portfolio primarily of intermediate-term in-
vestment grade California Municipal Bonds.
Merrill Lynch California
Municipal Bond Fund...... A portfolio of Merrill Lynch California Mu-
nicipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
and California income taxes as is consistent
with prudent investment management.
Merrill Lynch Capital Fund,
Inc........................... The highest total investment return consis-
tent with prudent risk through a fully man-
aged investment policy utilizing equity,
debt and convertible securities.
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<PAGE>
Merrill Lynch Colorado
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series, a series fund, whose objec-
tive is to provide shareholders with as high
a level of income exempt from Federal and
Colorado income taxes as is consistent with
prudent investment management.
Merrill Lynch Connecticut
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
and Connecticut income taxes as is consis-
tent with prudent investment management.
Merrill Lynch Corporate Bond
Fund, Inc..................... Current income from three separate diversi-
fied portfolios of fixed income securities.
Merrill Lynch Developing
Capital Markets Fund, Inc..... Long-term capital appreciation through in-
vestment in securities, principally equi-
ties, of issuers in countries having smaller
capital markets.
Merrill Lynch Dragon Fund,
Inc........................... Capital appreciation primarily through in-
vestment in equity and debt securities of
issuers domiciled in developing countries
located in Asia and the Pacific Basin, other
than Japan, Australia and New Zealand.
Merrill Lynch EuroFund......... Capital appreciation primarily through in-
vestment in equity securities of corpora-
tions domiciled in Europe.
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund.. A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is to provide
shareholders with as high a level of income
exempt from Federal income taxes as is con-
sistent with prudent investment management
while serving to offer shareholders the op-
portunity to own securities exempt from
Florida intangible personal property taxes
through investment in a portfolio primarily
of intermediate-term investment grade Flor-
ida Municipal Bonds.
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<PAGE>
Merrill Lynch Florida
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
income taxes as is consistent with prudent
investment management while seeking to offer
shareholders the opportunity to own securi-
ties exempt from Florida intangible personal
property taxes.
Merrill Lynch Fund For
Tomorrow, Inc. ............... Long-term growth through investment in a
portfolio of good quality securities, pri-
marily common stock, potentially positioned
to benefit from demographic and cultural
changes as they affect consumer markets.
Merrill Lynch Fundamental
Growth Fund, Inc. ............ Long-term growth of capital through invest-
ment in a diversified portfolio of equity
securities placing particular emphasis on
companies that have exhibited an above-aver-
age growth rate in earnings.
Merrill Lynch Fundamental
Value Portfolio (available
only for the exchanges by
certain individual retirement
accounts for which Merrill
Lynch acts as custodian)...... A portfolio of Merrill Lynch Asset Builder
Program, Inc., a series fund, whose objec-
tive is to provide shareholders with capital
appreciation and income by investing in se-
curities, with at least 65% of the portfo-
lio's assets being invested in equities.
Merrill Lynch Global
Allocation Fund, Inc.......... High total return, consistent with prudent
risk, through a fully managed investment
policy utilizing United States and foreign
equity, debt and money market securities,
the combination of which will be varied from
time to time both with respect to the types
of securities and markets in response to
changing market and economic trends.
Merrill Lynch Global Bond Fund
for Investment and
Retirement.................... High total investment return by investment in
a global portfolio of debt investments de-
nominated in various currencies and multina-
tional currency units.
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<PAGE>
Merrill Lynch Global
Convertible Fund, Inc......... High total return from investment primarily
in an internationally diversified portfolio
of convertible debt securities, convertible
preferred stock and "synthetic" convertible
securities consisting of a combination of
debt securities or preferred stock and war-
rants or options.
Merrill Lynch Global Holdings,
Inc. (residents of Arizona
must meet investor
suitability standards)........ The highest total investment return consis-
tent with prudent risk through worldwide in-
vestment in an internationally diversified
portfolio of securities.
Merrill Lynch Global
Opportunity Portfolio
(available only for the
exchanges by certain
individual retirement
accounts for which Merrill
Lynch acts as custodian)...... A portfolio of Merrill Lynch Asset Builder
Program, Inc., a series fund, whose objec-
tive is to provide shareholders with a high
total investment return through an invest-
ment policy utilizing United States and for-
eign equity, debt and money market securi-
ties, the combination of which will vary de-
pending upon changing market and economic
trends.
Merrill Lynch Global Resources
Trust......................... Long-term growth and protection of capital
from investment in securities of domestic
and foreign companies that possess substan-
tial natural resource assets.
Merrill Lynch Global SmallCap
Fund, Inc..................... Long-term growth of capital by investing pri-
marily in equity securities of companies
with relatively small market capitalizations
located in various foreign countries and in
the United States.
Merrill Lynch Global Utility
Fund, Inc..................... Capital appreciation and current income
through investment of at least 65% of its
total assets in equity and debt securities
issued by domestic and foreign companies
which are primarily engaged in the ownership
or operation of facilities used to generate,
transmit or distribute electricity, telecom-
munications, gas or water.
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<PAGE>
Merrill Lynch Growth Fund for
Investment and Retirement..... Growth of capital and, secondarily, income
from investment in a diversified portfolio
of equity securities placing principal em-
phasis on those securities which management
of the fund believes to be undervalued.
Merrill Lynch Healthcare Fund,
Inc. (residents of Wisconsin
must meet investor
suitability standards)........ Capital appreciation through worldwide in-
vestment in equity securities of companies
that derive or are expected to derive a sub-
stantial portion of their sales from prod-
ucts and services in healthcare.
Merrill Lynch International
Equity Fund................... Capital appreciation and, secondarily, income
by investing in a diversified portfolio of
equity securities of issuers located in
countries other than the United States.
Merrill Lynch Latin America
Fund, Inc..................... Capital appreciation by investing primarily
in Latin American equity and debt securi-
ties.
Merrill Lynch Maryland
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
and Maryland income taxes as is consistent
with prudent investment management.
Merrill Lynch Massachusetts
Limited Maturity Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is to provide
shareholders with as high a level of income
exempt from Federal and Massachusetts income
taxes as is consistent with prudent invest-
ment management through investment in a
portfolio primarily of intermediate-term in-
vestment grade Massachusetts Municipal
Bonds.
Merrill Lynch Massachusetts
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
and Massachusetts income taxes as is consis-
tent with prudent investment management.
35
<PAGE>
Merrill Lynch Michigan Limited
Maturity Municipal Bond Fund.. A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is to provide
shareholders with as high a level of income
exempt from Federal and Michigan income
taxes as is consistent with prudent invest-
ment management through investment in a
portfolio primarily of intermediate-term in-
vestment grade Michigan Municipal Bonds.
Merrill Lynch Michigan
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
and Michigan income taxes as is consistent
with prudent investment management.
Merrill Lynch Minnesota
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
and Minnesota personal income taxes as is
consistent with prudent investment manage-
ment.
Merrill Lynch Municipal Bond
Fund, Inc..................... Tax-exempt income from three separate diver-
sified portfolios of municipal bonds.
Merrill Lynch Municipal
Intermediate Term Fund........ Currently the only portfolio of Merrill Lynch
Municipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
income taxes as possible by investing in in-
vestment grade obligations with a dollar
weighted average maturity of five to twelve
years.
Merrill Lynch New Jersey
Limited Maturity Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is to provide
shareholders with as high a level of income
exempt from Federal and New Jersey income
taxes as is consistent with prudent invest-
ment management through a portfolio primar-
ily of intermediate-term investment grade
New Jersey Municipal Bonds.
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<PAGE>
Merrill Lynch New Jersey
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
and New Jersey income taxes as is consistent
with prudent investment management.
Merrill Lynch New Mexico
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
and New Mexico income taxes as is consistent
with prudent investment management.
Merrill Lynch New York Limited
Maturity Municipal Bond Fund.. A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is to provide
shareholders with as high a level of income
exempt from Federal, New York State and New
York City income taxes as is consistent with
prudent investment management through in-
vestment in a portfolio primarily of inter-
mediate-term investment grade New York Mu-
nicipal Bonds.
Merrill Lynch New York
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal,
New York State and New York City income
taxes as is consistent with prudent invest-
ment management.
Merrill Lynch North Carolina
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
and North Carolina income taxes as is con-
sistent with prudent investment management.
Merrill Lynch Ohio Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
and Ohio income taxes as is consistent with
prudent investment management.
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<PAGE>
Merrill Lynch Oregon Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
and Oregon income taxes as is consistent
with prudent investment management.
Merrill Lynch Pacific Fund,
Inc........................... Capital appreciation by investing in equity
securities of corporations domiciled in Far
Eastern and Western Pacific countries, in-
cluding Japan, Australia, Hong Kong and Sin-
gapore.
Merrill Lynch Pennsylvania
Limited Maturity Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State Lim-
ited Maturity Municipal Series Trust, a se-
ries fund, whose objective is to provide
shareholders with as high a level of income
exempt from Federal and Pennsylvania income
taxes as is consistent with prudent invest-
ment management through investment in a
portfolio of intermediate-term investment
grade Pennsylvania Municipal Bonds.
Merrill Lynch Pennsylvania
Municipal Bond Fund........... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
and Pennsylvania income taxes as is consis-
tent with prudent investment management.
Merrill Lynch Phoenix Fund, Long-term growth of capital by investing in
Inc. ......................... equity and fixed- income securities, includ-
ing tax-exempt securities, of issuers in
weak financial condition or experiencing
poor operating results believed to be under-
valued relative to the current or prospec-
tive condition of such issuer.
Merrill Lynch Quality Bond
Portfolio (available only for
the exchanges by certain
individual retirement
accounts for which Merrill
Lynch acts as custodian)...... A portfolio of Merrill Lynch Asset Builder
Program, Inc., a series fund, whose objec-
tive is to provide shareholders with a high
level of current income through investment
in a diversified portfolio of debt obliga-
tions, such as corporate bonds and notes,
convertible securities, preferred stocks and
governmental obligations.
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<PAGE>
Merrill Lynch Short-Term
Global Income Fund, Inc. ..... As high a level of current income as is con-
sistent with prudent investment management
from a global portfolio of high quality debt
securities denominated in various currencies
and multinational currency units and having
remaining maturities not exceeding three
years.
Merrill Lynch Special Value
Fund, Inc. ................... Long-term growth of capital from investments
in securities, primarily common stock, of
relatively small companies believed to have
special investment value and emerging growth
companies regardless of size.
Merrill Lynch Strategic
Dividend Fund................. Long-term total return from investment in
dividend paying common stocks which yield
more than Standard & Poor's 500 Composite
Stock Price Index.
Merrill Lynch Technology Fund,
Inc........................... Capital appreciation through worldwide in-
vestment in equity securities of companies
that derive or are expected to derive a sub-
stantial portion of their sales from prod-
ucts and services in technology.
Merrill Lynch Texas Municipal
Bond Fund..................... A portfolio of Merrill Lynch Multi-State Mu-
nicipal Series Trust, a series fund, whose
objective is to provide shareholders with as
high a level of income exempt from Federal
income taxes as is consistent with prudent
investment management by investing primarily
in a portfolio of long-term, investment
grade obligations issued by the State of
Texas, its political subdivisions, agencies
and instrumentalities.
Merrill Lynch U.S. Government
Securities Portfolio
(available only for exchanges
by certain individual
retirement accounts for which
Merrill Lynch acts as
custodian)............... A portfolio of Merrill Lynch Asset Builder
Program, Inc., a series fund, whose objec-
tive is to provide shareholders with a high
current return through investments in U.S.
Government and government agency securities,
including GNMA mortgage-backed certificates
and other mortgage-backed government securi-
ties.
39
<PAGE>
Merrill Lynch Utility Income
Fund, Inc. ................... High current income through investment in eq-
uity and debt securities issued by companies
which are primarily engaged in the ownership
or operation of facilities used to generate,
transmit or distribute electricity, telecom-
munications, gas or water.
Merrill Lynch World Income
Fund, Inc..................... High current income by investing in a global
portfolio of fixed-income securities denomi-
nated in various currencies, including mul-
tinational currencies.
Class A Share Money Market
Funds:
Merrill Lynch Ready Assets
Trust......................... Preservation of capital, liquidity and the
highest possible current income consistent
with the foregoing objectives from the
short-term money market securities in which
the Trust invests.
Merrill Lynch Retirement
Reserves Money Fund
(available only for exchanges
within certain retirement
plans)........................ Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund,
whose objectives are to provide shareholders
with current income, preservation of capital
and liquidity available from investing in a
diversified portfolio of short-term money
market securities.
Merrill Lynch U.S.A.
Government Reserves........... Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and re-
purchase agreements relating to such securi-
ties.
Merrill Lynch U.S. Treasury
Money Fund.................... Preservation of capital, liquidity and cur-
rent income through investment exclusively
in a diversified portfolio of short-term
marketable securities which are direct obli-
gations of the U.S. Treasury.
40
<PAGE>
Class B, Class C and Class D Share Money Market
Funds:
Merrill Lynch Government Fund.. A portfolio of Merrill Lynch Funds for Insti-
tutions Series, a series fund, whose objec-
tive is to provide shareholders with current
income consistent with liquidity and secu-
rity of principal from investment in securi-
ties issued or guaranteed by the U.S. Gov-
ernment, its agencies and instrumentalities
and in repurchase agreements secured by such
obligations.
Merrill Lynch Institutional
Fund.......................... A portfolio of Merrill Lynch Funds for Insti-
tution Series, a series fund, whose objec-
tive is to provide shareholders with maximum
current income consistent with liquidity and
the maintenance of a high quality portfolio
of money market securities.
Merrill Lynch Institutional
Tax-Exempt Fund............... A portfolio of Merrill Lynch Funds for Insti-
tutions Series, a series fund, whose objec-
tive is to provide shareholders with current
income exempt from Federal income taxes,
preservation of capital and liquidity avail-
able from investing in a diversified portfo-
lio of short-term, high quality municipal
bonds.
Merrill Lynch Treasury Fund.... A portfolio of Merrill Lynch Funds for Insti-
tutions Series, a series fund, whose objec-
tive is to provide shareholders with current
income consistent with liquidity and secu-
rity of principal from investment in direct
obligations of the U.S. Treasury and up to
10% of its total assets in repurchase agree-
ments secured by such obligations.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant, who will advise the Fund of the exchange, or, if
the exchange does not involve a money market fund, the shareholder may write to
the Transfer Agent requesting that the exchange be effected. Such letter must
be signed exactly as the account is registered with signatures guaranteed by an
"eligible guarantor institution" as such 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.
The exchange privilege may be modified or terminated in accordance with the
rules of the Commission. The Fund reserves the right to limit the number of
times an investor may exercise the exchange privilege. Certain funds may
suspend the continuous offering of their shares to the general public at any
time and may thereafter resume such offering from time to time. The exchange
privilege is available only to U.S. shareholders in states where the exchange
legally may be made.
41
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all of its net investment income. Dividends
from such net investment income will be declared daily prior to the
determination of net asset value on that day and paid monthly. Net investment
income for dividend purposes consists of interest earned less expenses of the
Fund accrued for that dividend period. 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. All net realized long-term capital gains and short-term capital gains,
if any, will be distributed to the Fund's shareholders at least annually.
See "Shareholder Services--Automatic Reinvestment of Dividends and Capital
Gains Distributions" for information concerning the manner in which dividends
and distributions may be automatically reinvested in shares of the Fund.
Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as discussed below whether they are reinvested in shares of the
Fund or received in cash. The per share dividends and distributions on Class B
and Class C shares will be lower than the per share dividends and distributions
on Class A and Class D shares as a result of the account maintenance,
distribution and higher transfer agency fees applicable with respect to the
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 "Determination of Net Asset
Value".
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. If it so
qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital
gains which it distributes to Class A, Class B, Class C and Class D
shareholders (together, the "shareholders"). The Fund intends to distribute
substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in futures or options) ("capital gain dividends") are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six months or less will be treated as long-term capital
loss to the extent of any capital gain dividends received by the shareholder.
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).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income or capital gain dividends.
Distributions by the Fund, whether from ordinary income or capital gains,
generally will not be eligible for the dividends received
42
<PAGE>
deduction allowed to corporations under the Code. If the 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 such month, 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 the dividend
was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
the 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 provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, 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 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 investor 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.
If a shareholder exercises an exchange privilege within 90 days of acquiring
such shares, then the loss the shareholder can recognize on the exchange will
be reduced (or the gain increased) to the extent the sales charge paid to the
Fund reduces any sales charge such shareholder would have owed upon the
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 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.
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. While the Fund intends to distribute its income
and capital gains in the manner necessary to avoid imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition
of the tax. In such event, the Fund will be liable for the tax only on the
amount by which it does not meet the foregoing distribution requirements.
Tax Treatment of Options and Futures Transactions. The Fund may write (i.e.,
sell) covered call and covered put options on its portfolio securities,
purchase put and call options on securities, and engage in
43
<PAGE>
transactions in financial futures and related options on such futures. In
general, unless an election is available to the Fund or an exception applies,
such options and 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 futures contract will be treated as sold for
its fair market value on the last day of the taxable year, and any gain or loss
attributable to such contracts will be 60% long-term and 40% short-term capital
gain or loss. Application of these rules to Section 1256 contracts held by the
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 the Fund's transactions in options, futures and short sales of
securities. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain closing transactions
in options, futures and short sales of securities.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting certain short sales of securities and
closing transactions within three months after entering into an option or
futures contract.
The Fund may make investments that produce taxable income which is not
matched by a corresponding receipt of cash or an offsetting loss deduction.
Such investments would include obligations that have original issue discount,
accrue negative amortization or are subordinated in the mortgage-backed
securities structure. Such taxable income would be treated as income earned by
the Fund and would be subject to the distribution requirements of the Code.
Because such income may not be matched by a corresponding receipt of cash by the
Fund or an offsetting loss deduction, the Fund may be required to dispose of
other securities to be able to make distributions to shareholders. The Fund
intends to make sufficient and timely distributions to shareholders so as to
qualify for the special tax treatment afforded RICs at all times and to avoid
imposition of the excise tax.
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.
Ordinary income and capital gain dividends also may be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax. In general, state law does not consider income
derived from mortgage-backed securities to be income attributable to U.S.
Government obligations.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
44
<PAGE>
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield, in advertisements or information
furnished to present or prospective shareholders. Total return and yield
figures are based on the Fund's historical performance and are not intended to
indicate future performance. Average annual total return and 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.
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) the rates of return calculated will not be average annual
rates, but rather, actual annual, annualized or aggregate rates 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. In addition, because
the Fund reduced the maximum applicable sales charge in 1988 from 6.25% to
4.00%, certain performance data also will be computed with the inclusion of the
lower sales charge. Such data generally will reflect higher rates of return
because a lower sales charge is deducted.
45
<PAGE>
Set forth below is total return information for the Class A, Class B, Class C
and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS D SHARES (FORMERLY
CLASS A SHARES** CLASS B SHARES* CLASS C SHARES** CLASS A SHARES)
-------------------------- -------------------------- -------------------------- --------------------------
EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE
AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A
PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT
$1,000 AT THE END $1,000 AT THE END $1,000 AT THE END $1,000 AT THE END
PERIOD INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD
------ ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One Year Ended
August 31,
1995........... 4.91% $1,049.10 5.10% $1,051.00
Five Years Ended
August 31,
1995........... 6.86% $1,393.20
Ten Years Ended
August 31,
1995........... 8.26% $2,211.20
Class A and
Class C
Inception
(October 21,
1994) through
August 31,
1995........... 8.29% $1,070.90 11.48% $1,098.00
Class B
Inception
(December 23,
1991) to August
31, 1995....... 4.74% $1,186.30
Class D
(formerly Class
A) Inception
(September 28,
1984) to
August 31,
1995........... 9.12% $2,594.50
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<CAPTION>
YER ENDED AUGUST 31,A
- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995............ 8.91% $1,089.10 9.48% $1,094.80
1994............ (2.55)% $ 974.50 (2.06)% $ 979.40
1993............ 7.80% $1,078.00 8.35% $1,083.50
1992............ 10.16% $1,101.60
1991............ 13.40% $1,134.00
1990............ 9.61% $1,096.10
1989............ 11.48% $1,114.80
1988............ 8.02% $1,080.20
1987............ 2.43% $1,024.30
1986............ 17.39% $1,173.90
Class A and
Class C
Inception
(October 21,
1994) to
August 31,
1995........... 11.56% $1,115.60 10.80% $1,108.00
Class B
Inception
(December 23,
1991) to August
31, 1992....... 4.54% $1,045.40
Class D
(formerly Class
A) Inception
(September 28,
1984) to
August 31,
1985........... 17.34% $1,173.40
</TABLE>
(footnotes on following page)
46
<PAGE>
<TABLE>
<CAPTION>
CLASS D SHARES (FORMERLY
CLASS A SHARES** CLASS B SHARES* CLASS C SHARES** CLASS A SHARES)
-------------------------- -------------------------- -------------------------- --------------------------
EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE
AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A
PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT
$1,000 AT THE END $1,000 AT THE END $1,000 AT THE END $1,000 AT THE END
PERIOD INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD
------ ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A and
Class C
Inception
(October 21,
1994) to
August 31,
1995........... 7.09% $1,070.90 9.80% $1,098.00
Class B
Inception
(December 23,
1991) to August
31, 1995....... 18.63% $1,186.30
Class D
(formerly Class
A) Inception
(September 28,
1984) to
August 31,
1995........... 159.45% $2,594.50
</TABLE>
- --------
* Information as to Class B shares is presented only for the period December
23, 1991 to August 31, 1995. Prior to December 23, 1991, no Class B shares
were publicly issued.
** Information as to Class A and Class C shares is presented only for the
period October 21, 1994 to August 31, 1995. Prior to October 21, 1994, no
new Class A or Class C shares were publicly issued.
In order to reflect the reduced sales charges in the case of Class A or
Class D shares, or the waiver of the contingent deferred sales charge 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 the Fund in advertisements directed to such
investors may take into account the reduced, and not the maximum, sales charge
and therefore may reflect greater total return since, due to the reduced sales
charges or the waiver of sales charges, a lower amount of expenses is
deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Declaration of Trust of the Fund permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest, par
value $0.10 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 Fund. At the date of this Statement
of Additional Information, the shares of the Fund are divided into four
classes, designated 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 Fund and have identical voting, dividend, liquidation and other rights and
the same terms and conditions except that the Class B, Class C and Class D
shares bear certain expenses related to the account maintenance and/or
distribution of such shares and have exclusive voting rights with respect to
matters relating to such account maintenance and/or distribution expenditures.
The Fund has received an order from the Commission permitting the issuance and
sale of multiple classes of shares of beneficial interest. The Board of
Trustees of the Fund may classify and reclassify the shares of the Fund into
additional classes at a future date.
47
<PAGE>
All shares of the Fund have equal voting rights, except that as noted above,
each class will have exclusive voting rights with respect to matters relating
to the 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 the Fund, and upon liquidation or dissolution each
share is entitled to receive its allocable share of the net assets of the Fund
remaining after satisfaction of outstanding liabilities, except that, as noted
above, expenses related to the distribution of each class will be borne solely
by such class. There normally will be no meetings of shareholders for the
purposes of electing Trustees unless and until such time as less than a
majority of the Trustees holding office have been elected by shareholders, at
which time the Trustees then in office will call a shareholders' meeting for
the election of Trustees. Shareholders may, in accordance with the terms of the
Declaration of Trust, cause a meeting of shareholders to be held for the
purpose of voting on the removal of Trustees. Also, the Fund will be required
to call a special meeting of shareholders in accordance with the requirements
of the Investment Company 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 the Fund.
Shares of the Fund, when issued, will be fully paid and nonassessable, have
no preference, preemptive, exchange or similar rights, and will be freely
transferable. Redemption and conversion rights are discussed elsewhere herein
and in the Prospectus. Holders of shares of the Fund 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 Fund 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 amendment may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Fund.
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A, Class B, Class C and Class D shares of the
Fund, based on the value of the Fund's net assets and number of shares
outstanding as of August 31, 1995, is set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ -------------- ----------- ------------
<S> <C> <C> <C> <C>
Net Assets................ $223,236,939 $1,262,985,320 $15,620,610 $976,161,161
============ ============== =========== ============
Number of Shares Outstand-
ing...................... 23,232,522 131,454,676 1,626,106 101,608,151
============ ============== =========== ============
Net Asset Value Per Share
(net assets
divided by number of
shares outstanding)...... $ 9.61 $ 9.61 $ 9.61 $ 9.61
Sales Charge (Class A and
Class D shares:
4.00% of offering price
(4.17% of net
asset value per share))*. .40 ** ** .40
------------ -------------- ----------- ------------
Offering Price............ $ 10.01 $ 9.61 $ 9.61 $ 10.01
============ ============== =========== ============
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC upon redemption. 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.
48
<PAGE>
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the shareholders of the
Fund. In addition, the employment of such auditors may be terminated without
any penalty by vote of a majority of the outstanding shares of the Fund at a
meeting called for the purpose of terminating such employment. The independent
auditors are responsible for auditing the financial statements of the Fund.
CUSTODIAN
The Bank of New York, 90 Washington Street, 12th Floor, New York, New York
10286, acts as the custodian of the Fund's assets. The Custodian is responsible
for safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities and collecting interest on the Fund's
investments.
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"). 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" in
the Prospectus.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on August 31 of each year. The Fund sends to
its shareholders 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 Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares of beneficial interest on December 1, 1995.
----------------
The Declaration of Trust establishing the Fund, dated July 20, 1984, 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 Federal Securities 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 Fund
shall be held to any personal liability, nor shall resort be had to their
private property for the satisfaction of any obligation or claim of the Fund,
but the "Trust Property" only shall be liable.
49
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch Federal Securities Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Federal Securities Trust as of
August 31, 1995, 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 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 August
31, 1995 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
Federal Securities Trust as of August 31, 1995, the results of its operations,
the changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey October 2, 1995
50
<PAGE>
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Date(s) (Note 1a)
US Government Obligations--21.06%
<S> <C> <C> <C> <C>
United States Treasury Notes $ 45,000,000 8.25 % 7/15/1998 $ 47,657,700
200,000,000 8.875 2/15/1999 217,624,000
100,000,000 6.25 5/31/2000 100,641,000
50,000,000 5.875 6/30/2000 49,586,000
5,000,000 6.125 7/31/2000 5,007,050
100,000,000 6.50 5/15/2005 101,266,000
Total US Government Obligations (Cost--$512,336,775) 521,781,750
US Government Agency Mortgage-Backed Obligations*--77.13%
Federal Home Loan Mortgage Corporation 748 10.00 7/01/2019 807
Participation Certificates 24,140,740 10.50 9/01/2000-9/01/2020 26,215,154
6,003,718 11.00 8/01/2010-9/01/2020 6,581,576
5,173,580 11.50 10/01/1998-6/01/2020 5,700,613
2,252,190 12.00 7/01/1999-6/01/2020 2,498,513
5,090,710 12.50 10/01/1999-7/01/2019 5,650,688
6,605,692 13.00 8/01/1999-2/01/2016 7,365,346
Federal Home Loan Mortgage Corporation 476,505 6.00 4/01/2009 461,314
Participation Certificates-- 51,590,784 7.00(2) 4/01/1997-1/01/2000 52,154,671
Gold Program 50,000,000 7.00 2/01/2005-5/01/2024 49,140,500
91,818,989 8.00 1/01/2007-5/01/2025 93,993,230
22,530,689 8.50 7/01/2008-7/01/2025 23,255,726
8,622,704 10.50 10/01/2020-12/01/2020 9,428,323
Federal Home Loan Mortgage 1423-DD 43,116,000 6.38 1/15/2006 42,091,995
Corporation REMICs** 93-1604-E 105,716,536 5.50 3/15/2007 101,950,384
GN29P 50,000,000 7.00 2/25/2018 50,250,000
190-F 732,257 9.20 10/15/2021 732,256
Trust 1220-A 14,265,814 6.29 2/15/2022 14,265,814
Trust 1220-B 115,982,210 0.47++ 2/15/2022 1,309,439
Trust 134 2,979,125 9.00(1) 4/15/2022 695,417
Trust 171 81,521,120 8.00 7/15/2024 83,176,814
Federal National Mortgage Association 865 6.50 12/01/2008 852
Mortgage-Backed Securities 50,173,180 7.00 6/01/2025-8/01/2025 49,310,703
111,535,653 7.50 12/01/2006-8/01/2025 112,599,188
195,809,791 8.00 7/01/2009-1/01/2025 200,650,092
178,638,760 8.50 3/01/2005-4/01/2025 184,339,589
40,483,293 8.50(3) 7/15/2023 41,419,671
22,182 10.50 9/01/2000 23,305
55,657,484 11.00 2/01/2011-12/01/2020 61,744,743
139,794 11.50 1/01/2015-6/01/2015 156,045
2,861,654 13.00 8/01/2010-6/01/2015 3,190,744
Federal National Mortgage 93-123-S 15,529,411 6.825++ 7/25/2000 13,821,176
Association REMICs** 94-M4-A 28,363,148 9.055 8/25/2026 29,586,309
</TABLE>
51
<PAGE>
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Face Interest Maturity Value
Issue Amount Rate Date(s) (Note 1a)
US Government Agency Mortgage-Backed Obligations* (concluded)
<S> <C> <C> <C> <C>
Government National Mortgage Association $ 46,277,305 7.00 % 2/15/2022-6/15/2024 $ 45,481,798
Mortgage-Backed Securities 247,610,714 7.50 8/15/2021-2/15/2025 249,002,287
141,131,710 8.00 6/15/2017-6/15/2025 144,614,841
68,514,583 8.50 3/15/2017-6/15/2025 71,169,524
33,829,260 9.50 4/15/2016-10/15/2018 36,418,890
80,542,332 10.00 12/15/2015-12/15/2021 87,845,941
416,868 10.50 10/15/2014-4/15/2021 459,726
2,215,677 11.00 1/15/2010-12/15/2017 2,471,853
24,605 11.50 8/15/2013-4/15/2015 27,757
<CAPTION>
Total US Government Agency Mortgage-Backed Obligations (Cost--$1,876,399,353) 1,911,253,614
Face
Amount Issue
Repurchase Agreements***--4.64%
<C> <S> <C>
$97,000,000 Nikko Securities Co., purchased on 8/31/1995 to yield 5.84% to 9/01/1995 97,000,000
18,000,000 Paine Webber Incorporated, purchased on 8/31/1995 to yield 5.81% to 9/01/1995 18,000,000
<CAPTION>
Total Repurchase Agreements (Cost--$115,000,000) 115,000,000
Par Strike Expiration
Value Issue Price Date
Options Purchased--0.01%
<S> <C> <S> <C> <C> <C>
Call Options $100,056,859 Government National Mortgage
Purchased Association, 6% Adjustable
Rate Mortgage 101.5 12/15/1995 330,188
Put Options 50,000,000 Federal National Mortgage
Purchased Association, 30-Year, 7.50% 99.69 9/07/1995 31,250
Total Options Purchased (Cost--$660,781) 361,438
Total Investment (Cost--$2,504,396,909)--102.84% 2,548,396,802
Options Written--0.00%
Put Options 32,100,000 United States Treasury Notes,
Written 6.50% due 5/15/2005 99.97 9/07/1995 (17,527)
Total Options Written (Cost--$300,938) (17,527)
Total Investments Net of Options Written (Cost--$2,504,095,971)--102.84% 2,548,379,275
Liabilities in Excess of Other Assets--(2.84%) (70,375,245)
--------------
Net Assets--100.00% $2,478,004,030
==============
<FN>
(1)Represents the interest only portion of a mortgage-backed
obligation.
(2)Represents balloon mortgages that amortize on a 30-year schedule
and have 5-year maturities.
(3)Federal Housing Administration/Veterans' Administration Mortgages
packaged by the Federal National Mortgage Association.
++Adjustable Rate Security. The interest rate resets periodically
and inversely. The interest rate shown is the rate in effect as of
August 31, 1995.
*Mortgage-Backed Obligations are subject to principal paydowns as a
result of prepayments or refinancings of the underlying mortgage
instruments. As a result, the average life may be substantially less
than the original maturity.
**Real Estate Mortgage Investment Conduits (REMICs).
***Repurchase Agreements are fully collateralized by US Government &
Agency Obligations.
</TABLE>
See Notes to Financial Statements.
52
<PAGE>
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 1995
<TABLE>
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$2,503,736,128) (Note 1a) $ 2,548,035,364
Options purchased, at value (cost--$660,781) (Notes 1a & 1c) 361,438
Cash 2,495,587
Receivables:
Securities sold $ 48,468,750
Interest 18,031,674
Beneficial interest sold 3,543,293
Principal paydowns 1,276,638
Loaned securities and extended deliveries (Note 6) 97,322 71,417,677
---------------
Prepaid registration fees and other assets (Note 1f) 120,799
---------------
Total assets 2,622,430,865
---------------
Liabilities: Options written, at value (premiums received--$300,938)
(Notes 1a & 1c) 17,527
Payables:
Securities purchased 131,693,516
Beneficial interest redeemed 5,243,272
Dividends to shareholders (Note 1g) 4,367,174
Distributor (Note 2) 1,020,710
Investment adviser (Note 2) 945,600 143,270,272
---------------
Accrued expenses and other liabilities 1,139,036
---------------
Total liabilities 144,426,835
---------------
Net Assets: Net assets $ 2,478,004,030
===============
Net Assets Class A Shares of beneficial interest, $0.10 par value,
Consist of: unlimited number of shares authorized $ 2,323,252
Class B Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 13,145,468
Class C Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 162,611
Class D Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 10,160,815
Paid-in capital in excess of par 2,840,038,128
Accumulated realized capital losses on investments--net (Note 5) (432,109,548)
Unrealized appreciation on investments--net 44,283,304
---------------
Net assets $ 2,478,004,030
===============
Net Asset Value: Class A--Based on net assets of $223,236,939 and 23,232,522
shares of beneficial interest outstanding $ 9.61
===============
Class B--Based on net assets of $1,262,985,320 and 131,454,676
shares of beneficial interest outstanding $ 9.61
===============
Class C--Based on net assets of $15,620,610 and 1,626,106
shares of beneficial interest outstanding $ 9.61
===============
Class D--Based on net assets of $976,161,161 and 101,608,151
shares of beneficial interest outstanding $ 9.61
===============
</TABLE>
See Notes to Financial Statements.
53
<PAGE>
FINANCIAL INFORMATION (continued)
Statement of Operations for the Year Ended August 31, 1995
<TABLE>
<S> <S> <C>
Investment Interest and discount earned $ 199,574,230
Income Other 432,339
(Note 1e): ---------------
Total income 200,006,569
---------------
Expenses: Investment advisory fees (Note 2) 11,490,071
Account maintenance and distribution fees--Class B (Note 2) 9,900,024
Account maintenance fees--Class D (Note 2) 2,666,871
Transfer agent fees--Class B (Note 2) 1,934,031
Transfer agent fees--Class D (Note 2) 1,350,193
Custodian fees 579,870
Accounting services (Note 2) 410,006
Printing and shareholder reports 328,719
Transfer agent fees--Class A (Note 2) 223,349
Professional fees 107,091
Registration fees (Note 1f) 72,413
Account maintenance and distribution fees--Class C (Note 2) 44,545
Trustees' fees and expenses 35,336
Transfer agent fees--Class C (Note 2) 8,785
Other 49,692
---------------
Total expenses 29,200,996
---------------
Investment income--net 170,805,573
---------------
Realized & Realized loss on investments--net (48,775,962)
Unrealized Change in unrealized appreciation/depreciation on
Gain (Loss) on investments--net 92,170,478
Investments--Net ---------------
(Notes 1c, 1e Net Increase in Net Assets Resulting from Operations $ 214,200,089
& 3): ===============
</TABLE>
See Notes to Financial Statements.
54
<PAGE>
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 170,805,573 $ 174,250,833
Realized loss on investments--net (48,775,962) (118,401,781)
Change in unrealized appreciation/depreciation on
investments--net 92,170,478 (133,557,622)
--------------- ---------------
Net increase (decrease) in net assets resulting from
operations 214,200,089 (77,708,570)
--------------- ---------------
Dividends to Investment income--net:
Shareholders Class A (12,352,715) --
(Note 1g): Class B (84,089,808) (88,957,069)
Class C (348,549) --
Class D (73,437,660) (85,293,764)
--------------- ---------------
Net decrease in net assets resulting from dividends
to shareholders (170,228,732) (174,250,833)
--------------- ---------------
Beneficial Interest Net decrease in net assets derived from beneficial interest
Transactions transactions (420,304,775) (881,720,587)
(Notes 1i & 4): --------------- ---------------
Net Assets: Total decrease in net assets (376,333,418) (1,133,679,990)
Beginning of year 2,854,337,448 3,988,017,438
--------------- ---------------
End of year $ 2,478,004,030 $ 2,854,337,448
=============== ===============
</TABLE>
See Notes to Financial Statements.
55
<PAGE>
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
For the For the
Period Period
The following per share data and ratios have been derived Oct. 21, Dec. 23,
from information provided in the financial statements. 1994++ to 1991++ to
Aug. 31, For the Year Ended Aug. 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1995++++ 1995++++ 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.16 $ 9.41 $ 10.14 $ 9.92 $ 9.92
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .58 .60 .48 .52 .44
Realized and unrealized gain (loss)
on investments--net .45 .20 (.73) .22 --
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.03 .80 (.25) .74 .44
---------- ---------- ---------- ---------- ----------
Less dividends from investment
income--net (.58) (.60) (.48) (.52) (.44)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.61 $ 9.61 $ 9.41 $ 10.14 $ 9.92
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 11.56%+++ 8.91% (2.55%) 7.80% 4.54%+++
Return:** ========== ========== ========== ========== ==========
Ratios to Average Expenses, excluding account
Net Assets: maintenance and distribution fees .64%* .66% .58% .55% .58%*
========== ========== ========== ========== ==========
Expenses .64%* 1.41% 1.33% 1.30% 1.33%*
========== ========== ========== ========== ==========
Investment income--net 7.21%* 6.39% 4.90% 5.27% 6.45%*
========== ========== ========== ========== ==========
Supplemental Net assets, end of period
Data: (in thousands) $ 223,237 $1,262,985 $1,497,358 $2,151,917 $1,921,893
========== ========== ========== ========== ==========
Portfolio turnover 260.34% 260.34% 322.68% 224.35% 230.83%
========== ========== ========== ========== ==========
<FN>
++Commencement of Operations.
++++Based on average outstanding shares for the period.
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
56
<PAGE>
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<CAPTION>
Class C Class D
For the
The following per share data and ratios Period
have been derived from information provided Oct. 21,
in the financial statements. 1994++ to
Aug. 31, For the Year Ended Aug. 31,
Increase (Decrease) in Net Asset Value: 1995++++ 1995++++ 1994 1993 1992 1991
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 9.16 $ 9.41 $ 10.14 $ 9.92 $ 9.66 $ 9.28
Performance: ---------- ---------- ---------- ---------- ---------- ----------
Investment income--net .51 .64 .52 .57 .70 .81
Realized and unrealized gain
(loss) on investments--net .45 .20 (.73) .22 .26 .38
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations .96 .84 (.21) .79 .96 1.19
---------- ---------- ---------- ---------- ---------- ----------
Less dividends from
investment income--net (.51) (.64) (.52) (.57) (.70) (.81)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of
period $ 9.61 $ 9.61 $ 9.41 $ 10.14 $ 9.92 $ 9.66
========== ========== ========== ========== ========== ==========
Total Investment Based on net asset value
Return:** per share 10.80%+++ 9.48% (2.06%) 8.35% 10.16% 13.40%
========== ========== ========== ========== ========== ==========
Ratios to Expenses, excluding account
Average Net maintenance and distribution
Assets: fees .67%* .64% .58% .54% .57% .60%
========== ========== ========== ========== ========== ==========
Expenses 1.47%* .89% .83% .79% .80% .78%
========== ========== ========== ========== ========== ==========
Investment income--net 6.28%* 6.91% 5.41% 5.80% 7.17% 8.62%
========== ========== ========== ========== ========== ==========
Supplemental Net assets, end of period
Data: (in thousands) $ 15,621 $ 976,161 $1,356,979 $1,836,100 $2,048,037 $2,230,619
========== ========== ========== ========== ========== ==========
Portfolio turnover 260.34% 260.34% 322.68% 224.35% 230.83% 311.04%
========== ========== ========== ========== ========== ==========
<FN>
++Commencement of Operations.
++++Based on average outstanding shares for the period.
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
57
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Federal Securities Trust (the "Trust") is registered
under the Investment Company Act of 1940 as a diversified, open-end
management investment company. 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--Securities traded in the over-the-
counter market 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. The Trust employs Merrill Lynch Securities Pricing
Service ("MLSPS"), an affiliate of Fund Asset Management, L.P.
("FAM"), to provide mortgage-backed securities prices for the Trust.
Options on US Government securities, which are traded on exchanges,
are valued at their last bid price in the case of options purchased
by the Trust and their last asked price in the case of options
written by the Trust. An option traded on the over-the-counter
market is valued at its last bid price or asked price as obtained
from at least two independent entities.Interest rate futures
contracts and options thereon, which are traded on exchanges, are
valued at their last sale price as of the close of such exchanges.
Securities with a remaining maturity of sixty 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.
(b) Repurchase agreements--The Trust invests in US Government
securities pursuant to repurchase agreements with a member bank of
the Federal Reserve System or a primary dealer in US Government
securities. Under such agreements, the bank or primary dealer agrees
to repurchase the security at a mutually agreed upon time and price.
The Trust takes possession of the underlying securities, marks to
market such securities and, if necessary, receives additions to such
securities daily to ensure that the contract is fully
collateralized.
(c) Derivative financial instruments--The Trust may engage in
various portfolio strategies to seek to increase its return by
hedging its portfolio against adverse movements in the debt and
currency markets. Losses may arise due to changes in the value of
the contract or if the counterparty does not perform under the
contract.
* Futures contracts--The Trust may purchase or sell interest rate
futures contracts. Upon entering into a contract, the Trust deposits
and maintains as collateral such initial margins as required by the
exchange on which the transaction is effected. Pursuant to the
contract, the Trust agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Trust as unrealized gains or losses. When
the contract is closed, the Trust records a realized gain or loss
equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed.
* Options--The Trust is authorized to write and purchase call and put
options. When the Trust writes an option, an amount equal to the
premium received by the Trust is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written. When a security is purchased or sold through an exercise of
an option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Trust enters into a closing transaction), the Trust
realizes a gain or loss
58
<PAGE>
on the option to the extent of the premiums received or paid
(or gain or loss to the extent the cost of the closing transaction
exceeds the premiums paid or received).
Written and purchased options are non-income producing investments.
(d) Income taxes--It is the Trust'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.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
discount) and extended delivery fees are recognized on the accrual
basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) 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.
(h) Dollar rolls--The Trust sells mortgage-backed securities for
delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity)
securities on a specific future date. The repurchase amount as of
August 31, 1995 was $16,212,732.
(i) Reclassification--Certain amounts have been reclassified as a
result of permanent book-tax differences.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Trust has entered into an Investment Advisory Agreement with
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 the Trust's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Trust. For such
services, the Trust pays a monthly fee based upon the average daily
value of the Trust's net assets at the following rate:
Portion of Average Daily
Value of Net Assets Rate
Not exceeding $500 million 0.500%
In excess of $500 million but not
exceeding $1 billion 0.475%
In excess of $1 billion but not
exceeding $1.5 billion 0.450%
In excess of $1.5 billion but not
exceeding $2 billion 0.425%
In excess of $2 billion but not
exceeding $2.5 billion 0.400%
In excess of $2.5 billion but not
exceeding $3.5 billion 0.375%
In excess of $3.5 billion but not
exceeding $5 billion 0.350%
In excess of $5 billion but not
exceeding $6.5 billion 0.325%
Exceeding $6.5 billion 0.300%
The Investment Advisory Agreement obligates FAM to reimburse the
Trust to the extent the Trust's expenses (excluding interest, taxes,
distribution fees, brokerage fees and commissions, and extraordinary
items) exceed 2.5% of the Trust's first $30 million of average daily
net assets, 2.0% of the next $70 million of average daily net
assets, and 1.5% of the average daily net assets in excess thereof.
FAM's obligation to reimburse the Trust is limited to the amount of
the management fee. No fee payment will be made to FAM during any
fiscal year which will cause such expenses to exceed the pro rata
expense limitation at the time of such payment.
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 Trust pays the Distributor on-
going account maintenance and distribution fees. The fees are
accrued daily and paid monthly at
59
<PAGE>
annual rates based upon the average daily net assets of the
shares as follows:
NOTES TO FINANCIAL STATEMENTS (concluded)
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.50%
Class C 0.25% 0.55%
Class D 0.25% --
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 August 31, 1995, MLFD earned underwriting
discounts and direct commissions and MLPF&S earned dealer
concessions on sales of the Trust's Class A and Class D Shares as
follows:
MLFD MLPF&S
Class A $ 1,123 $ 18,020
Class D $23,539 $248,456
For the year ended August 31, 1995, MLPF&S received contingent
deferred sales charges of $2,992,727 and $6,138 relating to
transactions in Class B and Class C Shares, respectively.
During the year ended August 31, 1995, the Trust paid MLSPS $2,080
for security price quotations to compute the net asset value of the
Trust.
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, MLFD, MLPF&S, MLFDS, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1995 were $6,460,392,807 and
$6,767,430,991, respectively.
Net realized and unrealized gains (losses) as of August 31, 1995
were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $(48,530,535) $ 44,299,236
Short-term investments 1,292 --
Options purchased 1,386,119 (299,343)
Options written (1,632,838) 283,411
------------ ------------
Total $(48,775,962) $ 44,283,304
============ ============
As of August 31, 1995, net unrealized appreciation for Federal
income tax purposes aggregated $24,726,096, of which $31,865,381
related to appreciated securities and $7,139,285 related to
depreciated securities. The aggregate cost of investments, including
options purchased less premiums received for options written, at
August 31, 1995 for Federal income tax purposes was $2,523,653,179.
Transactions in put options written for the year ended August 31,
1995 were as follows:
Face
Amount Premiums
Put Options Written Subject to Put Received
Outstanding options
written, beginning of year -- --
Options written $119,100,000 $ 1,578,126
Options exercised (87,000,000) (1,277,188)
------------ ------------
Outstanding options
written, end of year $ 32,100,000 $ 300,938
============ ============
4. Shares of Beneficial Interest:
Net decrease in net assets derived from beneficial
interest transactions was $420,304,775 and $881,720,587 for the
years ended August 31, 1995 and August 31, 1994, respectively.
60
<PAGE>
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Period Dollar
Oct. 21, 1994++ to Aug. 31, 1995 Shares Amount
Shares sold 30,530,411 $282,054,026
Shares issued to share-
holders in reinvestment
of dividends 455,652 4,239,634
------------ ------------
Total issued 30,986,063 286,293,660
Shares redeemed (7,753,541) (72,945,956)
------------ ------------
Net increase 23,232,522 $213,347,704
============ ============
[FN]
++Commencement of Operations.
Class B Shares for the Year Dollar
Ended August 31, 1995 Shares Amount
Shares sold 21,572,051 $ 201,569,458
Shares issued to shareholders
in reinvestment of dividends 5,141,582 47,944,155
------------ -------------
Total issued 26,713,633 249,513,613
Automatic conversion of
shares (142,436) (1,332,622)
Shares redeemed (54,176,662) (503,689,288)
------------ -------------
Net decrease (27,605,465) $(255,508,297)
============ =============
Class B Shares for the Year Dollar
Ended August 31, 1994 Shares Amount
Shares sold 25,174,866 $ 246,237,057
Shares issued to shareholders
in reinvestment of dividends 5,183,921 50,451,702
------------ -------------
Total issued 30,358,787 296,688,759
Shares redeemed (83,589,212) (816,233,633)
------------ -------------
Net decrease (53,230,425) $(519,544,874)
============ =============
Class C Shares for the Period Dollar
Oct. 21, 1994++ to Aug. 31, 1995 Shares Amount
Shares sold 1,942,998 $ 18,329,377
Shares issued to shareholders
in reinvestment of dividends 22,508 213,166
------------ ------------
Total issued 1,965,506 18,542,543
Shares redeemed (339,400) (3,229,586)
------------ ------------
Net increase 1,626,106 $ 15,312,957
============ ============
[FN]
++Commencement of Operations.
Class D Shares for the
Year Ended Dollar
August 31, 1995 Shares Amount
Shares sold 4,559,726 $ 42,599,935
Automatic conversion of
shares 142,436 1,332,622
Shares issued to share-
holders in reinvestment
of dividends 3,722,044 34,698,654
------------ -------------
Total issued 8,424,206 78,631,211
Shares redeemed (50,970,271) (471,652,190)
------------ -------------
Net decrease (42,546,065) $(393,020,979)
============ =============
Class D Shares for the
Year Ended Dollar
August 31, 1994 Shares Amount
Shares sold 14,555,924 $ 141,925,143
Shares issued to share-
holders in reinvestment
of dividends 4,202,561 40,918,356
------------ -------------
Total issued 18,758,485 182,843,499
Shares redeemed (55,745,563) (545,019,212)
------------ -------------
Net decrease (36,987,078) $(362,175,713)
============ =============
As a result of implementation of the Merrill Lynch Select Pricing SM
System, Class A Shares of the Fund outstanding prior to October 21,
1994 were redesignated Class D Shares. There were 119,438,530 shares
redesignated amounting to $1,423,379,743.
5. Capital Loss Carryforward:
At August 31, 1995, the Trust had a net capital loss carryforward of
approximately $384,313,000, of which $98,650,000 expires in 1996,
$68,370,000 expires in 1997, $39,147,000 expires in 1998, and
$178,145,000 expires in 2003. This amount will be available to
offset like amounts of any future taxable gains.
6. Loaned Securities:
At August 31, 1995, the Trust held US Treasury Notes having an
aggregate value of approximately $55,988,000 as collateral for
portfolio securities loaned having a market value of approximately
$55,640,000.
61
<PAGE>
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62
<PAGE>
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63
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
Portfolio Strategies Involving Options and Futures........................ 2
Other Portfolio Strategies................................................ 5
Investment Restrictions................................................... 6
Management of the Fund..................................................... 9
Trustees and Officers..................................................... 9
Management and Advisory Arrangements...................................... 11
Purchase of Shares......................................................... 13
Alternative Sales Arrangements............................................ 13
Initial Sales Charge Alternatives--Class A and Class D Shares............. 14
Reduced Initial Sales Charges............................................. 15
Distribution Plans........................................................ 19
Limitations on the Payment of Deferred Sales Charges...................... 20
Redemption of Shares....................................................... 21
Deferred Sales Charge--Class B and Class C Shares......................... 21
Portfolio Transactions..................................................... 22
Determination of Net Asset Value........................................... 24
Shareholder Services....................................................... 25
Investment Account........................................................ 25
Automatic Investment Plans................................................ 26
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 26
Systematic Withdrawal Plans--Class A and Class D Shares................... 26
Retirement Plans.......................................................... 27
Exchange Privilege........................................................ 28
Dividends, Distributions and Taxes......................................... 42
Dividends and Distributions............................................... 42
Taxes..................................................................... 42
Performance Data........................................................... 45
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................................................... 49
Additional Information.................................................... 49
Security Ownership of Certain Beneficial Owners........................... 49
Independent Auditors' Report............................................... 50
Financial Statements....................................................... 51
</TABLE>
Code #10260-1295
Statement of
Additional Information
[ART]
- -----------------------------------
MERRILL LYNCH
FEDERAL SECURITIES
TRUST
December 21, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS:
Contained in Part A:
Financial Highlights for each of the years in the ten-year period
ended August 31, 1995.
Contained in Part B:
Schedule of Investments as of August 31, 1995.
Statement of Assets and Liabilities as of August 31, 1995.
Statement of Operations for the year ended August 31, 1995.
Statements of Changes in Net Assets for the years ended August 31,
1995 and 1994.
Financial Highlights for each of the years in the five-year period
ended August 31, 1995.
(b) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1(a) --Declaration of Trust of the Registrant.(a)
(b) --Certification of amendment, dated December 20, 1991, to Declaration
of Trust.(a)
(c) --Instrument establishing Class A and Class B shares of the
Registrant.(a)
(d) --Certification of amendment, dated October 13, 1994, to Declaration
of Trust and Instrument establishing Class C and Class D shares of
the Registrant.(a)
2 --By-Laws of the Registrant.(a)
3 --None.
4 --Portions of the Declaration of Trust and By-Laws of the Registrant
defining the rights of holders of shares of the Registrant.(b)
5(a) --Management Agreement between the Registrant and Fund Asset Manage-
ment, Inc.(c)
(b) --Supplement to Management Agreement between Registrant and Fund Asset
Management, L.P.(d)
6(a) --Form of Class A Distribution Agreement between Registrant and Mer-
rill Lynch Funds Distributor, Inc.(d)
(b) --Class B Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor,
Inc.(a)
(c) --Form of Class C Distribution Agreement between Registrant and Mer-
rill Lynch Funds Distributor, Inc. (including Selected Dealers
Agreement).(d)
(d) --Form of Class D Distribution Agreement between Registrant and Mer-
rill Lynch Funds Distributor, Inc. (including Selected Dealers
Agreement).(d)
7 --None.
8 --Custody Agreement between Registrant and The Bank of New York.(a)
9 --Transfer Agency, Dividend Disbursing Agency and Shareholder Servic-
ing Agency Agreement between the Registrant and Merrill Lynch Finan-
cial Data Services, Inc.(a)
10 --Opinion of Brown & Wood, counsel to Registrant.
11 --Consent of Deloitte & Touche LLP, independent auditors for Regis-
trant.
12 --None.
13 --Certificate of Fund Asset Management, Inc.(a)
14 --None.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
15(a) --Amended and Restated Class B Distribution Plan of Registrant.(c)
(b) --Form of Class C Distribution Plan and Class C Distribution Plan Sub-
Agreement of Registrant.(d)
(c) --Form of Class D Distribution Plan and Class D Distribution Plan Sub-
Agreement of Registrant.(d)
16(a) --Schedule for computation of each performance quotation provided for
Class A shares in the Registration Statement in response to Item 22.
(b) --Schedule for computation of each performance quotation provided for
Class B shares in the Registration Statement in response to Item
22.(a)
(c) --Schedule for computation of each performance quotation provided for
Class C shares in the Registration Statement in response to Item 22.
(d) --Schedule for computation of each performance quotation provided for
Class D (formerly Class A) shares in the Registration Statement in
response to Item 22.(a)
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
</TABLE>
- --------
(a) Refiled pursuant to the Electronic Data Gathering, Analysis and Retrieval
("EDGAR") phase-in requirements.
(b) Reference is made to Article II, Section 2.3 and Articles III, V, VI, VIII,
IX, X and XI of the Registrant's Declaration of Trust, filed as Exhibit
1(a) to Post-Effective Amendment No. 12 to the Registrant's Registration
Statement under the Securities Act of 1933, as amended (the "Registration
Statement"); and to Articles I, V and VI of the Registrant's By-Laws, filed
as Exhibit 2 to Post-Effective Amendment No. 12 to the Registration
Statement.
(c) Filed on December 23, 1993 as an Exhibit to the Registrant's Registration
Statement on Form N-1A under the Securities Act of 1933.
(d) Filed on October 21, 1994 as an Exhibit to the Registrant's Registration
Statement on Form N-1A under the Securities Act of 1933.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The Registrant is not controlled by or under common control with any person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
NOVEMBER
TITLE OF CLASS 30, 1995
-------------- ----------
<S> <C>
Class A shares of beneficial interest, par value $0.10 per share..... 30,342
Class B shares of beneficial interest, par value $0.10 per share..... 77,828
Class C shares of beneficial interest, par value $0.10 per share..... 976
Class D shares of beneficial interest, par value $0.10 per share..... 60,973
</TABLE>
- --------
Note: The number of holders shown above includes holders of record plus
beneficial owners whose shares are held of record by Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
C-2
<PAGE>
ITEM 27. INDEMNIFICATION
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees, and
agents (including persons who serve at its request as directors, officers or
trustees of another organization in which it has any interest as a shareholder,
creditor or otherwise) against all liabilities and expenses (including amounts
paid in satisfaction of judgments, in compromise, as fines and penalties, and
as counsel fees) reasonably incurred by him in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which he may be involved or with which he may be threatened, while in office
or thereafter, by reason of his being or having been such a trustee, officer,
employee or agent, except with respect to any matter as to which he shall have
been adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties; provided, however, that as to
any matter disposed of by a compromise payment by such person, pursuant to a
consent decree or otherwise, no indemnification either for said payment or for
any other expenses shall be provided unless the Trust shall have received a
written opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence or
reckless disregard of duty, or the matter of good faith and reasonable belief
as to the best interest of the Trust, had been adjudicated, it would have been
adjudicated in favor of such person. The rights accruing to any Person under
these provisions shall not exclude any other right to which he may be lawfully
entitled; provided that no Person may satisfy any right of indemnity or
reimbursement granted herein or in Section 5.1 or to which he may be otherwise
entitled except out of the property of the Trust, and no shareholder shall be
personally liable to any Person with respect to any claim for indemnity or
reimbursement or otherwise. The Trustees may make advance payments in
connection with indemnification under this Section 5.3, provided that the
indemnified person shall have given a written undertaking to reimburse the
Trust in the event it is subsequently determined that he is not entitled to
such indemnification."
Insofar as the conditional advancing of indemnification moneys for actions
based upon the Investment Company Act of 1940 may be concerned, such payments
will be made only on the following conditions: (i) the advances must be limited
to amounts used, or to be used, for the preparation or presentation of a
defense to the action, including costs connected with the preparation of a
settlement; (ii) advances may be made only upon receipt of a written promise
by, or on behalf of, the recipient to repay that amount of the advance which
exceeds the amount to which it is ultimately determined that he is entitled to
receive from the Registrant by reason of indemnification; and (iii) (a) such
promise must be secured by a surety bond, other suitable insurance or an
equivalent form of security which assures that any repayments may be obtained
by the Registrant without delay or litigation, which bond, insurance or other
form of security must be provided by the recipient of the advance, or (b) a
majority of a quorum of the Registrant's disinterested, non-party Trustees, or
an independent legal counsel in a written opinion, shall determine, based upon
a review of readily available facts, that the recipient of the advance
ultimately will be found entitled to indemnification.
In Section 9 of the Class A, Class B, Class C and Class D shares Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933, against certain
types of civil liabilities arising in connection with the Registration
Statement or Prospectus.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to Trustees, officers and controlling
persons of the Registrant and the principal underwriter
C-3
<PAGE>
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a Trustee, officer or controlling person of the Registrant and the
principal underwriter in connection with the successful defense of any action,
suit or proceeding) is asserted by such Trustee, officer or controlling person
or the principal underwriter in connection with the shares being registered,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Fund Asset Management, L.P. ("FAM" or the "Manager") acts as investment
adviser for the following open-end investment companies: CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation
Program, Inc., Financial Institutions Series Trust, Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill
Lynch Funds for Institutions Series, Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust, Merrill Lynch Multi-State Municipal Series Trust,
Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc.,
Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc.,
and The Municipal Fund Accumulation Program, Inc., and for the following
closed-end investment companies: Apex Municipal Fund, Inc., Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Emerging Tigers Fund,
Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc. and MuniAssets Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the Manager,
acts as investment adviser for the following open-end investment companies:
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Balanced Fund for Investment and Retirement, Inc., Merrill Lynch Capital Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund,
Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation
Fund, Inc., Merrill Lynch Global Bond Fund for Investment and Retirement,
Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global Holdings,
Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund,
Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Growth Fund for
Investment and Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
Institutional Intermediate Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch Variable
Series Funds, Inc., and for the following closed-end investment companies:
Convertible Holdings, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc.
and Merrill Lynch Senior Floating Rate Fund, Inc.
C-4
<PAGE>
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Institutional Intermediate Fund
is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The
address of the Manager, MLAM and Princeton Services, Inc. ("Princeton
Services"), and Princeton Administrators, L.P. is also P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds
Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-
9081.The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML&Co.") is North Tower,
World Financial Center, 250 Vesey Street, New York, New York 10281. The address
of the Fund's transfer agent, Merrill Lynch Financial Data Services, Inc.
("FDS"), is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
September 1, 1992 for his own account or in the capacity of director, officer,
partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard is
Treasurer and Mr. Glenn is Executive Vice President of all or substantially all
of the investment companies described in the preceding paragraph and also hold
the same positions with all or substantially all of the investment companies
advised by MLAM as they do with those advised by the Manager. Messrs. Giordano,
Harvey, Kirstein, and Monagle are directors or officers of one or more of such
companies.
<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- -------------------- ----------------------------------
<S> <C> <C>
ML & Co................. Limited Partner Financial Services Holding Company
Princeton Services, Inc.
("Princeton Services"). General Partner General Partner of MLAM
Arthur Zeikel........... President President and Director of MLAM; Presi-
dent and Director of Princeton Servic-
es; Director of the Distributor; Execu-
tive Vice President of ML & Co.
Terry K. Glenn.......... Executive Vice Presi- Executive Vice President of MLAM;
dent Executive Vice President and Director
of Princeton Services; President and
Director of the Distributor; Director
of FDS; President of Princeton
Administrators, Inc.
Vincent R. Giordano..... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Elizabeth Griffin....... Senior Vice President Senior Vice President of MLAM
Norman R. Harvey........ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
N. John Hewitt.......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- -------------------- ----------------------------------
<S> <C> <C>
Philip L. Kirstein...... Senior Vice Senior Vice President, General Counsel
President, General and Secretary of MLAM; Senior Vice
Counsel and President, General Counsel, Director
Secretary and Secretary of Princeton Services;
Director of the Distributor
Ronald M. Kloss......... Senior Vice President Senior Vice President and Controller of
and Controller MLAM; Senior Vice President and
Controller of Princeton Services
Stephen M. M. Miller.... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.
Joseph T. Monagle....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of
and Treasurer MLAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of the
Distributor
Richard L. Rufener...... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services;
Vice President of the Distributor
Ronald L. Welburn....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Anthony Wiseman......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant. MLFD acts as
the principal underwriter for each of the open-end investment companies
referred to in the first two paragraphs of Item 28 except CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, Convertible Holdings, Inc., The
Corporate Fund Accumulation Program, Inc., MuniAssets Fund, Inc. and The
Municipal Fund Accumulation Program,, Inc.; and MLFD also acts as the principal
underwriter for the following closed-end investment companies: Merrill Lynch
High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate
Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Aldrich,
Crook, Brady, Breen, Graczyk, Fatseas and Wasel is One Financial Center, 15th
Floor, Boston, Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH DISTRIBUTOR WITH REGISTRANT
- ---- --------------------- ---------------------
<S> <C> <C>
Terry K. Glenn.................. President and Director Executive Vice President
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
(3)
(1) (2) POSITIONS AND OFFICES
NAME POSITIONS AND OFFICES WITH DISTRIBUTOR WITH REGISTRANT
- ---- -------------------------------------- ---------------------
<S> <C> <C>
Arthur Zeikel........... Director President and Trustee
Phillip L. Kirstein..... Director None
William E. Aldrich...... Senior Vice President None
Robert W. Crook......... Senior Vice President None
Kevin P. Boman.......... Vice President None
Michael J. Brady........ Vice President None
William M. Breen........ Vice President None
Sharon Creveling........ Vice President and Assistant Treasurer None
Mark A. DeSario......... Vice President None
James T. Fatseas........ Vice President None
Stanley Graczyk......... Vice President None
Debra W. Landsman-Yaros. Vice President None
Michelle T. Lau......... Vice President None
Gerald M. Richard....... Vice President and Treasurer Treasurer
Salvatore Venezia....... Vice President None
William Wasel........... Vice President None
Robert Harris........... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules thereunder will be
maintained at the offices of the Registrant, 800 Scudders Mill Road,
Plainsboro, New Jersey 08536 and its transfer agent, Merrill Lynch Financial
Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-
6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund--Management
and Advisory Arrangements" in the Prospectus constituting Part A of the
Registration Statement and under "Management of the Fund--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, the Registrant is not a party to any
management related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish to each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF THE
REQUIREMENTS FOR EFFECTIVENESS OF THIS POST-EFFECTIVE AMENDMENT TO ITS
REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1933
AND HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO, AND
STATE OF NEW JERSEY, ON THE 21ST DAY OF DECEMBER, 1995.
Merrill Lynch Federal Securities
Trust
(Registrant)
/S/ Arthur Zeikel
By: _________________________________
(Arthur Zeikel, President)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ Arthur Zeikel President and Trustee December 21, 1995
____________________________________ (Principal Executive
(Arthur Zeikel) Officer)
/S/ Gerald M. Richard Treasurer (Principal December 21, 1995
____________________________________ Financial and Accounting
(Gerald M. Richard) Officer)
Joe Grills* Trustee
____________________________________
(Joe Grills)
Walter Mintz* Trustee
____________________________________
(Walter Mintz)
Stephen B. Swensrud* Trustee
____________________________________
(Stephen B. Swensrud)
Melvin R. Seiden* Trustee
____________________________________
(Melvin R. Seiden)
Harry Woolf* Trustee
____________________________________
(Harry Woolf)
December 21, 1995
*By: /S/ Arthur Zeikel
____________________________________
(Arthur Zeikel, Attorney-in-Fact)
</TABLE>
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1(a) --Declaration of Trust of the Registrant.(a)
1(b) --Certification of amendment, dated December 20, 1991, to Declaration
of Trust.(a)
1(c) --Instrument establishing Class A and Class B shares of the
Registrant.(a)
1(d) --Certification of amendment, dated October 13, 1994, to Declaration
of Trust and Instrument establishing Class C and Class D shares of
the Registrant.(a)
2 --By-Laws of the Registrant.(a)
6(b) --Class B Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc. (including Form of Selected Dealers
Agreement).(a)
8 --Custody Agreement between Registrant and The Bank of New York.(a)
9 --Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between the Registrant and Merrill Lynch
Financial Data Services, Inc.(a)
10 --Opinion of Brown & Wood, counsel to Registrant
11 --Consent of Deloitte & Touche LLP, independent auditors for
Registrant
13 --Certificate of Fund Asset Management, Inc.(a)
16(a) --Schedule for computation of each performance quotation provided for
Class A shares in the Registration Statement in response to Item 22.
16(b) --Schedule for computation of each performance quotation provided for
Class B shares in the Registration Statement in response to Item
22.(a)
16(c) --Schedule for computation of each performance quotation provided for
Class C shares in the Registration Statement in response to Item 22
16(d) --Schedule for computation of each performance quotation provided for
Class D (formerly Class A) shares in the Registration Statement in
response to Item 22.(a)
17(a) --Financial Data Schedule for Class A Shares
17(b) --Financial Data Schedule for Class B Shares
17(c) --Financial Data Schedule for Class C Shares
17(d) --Financial Data Schedule for Class D Shares
</TABLE>
- --------
(a)Refiled pursuant to the Electronic Data Gathering, Analysis and Retrieval
("EDGAR") phase-in requirements.
<PAGE>
MERRILL LYNCH FEDERAL SECURITIES TRUST
------------------
Supplement to Prospectus dated December 21, 1995
------------------
FOR USE IN THE STATE OF OHIO
Notwithstanding the fact that the Board may determine that a Rule 144A
security is liquid and not subject to the 15% restriction on illiquid
securities, the State of Ohio does not recognize Rule 144A securities as
securities which are free of restrictions as to resale. Consequently, to the
extent required by Ohio law, the Fund will not invest more than 50% of its
total assets in securities of issuers which are restricted as to disposition,
including Rule 144A securities, or in securities of issuers having a record,
together with predecessors, of less than three years of continuous operations.
CODE # 10259-1295OH
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<PAGE>
Ex-99.1 (a)
DECLARATION OF TRUST
OF
MERRILL LYNCH FEDERAL SECURITIES TRUST
THE DECLARATION OF TRUST of Merrill Lynch Federal Securities
Trust is made the 20th day of July, 1984, by the parties signatory
hereto, as trustees (such persons, so long as they shall continue in
office in accordance with the terms of this Declaration of Trust, and
all other persons who at the time in question have been duly elected
or appointed as trustees in accordance with the provisions of this
Declaration of Trust and are then in office, being hereinafter called
the "Trustees").
W I T N E S S E T H:
WHEREAS, the Trustees desire to form a trust fund under the
law of Massachusetts for the investment and reinvestment of funds
contributed thereto; and
WHEREAS, it is proposed that the beneficial interest in the
trust assets be divided into transferable shares of beneficial
interest as hereinafter provided;
NOW, THEREFORE, the Trustees hereby declare that they will
hold in trust all money and property contributed to the trust fund
to manage and dispose of the same for the benefit of the holders
from time to time of the shares of beneficial interest issued
hereunder and subject to the provisions hereof, to wit:
<PAGE>
ARTICLE I
The Trust
1.1. Name. The name of the trust created hereby (the
"Trust") shall be "Merrill Lynch Federal Securities Trust", and so
far as may be practicable the Trustees shall conduct the Trust's
activities, execute all documents and sue or be sued under that
name, which name (and the word "Trust" wherever hereinafter used)
shall refer to the Trustees as Trustees, and not individually, and
shall not refer to the officers, agents, employees or Shareholders
of the Trust. However, should the Trustees determine that the use
of such name is not advisable, they may select such other name for
the Trust as they deem proper and the Trust may hold its property
and conduct its activities under such other name. Any name
change shall become effective upon the execution by a majority of
the then Trustees of an instrument setting forth the new name.
Any such instrument shall have the status of an amendment to this
Declaration.
1.2. Definitions. As used in this Declaration, the
following terms shall have the following meanings:
The terms "Affiliated Person", "Assignment", "Commission",
"Interested Person", "Majority Shareholder Vote" (the 67% or more
than 50% requirement of the third sentence of Section 2(a)(42) of
the 1940 Act, whichever may be applicable) and "Principal
Underwriter" shall have the meanings given them in the 1940 Act,
as amended from time to time.
"Declaration" shall mean this Declaration as amended from
time to time. References in this Declaration to "Declaration",
"hereof", "herein" and "hereunder" shall be deemed to refer to the
Declaration rather than the article or section in which such words
appear.
"Fundamental Policies" shall mean the investment restrictions
set forth in the Prospectus and designated as fundamental policies
therein.
"Person" shall mean and include individuals, corporations,
partnerships, trusts, associations, joint ventures and other
entities, whether or not legal entities, and governments a,-id
agencies and political subdivisions thereof.
"Prospectus" shall mean the currently effective Prospectus of
the Trust under the Securities Act of 1933, as amended, including
2.
<PAGE>
the Statement of Additional Information incorporated by reference
therein.
"Shareholders" shall mean as of any particular time all
holders of record of outstanding Shares at such time.
"Shares" shall mean the equal proportionate transferable
units of interest into which the beneficial interest in the Trust
shall be divided from time to time and includes fractions of
Shares as well as whole Shares.
"Trustees" shall mean the signatories to this Declaration, so
long as they shall continue in office in accordance with the terms
hereof, and all other persons who at the time in question have
been duly elected or appointed and have qualified as trustees in
accordance with the provisions hereof and are then in office, are
herein referred to as the "Trustees", and reference in this
Declaration to a Trustee or Trustees shall refer to such person or
persons in their capacity as trustees hereunder.
"Trust Property" shall mean as of any particular time any and
all property, real or personal, tangible or intangible, which at
such time is owned or held by or for the account of the Trust or
the Trustees.
The "1940 Act" refers to the Investment Company Act of 1940,
as amended from time to time.
3.
<PAGE>
ARTICLE II
Trustees
2.1. Number and Qualification. The number of Trustees shall
be fixed from time to time by written instrument signed by a
majority of the Trustees then in office, provided, however, that
the number of Trustees shall in no event be less than three or
more than fifteen (except prior to the first public offering of
Shares of the Trust). Any vacancy created by an increase in
Trustees may, to the extent permitted by the 1940 Act, be filled
by the appointment of an individual having the qualifications
described in this Article made by a written instrument signed by a
majority of the Trustees then in office. Any such appointment
shall not become effective, however, until the individual named in
the written instrument of appointment shall have accepted in
writing such appointment and agreed in writing to be bound by the
terms of this Declaration. No reduction in the number of Trustees
shall have the effect of removing any Trustee from office prior to
the expiration of this term. Whenever a vacancy in the number of
Trustees shall occur, until such vacancy is filled as provided in
Section 2.3 hereof, the Trustees in office, regardless of their
number, shall have all the powers granted to the Trustees and
shall discharge all the duties imposed upon the Trustees by this
Declaration. A Trustee shall be an individual at least 21 years
of age who is not under legal disability. Trustees need not own
Shares.
2.2. Term of Office. The Trustees shall hold office during
the lifetime of this Trust, and until its termination as
hereinafter provided; except (a) that any Trustee may resign his
trust by written instrument signed by him and delivered to the
other Trustees, which shall take effect upon such delivery or upon
such later date as is specified therein; (by that any Trustee may
be removed at any time by written instrument, signed by at least
two-thirds of the number of Trustees prior to such removal,
specifying the date when such removal shall become effective; (c)
that any Trustee who requests in writing to be retired or who had
become incapacitated by illness or injury may be retired by
written instrument signed by a majority of the other Trustees,
specifying the date of his retirement; and (d) a Trustee may be
removed at any special meeting of the Shareholders by a vote of
two-thirds of the outstanding Shares. Upon the resignation or
removal of a Trustee, or his otherwise ceasing to be a Trustee, he
shall execute and deliver such documents as the remaining Trustees
shall require for the purpose of conveying to the Trust or the
remaining Trustees any Trust Property held in the name of the
4.
<PAGE>
resigning or removed Trustee. Upon the incapacity or death of any
Trustee, his legal representative shall execute and deliver on his
behalf such documents as the remaining Trustees shall require as
provided in the preceding sentence.
2.3. Vacancies. The term of office of a Trustee shall
terminate and a vacancy shall occur in the event of the death,
resignation, bankruptcy, adjudicated incompetence or other
incapacity to perform the duties of the office, or removal, of a
Trustee. No such vacancy shall operate to annul this Declaration
or to revoke any existing agency created pursuant to the terms of
this Declaration. In the case of a vacancy, the Shareholders,
acting at any meeting of Shareholders held in accordance with
Section 10.2 hereof, or, to the extent permitted by the 1940 Act,
a majority of the Trustees continuing in office acting by written
instrument or instruments, may fill such vacancy, and any Trustee
so elected by the Trustees shall hold office as provided in this
Declaration.
2.4. Meetings. Meetings of the Trustees shall be held from
time to time upon the call of the Chairman, if any, the President,
the Secretary or any two Trustees. Regular meetings of the
Trustees may be held without call or notice at a time and place
fixed by the By-Laws or by resolution of the Trustees. Notice of
any other meeting shall be mailed or otherwise given not less than
48 hours before the meeting but may be waived in writing by any
Trustee either before or after such meeting. The attendance of a
Trustee at a meeting shall constitute a waiver of notice of such
meeting except where a Trustee attends a meeting for the express
purpose of objecting to the transaction of any business on the
ground that the meeting has not been lawfully called or convened.
The Trustees may act with or without a meeting. A quorum for all
meetings of the Trustees shall be a majority of the Trustees.
Unless provided otherwise in this Declaration, any action of the
Trustees may be taken at a meeting by vote of a majority of the
Trustees present (a quorum being present) or without a meeting by
written consents of a majority of the Trustees.
Any committee of the Trustees, including an executive
committee, if any, may act with or without a meeting. A quorum
for all meetings of any such committee shall be a majority of the
members hereof. Unless provided otherwise in this Declaration,
any action of any such committee may be taken at a meeting by vote
of a majority of the members present (a quorum being present) or
without a meeting by written consent of a majority of the members.
With respect to actions of the Trustees and any committee of
the Trustees, Trustees who are Interested Persons of the Trust
within the meaning of Section 1.2 hereof or otherwise interested
in any action to be taken may be counted for quorum purposes under
5.
<PAGE>
this Section and shall be entitled to vote to the extent permitted
by the 1940 Act.
All or any one or more Trustees may participate in a meeting
of the Trustees or any committee thereof by means of a conference
telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other and
participation in a meeting pursuant to such communications systems
shall constitute presence in person at such meeting.
2.5. Officers. The Trustees shall annually elect a
President, a Secretary and a Treasurer and may elect a Chairman.
The Trustees may elect or appoint or authorize the Chairman, if
any, or President to appoint such other officers or agents with
such powers as the Trustees may deem to be advisable. The
Chairman and President shall be and the Secretary and Treasurer
may, but need not, be a Trustee.
2.6. By-Laws. The Trustees may adopt and from time to time
amend or repeal the By-Laws for the conduct of the business of the
Trust.
6
<PAGE>
ARTICLE III
Powers of Trustees
3.1. General. The Trustees shall have exclusive and
absolute control over the Trust Property and over the business of
the Trust to the same extent as if the Trustees were the sole
owners of the Trust Property and business in their own right, but
with such powers of delegation as may be permitted by this
Declaration. The Trustees may perform such acts as in their sole
discretion are proper for conducting the business of the Trust.
The enumeration of any specific power herein shall not be
construed as limiting the aforesaid power. Such powers of the
Trustees may be exercised without order of or resort to any court.
3.2. Investments. The Trustees shall have power, subject to
the Fundamental Policies, to:
(a) conduct, operate and carry on the business of an
investment company;
(b) subscribe for, invest in, reinvest in, purchase or
otherwise acquire, hold, pledge, sell, assign, transfer, ex-
change, distribute or otherwise deal in or dispose of nego-
tiable or non-negotiable instruments, obligations, evidences
of indebtedness, certificates of deposit or indebtedness,
commercial paper, repurchase agreements, reverse repurchase
agreements, options, futures contracts, options on futures
contracts and other investments, including, without limita-
tion, those issued, guaranteed or sponsored by any state,
territory or possession of the United States and the District
of Columbia and their political subdivisions, agencies and
instrumentalities, or by the United States Government or its
agencies or instrumentalities, or international instrumental-
ities, or by any bank, savings institution, corporation or
other business entity organized under the laws of the United
States and, to the extent provided in the Prospectus and not
prohibited by the Fundamental Policies, organized under
foreign laws; and to exercise any and all rights, powers and
privileges of ownership or interest in respect of any and all
such investments of every kind and description, including,
without limitation, the right to consent and otherwise act
with respect thereto, with power to designate one or more
persons, firms, associations or corporations to exercise any
of said rights, powers and privileges in respect of any of
said instruments; and the Trustees shall be deemed to have
the foregoing powers with respect to any additional securi-
ties in which the Trust may invest should the investment
7.
<PAGE>
policies set forth in the Prospectus or the Fundamental
Policies be amended.
The Trustees shall not be limited to investing in obligations
maturing before the possible termination of the Trust, nor shall
the Trustees be limited by any law limiting the investments which
may be made by fiduciaries.
3.3. Legal Title. Legal Title to all the Trust Property
shall be vested in the Trustees as joint tenants except that the
Trustees shall have power to cause legal title to any Trust
Property to be held by or in the name of one or more of the
Trustees, or in the name of the Trust, or in the name of any other
Person as nominee, on such terms as the Trustees may determine,
provided that the interest of the Trust therein is appropriately
protected.
The right, title and interest of the Trustees in the Trust
Property shall vest automatically in each person who may hereafter
become a Trustee upon his due election and qualification. Upon
the resignation, removal or death of a Trustee he shall automat-
ically cease to have any right, title or interest in any of the
Trust Property, and the right, title and interest of such Trustee
in the Trust Property shall vest automatically in the remaining
Trustees. Such vesting and cessation of title shall be effective
whether or not conveyancing documents have been executed and
delivered.
3.4. Issuance and Repurchase of Securities. The Trustees
shall have the power to issue, sell, repurchase, redeem, retire,
cancel, acquire, hold, resell, reissue, dispose of, transfer, and
otherwise deal in, Shares, including shares in fractional
denominations, and, subject to the more detailed provisions set
forth in Articles VIII and IX, to apply to any such repurchase,
redemption, retirement, cancellation or acquisition of Shares any
funds or property of the Trust whether capital or surplus or
otherwise, to the full extent now or hereafter permitted by the
laws of the Commonwealth of Massachusetts governing business
corporations.
3.5. Borrow Money. Subject to the Fundamental Policies, the
Trustees shall have power to borrow money or otherwise obtain
credit and to secure the same by mortgaging, pledging or otherwise
subjecting as security the assets of the Trust, including the
lending of portfolio securities, and to endorse, guarantee, or
undertake the performance of any obligation, contract or
engagement of any other person, firm, association or corporation.
3.6. Delegation; Committees. The Trustees shall have power,
consistent with their continuing exclusive authority over the
8.
<PAGE>
management of the Trust and the Trust Property, to delegate from
time to time to such of their number or to officers, employees or
agents of the Trust the doing of such things and the execution of
such instruments either in the name of the Trust or the names of
the Trustees or otherwise as the Trustees may deem expedient, to
the same extent as such delegation is permitted to directors of a
Massachusetts business corporation and is permitted by the 1940
Act.
3.7. Collection and Payment. The Trustees shall have power
to collect all property due to the Trust; to pay all claims
including taxes, against the Trust Property; to prosecute, defend,
compromise or abandon any claim relating to the Trust Property; to
foreclose any security interest securing any obligations, by
virtue of which any property is owed to the Trust; and to enter
into releases, agreements and other instruments.
3.8. Expenses. The Trustees shall have power to incur and
pay any expenses which in the opinion of the Trustees are
necessary or incidental to carry out any of the purposes of this
Declaration, and to pay reasonable compensation from the funds of
the Trust to themselves as Trustees. The Trustees shall fix the
compensation of all officers, employees and Trustees. The
Trustees may pay themselves such compensation for special
services, including legal, underwriting, syndicating and brokerage
services, as they in good faith may deem reasonable and
reimbursement for expenses reasonably incurred by themselves on
behalf of the Trust.
3.9. Miscellaneous Powers. The Trustees shall have the
power to: (a) employ or contract with such Persons as the
Trustees may deem desirable for the transaction of the business of
the Trust; (b) enter into joint ventures, partnerships and any
other combinations or associations; (c) purchase, and pay for out
of Trust Property, insurance policies insuring the Shareholders,
Trustees, officers, employees, agents, investment advisers,
distributors, selected dealers or independent contractors of the
Trust against all claims arising by reason of holding any such
position or by reason of any action taken or omitted by any such
Person in such capacity, whether or not constituting negligence,
or whether or not the Trust would have the power to indemnify such
Person against such liability; (d) establish pension, profit-
sharing, share purchase, and other retirement, incentive and
benefit plans for any Trustees, officers, employees and agents of
the Trust; (e) make donations, irrespective of benefit to the
Trust, for charitable, religious, educational, scientific, civic
or similar purposes; (f) to the extent permitted by law, indemnify
any Person with whom the Trust has dealings, including any
advisor, administrator, manager, distributor and selected dealers,
to such extent as the Trustees shall determine; (g) guarantee
9.
<PAGE>
indebtedness or contractual obligations of others; (h) determine
and change the fiscal year of the Trust and the method in which
its accounts shall be kept; and (i) adopt a seal for the Trust,
but the absence of such seal shall not impair the validity of any
instrument executed on behalf of the Trust.
3.10. Further Powers. The Trustees shall have power to
conduct the business of the Trust and carry on its operations in
any and all of its branches and maintain offices both within and
without the Commonwealth of Massachusetts, in any and all states
of the United States of America, in the District of Columbia, and
in any and all commonwealths, territories, dependencies, colonies,
possessions, agencies or instrumentalities of the United States of
America and of foreign governments, and to do all such other
things and execute all such instruments as they deem necessary,
proper or desirable in order to promote the interests of the Trust
although such things are not herein specifically mentioned. Any
determination as to what is in the interests of the Trust made by
the Trustees in good faith shall be conclusive. In construing the
provisions of this Declaration, the presumption shall be in favor
of a grant of power to the Trustees. The Trustees will not be
required to obtain any court order to deal with the Trust
Property.
10.
<PAGE>
ARTICLE IV
Management and Distribution Arrangements
4.1. Management Arrangements. Subject to a Majority
Shareholder Vote, as required by the 1940 Act, the Trustees may in
their discretion from time to time enter into advisory or
management contracts whereby the other party to such contract
shall undertake to furnish the Trustees such advisory and
management services as the Trustees shall from time to time
consider desirable and all upon such terms and conditions as the
Trustees may in their discretion determine. Notwithstanding any
provisions of this Declaration, the Trustees may authorize any
advisor or manager (subject to such general or specific
instructions as the Trustees may from time to time adopt) to
effect purchases, sales, loans or exchanges of portfolio
securities of the Trust on behalf of the Trustees or may authorize
any officer, employee or Trustee to effect such purchases, sales,
loans or exchanges pursuant to recommendations of any such advisor
or manager (and all without further action by the Trustees). Any
such purchases, sales, loans and exchanges shall be deemed to have
been authorized by all of the Trustees.
4.2. Distribution Arrangements. The Trustees may in their
discretion from time to time enter into a contract, providing for
the sale of the Shares of the Trust to net the Trust not less than
the par value per share, whereby the Trust may either agree to
sell the Shares to the other party to the contract or appoint such
other party its sales agent for such Shares. In either case, the
contract shall be on such terms and conditions as the Trustees may
in their discretion determine not inconsistent with the provisions
of this Article IV or the By-Laws; and such contract may also
provide for the repurchase or sale of Shares by such other party
as principal or as agent of the Trust and may provide that such
other party may enter into selected dealer agreements with
registered securities dealers to further the purpose of the
distribution or repurchase of the Shares.
4.3. Parties to Contract. Any contract of the character
described in Section 4.1 and 4.2 of this Article IV or in Article
VII hereof may be entered into with any corporaration, firm, trust
or association, although one or more of the Trustees or officers
of the Trust may be an officer, director, Trustee, shareholder, or
member of such other party to the contract, and no such contract
shall be invalidated or rendered voidable by reason of the
existence of any such relationship, nor shall any person holding
such relationship be liable merely by reason of such relationship
for any loss or expense to the Trust under or by reason of said
contract or accountable for any profit realized directly or
11.
<PAGE>
indirectly therefrom, provided that the contract when entered into
was reasonable and fair and not inconsistent with the provisions
of this Article IV or the By-Laws. The same person (including a
firm, corporation, trust, or association) may be the other party
to contracts entered into pursuant to Sections 4.1 and 4.2 above
or Article VII, and any individual may be financially interested
or otherwise affiliated with persons who are parties to any or all
of the contracts mentioned in this Section 4.3.
4.4. Provisions and Amendments. Any contract entered into
pursuant to Section 4.1 and 4.2 of this Article IV shall be
consistent with and subject to the requirements of Section 15 of
the 1940 Act with respect to its continuance in effect, its
termination, and the method of authorization and approval of such
contract or renewal thereof, and no amendment to any contract,
entered into pursuant to Section 4.1 shall be effective unless
assented to by a Majority Shareholder Vote.
12.
<PAGE>
ARTICLE V
Limitations of Liability of Shareholders,
Trustees and Others
5.1. No Personal Liability of Shareholders, Trustees, etc.
No Shareholder shall be subject to any personal liability
whatsoever to any Person in connection with Trust Property or the
acts, obligations or affairs of the Trust. No Trustee, officer,
employee or agent of the Trust shall be subject to any personal
liability whatsoever to any Person, other than the Trust or its
Shareholders, in connection with Trust Property or the affairs of
the Trust, save only that arising from his bad faith, willful
misfeasance, gross negligence or reckless disregard of his duty to
such Person; and all such Persons shall look solely to the Trust
Property for satisfaction of claims of any nature arising in
connection with the affairs of the Trust. If any Shareholder,
Trustee, officer, employee, or agent, as such, of the Trust, is
made a party to any suit or proceeding to enforce any such
liability, he shall not on account thereof, be held to any
personal liability. The Trust shall indemnify and hold each
Shareholder harmless from and against all claims and liabilities,
to which such Shareholder may become subject by reason of his
being or having been a Shareholder, and shall reimburse such
Shareholder for all legal and other expenses reasonably incurred
by him in connection with any such claim or liability. The rights
accruing to a Shareholder under this Section 5.1 shall not exclude
any other right to which such Shareholder may be lawfully
entitled, nor shall anything herein contained restrict the right
of the Trust to indemnify or reimburse a Shareholder in any
appropriate situation even though not specifically provided
herein.
5.2. Non-Liability of Trustees, etc. No Trustee, officer"
employee or agent of the Trust shall be liable to the Trust, its
Shareholders, or to any Shareholder, Trustee, officer, employee,
or agent thereof for any action or failure to act (including
without limitation the failure to compel in any way any former or
acting Trustee to redress any breach of trust) except for his own
bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties.
5.3. Mandatory Indemnification. The Trust shall indemnify
each of its Trustees, officers, employees, and agents (including
persons who serve at its request as directors, officers or
trustees of another organization in which it has any interest, as
a shareholder, creditor or otherwise) against all liabilities and
expenses (including amounts paid in satisfaction of judgments, in
compromise, as fines and penalties, and as counsel fees)
13.
<PAGE>
reasonably incurred by him in connection with the defense or
disposition of any action, suit or other proceeding, whether civil
or criminal, in which he may be involved or with which he may be
threatened, while in office or thereafter, by reason of his being
or having been such a Trustee, officer, employee or agent, except
with respect to any matter as to which he shall have been
adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties; provided, however,
that as to any matter disposed of by a compromise payment by such
person, pursuant to a consent decree or otherwise, no
indemnification either for said payment or for any other expenses
shall be provided unless the Trust shall have received a written
opinion from independent legal counsel approved by the Trustees to
the effect that if either the matter of willful misfeasance, gross
negligence or reckless disregard of duty, or the matter of good
faith and reasonable belief as to the best interests of the Trust,
had been adjudicated, it would have been adjudicated in favor of
such person. The rights accruing to any Person under these
provisions shall not exclude any other right to which he may be
lawfully entitled; provided that no Person may satisfy any right
of indemnity or reimbursement granted herein or in Section 5.1 or
to which he may be otherwise entitled except out of the property
of the Trust, and no Shareholder shall be personally liable to any
Person with respect to any claim for indemnity or reimbursement or
otherwise. The Trustees may make advance payments in connection
with indemnification under this Section 5.3, provided that the
indemnified person shall have given a written undertaking to
reimburse the Trust in the event it is subsequently determined
that he is not entitled to such indemnification.
5.4. No Bond Required of Trustees. No Trustee shall, as
such, be obligated to give any bond or surety or other security
for the performance of any of his duties hereunder.
5.5. No Duty of Investigation; Notice in Trust instruments,
etc. No purchaser, lender, transfer agent or other person dealing
with the Trustees or any officer, employee or agent of the Trust
shall be bound to make any inquiry concerning the validity of any
transaction purporting to be made by the Trustees or by said
officer, employee or agent or be liable for the application of
money or property paid, loaned, or delivered to or on the order of
the Trustees or of said officer, employee or agent. Every
obligation, contract, instrument, certificate, Share, other
security of the Trust or undertaking, and every other act or thing
whatsoever executed in connection with the Trust shall be
conclusively taken to have been executed or done by the executors
thereof only in their capacity as Trustees under this Declaration
or in their capacity as officers, employees or agents of the
Trust. Every written obligation, contract, instrument,
certificate, Share, other security of the Trust or undertaking
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made or issued by the Trustees or by any officers, employees or
agents of the Trust, in their capacity as such, shall contain an
appropriate recital to the effect that the Shareholders, Trustees,
officers, employees and agents of the Trust shall not personally
be bound by or liable thereunder, nor shall resort be had to their
private property for the satisfaction of any obligation or claim
thereunder, and appropriate references shall be made herein to the
Declaration, and may contain any further recital which they may
deem appropriate, but the omission of such recital shall not
operate to impose personal liability on any of the Trustees,
Shareholders, officers, employees or agents of the Trust. The
Trustees may maintain insurance for the protection of the Trust
Property, its Shareholders, Trustees, officers, employees and
agents in such amount as the Trustees shall deem adequate to cover
possible tort liability, and such other insurance as the Trustees
in their sole judgment shall deem advisable.
5.6. Reliance on Experts, etc. Each Trustee and officer or
employee of the Trust shall, in the performance of his duties, be
fully and completely justified and protected with regard to any
act or any failure to act resulting from reliance in good faith
upon the books of account or other records of the Trust, upon an
opinion of counsel, or upon reports made to the Trust by any of
its officers or employees or by any investment adviser,
distributor, selected dealers, accountants, appraisers or other
experts or consultants elected with reasonable care by the
Trustees, officers or employees of the Trust, regardless of
whether such counsel or expert may also be a Trustee.
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ARTICLE VI
Shares of Beneficial Interest
6.1. Beneficial Interest. The interest of the beneficiaries
hereunder shall be divided into transferable shares of beneficial
interest, all of one class, with par value $.10 per share. The
number of such shares of beneficial interest authorized hereunder
is unlimited. All Shares issued hereunder including, without
limitation, Shares issued in connection with a dividend in Shares
or a split of Shares, shall be fully paid and nonassessable.
6.2. Rights of Shareholders. The ownership of the Trust
Property of every description and the right to conduct any
business hereinbefore described are vested exclusively in the
Trustees, and the Shareholders shall have no interest therein
other than the beneficial interest conferred by their Shares, and
they shall have no right to call for any partition or division of
any property, profits, rights or interests of the Trust nor can
they be called upon to share or assume any losses of the Trust or
suffer an assessment of any kind by virtue of their ownership of
Shares. The Shares shall be personal property giving only the
rights in this Declaration specifically set forth. The Shares
shall not entitle the holder to preference, preemptive, appraisal,
conversion or exchange rights (except for rights of appraisal
specified in Section 11.4).
6.3. Trust Only. It is the intention of the Trustees to
create only the relationship of Trustee and beneficiary between
the Trustees and each Shareholder from time to time. It is not
the intention of the Trustees to create a general Partnership,
limited partnership, joint stock association, corporation,
bailment or any form of legal relationship other than a trust.
Nothing in this Declaration shall be construed to make the
Shareholders, either by themselves or with the Trustees, partners
or members of a joint stock-association.
6.4. Issuance of Shares. The Trustees, in their discretion,
may from time to time without a vote of the Shareholders issue
Shares, in addition to the then issued and outstanding Shares and
Shares held in the treasury, to such party or parties and for such
amount not less than par value and type of consideration, includ-
ing cash or property, at such time or times, and on such terms as
the Trustees may deem best, and may in such manner acquire other
assets (including the acquisition of assets subject to, and in
connection with the assumption of, liabilities) and businesses.
In connection with any issuance of Shares, the Trustees may issue
fractional Shares. The Trustees may from time to time divide or
combine the Shares into a greater or lesser number without thereby
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changing the proportionate beneficial interests in the Trust.
Contributions to the Trust may be accepted for, and Shares shall
be redeemed as, whole Shares and/or 1/1,000ths of a Share or
multiples thereof.
6.5. Register of Shares. A register shall be kept at the
Trust or a transfer agent duly appointed by the Trustees under the
direction of the Trustees which shall contain the names and
addresses of the Shareholders and the number of Shares held by
them respectively and a record of all transfers thereof. Such
register shall be conclusive as to who are the holders of the
Shares and who shall be entitled to receive dividends or
distributions or otherwise to exercise or enjoy the rights of
Shareholders. No Shareholder shall be entitled to receive payment
of any dividend or distribution, nor to have notice given to him
as herein provided, until he has given his address to a transfer
agent or such other officer or agent of the Trustees as shall keep
the said register for entry thereon. It is not contemplated that
certificates will be issued for the Shares; however, the Trustees,
in their discretion, may authorize the issuance of share
certificates and promulgate appropriate rules and regulations as
to their use.
6.6. Transfer Agent and Registrar. The Trustee shall have
power to employ a transfer agent or transfer agents, and a
registrar or registrars. The transfer agent or transfer agents
may keep the said register and record therein the original issues
and transfers, if any, of the said Shares. Any such transfer
agent and registrars shall perform the duties usually performed by
transfer agents and registrars of certificates of stock in a
corporation, except as modified by the Trustees.
6.7. Transfer of Shares. Shares shall be transferable on
the records of the Trust only by the record holder thereof or by
his agent thereto duly authorized in writing, upon delivery to the
Trustees or a transfer agent of the Trust of a duly executed
instrument of transfer, together with such evidence of the
genuineness of each such execution and authorization and of other
matters as may reasonably be required. Upon such delivery the
transfer shall be recorded on the register of the Trust. Until
such record is made, the Shareholder of record shall be deemed to
be the holder of such Shares for all purposes hereof and neither
the Trustees nor any transfer agent or registrar nor any officer,
employee or agent of the Trust shall be affected by any notice of
the proposed transfer.
Any person becoming entitled to any Shares in consequence of
the death, bankruptcy, or incompetence of any Shareholder, or
otherwise by operation of law, shall be recorded on the register
of Shares as the holder of such Shares upon production of the
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proper evidence thereof to the Trustees or a transfer agent of the
Trust, but until such record is made, the Shareholder of record
shall be deemed to be the holder of such Shares for all purposes
hereof and neither the Trustees nor any transfer agent or
registrar nor any officer or agent of the Trust shall be affected
by any notice of such death, bankruptcy or incompetence, or other
operation of law.
6.8. Notices. Any and all notices to which any Shareholder
hereunder may be entitled and any and all communications shall be
deemed duly served or given if mailed, postage prepaid, addressed
to any Shareholder of record at his last known address as recorded
on the register of the Trust.
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ARTICLE VII
Custodian
7.1. Appointment and Duties. The Trustees shall at all
times employ custodian or custodians, meeting the qualifications
for custodians for portfolio securities of investment companies
contained in the 1940 Act, as custodian with authority as its
agent, but subject to such restrictions, limitations and other
requirements, if any, as may be contained in the By-Laws of the
Trust and the 1940 Act:
(1) to hold the securities owned by the Trust and
deliver the same upon written order;
(2) to receive and receipt for any moneys due to the
Trust and deposit the same in its own banking department or
elsewhere as the Trustees may direct;
(3) to disburse such funds upon orders or vouchers;
(4) if authorized by the Trustees, to keep the books
and accounts of the Trust and furnish clerical and accounting
services; and
(5) if authorized to do so by the Trustees, to compute
the net income of the Trust;
all upon such basis of compensation as may be agreed upon between
the Trustees and the custodian. If so directed by a Majority
Shareholder Vote, the custodian shall deliver and pay over all
property of the Trust held by it as specified in such vote.
The Trustees may also authorize the custodian to employ one
or more sub-custodians from time to time to perform such of the
act and services of the custodian and upon such terms and
conditions, as may be agreed upon between the custodian and such
sub-custodian and approved by the Trustees, provided that in every
case such sub-custodian shall meet the qualifications for
custodians contained in the 1940 Act.
7.2. Central Certificate System. Subject to such rules,
regulations and orders as the Commission may adopt, the Trustees
may direct the custodian to deposit all or any part of the
securities owned by the Trust in a system for the central handling
of securities established by a national securities exchange or a
national securities association registered with the Commission
under the Securities Exchange Act of 1934, or such other person as
may be permitted by the Commission, or otherwise in accordance
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with the 1940 Act, pursuant to which system all securities of any
particular class or series of any issuer deposited within the
system are treated as fungible and may be transferred or pledged
by bookkeeping entry without physical delivery of such securities,
provided that all such deposits shall be subject to withdrawal
only upon the order of the Trust.
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ARTICLE VIII
Redemption
8.1. Redemptions. All outstanding Shares may be redeemed at
the option of the holders thereof, upon and subject to the terms
and conditions provided in this Article VIII. The Trust shall,
upon application of any Shareholder or pursuant to authorization
from any Shareholder, redeem or repurchase from such Shareholder
outstanding Shares for an amount per share determined by the
application of a formula adopted for such purpose by resolution of
the Trustees (which formula shall be consistent with the 1940 Act,
and the rules and regulations promulgated thereunder); provided
that (a) such amount per share shall not exceed the cash
equivalent of the proportionate interest of each share in the
assets of the Trust at the time of the purchase or redemption and
(b) if so authorized by the Trustees, the Trust may, at any time
and from time to time, charge fees for effecting such redemption,
at such rates as the Trustees may establish, as and to the extent
permitted under the 1940 Act, and the rules and regulations
promulgated thereunder, and may, at any time and from time to
time, pursuant to such Act and such rules and regulations, suspend
such right of redemption. The procedures for effecting redemption
shall be as set forth in the Prospectus from time to time.
8.2. Redemption of Shares; Disclosure of Holding. If the
Trustees shall, at any time and in good faith, be of the opinion
that direct or indirect ownership of Shares or other securities of
the Trust has or may become concentrated in any person to an
extent which would disqualify the Trust as a regulated investment
company under the Internal Revenue Code, then the Trustees shall
have the power by lot or other means deemed equitable by them (i)
to call for redemption a number, or principal amount, of Shares or
other securities of the Trust sufficient, in the opinion of the
Trustees, to maintain or bring the direct or indirect ownership of
Shares or other securities of the Trust into conformity with the
requirements for such qualification and (ii) to refuse to transfer
or issue Shares or other securities of the Trust to any Person
whose acquisition of the Shares or other securities of the Trust
in question would in the opinion of the Trustees result in such
disqualification. The redemption shall be effected at a
redemption price determined in accordance with Section 8.1.
The holders of Shares or other securities of the Trust shall
upon demand disclose to the Trustees in writing such information
with respect to direct and indirect ownership of Shares or other
securities of the Trust as the Trustees deem necessary to comply
with the provisions of the Internal Revenue Code, or to comply
with the requirements of any other taxing authority.
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8.3. Redemptions of Accounts of Less than $1,000. Due to
the relatively high cost of maintaining investment accounts of
less than $1,000, the Trustees shall have the power to redeem
shares at a redemption price determined in accordance with Section
8.1 if at any time the total investment in such account does not
have a value of at least $1,000; provided, however, that the
Trustees may not exercise such power if the Prospectus does not
describe such power. In the event the Trustees determine to
exercise their power to redeem Shares provided in this Section
8.3, Shareholders shall be notified that the value of their
account is less than $1,000 and allowed 60 days to make an
additional investment before redemption is processed.
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ARTICLE IX
Determination of Net Asset Value,
Net Income and Distributions
9.1. Net Asset Value. The net asset value of each
outstanding Share of the Trust shall be determined at such time or
times on such days as the Trustees may determine, in accordance
with the 1940 Act. The method of determination of net asset value
shall be determined by the Trustees and shall be as set forth in
the Prospectus. The power and duty to make the daily calculations
may be delegated by the Trustees to the adviser, administrator,
manager, custodian, transfer agent or such other person as the
Trustees may determine. The Trustees may suspend the daily
determination of net asset value to the extent permitted by the
1940 Act.
9.2. Distributions to Shareholders. The Trustees shall from
time to time distribute ratably among the Shareholders such
proportion of the net profits, surplus (including paid-in
surplus), capital, or assets held by the Trustees as they may deem
proper. Such distribution may be made in cash or property
(including without limitation any type of obligations of the Trust
or any assets thereof), and the Trustees may distribute ratably
among the Shareholders additional Shares issuable hereunder in
such manner, at such times, and on such terms as the Trustees may
deem proper. Such distributions may be among the Shareholders of
record at the time of declaring a distribution or among ---he
Shareholders of record at such later date as the Trustees shall
determine. The Trustees may always retain from the net profits
such amount as they may deem necessary to pay the debts or
expenses of the Trust or to meet obligations of the Trust, or as
they may deem desirable to use in the conduct of its affairs or to
retain for future requirements or extensions of the business. The
Trustees may adopt and offer to Shareholders such dividend
reinvestment plans, cash dividend payout plans or related plans as
the Trustees shall deem appropriate.
Inasmuch as the computation of net income and gains for
Federal income tax purposes may vary from the computation thereof
on the books, the above provisions shall be interpreted to give
the Trustees the power in their discretion to distribute for any
fiscal year as ordinary dividends and as capital gains
distributions, respectively, additional amounts sufficient to
enable the Trust to avoid or reduce liability for taxes.
9.3. Power to Modify Foregoing Procedures. Notwithstanding
any of the foregoing provisions of this Article IX, the Trustees
may prescribe, in their absolute discretion, such other bases and
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times for determining the per share net asset value of the Trust's
Shares or net income, or the declaration and payment of dividends
and distributions as they may deem necessary or desirable or to
enable the Trust to comply with any provision of the 1940 Act, or
any rule or regulation thereunder, including any rule or
regulation adopted pursuant to Section 22 of the 1940 Act by the
Commission or any securities association registered under the
Securities Exchange Act of 1934, or any order of exemption issued
by said Commission, all as in effect now or hereafter amended or
modified.
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ARTICLE X
Shareholders
10.1. Voting Powers. The Shareholders shall have power to
vote (i) for the removal of Trustees as provided in Section 2.2,
(ii) with respect to any advisory or management contract as
provided in Section 4.1; (iii) with respect to the amendment of
this Declaration as provided in Section 11.3; and (iv) with
respect to such additional matters relating to the Trust as may be
required or authorized by the 1940 Act or other applicable law or
by this Declaration or the By-Laws of the Trust.
10.2. Meetings of Shareholders. Special meetings of the
Shareholders may be called at any time by a majority of the
Trustees and shall be called by any Trustee upon written request
of Shareholders holding in the aggregate not less than 10% of the
outstanding Shares having voting rights, such request specifying
the purpose or purposes for which such meeting is to be called.
Any such meeting shall be held within or without the Commonwealth
of Massachusetts on such day and at such time as the Trustees
shall designate. The holders of one-third of the outstanding
Shares present in person or by proxy shall constitute a quorum for
the transaction of any business, except as may otherwise be
required by the 1940 Act or other applicable law or by this
Declaration or the By-Laws of the Trust. if a quorum is present
at a meeting, the affirmative vote of a majority of the Shares
represented at the meeting constitutes the action of the
Shareholders, unless the 1940 Act, other applicable law, the
Declaration or the By-Laws of the Trust requires a greater number
of affirmative votes.
10.3. Notice of Meetings. Notice of all meetings of the
Shareholders, stating the time, place and purposes of the meeting,
shall be given by the Trustees by mail to each Shareholder at his
registered address, mailed at least 10 days and not more than 60
days before the meeting. Only the business stated in the notice
of the meeting shall be considered at such meeting. Any adjourned
meeting may be held as adjourned without further notice.
10.4. Record Date for Meetings. For the purpose of
determining the Shareholders who are entitled to notice of and to
vote at any meeting, or to participate in any distribution, or for
the purposes of any other action, the Trustees may from time to
Lime close the transfer books for such period, not exceeding 30
days, as the Trustees may determine; or without closing the
transfer books the Trustees may fix a date not more than 60 days
prior to the date of any meeting of Shareholders or daily
dividends or other action as a record date for the determination
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of the Persons to be treated as Shareholders of record for such
purposes, except for dividend payments which shall be governed by
Section 9.2 hereof.
10.5. Proxies, etc. At any meeting of Shareholders, any
holder of Shares entitled to vote thereat may vote by proxy,
provided that no proxy shall be voted at any meeting unless it
shall have been placed on file with the Secretary, or with such
other officer or agent of the Trust as the Secretary may direct,
for verification prior to the time at which such vote shall be
taken. Pursuant to a resoluton of a majority of the Trustees,
proxies may be solicited in the name of one or more Trustees or
one or more of the officers of the Trust. Only Shareholders of
record shall be entitled to vote. Each full Share shall be
entitled to one vote and fractional Shares shall be entitled to a
vote of such fraction. When any Share is held jointly by several
persons, any one of them may vote at any meeting in person or by
proxy in respect of such Share, but if more than one of them shall
be present at such meeting in person or by proxy, and such joint
owners or their proxies so present disagree as to any vote to be
cast, such vote shall not be received in respect of such Share. A
proxy purporting to be executed by or on behalf of a Shareholder
shall be deemed valid unless challenged at or prior to its
exercise, and the burden of proving invalidity shall rest on the
challenger. If the holder of any such Share is a minor or a
person of unsound mind, and subject to guardianship or to the
legal control of any other person as regards the charge or
management of such Share, he may vote by his guardian or such
other person appointed or having such control, and such vote may
be given in person or by proxy.
10.6. Reports. The Trustees shall cause to be prepared at
least annually a report of operations containing a balance sheet
and statement of income and undistributed income of the Trust
prepared in conformity with generally accepted accounting
principles and an opinion of an independent public accountant on
such financial statements. Copies of such reports shall be mailed
to all Shareholders of record within the time required by the 1940
Act, and in any event within a reasonable period preceding the
annual meeting of Shareholders. The Trustees shall, in addition,
furnish to the Shareholders at least semi-annually interim reports
containing an unaudited balance sheet of the Trust as of the end
of such period and an unaudited statement of income and surplus
for the period from the beginning of the current fiscal year to
the end of such period.
10.7. Inspection of Records. The records of the Trust shall
be open to inspection by Shareholders to the same extent as is
permitted shareholders of a Massachusetts business corporation.
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10.8. Shareholder Action by Written Consent. Any action
which may be taken by Shareholders may be taken without a meeting
if a majority of Shareholders entitled to vote on the matter (or
such larger proportion thereof as shall be required by any express
provision of this Declaration) consent to the action in writing
and the written consents are filed with the records of the
meetings of Shareholders. Such consent shall be treated for all
purposes as a vote taken at a meeting of Shareholders.
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ARTICLE XI
Duration; Termination of Trust;
Amendment; Mergers, Etc.
11.1. Duration. Subject to possible termination in
accordance with the provisions of Section 11.2 hereof, the Trust
created hereby shall continue until the expiration of 20 years
after the death of the last survivor of the initial Trustees named
herein and the following named persons:
Name Address Date of Birth
Lindsay Rider MacKinnon Mountain Farm Road January 27, 1981
Tuxedo Park, N.Y. 10987
Eric Alfred Pietrzak 95 Corona Avenue January 29, 1981
Pelham, N.Y. 10803
Angus Washburn Smith 12 Masterton Road October 15, 1982
Bronxville, N.Y. 10708
Ashley Chapin Smith 12 Masterton Road May 20, 1972
Bronxville, N.Y. 10708
Elisabeth Lyon Smith 12 Masterton Road October 15, 1982
Bronxville, N.Y. 10708
Thomas Ervin Smith 12 Masterton Road November 14, 1973
Bronxville, N.Y. 10708
11.2. Termination of Trust.
(a) The Trust may be terminated by the affirmative vote
of the holders of not less than two-thirds of the Shares at any
meeting of Shareholders or by an instrument in writing, without a
meeting, signed by a majority of the Trustees and consented to by
the holders of not less than two-thirds of such Shares. Upon the
termination of the Trust,
(i) The Trust shall carry on no business except for the
purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs
of the Trust and all of the powers of the Trustees under this
Declaration shall continue until the affairs of the Trust
shall have been wound up, including the power to fulfill or
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discharge the contracts of the Trust, collect its assets,
sell, convey, assign, exchange, transfer or otherwise dispose
of all or any part of the remaining Trust Property to one or
more persons at public or private sale for consideration
which may consist in whole or in part of cash, securities or
other property of any kind, discharge or pay its liabilities,
and do all other acts appropriate to liquidate its business;
provided that any sale, conveyance, assignment, exchange,
transfer or other disposition of all or substantially all the
Trust Property shall require approval of the principal terms
of the transaction and the nature and amount of the
consideration by vote or consent of the holders of a majority
of the Shares entitled to vote.
(iii) After paying or adequately providing for the
payment of all liabilities, and upon receipt of such
releases, indemnities and refunding agreements, as they deem
necessary for their protection, the Trustees may distribute
the remaining Trust Property, in cash or in kind or partly
each, among the Shareholders according to their respective
rights.
(b) After termination of the Trust and distribution to
the Shareholders as herein provided, 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 the Trustees shall thereupon be discharged from all further
liabilities and duties hereunder, and the rights and interests of
all Shareholders shall thereupon cease.
11.3. Amendment Procedure.
(a) This Declaration may be amended by the affirmative
vote of the holders of not less than a majority of the Shares at
any meeting of Shareholders or by an instrument in writing, with-
out a meeting, signed by a majority of the Trustees and consented
to by the holders of not less than a majority of such Shares. The
Trustees may also amend this Declaration without the vote or con-
sent of Shareholders if they deem it necessary to conform this
Declaration to the requirements of applicable federal laws or reg-
ulations or the requirements of the regulated investment company
provisions of the Internal Revenue Code, but the Trustees shall
not be liable for failing so to do.
(b) No amendment may be made, under Section 11.3 (a)
above, which would chanae any rights with respect to any Shares of
the Trust by reducing the amount payable thereon upon liquidation
of the Trust or by diminishing or eliminating any voting rights
pertaining thereto, except with the vote or consent of the holders
of two-thirds of the Shares. Nothing contained in this
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Declaration shall permit the amendment of this Declaration to
impair the exemption from personal liability of the Shareholders,
Trustees, officers, employees and agents of the Trust or to permit
assessments upon Shareholders.
(c) A certification in recordable form signed by a
majority of the Trustees setting forth an amendment and reciting
that it was duly adopted by the Shareholders or by the Trustees as
aforesaid or a copy of the Declaration, as amended, in recordable
form, and executed by a majority of the Trustees, shall be
conclusive evidence of such amendment when lodged among the
records of the Trust.
Notwithstanding any other provision hereof, until such time
as a Registration Statement under the Securities Act of 1933, as
amended, covering the first public offering of Shares of the Trust
shall have become effective, this Declaration may be terminated or
amended in any respect by the affirmative vote of a majority of
the Trustees or by an instrument signed by a majority of the
Trustees.
11.4. Merger, Consolidation and Sale of Assets. The Trust
may merge or consolidate with any other corporation, association,
trust or other organization or may sell, lease or exchange all or
substantially all of the Trust Property, including its good will,
upon such terms and conditions and for such consideration when and
as authorized at any meeting of Shareholders called for the pur-
pose by the affirmative vote of the holders of not less than two-
thirds of the Shares, or by an instrument or instruments in writ-
ing without meeting, consented to by the holders of not less than
two-thirds of such Shares, and any such merger, consolidation,
sale, lease or exchange shall be deemed for all purposes to have
been accomplished under and pursuant to the statutes of the Com-
monwealth of Massachusetts. In respect of any such merger, con-
solidation, sale or exchange of assets, any Shareholder shall be
entitled to rights of appraisal of his Shares to the same extent
as a shareholder of a Massachusetts business corporation in
respect of a merger, consolidation, sale or exchange of assets of
a Massachusetts business corporation, and such rights shall be his
exclusive remedy in respect of his dissent from any such action.
11.5. Incorporation. With the approval of the holders of a
majority of the Shares, the Trustees may cause to be organized or
assist in organizing a corporation or corporations under the laws
of any jurisdiction or any other trust, partnership, association
or other organization to take over all of the Trust Property or to
carry on any business in which the Trust shall directly or indi-
rectly have any interest, and to sell, convey and transfer the
Trust Property to any such corporal'-ion, trust, association or
organization in exchange for the Shares or securities thereof or
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otherwise, and to lend money to, subscribe for the Shares or
securities of, and enter into any contracts with any such corpo-
ration, trust, partnership, association or organization, or any
corporation, partnership, trust, association or organization in
which the Trust holds or is about to acquire shares or any other
interest. The Trustees may also cause merger or consolidation
between the Trust or any successor thereto and any such corpora-
tion, trust, partnership, association or other organization if and
to the extent permitted by law, as provided under the law then in
effect. Nothing contained herein shall be construed as requiring
approval of Shareholders for the Trustees to organize or assist in
organizing one or more corporations, trusts, partnerships, associ-
ations or other organizations and selling, conveying or transfer-
ring a portion of the Trust Property to such organizations or
entities.
31.
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ARTICLE XII
Miscellaneous
12.1. Filing. This Declaration and any amendment hereto
shall be filed in the office of the Secretary of the Commonwealth
of Massachusetts and in such other places as may be required under
the laws of Massachusetts and may also be filed or recorded in
such other places as the Trustees deem appropriate. Each amend-
ment so filed shall be accompanied by a certificate signed and
acknowleged by a Trustee stating that such action was duly taken
in a manner provided herein, and unless such amendment or such
certificate sets forth some later time for the effectiveness of
such amendment, such amendment shall be effective upon its filing.
A restated Declaration, containing the original Declaration and
all amendments theretofore made, may be executed from time to time
by a majority of the Trustees and shall, upon filing with the
Secretary of the Commonwealth of Massachusetts, be conclusive
evidence of all amendments contained therein and may thereafter be
referred to in lieu of the original Declaration and the various
amendments thereto.
12.2. Resident Agent. The Trust shall maintain a resident
agent in the Commonwealth of Massachusetts, which agent shall
initially be CT Corporation System, 10 Post Office Square, Boston,
Massachusetts 02109. The Trustees may designate a successor
resident agent, provided, however, that such appointment shall not
become effective until written notice thereof is delivered to the
office of the Secretary of the Commonwealth.
12.3. Governing Law. This Declaration is executed by the
Trustees and delivered in the Commonwealth of Massachusetts and
with reference to the laws thereof, and the rights of all parties
and the validity and construction of every provision hereof shall
the subject to and construed according to the laws of said State
and reference shall be specifically made to the business
corporation law of the Commonwealth of Massachusetts as to the
construction of matters not specifically covered herein or as to
which an ambiguity exists.
12.4. Counterparts. This Declaration may be simultaneously
executed in several counterparts, each of which shall be deemed to
be an original, and such counterparts, together, shall constitute
one and the same instrument, which shall be sufficiently evidenced
by any such original counterpart.
12.5. Reliance by Third Parties. Any certificate executed
by an individual who, according to the records of the Trust, or of
any recording office in which this Declaration may be recorded,
32.
<PAGE>
appears to be a Trustee hereunder, certifying to: (a) the number
or identity of Trustees or Shareholders, (b) the due authorization
of the execution of any instrument or writing, (c) the form of
any vote passed at a meeting of Trustees or Shareholders, (d) the
fact that the number of Trustees or Shareholders present at any
meeting or executing any written instrument satisfies the
requirements of this Declaration, (e) the form of any By-Laws
adopted by or the identity of any officers elected by the
Trustees, or (f) the existence of any fact or facts which in any
manner relate to the affairs of the Trust, shall be conclusive
evidence as to the matters so certified in favor of any person
dealing with the Trustees and their successors.
12.6. Provisions in Conflict With Law or Regulations.
(a) The provisions of this Declaration are severable,
and if the Trustees shall determine, with the advice of counsel,
that any of such provisions is in conflict with the 1940 Act, the
regulated investment company provisions of the Internal Revenue
Code or with other applicable laws and regulations, the
conflicting provision shall be deemed never to have constituted a
part of this Declaration; provided, however, that such
determination shall not affect any of the remaining provisions of
this Declaration or render invalid or improper any action taken or
omitted prior to such determination.
(b) If any provision of this Declaration shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such
jurisdiction and shall not in any manner affect such provision in
any other jurisdiction or any other provision of this Declaration
in any jurisdiction.
33.
<PAGE>
IN WITNESS WHEREOF, the undersigned, constituting all of the
Trustees of the Trust, have caused these presensts to be executed
as of the day and year first above written.
/s/ Arthur Zeikel
---------------------------
Arthur Zeikel
279 Watchung Fork
Westfield, New Jersey 07090
/s/ Philip L. Kirstein
---------------------------
Philip L. Kirstein
9 Liberty Street
Ossining, New York 10562
/s/ Michael Hennewinkel
---------------------------
Michael Hennewinkel
828 Bloomfield Avenue
Montclair, New Jersey 07042
34.
<PAGE>
Ex-99.1(b)
MERRILL LYNCH FEDERAL SECURITIES TRUST
The undersigned, constituting a majority of the Trustees of
Merrill Lynch Federal Securities Trust (the "Trust"), a
Massachusetts business trust, hereby certify that the Trustees of
the Trust have duly adopted the following amendment, as approved
by a majority of the shareholders of the Trust, to the
Declaration of Trust of the Trust dated the 20th day of July,
1984 (the "Declaration of Trust").
VOTED: That Section 1.2 of Article I of the Declaration of
Trust be and it hereby is amended in its entirety to
read as follows:
1.2 Definitions. As used in this Declaration, the
following terms shall have the following meanings:
The terms "Affiliated Person", "Assignment",
"Commission", "Interested Person", "Majority Shareholder
Vote"(the "67% or more than 50% requirement of the third
sentence of Section 2(a)(42) of the 1940 Act, whichever may
be applicable) and "Principal Underwriter" shall have the
meanings given them in the 1940 Act.
"Declaration" shall mean this Declaration as amended
from time to time. References in this Declaration to
"Declaration", "hereof", "herein" and "hereunder" shall be
deemed to refer to the Declaration rather than the article
or section in which such words appear.
"Fundamental Policies" shall mean the investment
restrictions set forth in the Prospectus and designated as
fundamental policies therein.
"Person" shall mean and include individuals,
corporations, partnerships, trusts, associations, joint
ventures and other entities, whether or not legal entities,
and governments and agencies and political subdivisions
thereof.
"Prospectus" shall mean the currently effective
Prospectus of the Trust under the Securities Act of 1933, as
<PAGE>
amended, including the Statement of Additional Information
incorporated by reference therein.
"Shareholders" shall mean as of any particular time all
holders of record of outstanding Shares at such time.
"Shares" shall mean the equal proportionate
transferable units of interest into which the beneficial
interest in the Trust shall be divided from time to time and
includes fractions of Shares as well as whole Shares. As
provided in Article VI hereof, the Trust may issue separate
classes of Shares; all references to Shares shall be deemed
to be Shares of a single class or all classes as the context
may require.
"Trustees" shall mean the signatories to this
Declaration, so long as they shall continue in office in
accordance with the terms hereof, and all other persons who
at the time in question have been duly elected or appointed
and have qualified as trustees in accordance with the
provisions hereof and are then in office, are herein
referred to as the "Trustees", and reference in this
Declaration to a Trustee or Trustees shall refer to such
person or persons in their capacity as trustees hereunder.
"Trust Property" shall mean as of any particular time
any and all property, real or personal, tangible or
intangible, which at such time is owned or held by or for
the account of the Trust or the Trustees.
The "1940 Act" refers to the Investment Company Act of
1940, as amended from time to time, and shall include the
rules and regulations and any relevant order of exemption
promulgated thereunder by the Commission.
VOTED: That Section 6.1 of Article VI of the Declaration of
Trust be and it hereby is amended in its entirety to
read as follows:
6.1. Beneficial Interest. The interest of the
beneficiaries hereunder shall be divided into transferable
shares of beneficial interest, par value $0.10 per share.
The number of such shares of beneficial interest authorized
hereunder is unlimited. The Trustees, in their discretion
without a vote of the Shareholders, may divide the shares of
beneficial interest into classes. In such event, each class
shall represent interests in the Trust property and have
identical voting, dividend, liquidation and other rights and
the same terms and conditions except that expenses related
directly or indirectly to the distribution of the shares of
2
<PAGE>
a class may be borne solely by such class (as shall be
determined by the Trustees) and, as provided in section
10.1, a class may have exclusive voting rights with respect
to matters relating to the expenses being borne solely by
such class. The bearing of such expenses solely by a class
of Shares shall be appropriately reflected (in the manner
determined by the Trustees) in the net asset value, dividend
and liquidation rights of the Shares of such class. The
Trustees may redesignate a class or series of shares of
beneficial interest whether or not shares of such class or
series are issued and outstanding, provided that such
redesignation does not affect the preferences, conversion or
other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of
redemption of such shares of beneficial interest. The
division of the Shares into classes and the terms and
conditions pursuant to which the Shares of the classes will
be issued must be made in compliance with the 1940 Act. All
Shares issued hereunder including, without limitation,
Shares issued into connection with a dividend in Shares or a
split of Shares, shall be fully paid and nonassessable.
VOTED: That Section 8.11 of Article VIII of the Declaration of
Trust be and it hereby is amended in its entirety to
read as follows:
8.1. Redemptions. All outstanding Shares may be
redeemed at the option of the holders hereof, upon and
subject to the terms and conditions provided in this Article
VIII. The Trust shall, upon application of any Shareholder
or pursuant to authorization from any Shareholder, redeemed
or repurchase from such Shareholder outstanding Shares for
an amount per share determined by the application of a
formula adopted for such purpose by resolution of the
Trustees (which formula shall be consistent with the 1940
Act); provided that (a) such amount per share shall not
exceed the cash equivalent of the proportionate interest of
each share in the assets of the Trust at the time of the
purchase or redemption and (b) if so authorized by the
Trustees, the Trust may, at any time and from time to time,
charge fees for effecting such redemption, at such rates as
the Trustees may establish, as and to the extent permitted
under the 1940 Act, and may, at any time and from time to
time, pursuant to such Act, suspend such right of
redemption. The procedures for effecting redemption shall.
be as set forth in the Prospectus from time to time.
VOTED: That Sections 9.1, 9.2 and 9.3 of Article IX of the
Declaration of Trust be and they hereby are amended in
their entirety to read as follows:
3
<PAGE>
9.1. Net Asset Value. The net asset value of each
outstanding Share of the Trust shall be determined at such
time or times on such days as the Trustees may determine, in
accordance with the 1940 Act. The method of determination
of net asset value of Shares of each class shall be
determined by the Trustees and shall be as set forth in the
Prospectus with any expenses being borne solely by a class
of Shares being reflected in the net asset value of such
Shares. The power and duty to make the daily calculations
may be delegated by the Trustees to the adviser,
administrator, manager, custodian, transfer agent or such
other person as the Trustees may determine. The Trustee may
suspend the daily determination of net asset value to the
extent permitted by the 1940 Act.
9.2. Distributions to Shareholders. The Trustees
shall form time to time distribute ratably among the
Shareholders such proportion of the net profits, surplus
(including paid-in-surplus), capital, or assets held by the
Trustees as they deem proper with any expenses being borne
solely by a class of Shares being reflected in the net
profits or other assets being distributed to such class.
Such distribution may be made in cash or property (including
without limitation any type of obligations of the Trust or
any assets thereof), and the Trustees may distribute ratably
among the Shareholders additional Shares issuable hereunder
in such manner, at such times, and on such terms as the
Trustees may deem proper. Such distributions may be among
the Shareholders of record at the time of declaring a
distribution or among the Shareholders of record at such
later date as the Trustees shall determine. The Trustees
may always retain from the net profits such amount as they
may deem necessary to pay the debts or expenses of the Trust
or to meet obligations of the Trust, or as they deem
desirable to use in the conduct of its affairs or to retain
for future requirements or extensions of the business. The
Trustees may adopt and offer to Shareholders such dividend
reinvestment plans, cash dividend payout plans or related
plans as the Trustees shall deem appropriate.
Inasmuch as the computation of net income and gains for
Federal income tax purposes may vary from the computation
thereof on the books, the above provisions shall be
interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary
dividends and as capital gains distributions, respectively,
additional amounts sufficient to enable the Trust to avoid
or reduce liability for taxes.
4
<PAGE>
9.3. Power to Modify Foregoing Procedures.
Notwithstanding any of the foregoing provisions of this
Article IX, the Trustees may prescribe, in their absolute
discretion, such other bases and times for determining the
per share net asset value of the Trust's Shares or net
income, or the declaration and payment of dividends and
distributions as they deem necessary or desirable or to
enable the Trust to comply with any provision of the 1940
Act, including any rule or regulation adopted pursuant to
Section 22 of the 1940 Act by the Commission or any
securities association registered under the Securities
Exchange Act of 1934, all as in effect now or hereafter
amended or modified.
VOTED: That Section 10.1 and 10.2 of Article X of the
Declaration of Trust be and they hereby are amended in
their entirety to read as follows:
10.1. Voting Powers. The Shareholders shall have
power to vote (i) for the removal of Trustees as provided in
Section 2.3, (ii) with respect to any advisory or
management contract as provided in section 4.1, (iii) with
respect to the amendment of this Declaration as may be
provided in section 11.3, (iv) with respect to such
additional matters relating to the Trust as may be required
or authorized by the 1940 Act, the laws of the Commonwealth
of Massachusetts or other applicable law or by this
Declaration or the By-Laws of the Trust, and (v) with
respect to such additional matters relating to the Trust as
may be properly submitted for Shareholder approval. If the
Shares shall be divided into classes as provided in Article
VI hereof, the Shares of each class shall have identical
voting rights except that the Trustees, in their discretion,
may provide a class with exclusive voting rights with
respect to matters related to expenses being borne solely by
such class.
10.2. Meetings of Shareholders. Special meetings of
the Shareholders may be called at any time by a majority of
the Trustees and shall be called by any trustee upon written
request of Shareholders holding in the aggregate not less
than 10% of the outstanding Shares having voting rights,
such request specifying the purpose or purposes for which
such meeting is to be called. Any such meeting shall be
held within or without the Commonwealth of Massachusetts on
such day and at such time as the Trustees shall designate.
The holders of one-third of the outstanding Shares present
in person or by proxy shall constitute a quorum for the
transaction of any business, except as may otherwise be
required by the 1940 Act, the laws of the Commonwealth of
5
<PAGE>
Massachusetts or other applicable law or by this Declaration
or the By-Laws of the Trust. If a quorum is present at a
meeting, the affirmative vote of a majority of the Shares
represented at the meeting constitutes the action of the
Shareholders, unless the 1940 Act, the laws of the
Commonwealth of Massachusetts or other applicable law, the
Declaration or by the By-Laws of the Trust requires a
greater number of affirmative votes. If the Shares shall be
divided into classes with a class having exclusive voting
rights with respect to certain matters, the aforesaid quorum
and voting requirements with respect to action to be taken
by the Shareholders of the class on such matters shall be
applicable only to the Shares of such class.
VOTED: That Section 11.2 of Article XI of the Declaration of
Trust be and it hereby is amended in its entirety to
read as follows:
11.2. Termination of Trust.
(a) The Trust may be terminated by the affirmative
vote of the holders of not less than two-thirds of the
Shares at any meeting of Shareholders or by an instrument in
writing, without a meeting, signed by a majority of the
Trustees and consented to by the holders of not less than
two-thirds of such Shares. Upon the termination of the
Trust,
(i) The Trust shall carry on no business except
for the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the
affairs of the Trust and all of the powers of the Trustees
under this Declaration shall continue until the affairs of
the Trust shall have been wound up, including the power to
fulfill or discharge the contracts of the Trust, collect its
assets, sell, convey, assign, exchange, transfer or
otherwise dispose of all or any part of the remaining Trust
Property to one or more persons at public or private sale
for consideration which may consist in whole or in part of
cash, securities or other property of any kind, discharge or
pay its liabilities, and do all other acts appropriate to
liquidate its business; provided that any sale, conveyance,
assignment, exchange, transfer or other disposition of all
or substantially all the Trust Property shall require
approval of the principal terms of the transaction and the
nature and amount of the consideration by vote or consent of
the holders of a majority of the Shares entitled to vote.
6
<PAGE>
(iii) After paying or adequately providing for
the payment of all liabilities, and upon receipt of such
releases, indemnities and refunding agreements, as they deem
necessary for their protection, the Trustees may distribute
the remaining Trust Property, in cash or in kind or partly
each, among the Shareholders of each class, according to
their respective rights taking into account the proper
allocation of expenses being borne solely by any class of
Shares.
(b) After termination of the Trust and distribution to
the Shareholders as herein provided, 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 the Trustees shall thereupon be
discharged from all further liabilities and duties
hereunder, and the rights and interest of all Shareholders
shall thereupon cease.
IN WITNESS WHEREOF, the undersigned, constituting a majority
of the Trustees, have signed this certificate in duplicate
original counterparts and have caused a duplicate original to be
lodged among the records of the Trust as required by Article XI
of the Declaration of Trust as of the 20th day of December,
1991.
/s/ Walter Mintz /s/ Melvin R. Seiden
----------------- --------------------
Walter Mintz Melvin R. Seiden
2 East 88th Street 993 Park Avenue
New York, New York 10128 New York, New York 10028
/s/ Stephen B. Sensrud /s/ Harry Woolf
---------------------- --------------------
Stephen B. Sensrud Harry Woolf
RFD #2, Box 403 29 Sergeant Street
East Kingston, New Hampshire 03827 Princeton, New Jersey 08540
/s/Arthur Zeikel
----------------
Arthur Zeikel
279 Watchung Fork
Westfield, New Jersey 07090
7
<PAGE>
The Declaration of Trust establishing Merrill Lynch Federal
Securities Trust, dated July 20, 1984, 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 Federal Securities 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 Merrill Lynch Federal
Securities Trust shall be held to any personal liability, nor
shall resort be had to their private property for the
satisfaction of any obligation or claim or otherwise in
connection with the affairs of said Trust but the Trust Property
only shall be liable.
8
<PAGE>
EX-99.1(c)
MERRILL LYNCH FEDERAL SECURITIES TRUST
Establishment and Designation
of
Class A Shares and Class B Shares of
Beneficial Interest of the Trust
The undersigned, being a majority of the Trustees of Merrill
Lynch Federal Securities Trust, a Massachusetts business trust
(the "Trust"), acting pursuant to Section 6.1 of the Declaration
of' Trust, as amended, dated July 20, 1984 (the "Declaration") of
the Trust, do hereby divide the shares of beneficial interest of
the Trust, par value $. 10 per share ("Shares"), to create two
classes of Shares, within the meaning of said section 6.1, as
follows:
1. The two classes of Shares are designated "Class A
Shares" and "Class B Shares", respectively.
2. Class A Shares and Class B Shares shall be entitled to
all of the rights and preferences accorded to Shares
under the Declaration.
The purchase price of Class A Shares and Class B
Shares, the method of determination of net asset value
of Class A Shares and Class B Shares, the price, terms
and manner of redemption of Class A Shares and Class B
Shares, and the relative dividend rights of holders of
Class A Shares and Class B Shares shall be established
by the Trustees of the Trust in accordance with the
provisions of the Declaration and shall be set forth in
the currently effective prospectus and statement of
additional information of the Trust, as amended from
time to time, under the Securities Act of 1933, as
amended.
4. All Shares issued prior to the filing of this
instrument with the Commonwealth of Massachusetts shall
be deemed Class A Shares.
<PAGE>
IN WITNESS WHEREOF, the undersigned, have signed this
instrument in duplicate original counterparts and have caused a
duplicate original to be lodged among the records of the Trust
this day of 19
/s/ Walter Mintz /s/ Melvin R. Seiden
------------------ ----------------------
Walter Mintz Melvin R. Seiden
2 East 88th Street 993 Park Avenue
New York, New York 10128 New York, New York 10028
/s/ Stephen B. Swensrud /s/ Harry Woolf
------------------------- ------------------
Stephen B. Swensrud Harry Woolf
RFD #2, Box 403 29 Sergeant street
East Kingston, New Hampshire 03827 Princeton, New Jersey 08540
/s/Arthur Zeikel
------------------
Arthur Zeikel
279 Watchung Fork
Westfield, New Jersey 07090
The Declaration of Trust establishing Merrill Lynch Federal
Securities Trust, dated July 20, 1984, 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 Federal Securities 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 Merrill Lynch Federal
Securities Trust shall be held to any personal liability, nor
shall resort be had to their private property for the
satisfaction of any obligation or claim or otherwise in
connection with the affairs of said Trust but the Trust Property
only shall be liable.
2
<PAGE>
Ex-99.1(d)
MERRILL LYNCH FEDERAL SECURITIES TRUST
Certification Of Amendment
To Declaration Of Trust
and
Establishment and Designation of Classes
The undersigned, constituting a majority of the Trustees of Merrill
Lynch Federal Securities Trust (the "Trust"), a Massachusetts business trust,
hereby certify that the Trustees of the Trust have duly adopted the following
amendments, as approved by a majority of the shareholders of the Trust, to the
Trust's Declaration of Trust .
VOTED: That Sections 6.1 and 6.2 of Article VI of the Declaration of
Trust be, and they hereby are, amended in their entirety to read
as follows:
6.1 Beneficial Interest. The interest of the beneficiaries hereunder
shall be divided into transferable shares of beneficial interest, par value
$0.10 per share. The number of such shares of beneficial interest authorized
hereunder is unlimited. The Trustees, in their discretion, without a vote of
the Shareholders, may divide the shares of beneficial interest into classes.
In such event, each class shall represent interests in the Trust property and
have identical voting, dividend, liquidation and other rights and the same
terms and conditions except that expenses related directly or indirectly to the
distribution of the shares of a class may be borne solely by such class (as
shall be determined by the Trustees) and, as provided in Section 10.1, a class
may have exclusive voting rights with respect to matters relating to the
expenses being borne solely by such class. The bearing of such expenses solely
by a class of Shares shall be appropriately reflected (in the manner determined
by the Trustees) in the net asset value, dividend and liquidation rights of the
Shares of such class. The Trustees may provide that shares of a class will be
exchanged for shares of another class without any act or deed on the part of
the holder of shares of the class being exchanged, whether or not shares of
such class are issued and outstanding, all on terms and conditions as the
Trustees may specify. The Trustees may redesignate a class or series of shares
of beneficial interest or a portion of a class or series of shares of
beneficial interest whether or not shares of such class or series are issued
and outstanding, provided that such redesignation does not substantially
adversely affect the preferences, conversion or
<PAGE>
other rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such issued and
outstanding shares of beneficial interest. The division of the Shares into
classes and the terms and conditions pursuant to which the Shares of the classes
will be issued must be made in compliance with the 1940 Act. All Shares issued
hereunder including, without limitation, Shares issued in connection with a
dividend in Shares or a split of Shares, shall be fully paid and nonassessable.
6.2. Rights of Shareholders. The ownership of the Trust Property of
every description and the right to conduct any business vested exclusively in
the Trustees, and the Shareholders shall have no interest therein other than the
beneficial interest conferred by their Shares, and they shall have no right to
call for any partition or division of any property, profits, rights or interests
of the Trust nor can they be called upon to share or assume any losses of the
Trust or suffer an assessment of any kind by virtue of their ownership of
Shares. The Shares shall be personal property giving only the rights in this
Declaration specifically set forth. The Shares shall not entitle the holder to
preference, preemptive, appraisal, conversion or exchange rights (except for
rights of appraisal specified in Section 11.4 and except as may be specified by
the Trustees in connection with the division of shares into classes or the
redesignation of classes or portions of classes in accordance with Section 6.1)
.
VOTED: That Section 10.1 of Article X of the Declaration of Trust be,
and it hereby is, amended in its entirety to read as follows:
10.1. Voting Powers. The Shareholders shall have power to vote (i)
for the removal of Trustees as provided in Section 2.2; (ii) with respect to
any advisory or management contract as provided in Section 4.1; (iii) with
respect to the amendment of this Declaration as provided in Section 11.3; (iv)
with respect to such additional matters relating to the Trust as may be
required or authorized by the 1940 Act, the laws of the Commonwealth of
Massachusetts or other applicable law or by this Declaration or the By-Laws of
the Trust; and (v) with respect to such additional matters relating to the
Trust as may be properly submitted for Shareholder approval. If the Shares of
a Series shall be divided into classes as provided in Article VI hereof, the
Shares of each class shall have identical voting rights except that the
Trustees, in their discretion, may provide a class with exclusive voting rights
with respect to matters related to expenses being borne solely by such class
whether or not shares of such class are issued and outstanding.
2
<PAGE>
The undersigned, being a majority of the Trustees of the Trust, acting
pursuant to Section 6.1 of the Declaration of Trust, do hereby divide the
shares of beneficial interest of each series of the Trust to create four
classes of shares, within the meaning of said Section 6.1, as follows:
1. The four classes of shares are designated "Class A Shares,"
"Class B Shares," "Class C Shares," and "Class D Shares."
2. Class A Shares, Class B Shares, Class C Shares and Class D
Shares shall be entitled to all of the rights and preferences
accorded to Shares under the Declaration of Trust.
3. The purchase price, the method of determination of net asset
value, the price, terms and manner of redemption, and the
relative dividend rights of holders of Class A Shares, Class B
Shares, Class C Shares and Class D Shares shall be established
by the Trustees of the Trust in accordance with the provisions
of the Declaration of Trust and shall be set forth in the
currently effective prospectus and statement of additional
information of the Trust relating to each series of the Trust,
as amended from time to time, contained in the Trust's
registration statement under the Securities Act of 1933, as
amended.
4. Class A Shares, Class B Shares, Class C Shares and Class D
Shares shall vote together as a single class except that shares
of a class may vote separately on matters affecting only that
class and shares of a class not affected by a matter will not
vote on that matter.
5. A class of shares of any series of the Trust may be terminated
by the Trustees by written notice to the Shareholders of the
class.
3
<PAGE>
IN WITNESS WHEREOF, the undersigned, constituting a majority of the
Trustees, have signed this certificate in duplicate original counterparts and
have caused a duplicate original to be lodged among the records of the Trust as
required by Article XI, Section 11.3(c) of the Declaration of Trust as of 13th
day of 13th October, 1994.
/s/ Joe Grills /s/ Walter Mintz
- --------------- ------------------
Joe Grills Walter Mintz
183 Soundview Lane Cumberland Associates
New Canaan, CT 06840 1114 Avenue of the Americas
New York, NY 10036
/s/ Melvin R. Seiden /s/ Stephen B. Swensrud
- --------------------- ------------------------
Melvin R. Seiden Stephen B. Swensrud
President Fernwood Associates
Silbanc Properties, Ltd. 24 Federal Street
780 Third Avenue, 25th Floor Suite 400
Suite 2502 A Boston, MA 02110
New York, NY 10017
/s/ Harry Woolf /s/ Arthur Zeikel
- ---------------- ------------------
Dr. Harry Woolf Arthur Zeikel
The Institute for Advanced 300 Woodland Avenue
Study Westfield, NJ 07090
South Olden Lane
Princeton, NJ 08540
The Declaration of Trust establishing Merrill Lynch Federal Securities
Trust, dated July 20, 1984, 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 of the Trust, "Merrill
Lynch Federal Securities 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 Merrill Lynch Federal Securities
Trust shall be held to any personal liability, nor shall resort be had to their
private property for the satisfaction of any obligation or claim or otherwise
in connection with the affairs of said Trust but the "Trust Property" only
4
<PAGE>
EX-99.2
BY- LAWS
OF
MERRILL LYNCH FEDERAL
SECURITIES TRUST
<PAGE>
MERRILL LYNCH FEDERAL SECURITIES TRUST
--------------------------------------
BY-LAWS
-------
These By-Laws are made and adopted pursuant to Section 2.6
of the Declaration of Trust establishing MERRILL LYNCH FEDERAL
SECURITIES TRUST, dated July 20, 1984, as from time to time
amended (hereinafter called the "Declaration"). All words and
terms capitalized in these By-Laws shall have the meaning or
meanings set forth for such words or terms in the Declaration.
ARTICLE I
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Shareholder Meetings
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Section 1.1. Chairman. The Chairman, if any, shall act as
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chairman at all meetings of the Shareholders; in his absence, the
President shall act as chairman; and in the absence of the
Chairman and President, the Trustee or Trustees present at each
meeting may elect a temporary chairman for the meeting, who may
be one of themselves.
Section 1.2. Proxies; Voting. Shareholders may vote either
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in person or by duly executed proxy and each full share repre-
sented at the meeting shall have one vote, all as provided in
Article X of the Declaration. No proxy shall be valid after
eleven (11) months from the date of its execution, unless a
longer period is expressly stated in such proxy.
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Section 1.3. Closing of Transfer Books and Fixing Record
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Dates. For the purpose of determining the Shareholders who are
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entitled to notice of or to vote or act at any meeting, including
any adjournment thereof, or who are entitled to participate in
any dividends, or for any other proper purpose, the Trustees may
from time to time close the transfer books or fix a record date
in the manner provided in Section 10.4 of the Declaration. if
the Trustees do not prior to any meeting of Shareholders so fix a
record date or close the transfer books, then the date of mailing
notice of the meeting or the date upon which the dividend
resolution is adopted, as the case may be, shall be the record
date.
Section 1.4. Inspectors of Election. In advance of any
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meeting of Shareholders, the Trustees may appoint Inspectors of
Election to act at the meeting or any adjournment thereof. if
Inspectors of Election are not so appointed, the Chairman, if
any, of any meeting of Shareholders may, and on the request of
any Shareholder or his proxy shall, appoint Inspectors of
Election of the meeting. The number of Inspectors shall be
either one or three. If appointed at the meeting on the request
of one or more Shareholders or proxies, a majority of Shares
present shall determine whether one or three Inspectors are to be
appointed, but failure to allow such determination by the
Shareholders shall not affect the validity of the Appointment of
Inspectors of Election. In case any person appointed as
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Inspector fails to appear or fails or refuses to act, the vacancy
may be filed by appointment made by the Trustees in advance of
the convening of the meeting or at the meeting by the person
acting as chairman. The Inspectors of Election shall determine
the number of Shares outstanding, the Shares represented at the
meeting, the existence of a quorum, the authenticity, validity
and effect of proxies, shall receive votes, ballots or consents,
shall hear and determine all challenges and questions in any way
arising in connection with the right to vote, shall count and
tabulate all votes or consents, determine the results, and do
such other acts as may be proper to conduct the election or vote
with fairness to all Shareholders. If there are three Inspectors
of Election, the decision, act or certificate of a majority is
effective in all respects as the decision, act or certificate of
all. On request of the Chairman, if any, of the meeting, or of
any Shareholder or his proxy, the Inspectors of Election shall
make a report in writing of any challenge or question or matter
determined by them and shall execute a certificate of any facts
found by them.
Section 1.5. Records at Shareholder Meetings. At each
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meeting of the Shareholders there shall be open for inspection
the minutes of the last previous Shareholder Meeting of the Trust
and a list of the Shareholders of the Trust, certified to be true
and correct by the Secretary or other proper agent of the Trust,
as of the record date of the meeting or the date of closing of
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transfer books, as the case may be. Such list of Shareholders
shall contain the name of each Shareholder in alphabetical order
and the address and number of Shares owned by such Shareholder.
Shareholders shall have such other rights and procedures of
inspection of the books and records of the Trust as are granted
to shareholders of a Massachusetts business corporation.
ARTICLE II
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Trustees
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Section 2.1. Annual and Regular Meetings. The Trustees
shall hold an annual meeting for the election of officers and the
transaction of other business which may come before-such meeting,
on such date as shall be fixed by the Trustees from time to time.
Regular meetings of the Trustees may be held without call or
notice at such place or places and times as the Trustees may by
resolution provide from time to time.
Section 2.2. Special Meetings. Special Meetings of the
Trustees shall be held upon the call of the Chairman, if any, the
President, the Secretary or any two Trustees, at such time, on
such day, and at such place, as shall be designated in the notice
of the meeting.
Section 2.3. Notice. Notice of a meeting shall be given by
mail or by telegram (which term shall include a cablegram) or
delivered personally. If notice is given by mail, it shall be
mailed not later than 48 hours preceding the meeting and if given
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by telegram or personally, such telegram shall be sent or
delivery made not later than 48 hours preceding the meeting.
Notice by telephone shall constitute personal delivery for these
purposes. Notice of a meeting of Trustees may be waived before
or after any meeting by signed written waiver. Neither the
business to be transacted at, nor the purpose of, any meeting of
the Board of Trustees need be stated in the notice or waiver of
notice of such meeting, and no notice need be given of action
proposed to be taken by unanimous written consent. The
attendance of a Trustee at a meeting shall constitute a waiver of
notice of such meeting except where a Trustee attends a meeting
for the express purpose of objecting to the transaction of any
business on the ground that the meeting has not been lawfully
called or convened.
Section 2.4. Chairman; Records. The Chairman, if any,
shall act as chairman at all meetings of the Trustees; in his
absence the President shall act as chairman; and, in the absence
of the Chairman and the President, the Trustees present shall
elect one of their number to act as temporary chairman. The
results of all actions taken at a meeting of the Trustees, or by
unanimous written consent of the Trustees, shall be recorded by
the Secretary.
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ARTICLE III
Officers
Section 3.1. Officers of the Trust. The officers of the
Trust shall consist of a Chairman, if any, a President, a
Secretary, a Treasurer and such other officers or assistant
officers, including Vice-Presidents, as may be elected by the
Trustees. Any two or more of the offices may be held by the same
person, except that the same person may not be both President and
Secretary. The Trustees may designate a Vice-President as an
Executive Vice-President and may designate the order in which the
other Vice-Presidents may act. The Chairman and the President
shall be Trustees, but no other officer of the Trust need be a
Trustee.
Section 3.2. Election and Tenure. At the initial organ-
ization meeting and thereafter at each annual meeting of the
Trustees, the Trustees shall elect the Chairman, if any,
President, Secretary, Treasurer and such other officers as the
Trustees shall deem necessary or appropriate in order to carry
out the business of the Trust. Such officers shall hold office
until the next annual meeting of the Trustees and until their
successors have been duly elected and qualified. The Trustees
may fill any vacancy in office or add any additional officers at
any time.
Section 3.3. Removal of Officers. Any officer may be
removed at any time, with or without cause, by action of a
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majority of the Trustees. This provision shall not prevent the
making of a contract of employment for a definite term with any
officer and shall have no effect upon any cause of action which
any officer may have as a result of removal in breach of a
contract of employment. Any officer may resign at any time by
notice in writing signed by such officer and delivered or mailed
to the Chairman, if any, President, or Secretary, and such
resignation shall take effect immediately upon receipt by the
Chairman, if any, President, or Secretary, or at a later date
according to the terms of such notice in writing.
Section 3.4. Bonds and Surety. Any officer may be required
by the Trustees to be bonded for the faithful performance of his
duties in such amount and with such sureties as the Trustees may
determine.
Section 3.5. Chairman, President, and Vice-Presidents. The
Chairman, if any, shall, if present, preside at all meetings of
the Shareholders and of the Trustees and shall exercise and
perform such other powers and duties as may be from time to time
assigned to him by the Trustees. Subject to such supervisory
powers, if any, as may be given by the Trustees to the Chairman,
if any, the President shall be the chief executive officer of the
Trust and, subject to the control of the Trustees, shall have
general supervision, direction and control of the business of the
Trust and of its employees and shall exercise such general powers
of management as are usually vested in the office of President of
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a corporation. In the absence of the Chairman, if any, the
President shall preside at all meetings of the Shareholders and
of the Trustees. The President shall be, ex-officio, a member of
all standing committees, except as otherwise provided in the
resolutions or instruments creating any such committees. Subject
to direction of the Trustees, the Chairman, if any, and the
President shall each have power in the name and on behalf of the
Trust to execute any and all loan documents, contracts,
agreements, deeds, mortgages, and other instruments in writing,
and to employ and discharge employees and agents of the Trust.
Unless otherwise directed by the Trustees, the Chairman, if any,
and the President shall each have full authority and power, on
behalf of all of the Trustees, to attend and to act and to vote,
on behalf of the Trust at any meetings of business organizations
in which the Trust holds an interest, or to confer such powers
upon any other persons, by executing any proxies duly authorizing
such persons. The Chairman, if any, and the President shall have
such further authorities and duties as the Trustees shall from
time to time determine. In the absence or disability of the
President, the Vice-Presidents in order of their rank as fixed by
the Trustees or, if more than one and not ranked, the Vice-
President designated by the Trustees, shall perform all of the
duties of the President, and when so acting shall have all the
powers of and be subject to all of the restrictions upon the
President. Subject to the direction of the Trustees, and of the
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President, each Vice-President shall have the power in the name
and on behalf of the Trust to execute any and all loan documents,
contracts, agreements, deeds, mortgages and other instruments in
writing, and, in addition, shall have such other duties and
powers as shall be designated from time to time by the Trustees
or by the President.
Section 3.6. Secretary. The Secretary shall keep the
minutes of all meetings of, and record all votes of,
Shareholders, Trustees and the Executive Committee, if any. He
shall be custodian of the seal of the Trust, if any, and he (and
any other person so authorized by the Trustees) shall affix the
seal or, if permitted, a facsimile thereof, to any instrument
executed by the Trust which would be sealed by a Massachusetts
corporation executing the same or a similar instrument and shall
attest the seal and the signature or signatures of the officer or
officers executing such instrument on behalf of the Trust. The
Secretary shall also perform any other duties commonly incident
to such office in a Massachusetts business corporation, and shall
have such other authorities and duties as the Trustees shall from
time to time determine.
Section 3.7. Treasurer. Except as otherwise directed by
the Trustees, the Treasurer shall have the general supervision of
the monies, funds, securities, notes receivable and other
valuable papers and documents of the Trust, and shall have and
exercise under the supervision of the Trustees and of the
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President all powers and duties normally incident to his office.
He may endorse for deposit or collection all notes, checks and
other instruments payable to the Trust or to its order. He shall
deposit all funds of the Trust in such depositories as the
Trustees shall designate. He shall be responsible for such
disbursement of the funds of the Trust as may be ordered by the
Trustees or the President. He shall keep accurate account of the
books of the Trust's transactions which shall be the property of
the Trust, and which together with all other property of the
Trust in his possession, shall be subject at all times to the
inspection and control of the Trustees. Unless the Trustees
shall otherwise determine, the Treasurer shall be the principal
accounting officer of the Trust and shall also be the principal
financial officer of the Trust. He shall have such other duties
and authorities as the Trustees shall from time to time
determine. Notwithstanding anything to the contrary herein
contained, the Trustees may authorize any adviser, administrator,
manager or transfer agent to maintain bank accounts and deposit
and disburse funds of the Trust.
Section 3.8. Other Officers and Duties. The Trustees may
elect such other officers and assistant officers as they shall
from time to time determine to be necessary or desirable in order
to conduct the business of the Trust. Assistant officers shall
act generally in the absence of the officer whom they assist and
shall assist that officer in the duties of his office. Each
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officer, employee and agent of the Trust shall have such other
duties and authority as may be conferred upon him by the Trustees
or delegated to him by the President.
ARTICLE IV
Miscellaneous
Section 4.1. Custodians. In accordance with Section 7.1 of
the Declaration, the funds of the Trust shall be deposited with
such custodian or custodians as the Trustees shall designate and
shall be drawn out on checks, drafts or other orders signed by
such officer, officers, agent or agents (including any adviser,
administrator or manager), as the Trustees may from time to time
authorize.
Section 4.2. Signatures. All contracts and other
instruments shall be executed on behalf of the Trust by such
officer, officers, agent or agents, as provided in these By-Laws
or as the Trustees may from time to time by resolution provide.
Section 4.3. Seal. The seal of the Trust, if any, may be
affixed to any document, and the seal and its attestation may be
lithographed, engraved or otherwise printed on any document with
the same force and effect as if it had been imprinted and
attested manually in the same manner and with the same effect as
if done by a Massachusetts business corporation.
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ARTICLE V
Share Certificates and Share Transfers
Section 5.1. Share Certificates. Each holder of Shares of
the Trust shall be entitled upon request to have a certificate or
certificates, in such form as shall be approved by the Trustees,
representing the number of Shares owned by him, provided,
however, that certificates for fractional Shares shall not be
delivered in any case. The certificates representing Shares
shall be signed by or in the name of the Trust by the President
or a Vice-President and by the Secretary or an Assistant
Secretary or the Treasurer or an Assistant Treasurer and sealed
with the seal of the Trust. Any or all of the signatures or the
seal on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to
be such officer, transfer agent or registrar before such
certificate shall be issued, it may be issued by the Trust with
the same effect as if such officer, transfer agent or registrar
were still in office at the date of issue.
Section 5.2. Transfer Agents, Registrars and the Like. As
provided in Section 6.6 of the Declaration, the Trustees shall
have authority to employ and compensate such transfer agents and
registrars with respect to the Shares of the Trust as the
Trustees shall deem necessary or desirable and may require all
certificates for Shares to bear the signature or signatures of
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any of them. In addition, the Trustees shall have power to
employ and compensate such dividend disbursing agents, warrant
agents and agents for the reinvestment of dividends as they shall
deem necessary or desirable. Any of such agents shall have such
power and authority as is delegated to any of them by the
Trustees.
Section 5.3. Transfer of Shares. The Shares of the Trust
shall be transferable on the books of the Trust only upon
delivery to the Trustees or a transfer agent of the Trust of
proper documentation as provided in Section 6.7 of the Declara-
tion, and on surrender of the certificate or certificates, if
issued, for such Shares properly endorsed or accompanied by a
duly executed stock transfer power and the payment of all taxes
thereon. The Trust, or its transfer agents, shall be authorized
to refuse any transfer unless and until presentation of such
evidence as may be reasonably required to show that the requested
transfer is proper.
Section 5.4. Registered Shareholders. The Trust may deem
and treat the holder of record of any Share as the absolute owner
thereof for all purposes and shall not be required to take any
notice of any right or claim of right of any other person.
Section 5.5. Regulations. The Trustees may make such
additional rules and regulations, not inconsistent with these
By-Laws, as it may deem expedient concerning the issue, transfer
and registration of certificates for Shares of the Trust.
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Section 5.6. Lost, Destroyed or Mutilated Certificates.
The holder of any certificate representing Shares of the Trust
shall immediately notify the Trust of any loss, destruction or
mutilation of such certificate, and the Trust may issue a new
certificate in the place of any certificate theretofore issued by
it which the owner thereof shall allege to have been lost or
destroyed or which shall have been mutilated, and the Trustees
may, in their discretion, require such owner or his legal
representatives to give the Trust a bond in such sum, limited or
unlimited, and in such form and with such surety or sureties, as
the Trustees in their absolute discretion shall determine, to
indemnify the Trust against any claim that may be made against it
on account of the alleged loss or destruction of any such
certificate, or issuance of a new certificate. Anything herein
to the contrary notwithstanding, the Trustees in their absolute
discretion, may refuse to issue any such new certificates, except
pursuant to legal proceedings under the laws of the Commonwealth
of Massachusetts.
ARTICLE VI
Amendment of By-Laws
Section 6.1. Amendment and Repeal of By-Laws. In accor-
dance with Section 2.6 of the Declaration, the Trustees shall
have the power to alter, amend or repeal the By-Laws or adopt new
By-Laws at any time. Action by the Trustees with respect to the
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By-Laws shall be taken by an affirmative vote of a majority of
the Trustees. The Trustees shall in no event adopt By-Laws which
are in conflict with the Declaration, and any apparent incon-
sistency shall be construed in favor of the related provisions in
the Declaration.
The Declaration establishing Merrill Lynch Federal
Securities Trust, 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 Federal Securities 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 Merrill Lynch Federal Securities
Trust shall be held to any personal liability, nor shall resort
be had to their private property for the satisfaction of any
obligation or claim or otherwise in connection with the affairs
of said Merrill Lynch Federal Securities Trust but the Trust
Property only shall be liable.
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Ex-99.6(b)
CLASS B SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 20th day of December, 1991, between MERRILL
LYNCH FEDERAL SECURITIES TRUST, a Massachusetts business trust (the "Fund"), and
MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the
"Distributor").
W I T N E S S E T H :
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"), as an open-end investment
company, and it is affirmatively in the interest of the Fund to offer its shares
for sale continuously; and
WHEREAS, the Distributor is a securities firm engaged in the business of
selling shares of investment companies either directly to purchasers or through
other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering of the
Fund's Class B shares in order to promote the growth of the Fund and facilitate
the distribution of its Class B shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby appoints the
Distributor as the principal underwriter and distributor of the Fund to sell
Class B shares of beneficial interest in the Fund (sometimes herein referred to
as "Class B
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shares") to the public and hereby agrees during the term of this
Agreement to sell shares of the Fund to the Distributor upon the terms and
conditions herein set forth .
Section 2. Exclusive Nature of Duties. The Distributor shall be the
exclusive representative of the Fund to act as principal underwriter and
distributor of the Class B shares, except that:
(a) The Fund may, upon written notice to the Distributor, from time to
time designate other principal underwriters and distributors of Class B shares
with respect to areas other than the United States as to which the Distributor
may have expressly waived in writing its right to act as such. If such
designation is deemed exclusive, the right of the Distributor under this
Agreement to sell Class B shares in the areas so designated shall terminate,
but this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.
(b) The exclusive rights granted to the Distributor to purchase Class B
shares from the Fund shall not apply to Class B shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding Class B
shares of any such company by the Fund.
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(c) Such exclusive right also shall not apply to Class B shares issued
by the Fund pursuant to reinvestment of dividends or capital gains
distributions.
(d) Such exclusive rights also shall not apply to Class B shares issued
by the Fund pursuant to any reinstatement privilege afforded redeeming
shareholders.
Section 3. Purchase of Class B Shares from the Fund.
(a) The Fund will commence an offering of its Class B shares and
thereafter the Distributor shall have the right to buy from the Fund the Class B
shares needed, but not more than the Class B shares needed (except for clerical
errors in transmission) to fill unconditional orders for Class B shares of the
Fund placed with the Distributor by investors or securities dealers. The price
which the Distributor shall pay for the Class B shares so purchased from the
Fund shall be the net asset value, determined as set forth in Section 3(c)
hereof.
(b) The Class B shares are to be resold by the Distributor to investors
at net asset value, as set forth in Section 3(c) hereof, or to securities
dealers having agreements with the Distributor upon the terms and conditions set
forth in Section 7 hereof.
(c) The net asset value of Class B shares of the Fund shall be
determined by the Fund or any agent of the Fund in accordance with the method
set forth in the currently effective prospectus and statement of additional
information of the Fund (the
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"prospectus" and "statement of additional information," respectively) under the
Securities Act of 1933, as amended (the "Securities Act"), and guidelines
established by the Board of Trustees.
(d) The Fund shall have the right to suspend the sale of its Class B
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Fund shall also have the right to suspend
the sale of its Class B shares if trading on the New York Stock Exchange shall
have been suspended, if a banking moratorium shall have been declared by
Federal or New York authorities, or if there shall have been some other event,
which, in the judgment of the Fund, makes it impracticable or inadvisable to
sell the shares.
(e) The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class B shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class B shares. The Fund (or its
agent) will confirm orders upon their receipt, will make appropriate book
entries and, upon receipt by the Fund (or its agent) of payment therefor, will
deliver deposit receipts or certificates for such Class B shares pursuant to the
instructions of the Distributor. Payment shall be made to the Fund in New York
Clearing House funds. The Distributor agrees to cause such
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payment and such instructions to be delivered promptly to the Fund (or its
agent).
Section 4. Repurchase or Redemption of Class B Shares by
the Fund.
(a) Any of the outstanding Class B shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class B
shares so tendered in accordance with its obligations as set forth in Article
VIII of its Declaration of Trust, as amended from time to time, and in
accordance with the applicable provisions set forth in the prospectus and
statement of additional information of the Fund. The price to be paid to redeem
or repurchase the Class B shares shall be equal to the net asset value
calculated in accordance with the provisions of Section 3(c) hereof, less the
redemption fee or other charge, if any, set forth in the prospectus and
statement of additional information of the Fund. All payments by the Fund
hereunder shall be made in the manner set forth below.
The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of the Distributor on or
before the seventh business day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of shares shall be
paid by the Fund as follows: (i) any applicable contingent deferred sales charge
shall be paid to the Distributor, and (ii) the balance shall be paid to or for
the account of the shareholder, in each
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case in accordance with the applicable provisions of the prospectus and
statement of additional information.
(b) Redemption of Class B shares or payment may be suspended at times
when the New York Stock Exchange is closed, when trading on said Exchange is
closed, when trading on said Exchange is restricted, when an emergency exists as
a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund.
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Class B shares
of the Fund, and this shall include, upon request by the Distributor, one
certified copy of all financial statements prepared for the Fund by independent
public accountants. The Fund shall make available to the Distributor such number
of copies of its prospectus and statement of additional information as the
Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to
the necessary approval of the shareholders, all necessary action to fix the
number of authorized shares and such steps as may be necessary to register the
same under the Securities Act to the
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end that there will be available for sale such number of Class B shares as the
Distributor reasonably may be expected to sell.
(c) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class B shares for sale under the
securities laws of such states as the Distributor and the Fund may approve. Any
such qualification may be withheld, terminated or withdrawn by the Fund at any
time in its discretion. As provided in Section 8(c) hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualification. (d) The Fund will furnish, in reasonable quantities upon request
by the Distributor, copies of annual and interim reports of the Fund.
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort to effect
sales of Class B shares of the Fund, but shall not be obligated to sell any
specific number of shares. The services of the Distributor to the Fund
hereunder are not to be deemed exclusive and nothing herein contained shall
prevent the Distributor from entering into like arrangements with other
investment companies so long as the performance of its obligations hereunder is
not impaired thereby.
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(b) In selling the Class B shares of the Fund, the Distributor shall
use its best efforts in all respects duly to conform with the requirements of
all Federal and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer, as defined in Section 7 hereof, nor any
other person is authorized by the Fund to give any information or to make any
representations, other than those contained in the registration statement or
related prospectus and statement of additional information and any sales
literature specifically approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as approved by
the officers of the Fund, for the confirmation of sales to investors and
selected dealers, the collection of amounts payable by investors and selected
dealers on such sales, and the cancellation of unsettled transactions, as may be
necessary to comply with the requirements of the National Association of
Securities Dealers, Inc. (the "NASD"), as such requirements may from time to
time exist.
Section 7. Selected Dealer Agreements.
(a) The Distributor shall have the right to enter into
selected dealer agreements with securities dealers of its choice ("selected
dealers") for the sale of Class B shares; provided, that the Fund shall approve
the forms of agreements with dealers. Class B shares sold to selected dealers
shall be for resale by such dealers only at net asset value determined as set
forth in
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Section 3(d) hereof. The initial form of agreement with selected dealers to be
used during the continuous offering of the shares is attached hereto as Exhibit
A.
(b) Within the United States, the Distributor shall offer and sell
Class B shares only to such selected dealers that are members in good standing
of the NASD.
Section 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the Fund, including
fees and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company Act, the Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy materials to Class B
shareholders (including but not limited to the expense of setting in type any
such registration statements, prospectuses, statements of additional
information, annual or interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments made to
selected dealers as reimbursement for their expenses associated with payments of
sales commissions to financial consultants. In addition, after the prospectuses,
statements of additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs and expenses of
printing and distributing any copies thereof
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which are to be used in connection with the offering of Class B shares to
selected dealers or investors pursuant to this Agreement. The Distributor shall
bear the costs and expenses of preparing, printing and distributing any other
literature used by the Distributor or furnished by it for use by selected
dealers in connection with the offering of the Class B shares for sale to the
public and any expenses of advertising incurred by the Distributor in connection
with such offering. It is understood and agreed that, so long as the Fund's
Class B Shares Distribution Plan pursuant to Rule 12b-1 under the Investment
Company Act remains in effect, any expenses incurred by the Distributor
hereunder may be paid from amounts recovered by it from the Fund under such
Plan.
(c) The Fund shall bear the cost and expenses of qualification of the
Class B shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or
dealer, in such states of the United States or other jurisdictions as shall be
selected by the Fund and the Distributor pursuant to Section 5(c) hereof and
the cost and expenses payable to each such state for continuing qualification
therein until the Fund decides to discontinue such qualification pursuant to
Section 5(c) hereof.
Section 9. Indemnification.
(a) The Fund shall indemnify and hold harmless the Distributor and each
person, if any, who controls the Distributor
10
<PAGE>
against any loss, liability, claim, damage or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, claim, damage or
expense and reasonable counsel fees incurred in connection therewith), as
incurred, arising by reason of any person acquiring any Class B shares, which
may be based upon the Securities Act, or on any other statute or at common law,
on the ground that the registration statement or related prospectus and
statement of additional information, as from time to time amended and
supplemented, or an annual or interim report to Class B shareholders of the
Fund, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, unless such statement or omission was made in
reliance upon, and in conformity with, information furnished to the Fund in
connection therewith by or on behalf of the Distributor; provided, however, that
in no case (i) is the indemnity of the Fund in favor of the Distributor and any
such controlling persons to be deemed to protect such Distributor or any such
controlling persons thereof against any liability to the Fund or its security
holders to which the Distributor or any such controlling persons would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence in
the performance of their duties or by reason of the reckless disregard of their
obligations and duties under this Agreement; or (ii) is the Fund to be liable
under its indemnity agreement
11
<PAGE>
contained in this paragraph with respect to any claim made against the
Distributor or any such controlling persons, unless the Distributor or such
controlling persons, as the case may be, shall have notified the Fund in writing
within a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon the
Distributor or such controlling persons (or after the Distributor or such
controlling persons shall have received notice of such service on any designated
agent), but failure to notify the Fund of any such claim shall not relieve it
from any liability which it may have to the person against whom such action is
brought otherwise than on account of its indemnity agreement contained in this
paragraph. The Fund will be entitled to participate at its own expense in the
defense or, if it so elects, to assume the defense of any suit brought to
enforce any such liability, but if the Fund elects to assume the defense, such
defense shall be conducted by counsel chosen by it and satisfactory to the
Distributor or such controlling person or persons, defendant or defendants in
the suit. In the event the Fund elects to assume the defense of any such suit
and retain such counsel, the Distributor or such controlling person or persons,
defendant or defendants in the suit, shall bear the fees and expenses, as
incurred, of any additional counsel retained by them, but, in case the Fund does
not elect to assume the defense of any such suit, it will reimburse the
Distributor or such controlling
12
<PAGE>
person or persons, defendant or defendants in the suit, for the reasonable fees
and expenses, as incurred, of any counsel retained by them. The Fund shall
promptly notify the Distributor of the commencement of any litigation or
proceedings against it or any of its officers or Trustees in connection with the
issuance or sale of any of the Class B shares.
(b) The Distributor shall indemnify and hold harmless the Fund and each
of its Trustees and officers and each person, if any, who controls the Fund
against any loss, liability, claim, damage or expense, as incurred, described in
the foregoing indemnity contained in subsection (a) of this Section, but only
with respect to statements or omissions made in reliance upon, and in conformity
with, information furnished to the Fund in writing by or on behalf of the
Distributor for use in connection with the registration statement or related
prospectus and statement of additional information, as from time to time
amended, or the annual or interim reports to shareholders. In case any action
shall be brought against the Fund or any person so indemnified, in respect of
which indemnity may be sought against the Distributor, the Distributor shall
have the rights and duties given to the Fund, and the Fund and each person so
indemnified shall have the rights and duties given to the Distributor by the
provisions of subsection (a) of this Section 9.
Section 10. Duration and Termination of this Agreement.
This Agreement shall become effective as of the date first
13
<PAGE>
above written and shall remain in force until November 30, 1993 and thereafter,
but only so long as such continuance is specifically approved at least annually
by (i) the Trustees, or by the vote of a majority of the outstanding Class B
voting securities of the Fund, and (ii) by the vote of a majority of those
Trustees who are not parties to this Agreement or interested persons of any such
party cast in person at a meeting called for the purpose of voting on such
approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees or by vote of a majority of the outstanding Classs B
voting securities of the Fund, or by the Distributor, on sixty days' written
notice to the other party. This Agreement shall automatically terminate in the
event of its assignment.
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 11. Amendments of this Agreement. This Agreement may be amended
by the parties only if such amendment is specifically approved by (i) the
Trustees, or by the vote of a majority of outstanding voting Class B securities
of the Fund, and (ii) by the vote of a majority of those Trustees of the Fund
who are not parties to this Agreement or interested persons of any such party
14
<PAGE>
cast in person at a meeting called for the purpose of voting on such approval.
Section 12. Governing Law. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the Investment Company
Act. To the extent that the applicable law of the State of New York, or any of
the provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
Section 13. Personal Liability. The Declaration of Trust establishing
Merrill Lynch Federal Securities Trust, dated July 20, 1984, 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 Federal Securities 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 Fund shall be held to
any personal liability, nor shall resort be had to their private property for
the satisfaction of any obligation or claim or otherwise in connection with the
affairs of the Fund, but the "Trust Property" only shall be liable .
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MERRILL LYNCH FEDERAL SECURITIES TRUST
By /s/ Arthur Zeikel
------------------
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By /s/ Gerald M. Richard
----------------------
16
<PAGE>
EXHIBIT A
MERRILL LYNCH FEDERAL SECURITIES TRUST
Class B SHARES OF BENEFICIAL INTEREST
SELECTED DEALER AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an
agreement with Merrill Lynch Federal Securities Trust, a Massachusetts business
trust (the "Fund"), pursuant to which it acts as the distributor for the sale of
Class B shares of beneficial interest, par value $0.10 per share (herein
referred to as the "Class B shares"), of the Fund and as such has the right to
distribute Class B shares of the Fund for resale. The Fund is an open-end
investment company registered under the Investment Company Act of 1940, as
amended, and its Class B shares being offered to the public are registered under
the Securities Act of 1933, as amended. You have received a copy of the Class B
Shares Distribution Agreement (the "Distribution Agreement") between ourself and
the Fund and reference is made herein to certain provisions of such Distribution
Agreement. The terms "Prospectus" and "Statement of Additional Information" as
used herein refer to the prospectus and statement of additional information,
respectively, on file with the Securities and Exchange Commission which is part
of the most recent effective registration statement pursuant to the Securities
Act of 1933, as amended. As principal, we offer to sell to you, as a member of
the Selected Dealers Group, Class B shares of the Fund upon the following terms
and conditions:
1. In all sales of these Class B shares to the public, you shall act as
dealer for your own account and in no transaction shall you have any authority
to act as agent for the Fund, for us or for any other member of the Selected
Dealers Group.
2. Orders received from you will be accepted through us only at the
public offering price applicable to each order, as set forth in the current
Prospectus and Statement of Additional Information of the Fund. The procedure
relating to the handling of orders shall be subject to Section 4 hereof and
instructions which we or the Fund shall forward from time to time to you. All
orders are subject to acceptance or rejection by the Distributor or the Fund in
the sole discretion of either. The minimum initial and subsequent purchase
requirements are as set forth in the current Prospectus and Statement of
Additional Information of the Fund.
1
<PAGE>
3. You shall not place orders for any of the Class B shares unless you
have already received purchase orders for such Class B shares at the applicable
public offering prices and subject to the terms hereof and of the Distribution
Agreement. You agree that you will not offer or sell any of the Class B shares
except under circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales and offers
to sell Class B shares you will furnish to each person to whom any such sale or
offer is made a copy of the Prospectus and, if requested, the Statement of
Additional Information (as then amended or supplemented) and will not furnish to
any person any information relating to the Class B shares of the Fund, which is
inconsistent in any respect with the information contained in the Prospectus and
Statement of Additional Information (as then amended or supplemented) or cause
any advertisement to be published in any newspaper or posted in any public place
without our consent and the consent of the Fund.
4. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Fund for Class B shares of the Fund to be resold by us to you
subject to the applicable terms and conditions governing the placement of
orders by us set forth in Section 3 of the Distribution Agreement and (ii) to
tender Class B shares directly to the Fund or its agent for redemption subject
to the applicable terms and conditions set forth in Section 4 of the
Distribution Agreement.
5. You shall not withhold placing orders received from your customers
so as to profit yourself as a result of such withholding: e.g., by a change in
the "net asset value" from that used in determining the offering price to your
customers.
6. No person is authorized to make any representations concerning
Class B shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed information
subsequently issued by us or the Fund as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class B
shares through us you shall rely solely on the representations contained in the
Prospectus and Statement of Additional Information and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's Prospectus, Statement of Additional Information, periodic reports and
proxy solicitation material is our sole responsibility and not the
responsibility of the Fund, and you agree that the Fund shall have no liability
or responsibility to you in these respects unless expressly assumed in
connection therewith.
7. You agree to deliver to each of the purchasers making purchases from
you a copy of the then current Prospectus and, if
2
<PAGE>
requested, the Statement of Additional Information at or prior to the time of
offering or sale and you agree thereafter to deliver to such purchasers copies
of the annual and interim reports and proxy solicitation materials of the Fund.
You further agree to endeavor to obtain proxies from such purchasers. Additional
copies of the Prospectus and Statement of Additional Information, annual or
interim reports and proxy solicitation materials of the Fund will be supplied to
you in reasonable quantities upon request.
8. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of Class B shares entirely. Each party hereto has
the right to cancel this Agreement upon notice to the other party.
9. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this
paragraph is intended to operate as, and the provisions of this paragraph shall
not in any way whatsoever constitute, a waiver by you of compliance with any
provision of the Securities Act of 1933, as amended, or of the rules and
regulations of the Securities and Exchange Commission issued thereunder.
10. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United States,
we both hereby agree to abide by the Rules of Fair Practice of such
Association.
11. Upon application to us, we will inform you as to the states in
which we believe the Class B shares have been qualified for sale under, or are
exempt from the requirements of, the respective securities laws of such states,
but we assume no responsibility or obligation as to your right to sell Class B
shares in any jurisdiction. We will file with the Department of State in New
York a Further State Notice with respect to the Class B shares, if necessary.
12. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the address
specified by you below.
3
<PAGE>
13. Your first order placed pursuant to this Agreement for the
purchase of Class B shares of the Fund will represent your acceptance of this
Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By /s/ Gerald M. Richard
----------------------
(Authorized Signature)
Please return one signed copy
of this Agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name:
By:
Address:
Date:
4
<PAGE>
EX-99.8
CUSTODY AGREEMENT
Agreement made as of this 16th day of August, 1984,
between MERRILL LYNCH FEDERAL SECURITIES TRUST, a Massachu-
setts business trust organized and existing under the laws
of the Commonwealth of Massachusetts, having its principal
office and place of business at 633 Third Avenue, New York,
New York 10017 (hereinafter called the "Fund"), and THE BANK
OF NEW YORK, a New York corporation authorized to do a bank-
ing business, having its principal office and place of busi-
ness at 48 Wall Street, New York, New York 10015 (herein-
after called the "Custodian").
W I T N E S S E T H
that for and in consideration of the mutual promises herein-
after set forth the Trust and the Custodian agree as fol-
lows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words
and phrases, unless the context otherwise requires, shall
have the following meanings:
1. "Authorized Person" shall be deemed to include the
Treasurer, the Controller or any other person, whether or
not any such person is an officer or employee of the Fund,
duly authorized by the Trustees of the Fund to give Oral
Instructions and Written Instructions on behalf of the Fund
and listed in the Certificate annexed hereto as Appendix A
or such other Certificate as may be received by the Custo-
dian from time to time.
2. "Book-Entry System" shall mean the Federal
Reserve/Treasury book-entry system for United States and
federal agency securities, its successor or successors and
its nominee or nominees.
<PAGE>
3. "Certificate" shall mean any notice, instruction,
or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian which is actu-
ally received by the Custodian and signed on behalf of the
Fund by any two officers of the Fund.
4. "Call option" shall mean an exchange traded option
with respect to Securities other than Futures Contracts and
Futures Contract Options entitling the holder, upon timely
exercise and payment of the exercise price, as specified
therein, to purchase from the writer thereof the specified
underlying Securities.
5. "Clearing Member" shall mean a registered broker-
dealer which is a clearing member under the rules of the
Options Clearing Corporation, a clearing agency registered
under Section 17A of the Securities Exchange Act of 1934,
and a member of a national securities exchange qualified to
act as a custodian for an investment company, or any broker-
dealer reasonably believed by the Custodian to be such a
clearing member.
6. "Depository" shall mean The Depository Trust Com-
pany ("DTC") , a clearing agency registered with the Securi-
ties and Exchange Commission, its successor or successors
and its nominee or nominees, provided the Custodian has
received a certified copy of a resolution of the Fund's
Board of Trustees specifically approving deposits in DTC.
The term "Depository" shall further mean and include any
other person authorized to act as a depository under the
Investment Company Act of 1940, its successor or successors
and its nominee or nominees, specifically identified in a
certified copy of a resolution of the Fund's Board of
Trustees specifically approving deposits therein by the
Custodian.
7. "Financial Futures Contract" shall mean the firm
commitment to buy or sell fixed income securities including,
but not limited to, U.S. Treasury Bills, U.S. Treasury
Notes, U.S. Treasury Bonds, Government National Mortgage
Association modified pass-through mortgage-backed securities
and domestic bank certificates of deposit, during a speci-
fied month at an agreed upon price.
8. "Futures Contract Option" shall mean an option
with respect to a Financial Futures Contract.
9. "Margin Account" shall mean a segregated account
in the name of a broker, dealer, or futures commission mer-
chant, or in the name of the Fund for the benefit of a
broker, dealer, or futures commission merchant, as the case
2
<PAGE>
may be, separate and distinct from the custody account, in
which certain Securities and/or money of the Fund shall be
deposited and withdrawn from time to time in connection with
such transactions as the Fund may from time to time deter-
mine. Securities held in the Book-Entry System or the
Depository shall be deemed to have been deposited in, or
withdrawn from, a Margin Account upon the Custodian's
effecting an appropriate entry in its books and records.
10. "Money Market Security" shall be deemed to
include, without limitation, certain U.S. government and
agency securities for which the purchase and sale of such
securities normally requires settlement in federal funds on
the same day as such purchase or sale.
II. "Officers" shall be deemed to include the Presi-
dent, any Vice President, the Secretary, the Treasurer, the
Controller, any Assistant Secretary, any Assistant Treasurer
or any other person or persons, whether or not any such
other person is an officer of the Fund, duly authorized by
the Trustees of the Fund to execute any Certificate,
instruction, notice or other instrument on behalf of the
Fund and listed in the Certificate annexed hereto as
Appendix B or such other Certificate as may be received by
the Custodian from time to time.
12. "Option" shall mean a Call Option and/or a Put
Option,
13. "Put Option" shall mean an exchange traded option
with respect to Securities other than Futures Contracts and
Futures Contract options entitling the holder, upon timely
exercise and tender of the specified underlying Securities,
to sell such Securities to the writer thereof for the exer-
cise price.
14. "Securities Collateral Account" shall mean a
segregated account so denominated which is pledged to the
Custodian as security for, and in consideration of, the Cus-
todian's issuance of any Put Option guarantee letter or
similar document described in paragraph 7 of Article V here-
in.
15. "Oral Instructions" shall mean verbal instruc-
tions actually received by the Custodian from an Authorized
Person or from a person reasonably believed by the Custodian
to be an Authorized Person.
16. "Security" shall be deemed to include, without
limitation, Money Market Securities, Call Options, Put
Options, Financial Futures Contracts, Futures Contract
3
<PAGE>
Options, Government National Mortgage Association mortgaged
backed certificates, Federal National Mortgage Association
mortgaged backed securities, and Federal Home Loan Mortgage
Corporation mortgaged backed securities, and any certifi-
cates, receipts, warrants or other instruments representing
rights to receive, purchase, sell or subscribe for the same,
or evidencing or representing any other rights or interest
therein, or any property or assets.
17. "Senior Security Account" shall mean an account
maintained under the terms of this Agreement as a segregated
account, by recordation or otherwise, within the custody
account in which certain Securities and/or other assets of
the Fund shall be deposited and withdrawn from time to time
in accordance with Certificates received by the Custodian in
connection with such transactions as the Fund may from time
to time determine.
18. "Shares" shall mean the shares of beneficial
interest of the Fund.
19. "Written Instructions" shall mean written com-
munications actually received by the Custodian from an
Authorized Person or from a person reasonably believed by
the Custodian to be an Authorized Person by telex or any
other such system whereby the receiver of such communica-
tions is able to verify by codes or otherwise with a reason-
able degree of certainty the identity of the sender of such
communication.
ARTICLE II
APPOINTMENT OF CUSTODIAN
1. The Fund hereby constitutes and appoints the
Custodian as custodian of the Securities and moneys at any
time owned by the Fund during the period of this Agreement.
2. The Custodian hereby accepts appointment as such
custodian and agrees to perform the duties- thereof as here-
inafter set forth.
4
<PAGE>
ARTICLE III
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of
this Article and in Article VIII, the Fund will deliver or
cause to be delivered to the Custodian all Securities and
all moneys owned by it, at any time during the period of
this Agreement. The Custodian will not be responsible for
any Securities and moneys not actually received by it. The
Custodian will be entitled to reverse any credits made on
the Fund's behalf where such credits have been previously
made and moneys are not finally collected. The Fund shall
deliver to the Custodian a certified resolution of the
Trustees of the Fund approving, authorizing and instructing
the Custodian on a continuous and on-going basis to deposit
in the Book-Entry System all Securities eligible for deposit
therein, and to utilize the Book-Entry System to the extent
possible in connection with its performance hereunder,
including, without limitation, in connection with settle-
ments of purchases and sales of Securities, loans of Securi-
ties, and deliveries and returns of Securities collateral.
Prior to a deposit of Securities in the Depository the Fund
shall deliver to the Custodian a certified resolution of the
Trustees of the Fund approving, authorizing and instructing
the Custodian on a continuous and on-going basis until
instructed to the contrary by a Certificate actually
received by the Custodian to deposit in the Depository all
Securities eligible for deposit therein and to utilize the
Depository to the extent possible with respect to such
Securities in connection with its performance hereunder,
including, without limitation, in connection with settle-
ments of purchases and sales of Securities, loans of Securi-
ties, and deliveries and returns of Securities collateral.
Securities and moneys deposited in either the Book-Entry
System or the Depository will be represented in accounts
which include only assets held by the Custodian for custo-
mers, including, but not limited to, accounts in which the
Custodian acts in a fiduciary or. representative capacity.
Prior to the Custodian's accepting, utilizing and acting
with respect to Clearing Member confirmations for Options
and transactions in options as provided in this Agreement,
the Custodian shall have received a certified resolution of
the Trustees of the Fund approving, authorizing and
instructing the Custodian on a continuous and on-going
basis, until instructed to the contrary by a Certificate
actually received by the Custodian, to accept, utilize and
act in accordance with such confirmations as provided in
this Agreement.
5
<PAGE>
2. The Custodian shall credit to the separate account
in the name of the Fund all moneys received by it for the
account of the Fund, and shall disburse the same only:
(a) As hereinafter provided;
(b) Pursuant to Certificates setting forth the
name and address of the person to whom the payment is to be
made, and the purpose for which payment is to be made; or
(c) In payment of the fees and in reimbursement
of the expenses and liabilities of the Custodian.
3. Promptly after the close of business on each day
the Custodian shall furnish the Fund with confirmations and
a summary of all transfers to or from the account of the
Fund either hereunder or with any co-custodian or sub-
custodian appointed in accordance with this Agreement during
said day. Where Securities are transferred to the account
of the Fund, the Custodian shall also by book entry or
otherwise identify as belonging to the Fund a quantity of
Securities in a fungible bulk of Securities registered in
the name of the Custodian (or its nominee) or shown on the
Custodian's account on the books of the Book-Entry System or
the Depository. At least monthly and from time to time, the
Custodian shall furnish the Fund with a detailed statement
of the Securities and moneys held by the Custodian for the
Fund.
4. Except as otherwise provided in paragraph 7 of
this Article and in Article VIII, all Securities held by the
Custodian hereunder, which are issued or issuable only in
bearer form, except such Securities as are held in the
Book-Entry System, shall be held by the Custodian in that
form; all other Securities held hereunder may be registered
in the name of the Fund, in the name of any duly appointed
registered nominee of the Custodian as the Custodian may
from time to time determine, or in the name of the Book-
Entry System or the Depository or their successor or succes-
sors, or their nominee or nominees., The Fund agrees to fur-
nish to the Custodian appropriate instruments to enable the
Custodian to hold or deliver in proper form for transfer, or
to register in the name of its registered nominee or in the
name of the Book-Entry System or the Depository any Securi-
ties which it may hold hereunder and which may from time to
time be registered in the name of the Fund. The Custodian
shall hold all such Securities not held in the Book-Entry
System or in the Depository in a separate account in the
name of the Fund physically segregated at all times from
those of any other person or persons.
6
<PAGE>
5. Except as otherwise provided in this Agreement,
unless otherwise instructed to the contrary by a Certifi-
cate, the Custodian by itself, or through the use of the
Book-Entry System or the Depository with respect to Securi-
ties held hereunder and therein deposited, shall with
respect to all Securities held for the Fund hereunder:
(a) Collect all income and principal due or
payable;
(b) Present for payment and collect the amount
payable upon all Securities which may mature or be called
but only if either (i) the Custodian receives a written
notice of such call, or (ii) notice of such call appears in
one or more of the publications listed in Appendix C annexed
hereto, which may be amended at any time by the Custodian
without prior notification or consent of the Fund;
(c) Present for payment and collect the amount
payable upon all securities which may mature or be retired,
or retired, or otherwise become payable;
(d) Surrender Securities in temporary form for
definitive Securities;
(e) Execute, as custodian, any necessary declara-
tions or certificates of ownership under the Federal Income
Tax Laws or the laws or regulations of any other taxing
authority now or hereafter in effect; and
(f) Hold directly, or through the Book-Entry
System or the Depository with respect to Securities therein
deposited, for the account of the Fund all rights and simi-
lar securities issued with respect to any Securities held by
the Custodian hereunder.
6. Upon receipt of a Certificate and not otherwise,
the Custodian, directly or through the use of the Book-Entry
System or the Depository shall:
(a) Execute and deliver to such persons as may be
designated in such Certificate proxies, consents, authoriza-
tions, and any other instruments whereby the authority of
the Fund as owner of any Securities held by the Custodian
hereunder specified in such Certificate may be exercised;
(b) Deliver any Securities held by the Custodian
hereunder specified in such Certificate in exchange for
other Securities or cash issued or paid in connection with
the liquidation, reorganization, refinancing, merger, con-
7
<PAGE>
solidation or recapitalization of any corporation, or the
exercise of any conversion privilege and receive and hold
hereunder any cash or other Securities received in exchange;
(c) Deliver any Securities held by the Custodian
hereunder to any protective committee, reorganization com-
mittee or other person in connection with the reorganiza-
tion, refinancing, merger, consolidation, recapitalization
or sale of assets of any corporation, and receive and hold
hereunder such certificates of deposit, interim receipts or
other instruments or documents as may the issued to it to
evidence such delivery;
(d) Make such transfers or exchanges of the
assets of the Fund and take such other steps as shall be
stated in such Certificate to be for the purpose of effec-
tuating any duly authorized plan of liquidation, reorganiza-
tion, merger, consolidation or recapitalization of the Fund;
(e) Present for payment and collect the amount
payable upon Securities not described in preceding paragraph
5(b) of this Article which may be called as specified in the
Certificate.
7. Notwithstanding any provision elsewhere contained
herein, the Custodian shall not be required to obtain pos-
session of any instrument or certificate representing any
Futures Contract, any Option, or any Futures Contract Option
until after it shall have determined, or shall have received
a Certificate from the Fund stating, that any such instru-
ments or certificates are available. The Fund shall deliver
to the Custodian such a Certificate no later than the busi-
ness day preceding the availability of any such instrument
or certificate. Prior to such availability, the Custodian
shall comply with Section 17(f) of the Investment Company
Act of 1940 as amended, in connection with the purchase,
sale, settlement, closing out or writing of Future
Contracts, Options, and Futures Contract Options, by making
payments or deliveries specified in Certificates received by
the Custodian in connection with any such purchase, sale,
writing, settlement or closing out upon its receiving from a
broker, dealer, or futures commission merchant a statement
or confirmation reasonably believed by the Custodian to be
in the form customarily used by brokers, dealers, or future
commission merchants with respect to such Futures Contracts,
Option, or Futures Contract Option, as the case may be, con-
firming that such Security is held by such broker, dealer or
futures commission merchant, in book-entry form or other-
wise, in the name of the Custodian (or any nominee of the
Custodian) as custodian for the Fund. Whenever any such
instruments or certificates are available, the Custodian
8
<PAGE>
shall, notwithstanding any provision in this Agreement to
the contrary, make payment for any Futures Contract, Option,
or Futures Contract option for which such instruments or
such certificates are available only against the delivery to
the Custodian of such instrument or such certificate. Any
such instrument or certificate delivered to the Custodian
shall be held by the Custodian hereunder in accordance with,
and subject to, the provisions of this Agreement.
ARTICLE IV
PURCHASE AND SALE OF INVESTMENTS-OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the
Fund to be held by the Custodian hereunder, other than a
purchase of an Option, a Futures Contract, or a Futures
Contract Option, the Fund shall deliver to the Custodian (i)
with respect to each purchase of Securities which are not
Money Market Securities, a Certificate, and (ii) with
respect to each purchase of Money Market Securities, a Cer-
tificate, Oral Instructions or Written Instructions, speci-
fying with respect to each such purchase: (a) the name of
the issuer and the title of the Securities; (b) the number
of shares or the principal amount purchased and accrued
interest, if any; (c) the date of purchase and settlement;
(d) the purchase price per unit; (e) the total amount pay-
able upon such purchase; (f) the name of the person from
whom or the broker through whom the purchase was made, and
the name of the clearing broker, if any; (g) the name of the
broker to whom payment is to be made; and (h) the amount of
cash and/or the amount and kind of Securities, if any, to be
deposited in the Senior Security Account. The Custodian
shall upon receipt of Securities purchased by or for the
Fund pay to the broker specified in the Certificate out of
the moneys held for the account of the Fund the total amount
payable upon such purchase, provided that the same conforms
to the total amount payable as set forth in such Certifi-
cate, Oral Instructions or Written Instructions.
2. Promptly after each sale by the Fund of Securities
held by the Custodian hereunder, other than a sale of any
Option, Futures Contract, or Futures Contract Option, the
Fund shall deliver to the Custodian (i) with respect to each
sale of Securities which are not Money Market Securities, a
Certificate, and (ii) with respect to each sale of Money
Market Securities, a Certificate, Oral Instructions or
Written Instructions, specifying with respect to each such
9
<PAGE>
sale: (a) the name of the issuer and the title of the
Security; (b) the number of shares or principal amount sold,
and accrued interest, if any; (c) the date of sale; (d) the
sale price per unit; (e) the total amount payable to the
Fund upon such sale; (f) the name of the broker through whom
or the person to whom the sale was made, and the name of the
clearing broker, if any; and (g) the name of the broker to
whom the Securities are to be delivered. The Custodian
shall deliver the Securities to the broker specified in the
Certificate upon receipt of the total amount payable to the
Fund upon such sale, provided that the same conforms to the
total amount payable as set forth in such Certificate, Oral
Instructions or Written Instructions.
ARTICLE V
OPTIONS
1. Promptly after the purchase of any Option by the
Fund, the Fund shall deliver to the Custodian a Certificate
specifying with respect to each option purchased: (a) the
type of Option (put or call), (b) the title and aggregate
principal. amount of securities subject to such option; (c)
the expiration date; (d) the exercise price (e) the dates
of purchase and settlement; (f) the total amount payable by
the Fund in connection with such purchase; (g) the name of
the broker through whom such option was purchased and the
name of the clearing broker, if any; and (h) the name of the
broker to whom payment is to be made. The Custodian shall
pay to the broker specified in the Certificate, upon receipt
of a Clearing Member's statement confirming the purchase of
such option which is held by such Clearing Member in the
name of the Custodian (or any nominee of the Custodian) as
custodian for the Fund, out of moneys held for the account
of Fund the total amount payable upon such purchase,
provided that the same conforms to the total amount payable
as set forth in such Certificate.
2. Promptly after the sale of any option purchased by
the Fund pursuant to paragraph l hereof, the Fund shall
deliver to the Custodian a Certificate specifying with
respect to each such sale: (a) that it is a Closing Trans-
action as hereinafter referred to; (b) the type of option
(put or call); (c) the title and aggregate principal amount
of securities subject to such option; (d) the date of sale;
(e) the sale price; (f) the date of settlement; (g) the
total amount payable to the Fund upon such sale; and (h) the
name of the Clearing Member through whom the sale was made.
The Custodian shall consent to the through whom 'the sale was
10
<PAGE>
made against payment to the Custodian of the total amount
payable to the Fund, provided that the same conforms to the
total amount payable as set forth in such Certificate.
3. Promptly after the exercise by the Fund of any
Call Option purchased by the Fund pursuant to paragraph 1
hereof, the Fund shall deliver to the Custodian a Certifi-
cate specifying with respect to such Call Option: (a) the
title and aggregate principal amount of securities subject
to the Call Option; (b) the expiration date; (c) the date of
exercise and settlement; (d) the exercise price; (e) the
total amount to be paid by the Fund upon such exercise; and
(f) the name of the Clearing Member through whom such Call
Option was exercised. The Custodian shall, upon receipt of
the Securities underlying the Call option which was exer-
cised pay out of the moneys held for the account of the Fund
the total amount payable to the Clearing Member through whom
the Call Option was exercised, provided that the same con-
forms to the total amount payable as set forth in such
Certificate.
4. Promptly after the exercise by the Fund of any Put
option purchased by the Fund pursuant to paragraph 1 hereof,
the Fund shall deliver to the Custodian a Certificate speci-
fying with respect to such Put Options: (a) the title and
aggregate principal amount of securities subject to the Put
option; (b) the expiration date; (c) the date of exercise
and settlement; (d) the exercise price; (e) the total amount
to be paid to the Fund upon such exercise; (f) the name of
the Clearing Member through whom such Put Option was exer-
cised. The Custodian shall upon receipt of the amount pay-
able upon the exercise of the Put Option, deliver or cause
the Depository to deliver the Securties subject to such Put
Option, provided the same conforms to the amount payable to
the Fund as set forth in such Certificate.
5. Whenever the Fund writes a Call Option, the Fund
shall promptly deliver to the Custodian a Certificate speci-
fying with respect to such Call Option: (a) the title and
aggregate principal amount of securities for which the Call
Option was written and which underlie the same; (b) the
expiration date; (c) the exercise price; (d) the premium to
be received by the Fund; (e) the date such Call option was
written; (f) the date of settlement; (g) the name of the
Clearing Member through whom the Call Option was written.
The Custodian shall deliver or cause to be delivered, in
exchange for receipt of the premium specified in the
Certificate with respect to such Call Option, such receipts
as are required in accordance with the customs prevailing
11
<PAGE>
among Clearing members in Call Options, and shall impose, or
direct the Depository to impose, upon the underlying Securi-
ties specified in the Certificate such restrictions as may
be required by such receipts. Notwithstanding the fore-
going, the Custodian has the right, upon prior written noti-
fication to the Fund, at any time to refuse to issue any
receipts for Securities in the possession of the Custodian
and not deposited with the Depository, underlying a Call
Option.
6. Whenever a Call Option written by the Fund and
described in the preceding paragraph of this Article is
exercised, the Fund shall promptly deliver to the Custodian
a Certificate instructing the Custodian to deliver, or to
direct the Depository to deliver, the Securities subject to
such Call option and specifying: (a) the particular Call
option being exercised; (b) the title and aggregate princi-
pal amount of securities subject to the Call option; (c) the
Clearing Member to whom the underlying Securities are to be
delivered; and (d) the total amount payable to the Fund upon
such delivery. Upon the return and/or cancellation of any
receipts delivered pursuant to paragraph 5 of this Article,
the Custodian shall deliver, or cause the Depository to
deliver, the Securities subject to such receipts, or, if
possible and so specified in the Certificate, other Securi-
ties equal to the underlyng Securities against receipt of
the amount to be received, provided the same conforms to the
amount payable to the Fund as set forth in such Certifi-
cate.
7. Whenever the Fund writes a Put Option, the Fund
shall promptly deliver to the Custodian a Certificate speci-
fying with respect to such Put Option: (a) the title and
aggregate principal amount of securities for which the Put
Option is written and which underly the same; (b) the
expiration date; (c) the exercise price; (d) the premium to
be received by the Fund; (e) the date such Put Option is
written; (f) the date of settlement; (g) the name of the
Clearing Member through whom such Put Option was written;
(h) the amount of cash and/or the amount and kind of Securi-
ties, if any, to be deposited in the Senior Security
Account; and (i) the amount of cash and/or the amount and
kind of Securities to be deposited into the Securities
Collateral Account. The Custodian shall, after making the
deposits into the Securities Collateral Account specified in
the Certificate, issue a Put option guarantee letter sub-
stantially in the form utilized by the Custodian on the date
hereof, and deliver the same to the Clearing Member speci-
fied in the Certificate against receipt of the premium
specified in said Certificate. Notwithstanding the fore-
going, the Custodian shall be under no obligation to issue
any Put Option guarantee letter or similar document if it is
12
<PAGE>
unable to make any of the representations contained there-
in.
8. Whenever a Put Option written by the Fund and
described in the preceding paragraph is exercised, the Fund
shall promptly deliver to the Custodian a Certificate speci-
fying: (a) the particular Put Option being exercised; (b)
the title and aggregate principal amount of securities sub-
ject to the Put Option; (c) the Clearing Member from whom
the underlying Securities are to be received; and (d) the
total amount payable by the Fund upon such delivery; (e) the
amount of cash and/or the amount and kind of Securities, if
any, to be withdrawn from the Securities Collateral Account;
and (f) the amount of cash and/or the amount and kind of
Securities, if any, to be withdrawn from the Senior Security
Account. Upon the return and/or cancellation of any Put
Option guarantee letter or similar document issued by the
Custodian in connection with such Put option, the Custodian
shall upon receipt of the Securities to be received by the
Fund pay out of the moneys held for the account of the Fund
the total amount payable to the Clearing Member, provided
the same conforms to the amount specified in the Certifi-
cate.
9. Whenever the Fund purchases any option identical
to a previously written Option described in paragraph 5 or 7
of this Article in a transaction expressly designated as a
"Closing Purchase Transaction" in order to liquidate its
position as a writer of an Option, the Fund shall promptly
deliver to the Custodian a Certificate specifying with
respect to the option being purchased: (a) that the trans-
action is a Closing Purchase Transaction; (b) the title and
aggregate principal amount of securities subject to the
option; (c) the exercise price; (d) the premium to be paid
by the Fund; (e) the expiration date; (f) the date of such
purchase; (g) the name of the Clearing Member to whom the
premium is to be paid; (h) and the amount of cash and/or the
amount and kind of Securities, if any, to be withdrawn from
the Securities Collateral Account, a specified Margin
Account or the Senior Security Account. Upon the return
and/or cancellation of any receipt issued pursuant to para-
graph 5 or paragraph 7 of this Article with respect to the
option being liquidated through the Closing Purchase Trans-
action, the Custodian shall make payment out of the moneys
held for the account of the Fund of the premium specified in
the Certificate.
10. Upon the expiration of, exercise of, or consumma-
tion of a Closing Transaction with respect to, any Option
purchased or written by the Fund and described in this Arti-
cle, the Custodian shall (a) delete such option from the
13
<PAGE>
statements delivered to the Fund pursuant to paragraph 3 of
Article III herein, (b) if such expired Option was a Call
option written by the Fund, free, or instruct the Depository
to free, the Securities underlying such Call Option from any
restrictions imposed by receipts issued in connection there-
with, and (c) if such expired option was a Put Option, make
an appropriate withdrawal from the Securities Collateral
Account, as may be specified in a Certificate.
ARTICLE VI
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures Con-
tract, the Fund shall deliver to the Custodian a Certificate
specifying with respect to such Futures Contract, (or with
respect to any number of identical Futures Contract(s)): (a)
the category of Futures Contract (the name of the underlying
financial instrument); (b) the number of identical Futures
Contracts entered into; (c) the delivery or settlement date
of the Futures Contract(s); (d) the date the Futures Con-
tract(s) was (were) entered into and the maturity date; (e)
whether the Fund is buying (going long) or selling (going
short) on such Futures Contract(s); (f) the amount of cash
and/or the amount and kind of Securities, if any, to be
deposited by the Custodian in a Margin Account with respect
to such Futures Contract and the name in which such Margin
Account has been, or is to be, established; (g) the amount
of cash and/or the amount and kind of Securities, if any, to
be deposited in the Senior Security Account; (h) the name of
the broker, dealer, or futures commission merchant through
whom the Futures Contract was entered into and the name of
the clearing broker, if any; and (i) the amount of fee or
commission, if any, to be paid and the name of the broker,
dealer, or futures commission merchant to whom such payment
is to be made. The Custodian shall upon receipt of a state-
ment from the broker, dealer, or futures commission
merchant, or from the clearing broker, if any, confirming
the purchase (creation of a long position) or sale (creation
of a short position) of a Futures Contract(s) which is (are)
held by such broker, dealer, or futures commission merchant
in the name of the Custodian (or any nominee of the Custo-
dian) as custodian for the Fund, make payment out of the
moneys held for the account of the Fund of the fee or com-
mission, if any, specified in the Certificate and deposit in
such Margin Account and/or in the Senior Security Account
the amount of cash and/or the amount and kind of securities
specified in said Certificate.
14
<PAGE>
2 (a) Whenever the Fund shall be required to make
any variation margin payment or similar payment to a broker,
dealer, or futures commission merchant with respect to an
outstanding Futures Contract, the Fund shall deliver to the
Custodian a Certificate specifying: (a) such information as
may be necessary to identify the Futures Contract to which
such payment relates; (b) the amount of cash and/or the
amount and kind of Securities to be paid or delivered and
the date on which such payment or delivery is to be made;
and (c) the name of the broker, dealer, or futures commis-
sion merchant to whom such payment or delivery is to be
made. The Custodian shall in accordance with such Certifi-
cate make the payments and deliveries out of the money and
Securities held hereunder.
(b) Whenever the Fund shall be entitled to
receive a variation margin payment or similar payment from a
broker, dealer, or futures commission merchant with respect
to an outstanding Futures Contract, the Fund shall deliver
to the Custodian a Certificate specifying: (a) the amount of
cash and/or the amount in kind of Securities to be paid, or
delivered, to the Fund in the date of such payment or
delivery; and (b) the name of the broker, dealer, or futures
commission merchant who shall make such payment and or
delivery. The Custodian shall accept the money and/or
Securities delivered by such broker, dealer, or futures com-
mission merchant and hold the same hereunder, provided that
such payment or delivery conforms to such Certificate.
3. Whenever a Futures Contract is retained by the
Fund until delivery or settlement is made on such Futures
Contract, the Fund shall deliver to the Custodian a Certifi-
cate specifying: (a) the particular Futures Contract; (b)
the Securities and/or amount of cash to be delivered or
received; (c) the broker, dealer, or futures commission
merchant to or from whom payment or delivery is to be made
or received; and (d) the amount of cash and/or Securities to
be withdrawn from the related Margin Account and/or the
Senior Security Account. Upon the receipt of a broker's,
dealer's, or futures commission merchant's statement con-
firming that the Futures Contract is being settled and that
the Fund's position in such Futures Contract is thereby
terminated, the Custodian shall make out of the moneys held
for the account of the Fund or receive, as the case may be,
the payment or delivery specified in the Certificate, and
delete such Futures Contract from the statements delivered
to the Fund pursuant to paragraph 3 of Article III herein.
4. Whenever the Fund shall enter into a Futures Con-
tract to offset a Futures Contract, the Fund shall deliver
to the Custodian a Certificate specifying: (a) the amount to
15
<PAGE>
be paid or received by the Fund; (b) the Futures Contract
being offset; and (c) the broker, dealer, or futures com-
mission merchant to whom, or from whom such amount is to be
paid or received. The Custodian shall, upon receipt of a
broker's, dealer's, or futures commission merchant's state-
ment confirming the offsetting transaction, make payment out
of the moneys held for the account of the Fund of the fee or
commission, if any, specified in the Certificate and delete
the Futures Contract being offset from the statements
delivered to the Fund pursuant to paragraph 3 of Article III
herein, and make such withdrawals from the Senior Security
Account and/or the Margin Account as may be specified in
such Certificate.
ARTICLE VII
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract
option by the Fund, the Fund shall promptly deliver to the
Custodian a Certificate specifying with respect to such
Futures Contract Option: (a) the type of Futures Contract
option (put or call) ; (b) the type of Futures Contract and
such other information as may be necessary to identify the
Futures Contract underlying the Futures Contract Option pur-
chased; (c) the expiration date; (d) the exercise price; (e)
the dates of purchase and settlement; (f) the amount premium
to be paid by the Fund upon such purchase; (g) the name of
the broker' or futures commission merchant through whom such
option was purchased, and the name of the clearing broker,
if any; and (h) the name of the broker, or futures
commission merchant to whom payment is to be made. The
Custodian shall pay, upon receipt of a broker's or futures
commission merchant's or clearing broker's statement con-
firming the purchase of such Futures Contract Option which
is held by such broker or futures commission merchant in the
name of the Custodian (or any nominee of the Custodian) as
custodian for the Fund, out of the moneys held for the
account of the Fund, the amount to be paid by the Fund upon
such purchase to the person from whom or the broker or
futures commissions merchant through whom the purchase was
made, provided that the same conforms to the amount set
forth in such Certificate.
2. Promptly after the sale of any Futures Contract
Option purchased by the Fund pursuant to paragraph I hereof,
the Fund shall promptly deliver to the Custodian a Certifi-
cate specifying with respect to each such sale: (a) that the
sale is a Closing Transaction; (b) the type of Futures Con-
16
<PAGE>
tract Option (put or call); (c) the type of Futures Contract
and such other information as may be necessary to identify
Futures Contract underlying the Futures Contract Option; and
(d) the date of sale; (e) the sale price; (f) the date of
settlement; (g) the total amount payable to the Fund upon
such sale; and (h) the name of the broker of futures commis-
sion merchant through whom the sale was made. The Custodian
shall consent to the cancellation of the Futures Contract
option being closed against payment to the Custodian of the
total amount payable to the Fund, provided the same conforms
to the total amount payable as set forth in such
Certificate.
3. Whenever a Futures Contract option purchased by the
Fund pursuant to paragraph 1 is exercised by the Fund, the
Fund shall promptly deliver to the Custodian a Certificate
specifying: (a) the particular Futures Contract Option (put
or call) being exercised; (b) the type of Futures Contract
underlying the Futures Contract option; (c) the date of
exercise; (d) the name of the broker or futures commission
merchant through whom the Futures Contract option is exer-
cised; (d) the net total amount, if any, payable by the
Fund; (e) the amount, if any, to be received by the Fund;
(f) the amount of cash and/or the amount and kind of Securi-
ties to be deposited in a Margin Account, and the name in
which such Margin Account is to be or has been established;
and (g) the amount of cash and/or the amount and kind of
Securities to be deposited in the Senior Security Account.
The Custodian shall, upon its receipt from such broker or
futures commission merchant of a statement confirming that
the underlying Futures Contract is held by such broker or
futures commission merchant in the name of the Custodian (or
any nominee of the Custodian) as custodian for the Fund and
its receipt of the net total amount payable to the Fund, if
any, specified in the Certificate, make out of the moneys
held for the account of the Fund the payments, if any, and
the deposits, if any, into the Margin Account and the Senior
Security Account specified in the Certificate.
4. Whenever the Fund writes a Futures Contract
option, the Fund shall promptly deliver to the Custodian a
Certificate specifying with respect to such Futures Contract
option: (a) the type of Futures Contract Option (put or
call); (b) the type of Futures Contract,and such other
information as may be necessary to identify the Futures
Contract underlying the Futures Contract option; (c) the
expiration date; (d) the exercise price; (e) the premium to
be received by the Fund; (f) the name of the broker or
futures commission merchant through whom the premium is to
be received; (g) if the Futures Contract Option is a put,
the amount of cash and/or the amount and kind of Securities,
17
<PAGE>
ties, if any, to be deposited by the Custodian in a Margin
Account relating to such Futures Contract Option, and the
name in which such Margin Account is to be, or has been
established; and (h) the amount of cash and/or the amount
and kind of Securities, if any, to be deposited in the
Senior Security Account. The Custodian shall upon receipt
of the premium specified in the Certificate make the
deposits into the Margin Account and/or into the Senior
Security Account specified in the Certificate.
5. Whenever a Futures Contract Option written by the
Fund which is a call is exercised, the Fund shall promptly
deliver to the Custodian a Certificate specifying: (a) the
particular Futures Contract Option exercised; (b) the type
of Futures Contract underlying the Futures Contract Option;
(c) the name of the broker or futures commission merchant
through whom such option is exercised; (d) the net total
amount payable to the Fund upon such exercise, if any; (e)
the net total amount, if any, payable by the Fund upon such
exercise; (f) the amount of cash and/or amount and kind of
Securities to be deposited in a Margin Account, and the name
in which such account is to be or has been established; and
(g) the amount of cash and/or the amount and kind of Securi-
ties to be deposited in the Senior Security Account. The
Custodian shall, upon its receipt of the net total amount
payable to the Fund, if any, specified in such Certificate,
and its receipt from such broker or dealer of a statement
confirming that the underlying Futures Contract is held by
such broker or dealer in the name of the Custodian (or any
nominee of the Custodian) as custodian for the Fund, make
the payments, if any, and the deposits, if any, into the
Margin Account and/or the Senior Security Account specified
in the Certificate.
6. Whenever a Futures Contract option which is written
by the Fund which is a put is exercised, the Fund shall
promptly deliver to the Custodian a Certificate specifying:
(a) the particular Futures Contract Option exercised; (b)
the type of Futures Contract underlying such Futures
Contract option; (c) the name of the broker or futures
commission merchant through whom such option is exercised;
(d) the net total amount payable to the Fund, upon such
exercise, if any; (e) the net total amount, if any, payable
by the Fund, upon such exercise; and (f) the amount and kind
of Securities and/or cash to be withdrawn from or deposited
in, the Senior Security Account, if any, and/or the related
Margin Account, if any. The Custodian shall, upon its
receipt of a broker's or futures commission merchant's
statement confirming that the Futures Contract, if any,
specified in the Certificate is held by such broker or
future commission merchant in the name of the Custodian (or
18
<PAGE>
any nominee of the Custodian) as custodian for the Fund, and
upon its receipt of the net total amount payable to the
Fund, if any, specified in the Certificate, make out of the
moneys held for the Account of the Fund the payments, if
any, and the deposits, if any, into the Margin Account and/
or the Senior Security Account specified in the Certifi-
cate.
7. Whenever the Fund purchases any Futures Contract
option identical to a previously written Futures Contract
option described in this Article in order to liquidate its
position as a writer of such Futures Contract Option, the
Fund shall promptly deliver to the Custodian a Certificate
specifying with respect to the Futures Option Contract being
purchased: (a) that the transaction is a closing transac-
tion; (b) the type of Future Contract and such other infor-
mation as may be necessary to identify the Futures Contract
underlying the Futures Option Contract (c) the exercise
price, (d) the premium to be paid by the Fund; (e) the
expiration date; (f) the name of the broker or futures com-
mission merchant to whom the premium is to be paid; and (g)
the amount of cash and/or the amount and kind of Securities,
if any, to be withdrawn from the related Margin Account
and/or the Senior Security Account. The Custodian shall
upon receipt of a broker's or futures commission merchant's
statement confirming the liquidation of the Fund's position
as the writer of such Futures Contract, make the payments
and effect the withdrawals from the related Margin Account
and/or the Senior Security Account specified in the Certifi-
cate and delete such Futures Contract Option from statements
delivered to the Fund by the Custodian pursuant to paragraph
3 of Article III herein.
8. Upon the expiration, exercise, or consummation of a
closing transaction with respect to, any of Futures Contract
option purchased by the Fund pursuant to paragraph 1 of this
Article or of any Futures Contract Option written or pur-
chased by the Fund and described in this Article, the Custo-
than shall (a) delete such Futures Contract Option from the
statements delivered to the Fund pursuant to paragraph 3 of
Article III herein and, (b) make such withdrawals from,
and/or in the case of an exercise such deposits into, the
Margin Account and/or the Senior Security Account as may be
specified in a Certificate.
9. Futures Contracts purchased by the Fund pursuant to
an exercise of a Futures Contract Option described in this
Article shall be subject to Article VI hereof.
19
<PAGE>
ARTICLE VIII
SHORT SALES
1. Promptly after any short sales by the Fund, the
Fund shall promptly deliver to the Custodian a Certificate
specifying: (a) the name of the issuer and the title of the
Security; (b) the principal amount sold, and accrued inter-
est, if any; (c) the dates of the sale and settlement; (d)
the sale price per unit; (e) the total amount credited to
the Fund upon such sale, if any, (f) the amount of cash
and/or the amount and kind of Securities, if any, which are
to be deposited in a Margin Account and the name in which
such Margin Account has been or is to be established; (g)
the amount of cash and/or the amount and kind of U.S.
Government Securities, if any, to be deposited in a Senior
Security Account, and (h) the name of the broker through
whom such short sale was made. The Custodian shall upon its
receipt of a statement from such broker confirming such sale
and that the total amount credited to the Fund upon such
sale, if any, as specified in the Certificate is held by
such broker for the account of the Custodian (or any nominee
of the Custodian) as custodian of the Fund, make the
deposits into the Margin Account and the Senior Security
Account specified in the Certificate. Notwithstanding the
foregoing, transactions by the Fund which constitute selling
short "against the box", if not effected in accordance with
the foregoing, shall be effected in accordance with the
terms of a separate agreement between the Custodian and
Fund.
2. In connection with the closing-out of any short
sale, the Fund shall promptly deliver, to the Custodian a
Certificate specifying with respect to each such closing-
out: (a) the name of the issuer and the title of the Secur-
ity; (b) the principal amount, and accrued interest, if any,
required to- effect such closing-out to be delivered to the
broker; (c) the dates of closing-out and settlement; (d) the
purchase price per unit; (e) the net total amount payable to
the Fund upon such closing-out; (f) the net total amount
payable to the broker upon such closing-out; (g) the amount
of cash and the amount and kind of Securities to be with-
drawn, if any, from the Margin Account; (h) the amount of
cash and/or the amount and kind of Securities, if any, to be
withdrawn from the Senior Security Account; and (i) the name
of the broker through whom the Fund is effecting such
closing-out. The Custodian shall, upon receipt of the net
total amount payable to the Fund upon such closing-out, pay
out of the moneys held for the account of the, Fund to the
broker the net total amount payable to the broker, and make
20
<PAGE>
the withdrawals from the Margin Account and the Senior
Security Account, as the same are specified in the Certifi-
cate.
ARTICLE IX
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Within 24 hours after each loan of portfolio
Securities held by the Custodian hereunder the Fund shall
deliver or cause to be delivered to the Custodian a Certifi-
cate specifying with respect to each such loan: (a) the
name of the issuer and the title of the Securities, (b) the
principal amount loaned, (c) the date of loan and delivery,
(d) the total amount to be delivered to the Custodian
against the loan of the Securities, including the amount of
cash collateral and the premium, if any, separately identi-
fied, and (e) the name of the broker, dealer, or financial
institution to which the loan was made. The Custodian shall
deliver the Securities thus designated to the broker, dealer
or financial institution to which the loan was made upon
receipt of the total amount designated as to be delivered
against the loan of Securities. The Custodian may accept
payment in connection with a delivery otherwise than through
the Book-Entry System or Depository only in the form of a
certified or bank cashier's check payable to the order of
the Fund or the Custodian drawn on New York Clearing House
funds and may deliver Securities in accordance with the
customs prevailing among dealers in securities.
2. Promptly after each termination of the loan of
Securities by the Fund, the Fund shall deliver or cause to
be delivered to the Custodian a Certificate specifying with
respect to each such loan termination and return of securi-
ties: (a) the name of the issuer and the title of the Secu-
rities to be returned, (b) the number of shares or the prin-
cipal amount to be returned, (c) the date of termination,
(d) the total amount to be delivered by the Custodian
(including the cash collateral for such Securities minus any
offsetting credits as described in said Certificate), and
(e) the name of the broker, dealer, or financial institution
from which the Securities will be returned. The Custodian
shall receive all Securities returned from the broker,
dealer, or financial institution to which such Securities
were loaned and upon receipt thereof shall pay, out of the
moneys held for the account of the Fund, the total amount
payable upon such return of Securities as set forth in the
Certificate.
21
<PAGE>
ARTICLE X
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND THE SECURITIES COLLATERAL ACCOUNT
1. The Custodian shall, from time to time, make addi-
tional deposits to, or withdrawals from, a Senior Security
Account as directed by a Certificate received by the Custo-
dian specifying the amount of cash and/or the amount and
kind of Securities to be deposited in, or withdrawn from,
such Senior Security Account. In the event that the Fund
fails to specify in a Certificate the name of the issuer,
the title and the principal amount of any particular Securi-
ties to be deposited by the Custodian into, or withdrawn
from, the Senior Securities Account, the Custodian shall be
under no obligation to make any such deposit and shall so
notify the Fund.
2. The Custodian shall make deliveries or payments
from a Margin Account to the broker, dealer, or futures com-
mission merchant in whose name, or for whose benefit, the
account was established only upon the receipt of a certifi-
cation signed by an officer, director, or employee of such
broker, dealer, or futures commission merchant stating that
all conditions precedent to its right under its agreement
with the Fund to direct disposition of the assets held
therein have been satisfied and specifying the amount of
money and/or the amount and kind of Securities to be paid or
delivered to such broker, dealer, or futures commission
merchant and the date of such payment. After receipt of
such a certification, the Custodian shall orally so advise
an Officer or Authorized Person of such receipt, and make
the payments and/or deliveries to the broker, dealer, or
futures commission merchant therein specified, provided,
however that payments and/or deliveries pursuant to such a
certification may be delayed until the business day next
succeeding the Custodian's receipt of such certification.
Except as otherwise expressly provided herein above,
the Custodian shall be under no duty or obligation to act in
accordance with or with respect to any Certificate, or with
any other order, direction or request of the Fund, in what-
ever form, with respect to any cash or Securities deposited
in any Margin Account, including, without limitation, any
Certificate, order, direction, or request to pay, deliver,
transfer or withdraw any such cash or Securities unless such
order direction or request is contained in a Certificate
believed by the Custodian to bear the signed consent thereto
of an officer, director, or employee of the broker, dealer,
futures commission merchant or Clearing Member in whose
22
<PAGE>
name, or for whose benefit the Margin Account was estab-
lished.
3. unless otherwise instructed by a Certificate,
amounts received by the Custodian as payments or distribu-
tions with respect to Securities deposited in any Margin
Account shall be held by the Custodian hereunder and neither
credited to, nor deposited in, such Margin Account.
4. The Custodian shall have a continuing lien and
security interest in and to any property at any time held by
the Custodian in any Securities Collateral Account described
herein. In accordance with applicable law the Custodian may
enforce its lien and realize on any such property whenever
the Custodian has made payment or delivery pursuant to any
Put Option guarantee letter or similar document or any
receipt issued hereunder by the Custodian. In the event the
Custodian should realize on any such property net proceeds
which are less than the Custodian's obligations under any
Put Option guarantee letter or similar document or any
receipt, such deficiency shall be a debt owed the Custodian
by the Fund within the scope of Article XIV herein.
5. In the event the Fund furnishes the Custodian with
an order of exemption under the Investment Company Act of
1940, as amended, permitting the Fund to establish with
brokers and/or futures commission merchants accounts (here-
inafter "Exempt Accounts") intended to replace any Margin
Account, then, notwithstanding any other provisions con-
tained herein, the Fund may substitute an instruction to
deliver Securities and/or money to a broker or futures com-
mission merchant for deposit into an Exempt Account for an
instruction to deposit Securities and/or money into a Margin
Account. The Custodian shall be under no duty or obligation
with respect to any Securities and/or money so delivered for
deposit into an Exempt Account, including any obligation to
provide the Fund with any statements with respect to any
Exempt Account, nor shall the Custodian have any duty or
obligation with respect to the operation or terms of the
Exempt Account, the timely return, or withdrawal, of any
such Securities or money delivered for deposit therein, or
the payment by such broker or futures commission merchant of
amounts to be paid to the Fund with respect to any such
Exempt Account. The Custodian shall accept from any such
broker and/or futures commission merchant any Securities
and/or moneys purportedly paid out of, or distributed with
respect to, any Exempt Account, when so instructed in a
Certificate.
6. Promptly after the close of business on each busi-
ness day the Custodian shall furnish the Fund with a state-
23
<PAGE>
ment with respect to each Margin Account in which money or
Securities are deposited specifying: (a) the name of the
Margin Account, (b) the amount and kind of Securities on
deposit therein; and (c) the amount of money on deposit
therein. The Custodian shall make available upon request to
any broker, dealer, or futures commission merchant specified
in the name of a Margin Account a copy of the statement
furnished the Fund with respect to such Margin Account.
7. Promptly after the close of business on each busi-
ness day in which cash and/or Securities are maintained in
the Securities Collateral Account, the Custodian shall furn-
ish the Fund with a Statement with respect to such Securi-
ties Collateral Account specifying the amount of cash and/or
the amount and kind of Securities held therein. No later
than the close of business next succeeding the delivery to
the Fund of such statement, the Fund shall furnish to the
Custodian a Certificate or Written Instructions specifying
the then market value of the Securities described in such
statement. In the event such then market value is indicated
to be less than the Custodian's obligation with respect to
any outstanding Put Option guarantee letter or similar docu-
ment, the Fund shall promptly specify in a Certificate the
additional cash and/or Securities to be deposited in such
Securities Collateral Account to eliminate such deficiency.
ARTICLE XI
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall furnish to the Custodian a copy of
the resolution of the Trustees of the Fund, certified by the
Secretary or any Assistant Secretary, either (i) setting
forth the date of the declaration of a dividend or distribu-
tion, the date of payment thereof, the record date as of
which shareholders entitled to payment shall be determined,
the amount payable per Share to the shareholders of record
as of that date and the total amount payable to the Dividend
Agent and any sub-dividend agent or co-dividend agent of the
Fund on the payment date, or (ii) authorizing the declara-
tion of dividends and distributions on a daily or other
periodic basis and authorizing the Custodia'n to rely on oral
Instructions, Written Instructions or a Certificate setting
forth the date of the declaration of such dividend or dis-
tribution, the date of payment thereof, the record date as
of which shareholders entitled to payment shall be deter-
mined, the amount payable per Share of such Series to the
shareholders of record as of that date and the total amount
payable to the Dividend Agent on the payment date.
24
<PAGE>
2. Upon the payment date specified in such resolu-
tion, Oral Instructions, Written Instructions or Certifi-
cate, as the case may be, the Custodian shall pay out of the
moneys held for the account of the Fund the total amount
payable to the Dividend Agent, and any sub-dividend agent or
co-dividend agent of the Fund.
ARTICLE XII
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall
deliver to the Custodian a Certificate duly specifying:
(a) The number of Shares sold, trade date, and
price; and
(b) The amount of money to be received by the
Custodian for the sale of such Shares.
2. Upon receipt of - such money from the Transfer
Agent, the Custodian shall credit such money to the account
of the Fund.
3. Upon issuance of any Shares, the Custodian shall
pay, out of the money held for the account of the Fund, all
original issue or other taxes required to be paid by the
Fund in connection with such issuance upon the receipt of a
Certificate specifying the amount to be paid.
4. Except as provided hereinafter, whenever the Fund
shall redeem any Shares, it shall furnish to the Custodian a
Certificate specifying:
(a) The number of Shares redeemed; and
(b) The amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice
setting forth the number of Shares received by the Transfer
Agent for redemption and that such Shares are in good form
for redemption, the Custodian shall make payment to the
Transfer Agent out of the moneys held for the account of the
Fund the total amount specified in the Certificate issued
pursuant to the foregoing paragraph 4 of this Article.
6. Notwithstanding the above provisions regarding the
redemption of any Shares, whenever any Shares are redeemed
25
<PAGE>
pursuant to any check redemption privilege which may from
time to time be offered by the Fund, the Custodian, unless
otherwise instructed by a Certificate, shall, upon receipt
of an advice from the Fund or its agent setting forth that
the redemption is in good form for redemption in accordance
with the check redemption procedure, honor the check pre-
sented as part of such check redemption privilege out of the
money held in the account of the Fund for such purpose.
ARTICLE XIII
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian should in its sole discretion
advance funds on behalf of the Fund which results in an
overdraft because the moneys held by the Custodian for the
account of the Fund shall be insufficient to pay the total
amount payable upon a purchase of Securities, as set forth
in a Certificate, Written Instructions or Oral Instructions,
or which results in an overdraft for some other reason, or
if the Fund is any other reason indebted to the Custodian,
(except a borrowing for investment or for temporary or
emergency purposes using Securities as collateral pursuant
to a separate agreement and subject to the provisions of
paragraph 2 of this Article), such overdraft or indebtedness
shall be deemed to be a loan made by the Custodian to the
Fund payable on demand and shall bear interest from the date
incurred at a rate per annum (based on a 360-day year for
the actual number of days involved) equal to 1/2% over
Custodian's prime commercial lending rate in effect from
time to time, such rate to be adjusted on the effective date
of any change in such prime commercial lending rate but in
no event to be less than 6% per annum. In addition, the
Fund hereby agrees that the Custodian shall have a continu-
ing lien and security interest in and to any property at any
time held by it for the benefit of the Fund or in which the
Fund may have an interest which is then in the Custodian's
possession or control or in possession or control of any
third party acting in the Custodian's behalf. The Fund
authorizes the Custodian, in its sole discretion, at any
time to charge any such overdraft or indebtedness together
with interest due thereon against any balance of account
standing to the Fund's credit on the Custodian's books.
2. The Fund will cause to be delivered to the Custo-
dian by any bank (including, if the borrowing is pursuant to
a separate agreement, the Custodian) from which it borrows
money for investment or for temporary or emergency purposes
using Securities held by the Custodian hereunder as colla-
26
<PAGE>
teral for such borrowings, a notice or undertaking in the
form currently employed by any such bank setting forth the
amount which such bank will loan to the Fund against
delivery of a stated amount of collateral. The Fund shall
promptly deliver to the Custodian a Certificate specifying
with respect to each such borrowing: (a) the name of the
bank, (b) the amount and terms of the borrowing, which may
be set forth by incorporating by reference an attached
promissory note, duly endorsed by the Fund, or other loan
agreement, (c) the time and date, if known, on which the
loan is to be entered into, (d) the date on which the loan
becomes due and payable, (e) the total amount payable to the
Fund on the borrowing date, (f) the market value of Securi-
ties to be delivered as collateral for such loan, including
the name of the issuer, the title and the number of shares
or the principal amount of any particular Securities, and
(g) a statement specifying whether such loan is for invest-
ment purposes or for temporary or emergency purposes and
that such loan is in conformance with the Investment Company
Act of 1940 and the Fund's prospectus and statement of addi-
tional information. The Custodian shall deliver on the bor-
rowing date specified in a Certificate the specified col-
lateral and the executed promissory note, if any, against
delivery by the lending bank of the total amount of the loan
payable, provided that the same conforms to the total amount
payable as set forth in the Certificate. The Custodian may,
at the option of the lending bank, keep such collateral in
its possession, but such collateral shall be subject to all
rights therein given the lending bank by virtue of any
promissory note or loan agreement. The Custodian shall
deliver such Securities as additional collateral as may be
specified in a Certificate to collateralize further any
transaction described in this paragraph. The Fund shall
cause all Securities released from collateral status to be
returned directly to the Custodian, and the Custodian shall
receive from time to time such return of collateral as may
be tendered to it. In the event that the Fund fails to
specify in a Certificate the name of the issuer, the title
and number of shares or the principal amount of any particu-
lar Securities to be delivered as collateral by the
Custodian, the Custodian shall not be under any obligation
to deliver any Securities.
ARTICLE XIV
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, neither the Custo-
dian nor its nominee shall be liable for any loss or damage,
including counsel fees, resulting from its action or omis-
27
<PAGE>
sion to act or otherwise, except for any such loss or damage
arising out of its own negligence or willful misconduct.
The Custodian may, with respect to questions of law, apply
for and obtain the advice and opinion of counsel to the Fund
or of its own counsel, at the expense of the Fund, and shall
be fully protected with respect to anything done or omitted
by it in good faith in conformity with such advice or opin-
ion. The Custodian shall be liable to the Fund for any loss
or damage resulting from the use of the Book-Entry System or
any Depository arising by reason of any negligence, misfeas-
ance or willful misconduct on the part of the Custodian or
any of its employees or agents.
2. without limiting the generality of the foregoing,
the Custodian shall be under no obligation to inquire into,
and shall not be liable for:
(a) The validity of the issue of any Securities
purchased, sold, or written by or for the Fund, the legality
of the purchase, sale or writing thereof, or the propriety
of the amount paid or received therefor;
(b) The legality of the sale or redemption of
any Shares, or the propriety of the amount to be received or
paid therefor;
(c) The legality of the declaration or payment of
any dividend by the Fund;
(d) The legality of any borrowing by the Fund
using Securities as collateral;
(e) The legality of any loan of portfolio Securi-
ties, nor shall the Custodian be under any duty or obliga-
tion to see to it that any cash collateral delivered to it
by a broker, dealer, or financial institution or held by it
at any time as a result of such loan of portfolio Securities
of the Fund is adequate collateral for the Fund against any
loss it might sustain as a result of such loan. The Custo-
dian specifically, but not by way of limitation, shall not
be under any duty or obligation periodically to check or
notify the Fund that the amount of such cash collateral held
by it for the Fund is sufficient collateral for the Fund,
but such duty or obligation shall be the sole responsibility
of the Fund. In addition, the Custodian shall be under no
duty or obligation to see that any broker, dealer or finan-
cial institution to which portfolio Securities of the Fund
are lent pursuant to Article IX of this Agreement makes pay-
ment to it of any dividends or interest which are payable to
or for the account of the Fund during the period of such
loan or at the termination of such loan, provided, however,
28
<PAGE>
that the Custodian shall promptly notify the Fund in the
event that such dividends or interest are not paid and
received when due; or
(f) The sufficiency or value of any amounts of
money and/or Securities held in any Margin Account, Senior
Security Account, Exempt Account or Securities Collateral
Account in connection with transactions by the Fund. In
addition, the Custodian shall be under no duty or obligation
to see that any broker, dealer, futures commission merchant
or Clearing Member makes payment to the Fund of any
variation margin payment or similar payment which the Fund
may be entitled to receive from such broker, dealer, futures
commission merchant or Clearing Member, to see that any pay-
ment received by the Custodian from any broker, dealer,
futures commission merchant or Clearing Member is the amount
the Fund is entitled to receive, or to notify the Fund of
the Custodian's receipt or non-receipt of any such payment.
3. The Custodian shall not be liable for, or con-
sidered to be the Custodian of, any money, whether or not
represented by any check, draft, or other instrument for the
payment of money, received by it on behalf of the Fund until
the Custodian actually receives and collects such money
directly or by the final crediting of the account represent-
ing the Fund's interest at the Book-Entry System or the
Depository.
4. The Custodian shall not be under any duty or obli-
gation to take action to effect collection of any amount due
to the Fund from the Transfer Agent of the Fund nor to take
any action to effect payment or distribution by the Transfer
Agent of the Fund of any amount paid by the Custodian to the
Transfer Agent of the Fund in accordance with this Agree-
ment.
5. The Custodian shall not be under any duty or obli-
gation to take action to effect collection of any amount, if
the Securities upon which such amount is payable are in
default, or if payment is refused, after due demand or pre-
sentation, unless and until (i) it shall be directed to take
such action by a Certificate and (ii) it shall be assured to
its satisfaction of reimbursement of its costs and expenses
in connection with any such action.
6. The Custodian may appoint one or more banking
institutions as Depository or Depositories, as Sub-Custodian
or Sub-Custodians, or as Co-Custodian or Co-Custodians
including, but not limited to, banking institutions located
in foreign countries, of Securities and moneys at any time
owned by the Fund, upon such terms and conditions as may be
29
<PAGE>
approved in a Certificate or contained in an agreement exe-
cuted by the Custodian, the Fund and the appointed institu-
tion.
7. The custodian shall not be under any duty or obli-
gation (a) to ascertain whether any Securities at any time
delivered to, or held by it, for the account of the Fund are
such as properly may be held by the Fund under the provi-
sions of its Declaration of Trust and its then current
prospectus and statement of additional information, or (b)
to ascertain whether any transactions by the Fund, whether
or not involving the Custodian, are such transactions as may
properly be engaged in by the Fund.
8. The Custodian shall be entitled to receive and the
Fund agrees to pay to the Custodian all out-of-pocket expen-
ses and such compensation as may be agreed upon from time to
time between the Custodian and the Fund. The Custodian may
charge such compensation and any expenses incurred by the
Custodian in the performance of its duties pursuant to such
agreement against any money held by it for the account of
the Fund. The Custodian shall also be entitled to charge
against any money held by it for the account of the Fund of
the amount of any loss, damage, liability or expense,
including counsel fees, for which it shall be entitled to
reimbursement under the provisions of this Agreement. The
expenses for which the Custodian shall be entitled to reim-
bursement hereunder shall include, but are not limited to,
the expenses of sub-custodians and foreign branches of the
Custodian incurred in settling outside of New York City
transactions involving the purchase and sale of Securities
of the Fund.
9. The Custodian shall be entitled to rely upon any
Certificate, notice or other instrument in writing received
by the Custodian and reasonably believed by the Custodian to
be a Certificate. Such reliance by the Custodian shall
include, without limitation, reliance on the validity,
legality and propriety of any instructions continued there-
in. The Custodian shall be entitled to rely upon any Oral
Instructions and any Written Instructions actually received
by the Custodian hereinabove provided for. The Fund agrees
to forward to the Custodian a Certificate or facsimile
thereof confirming such Oral Instructions or Written
Instructions in such manner so that such Certificate or
facsimile thereof is received by the Custodian, whether by
hand delivery, telecopier or other similar device, or other-
wise, by the close of business of the same day that such
Oral Instructions or Written Instructions are given to the
Custodian. The Fund agrees that the fact that such confirm-
ing instructions are not received by the Custodian shall in
no way affect the validity of the transactions or enforce-
30
<PAGE>
ability of the transactions hereby authorized by the Fund.
The Fund agrees that the Custodian shall incur no liability
to the Fund in acting upon Oral Instructions or Written
Instructions given to the Custodian hereunder concerning
such transactions provided such instructions reasonably
appear to have been received from an Authorized Person.
10. The Custodian shall be entitled to rely upon any
instrument or notice in writing received by the Custodian
and reasonably believed by the Custodian to be a certifica-
tion described in paragraph 2 of Article X herein. Without
limiting the generality of the foregoing, the Custodian
shall be under no duty to acquire into, and shall not be
liable for, the accuracy of any statements or representa-
tions contained in any such instrument or other notice
including, without limitation, any specification of any
amount to be paid to a broker, dealer, or futures commission
merchant.
11. The books and records pertaining to the Fund which
are in the possession of the Custodian shall be the property
of the Fund. Such books and records shall be prepared and
maintained as required by the Investment Company Act of
1940, as amended, and other applicable securities laws and
rules and regulations. The Fund, or the Fund's authorized
representatives, shall have access to such books and records
during the Custodian's normal business hours. Upon the
reasonable request of the Fund, copies of any such books and
records shall be provided by the Custodian to the Fund or
the Fund's authorized representative, and the Fund shall
reimburse the Custodian its expenses of providing such
copies.
12. The Custodian shall provide the Fund - with any
report obtained by the Custodian on the system of internal
accounting control of the Book-Entry System or the Deposi-
tory, and with such reports on its own systems of internal
accounting control as the Fund may reasonably request from
time to time.
13. The Fund agrees to indemnify the Custodian against
and save the Custodian harmless from all liability, claims,
losses and demands whatsoever, including attorney's fees,
howsoever arising or incurred because of or in connection
with the Custodian's payment or non-payment of checks pursu-
ant to paragraph 6 of Article XIII as part of any check
redemption privilege program of the Fund, except for any
such liability, claim, loss and demand arising out of the
Custodian's own negligence or willful misconduct.
31
<PAGE>
14. Subject to the foregoing provisions of this Agree-
ment, the Custodian may deliver and receive Securities, and
receipts with respect to such Securities, and arrange for
payments to be made and received by the Custodian in accord-
ance with the customs prevailing from time to time among
brokers or dealers in such Securities.
15. The Custodian shall have no duties or responsibil-
ities whatsoever except such duties and responsibilities as
are specifically set forth in this Agreement, and no
covenant or obligation shall be implied in this Agreement
against the Custodian.
ARTICLE XV
TERMINATION
1. Either of the parties hereto may terminate this
Agreement by giving to the other party a notice in writing
specifying the date of such termination, which shall be not
less than ninety (90) days after the date of giving of such
notice. In the event such notice is given by the Fund, it
shall be accompanied by a copy of a resolution of the Trus-
tees of the Fund, certified by the Secretary or any Assis-
tant Secretary, electing to terminate this Agreement and
designating a successor custodian or custodians, each of
which shall be a bank or trust company having not less than
$2,000,000 aggregate capital, surplus and undivided
profits. In the event such notice is given by the Custodian,
the Fund shall, on or before the termination date, deliver
to the Custodian a copy of a resolution of its Trustees,
certified by the Secretary or any Assistant Secretary,
designating a successor custodian or custodians. In the
absence of such designation by the Fund, the Custodian may
designate a successor custodian which shall be a bank or
trust company having not less than $2,000,000 aggregate
capital, surplus and undivided profits. Upon the date set
forth in such notice this Agreement shall terminate, and the
Custodian shall upon receipt of a notice of acceptance by
the successor custodian on that date deliver directly to the
successor custodian all Securities and moneys then owned by
the Fund and held by it as Custodian, after deducting all
fees, expenses and other amounts for the payment or reim-
bursement of which it shall then be entitled.
2. If a successor custodian is not designated by the
Fund or the Custodian in accordance with the preceding para-
graph, the Fund shall upon the date specified in the notice
of termination of this Agreement and upon the delivery by
32
<PAGE>
the Custodian of all Securities (other than Securities held
in the Book-Entry System which cannot be delivered to the
Fund) and moneys then owned by the Fund be deemed to be its
own custodian and the Custodian shall thereby be relieved of
all duties and responsibilities pursuant to this Agreement,
other than the duty with respect to Securities held in the
Book Entry System which cannot be delivered to the Fund to
hold such Securities hereunder in accordance with this
Agreement.
ARTICLE XVI
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate
signed by two of the present officers of the Fund under its
seal, setting forth, the names and the signatures of the
present Authorized Persons. The Fund agrees to furnish to
the Custodian a new Certificate in similar form in the event
that any such present Authorized Person ceases to be an
Authorized Person or in the event that other or additional
Authorized Persons are elected or appointed. Until such new
Certificate shall be received, the Custodian shall be fully
protected in acting tinder the provisions of this Agreement
upon Oral Instructions or signatures of the present Author-
ized Persons as set forth in the last delivered Certificate.
2. Annexed hereto as Appendix B is a Certificate
signed by two of the present Officers of the Fund under its
seal, setting forth the names and the signatures of the
present officers of the Fund. The Fund agrees to furnish to
the Custodian a new Certificate in similar form in the event
any such present officer ceases to be an Officer of the
Fund, or in the event that other or additional officers are
elected or appointed. Until such new Certificate shall be
received, the Custodian shall be fully protected in acting
under the provisions of this Agreement upon the signatures
of the officers as set forth in the last delivered Certifi-
cate.
3. Any notice or other instrument in writing, author-
ized or required by this Agreement to be given to the Custo-
dian, shall be sufficiently given if addressed to the Custo-
dian and mailed or delivered to it at its offices at 90
Washington Street, New York, New York 10015, or at such
other place as the Custodian may from time to time designate
in writing.
33
<PAGE>
4. Any notice or other instrument in writing, author-
ized or required by this Agreement to be given to the Fund
shall be sufficiently given if addressed to the Fund and
mailed or delivered to it at its office at 633 Third Avenue,
New York, New York 10017 or at such other place as the Fund
may from time to time designate in writing.
5. This Agreement may not be amended or modified in
any manner except by a written agreement executed by both
parties with the same formality as this Agreement and
approved by a resolution of the Trustees of the Fund. For
purposes of this paragraph, the execution by the Custodian
and the Fund of any agreement described in paragraph I of
Article VIII hereof shall not be deemed an amendment of this
Agreement.
6. This Agreement shall extend to and shall be bind-
ing upon the parties hereto, and their respective successors
and assigns; provided, however, that this Agreement shall
not be assignable by the Fund without the written consent of
the Custodian, or by the Custodian without the written con-
sent of the Fund, authorized or approved by a resolution of
its Trustees.
7. This Agreement shall be construed in accordance
with the laws of the State of New York.
8. The Declaration of Trust establishing the Fund,
dated July 20, 1984, a copy of which, together with all
amendments thereto (the "Declaration"), is on file in the
office of the Secretary of the Commonwealth of Massachu-
setts, provides that the name "Merrill Lynch Federal Securi-
ties Trust" refers to the Trustees under the Declaration
collectively as Trustees, but not as individuals or per-
sonally; and no Trustee, shareholder, officer, employee or
agent of the Fund shall be held to any personal liability,
nor shall resort be had to their private property for the
satisfaction of any obligation or claim of said Fund but the
"Trust Property" only shall be liable.
9. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an origi-
nal, but such counterparts shall, together,,-constitute only
one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers,
thereunto duly authorized and their respective seals to be
hereunto affixed, as of the day and year first above
written.
34
<PAGE>
MERRILL LYNCH FEDERAL SECURITIES
TRUST
By:/s/
-----------------------------
Attest:
/s/ Michael Hennewinkel
-----------------------
THE BANK OF NEW YORK
By:/S/
------------------------------
Attest:
/s/
-----------------------
- 35 -
<PAGE>
Ex-99.9
TRANSFER AGENCY, DIVIDEND DISBURSING AGENCY
AND SHAREHOLDER SERVICING AGENCY AGREEMENT
THIS AGREEMENT made as of the 1st day of August, 1987
by and between Merrill Lynch Federal Securities Trust (the
"Fund") and Merrill Lynch Financial Data Service, Inc. ("MLFDS"),
a New Jersey corporation.
WITNESSETH:
WHEREAS, the Fund wishes to appoint MLFDS to be the
Transfer Agent, Dividend Disbursing Agent and Shareholder
Servicing Agent, and subject to, the terms and provisions of this
Agreement, and MLFDS is desirous of accepting such appointment
upon, and subject to, such terms and provisions:
NOW THEREFORE, in consideration of mutual covenants
contained in this Agreement, the Fund and MLFDS agree as follows:
1. Appointment of MLFDS as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent.
(a) The Fund hereby appoints MLFDS to act as Transfer
Agent, Dividend Disbursing Agent and Shareholder Servicing Agent
for the Fund upon, and subject to, the terms and provisions of
this Agreement.
(b) MLFDS hereby accepts the appointment as Transfer Agent,
Dividend Disbursing Agent and Shareholder Servicing Agent for the
Fund, and agrees to act as such upon, and subject to, the terms
and provisions of this Agreement.
2. Definitions.
(a) In this Agreement:
(I) The term "Act" means the Investment Company Act
of 1940 as amended from time to time and any rule or regulation
thereunder;
(II) The term "Account" means any account of a
Shareholder, or, if the shares are held in an account in the name
of MLPF&S for benefit of an identified customer, such account,
including a Plan Account, any account under a plan (by whatever
name referred to in the Prospectus) pursuant to the Self-Employed
Individuals Retirement Act of 1962 ("Keogh Act Plan") and any
<PAGE>
plan (by whatever name referred to in the Prospectus) in
conjunction with Section 401 of the Internal Revenue Code
("Corporation Master Plan");
(III) The term "application" means an application
made by a Shareholder or prospective Shareholder respecting the
opening of an Account:
(IV) The term "MLFD" means Merrill Lynch Funds
Distributor, Inc., a Delaware corporation;
(V) The term "MLPF&S" means Merrill Lynch,
Pierce, Fenner & Smith Incorporated, a Delaware corporation ;
(VI) The term "Officer's Instruction" means an
instruction in writing given on behalf of the Fund to MLFDS, and
signed on behalf of the Fund by the President, any vice
President, the Secretary or the Treasurer of the Fund;
(VII) The term "Prospectus" means the Prospectus
and the Statement of Additional Information of the Fund as from
time to time in effect;
(VIII) The term "Shares" means shares of stock or
beneficial interest, as the case may be, of the Fund,
irrespective of class or series;
(IX) The term "Shareholder" means the holder of
record of Shares;
(X) The term "Plan Account" means an account
opened by a Shareholder or prospective Shareholder with respect to
an open account, monthly payment or withdrawal plan (in each case
by whatever name referred to in the Prospectus), and may also
include an account relating to any other Plan if and when provision
is made for such plan in the Prospectus.
3. Duties of MLFDS and Transfer Agent, Dividend Disbursing
Agent and Shareholder Servicing Agent.
(a) Subject to the succeeding provisions of the
Agreement, MLFDS hereby agrees to perform the following functions
as Transfer Agent, Dividend Disbursing Agent and Shareholder
Servicing Agent for the Fund:
(I) Issuing, transferring and redeeming Shares;
(II) Opening, maintaining, servicing and closing
Accounts;
2
<PAGE>
(III) Acting as agent for the Fund Shareholders
and/or customers of MLPF&S in connection with Plan Accounts, upon
the terms and subject to the conditions contained in the
Prospectus and application relating to the specific Plan Account;
(IV) Acting as agent of the Fund and/or MLPF&S,
maintaining such records as may permit the imposition of such
contingent deferred sales charges as may be described in the
Prospectus, including such reports as may be reasonably requested
by the Fund with respect to such Shares as may be subject to a
contingent deferred sales charge;
(V) Upon the redemption of Shares subject to such
a contingent deferred sales charge, calculating and deducting from
the redemption proceeds thereof the amount of such charge in the
manner set forth in the Prospectus. MLFDS shall pay, on behalf of
MLFD, to MLPF&S such deducted contingent deferred sales charges
imposed upon all Shares maintained in the name of MLPF&S, or
maintained in the name of an account identified as a customer
account of MLPF&S. Sales charges imposed upon any other Shares
shall be paid by MLFS to MLFD;
(VI) Exchanging the investment of an investor
into, or from the shares of other open-end investment companies or
other series portfolios of the Fund, if any, if and to the extent
permitted by the Prospectus at the direction of such investor;
(VII) Processing redemptions;
(VIII) Examining and approving legal transfers;
(IX) Replacing lost, stolen or destroyed
certificates representing Shares, in accordance with, and subject
to, procedures and conditions adopted by the Fund;
(X) Furnishing such confirmations of transactions
relating to their Shares as required by applicable law;
(XI) Acting as agent for the Fund and/or MLPF&S,
furnishing such appropriate periodic statements relating to
Accounts, together with additional enclosures, including
appropriate income tax information and income tax forms duly
completed, as required by applicable law;
(XIII) Acting as agent for the Fund and/or MLPP&S,
mailing annual, semi-annual and quarterly reports prepared by or
on behalf of the Fund, and mailing new Prospectuses upon their
issue to Shareholders as required by applicable law;
3
<PAGE>
(XIII) Furnishing such periodic statements of
transactions effected by MLFDS, reconciliations, balances and
summaries as the Fund may reasonably request;
(XIV) Maintaining such books and records relating to
transactions effected by MLFDS as are required by the Act, or by
any other applicable provision of law, rule or regulation, to be
maintained by the Fund or its transfer agent with respect to such
transactions, and preserving, or causing to be preserved any such
books and records for such periods as may be required by any such
law, rule or regulation and as may be required by any such law,
rule or regulation and as may be agreed upon from time to time
between MLFDS and the Fund. In addition, MLFDS agrees to
maintain and preserve master files and historical computer tapes
on a daily basis in multiple separate locations a sufficient
distance apart to insure preservation of at least one copy of
such information;
(XV) Withholding taxes on non-resident alien
Accounts, preparing and filing U.S. Treasury Department Form 1099
and other appropriate forms as required by applicable law with
respect to dividends and distributions; and
(XVI) Reinvesting dividends for full and fractional
shares and disbursing cash dividends, as applicable.
(b) MLFDS agrees to act as proxy agent in connection
with the holding of annual, if any, and special meetings of
Shareholders, mailing such notices, proxies and proxy statements
in connection with the holding of such meetings as may be
required by applicable law, receiving and tabulating votes cast
by proxy and communicating to the Fund the results of such
tabulation accompanies by appropriate certifications, and
preparing and furnishing to the Fund certified lists of
Shareholders as of such date, in such form and containing such
information as may be required by the Fund.
(c) MLFDS agrees to deal with, and answer in a timely
manner, all correspondence and inquiries relating to the
functions of MLFDS under this Agreement with respect to Accounts.
(d) MLFDS agrees to furnish to the Fund such
information and at such intervals as is necessary for the Fund to
comply with registration and/or the reporting requirements
(including applicable escheat laws) of the Securities and
Exchange Commission, Blue Sky authorities or other governmental
authorities.
4
<PAGE>
(e) MLFDS agrees to provide to the Fund such
information as may reasonably be required to enable the Fund to
reconcile the number of outstanding Shares between MLFD's records
and the account books of the Fund.
(f) Notwithstanding anything in the foregoing
provisions of this paragraph, MLFDS agrees to perform its
functions thereunder subject to such modification (whether in
respect of particular cases or in any particular class of cases)
as may from time to time be contained in an Officer's
Instruction.
4. Compensation.
The charges for services described in this Agreement,
including "out-of-pocket" expenses, will be set forth in the
Schedule of Fees attached hereto.
5. Right of Inspection.
MLFDS agrees that it will in a timely manner make
available to, and permit, any officer, accountant, attorney or
authorized agent of the Fund to examine and make transcripts and
copies (including photocopies and computer or other electronical
information storage media and print-outs) of any and all of its
books and records which relate to any transaction or function
performed by MLFDS under or pursuant to this Agreement.
6. Confidential Relationship.
MLFDS agrees that it will, on behalf of itself and its
officers and employees, treat all transactions contemplated by
this Agreement, and all information germane thereto, as
confidential and not to be disclosed to any person (other than
the Shareholder concerned, or the Fund, or as may be disclosed in
the examination of any books or records by any person lawfully
entitled to examine the same) except as may be authorized by the
Fund by way of an Officer's Instruction.
7. Indemnification.
The Fund shall indemnify and hold MLFDS harmless from
any loss, cost, damage and reasonable expenses, including
reasonable attorney's fees (provided that such attorney is
appointed with the Fund's consent, which consent shall not be
unreasonably withheld), incurred by it resulting from any claim,
demand, action, or suit in connection with the performance of its
duties hereunder, provided that this indemnification shall not
apply to actions or commissions of MLFDS in cases of willful
misconduct, failure to act in good faith or negligence by MLFDS,
5
<PAGE>
it's officers, employees or agents, and further provided, that
prior to confession any claim against it which may be subject to
this indemnification, MLFDS shall give the Fund reasonable
opportunity to defend against said claim in its own name or in
the name of MLFDS. An action taken by MLFDS upon any officer's
Instruction reasonably believed by it to have been properly
executed shall not constitute willful misconduct, failure to act
in good faith or negligence under this Agreement.
8. Regarding MLFDS.
(a) MLFDS hereby agrees to hire, purchase, develope and
maintain such dedicated personnel, facilities, equipment,
software, resources and capabilities as may be reasonably
determined by the Fund to be necessary for the satisfactory
performance of the duties and responsibilities of MLFDS. MLFDS
warrants and represents that its officers and supervisory
personnel charged with carrying out its functions as Transfer
Agent, Dividend Disbursing Agent and Shareholder Servicing Agent
for the Fund possess the special skill and technical knowledge
appropriate for that purpose. MLFDS shall at all times exercise
due care and diligence in the performance of its functions as
Transfer Agent, Dividend Disbursing Agent and Shareholder
Servicing Agent for the Fund. MLFDS agrees that, in determining
whether it has exercised due care and diligence, its conduct
shall be measured by the standard applicable to persons
possessing such special skill and technical knowledge.
(b) MLFDS warrants and represents that is duly authorized
and permitted to act as Transfer Agent, Dividend Disbursing
Agent, and Shareholder Servicing Agent under all applicable laws
and that it will immediately notify the Fund of any revocation of
such authority or permission or of the commencement of any
proceeding or other action which may lead to such revocation.
9. Termination.
(a) This Agreement shall become effective as of the date
first above written and shall thereafter continue from year to
year. This Agreement may be terminated by the Fund of MLFDS
(without penalty to the Fund or MLFDS) provided that the
terminating party gives the other party written notice of such
termination at least sixty (60) days in advance, except that the
Fund may terminate this Agreement immediately upon written notice
to MLFDS if the authority or permission of MLFDS to act as
Transfer Agent, Dividend Disbursing Agent and Shareholder
Servicing Agent has been revoked or if any proceeding or other
action which the Fund reasonably believes will lead to such
revocation has been commenced.
6
<PAGE>
(b) Upon termination of this Agreement, MLFDS shall deliver
all unissued and canceled stock certificates representing Shares
remaining in its possession, and all Shareholder records, books,
stock ledgers, instruments and other documents (including
computerized or other electronically stored information ) made or
accumulated in the performance of its duties as Transfer Agent,
Disbursing Agent and Shareholder Servicing Agent for the Fund
along with a certified locator document clearly indicating the
complete contents therein, to such successor as may be specified
in a notice of termination or Officer's Instruction; and the Fund
assumes all responsibility for failure thereafter to produce any
paper, record or documents so delivered and identified in the
locator document, if and when required to be produced.
10. Amendment.
Except to the extent that the performance by MLFDS of
its functions under this Agreement may from time to time be
modified by an officer's Instruction, this Agreement may be
amended or modified only by further written agreement between the
parties.
11.Governing Law.
This Agreement shall be governed by the laws of the
State of New Jersey.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be signed by their respective duly authorized
officers and their respective corporation seals hereunto duly
affixed and attested, as of the day and year above written.
MERRILL LYNCH FEDERAL SECURITIES TRUST
By:/S/ Gerald M. Richard
---------------------
Title: Treasurer
-----------------
MERRILL LYNCH FINANCIAL DATA SERVICE, INC.
By:/s/ Robert C. Doan
-------------------
Title: President
----------
7
<PAGE>
EX-99.13
CERTIFICATE OF SOLE STOCKHOLDER
Fund Asset Management, Inc., the holder of 10,668 shares of
beneficial interest, par value $0.10 per share, of Merrill Lynch
Federal Securities Trust, a Massachusetts business trust (the
"Fund"), does hereby confirm to the Fund its representation that
it purchased such shares for investment purposes, with no present
intention of redeeming or reselling any portion thereof, and does
further agree that if it redeems any portion of such shares prior
to the amortization of the Fund's organizational expenses, the
proceeds thereof will be reduced by the proportionate amount of
the unamortized organizational expenses which the number of shares
being redeemed bears to the number of shares initially purchased.
FUND ASSET MANAGEMENT, INC.
By /s/ Terry K. Glenn
-------------------
Dated: August 16, 1984
<PAGE>
Exhibit 16(b)
Merrill Lynch Federal Securities Trust
Standardized Yield Computation
August 31, 1988
(assuming 4% sales load)
Long term income generally based on
yield to maturity times market
value of each security. $21,283,038
Plus short term income accrued for
the past thirty days 6,507,476
--------------
Equals Total Income 27,790,514
Less expenses for the past thirty
days 1,885,036
--------------
Equals net monthly income for yield
calculation 25,905,478
--------------
Average shares outstanding for the
month 396,738,256
Times maximum offering price 9.53
--------------
Equals total dollars $3,780,915,580
==============
Net monthly Income divided by total
dollars equals .0068516415
Add 1 1.0068516415
Raise to the power of 6 1.04182049
Subtract 1 .04182049
Times 2 .08364098
Expressed as a percentage equals
the standardized yield for
the month 8.36%
=====
<PAGE>
MERRILL LYNCH FEDERAL SECURITIES TRUST
TOTAL RETURN
(assuming 4% sales load)
Since Annual
Inception Total
1 Year 09/28/84 Return*
------ -------- ------
Initial Investment $1,000.00 $1,000.00 $1,000.00
Divided by
Maximum Offering Price 9.68 9.77
----- -----
Divided by Net Assets Value 9.29
-----
Equals Shares Purchased 103.31 102.35 107.64
Plus Shares Acquired Through
Dividend Reinvestment 9.78 57.20 10.16
----- ------ ------
Equals Shares Held
at 8/31/88 113.09 159.55 117.80
Multiplied by Net Asset
Value at 8/31/88 9.17 9.17 9.17
----- ----- -----
Equals Ending Redeemable
Value of a $1,000
Investment (ERV) 8/31/88 $1,037.04 $1,463.07 $1,080.23
Divided by $1,000 (P) 1.0370 1.4630 1.0802
Subtract 1 .0370 .4630 .0802
Expressed as a percentage
equals the Aggregate Total
Return for the Period (T) 3.70% 46.30%
===== ======
Expressed as a percentage
equals the Aggregate Total
Return for the Period 8.02%
=====
ERV divided by P 1.0370 1.4630
Raise to the power of 1 1 / 3.9233
Equals 1.0370 1.1018
Subtract 1 .0370 .1018
Expressed as a percentage
equals the Average
Annualized Total Return 3.70% 10.18%
===== ======
*Does not include sales charge for the period
<PAGE>
Exhibit 16(d)
Merrill Lynch Federal Securities Trust
Standardized Yield Computation
August 31, 1988
(assuming 6.25% sales load)
Long term income generally based on
yield to maturity times market
value of each security $21,283,038
Plus short term income accrued for
the past thirty days 6,507,476
--------------
Equals Total Income 27,790,514
Less expenses for the past thirty
days l,885,036
--------------
Equals net monthly income for yield
calculation 25,905,478
--------------
Average shares outstanding for the
month 396,738,256
Times maximum offering price 9.76
--------------
Equals total dollars $3,872,165,378
==============
Net monthly income divided by total
dollars equals .0066901786
Add 1 1.0066901786
Raise to the power of 6 1.040818468
Subtract 1 .04081847
Times 2 .0816369
Expressed as a percentage equals
the standardized yield for
the month 8.16%
-----
<PAGE>
MERRILL LYNCH FEDERAL SECURITIES TRUST
TOTAL RETURN
(assuming 6.25% sales load)
Since Annual
Inception Total
1 Year 09/28/84 Return*
------ -------- ------
Initial Investment $1,000.00 $1,000.00 $1,000.00
Divided by
Maximum Offering Price 9.91 10.00
------ -----
Divided by Net Assets Value 9.29
-----
Equals Shares Purchased 100.91 100.00 107.64
Plus Shares Acquired Through
Dividend Reinvestment 9.53 55.80 10.16
----- ------ -------
Equals Shares Held
at 8/31/88 110.44 155.80 117.80
Multiplied by Net Asset
Value at 8/31/88 9.17 9.17 9.17
----- ----- -----
Equals Ending Redeemable
Value of a $1,000
Investment (ERV) 8/31/88 $1,012.73 1,428.69 1,080.23
Divided by $1,000 (P) 1.0127 1.4287 1.0802
Subtract 1 .0127 .4287 .0802
Expressed as a percentage
equals the Aggregate Total
Return for the Period (T) 1.27% 42.87%
===== ======
Expressed as a percentage
equals the Aggregate Total
Return for the Period 8.02%
=====
ERV divided by P 1.0127 1.4287
Raise to the power of 1 1/3.9233
Equals 1.0127 1.0952
Subtract 1 .0127 .0952
Expressed as a percentage
equals the Average
Annualized Total Return 1.27% 9.52%
===== =====
*Does not include sales charge for the period
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> MERRILL LYNCH FEDERAL SECURITIES TRUST - CLASS A
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-START> OCT-21-1994
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 2504095971
<INVESTMENTS-AT-VALUE> 2548379275
<RECEIVABLES> 71417677
<ASSETS-OTHER> 2616386
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2622413338
<PAYABLE-FOR-SECURITIES> 131693516
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12715792
<TOTAL-LIABILITIES> 144409308
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2865830274
<SHARES-COMMON-STOCK> 23232522
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (432109548)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 44283304
<NET-ASSETS> 223236939
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 199574230
<OTHER-INCOME> 432339
<EXPENSES-NET> 29200996
<NET-INVESTMENT-INCOME> 170805573
<REALIZED-GAINS-CURRENT> (48775962)
<APPREC-INCREASE-CURRENT> 92170478
<NET-CHANGE-FROM-OPS> 214200089
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 12352715
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 30530411
<NUMBER-OF-SHARES-REDEEMED> 7753541
<SHARES-REINVESTED> 455652
<NET-CHANGE-IN-ASSETS> (376333418)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (383910428)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11490071
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 29200996
<AVERAGE-NET-ASSETS> 201110969
<PER-SHARE-NAV-BEGIN> 9.16
<PER-SHARE-NII> .58
<PER-SHARE-GAIN-APPREC> .45
<PER-SHARE-DIVIDEND> .58
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.61
<EXPENSE-RATIO> .64
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> MERRILL LYNCH FEDERAL SECURITIES TRUST - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-START> SEP-01-1994
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 2504095971
<INVESTMENTS-AT-VALUE> 2548379275
<RECEIVABLES> 71417677
<ASSETS-OTHER> 2616386
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2622413338
<PAYABLE-FOR-SECURITIES> 131693516
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12715792
<TOTAL-LIABILITIES> 144409308
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2865830274
<SHARES-COMMON-STOCK> 131454676
<SHARES-COMMON-PRIOR> 159060141
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (432109548)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 44283304
<NET-ASSETS> 1262985320
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 199574230
<OTHER-INCOME> 432339
<EXPENSES-NET> 29200996
<NET-INVESTMENT-INCOME> 170805573
<REALIZED-GAINS-CURRENT> (48775962)
<APPREC-INCREASE-CURRENT> 92170478
<NET-CHANGE-FROM-OPS> 214200089
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 84089808
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 21572051
<NUMBER-OF-SHARES-REDEEMED> 54319098
<SHARES-REINVESTED> 5141582
<NET-CHANGE-IN-ASSETS> (376333418)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (383910428)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11490071
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 29200996
<AVERAGE-NET-ASSETS> 1320003209
<PER-SHARE-NAV-BEGIN> 9.41
<PER-SHARE-NII> .60
<PER-SHARE-GAIN-APPREC> .20
<PER-SHARE-DIVIDEND> .60
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.61
<EXPENSE-RATIO> 1.41
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> MERRILL LYNCH FEDERAL SECURITIES TRUST - CLASS C
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-START> OCT-21-1994
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 2504095971
<INVESTMENTS-AT-VALUE> 2548379275
<RECEIVABLES> 71417677
<ASSETS-OTHER> 2616386
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2622413338
<PAYABLE-FOR-SECURITIES> 131693516
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12715792
<TOTAL-LIABILITIES> 144409308
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2865830274
<SHARES-COMMON-STOCK> 1626106
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (432109548)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 44283304
<NET-ASSETS> 15620610
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 199574230
<OTHER-INCOME> 432339
<EXPENSES-NET> 29200996
<NET-INVESTMENT-INCOME> 170805573
<REALIZED-GAINS-CURRENT> (48775962)
<APPREC-INCREASE-CURRENT> 92170478
<NET-CHANGE-FROM-OPS> 214200089
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 348549
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1942998
<NUMBER-OF-SHARES-REDEEMED> 339400
<SHARES-REINVESTED> 22508
<NET-CHANGE-IN-ASSETS> (376333418)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (383910428)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11490071
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 29200996
<AVERAGE-NET-ASSETS> 6514022
<PER-SHARE-NAV-BEGIN> 9.16
<PER-SHARE-NII> .51
<PER-SHARE-GAIN-APPREC> .45
<PER-SHARE-DIVIDEND> .51
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.61
<EXPENSE-RATIO> 1.47
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> MERRILL LYNCH FEDERAL SECURITIES TRUST - CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-START> SEP-01-1994
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 2504095971
<INVESTMENTS-AT-VALUE> 2548379275
<RECEIVABLES> 71417677
<ASSETS-OTHER> 2616386
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2622413338
<PAYABLE-FOR-SECURITIES> 131693516
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12715792
<TOTAL-LIABILITIES> 144409308
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2865830274
<SHARES-COMMON-STOCK> 101608151
<SHARES-COMMON-PRIOR> 144154216
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (432109548)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 44283304
<NET-ASSETS> 976161161
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 199574230
<OTHER-INCOME> 432339
<EXPENSES-NET> 29200996
<NET-INVESTMENT-INCOME> 170805573
<REALIZED-GAINS-CURRENT> (48775962)
<APPREC-INCREASE-CURRENT> 92170478
<NET-CHANGE-FROM-OPS> 214200089
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 73437660
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4702162
<NUMBER-OF-SHARES-REDEEMED> 50970271
<SHARES-REINVESTED> 3722044
<NET-CHANGE-IN-ASSETS> (376333418)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (383910428)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11490071
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 29200996
<AVERAGE-NET-ASSETS> 1066748301
<PER-SHARE-NAV-BEGIN> 9.41
<PER-SHARE-NII> .64
<PER-SHARE-GAIN-APPREC> .20
<PER-SHARE-DIVIDEND> .64
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.61
<EXPENSE-RATIO> .89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.10
Brown & Wood
One World Trade Center
New York, New York 10048
Telephone: (212) 839-5300
Facsimile: (212) 839-5599
December 21, 1995
Merrill Lynch Federal Securities Trust
P.O. Box 9011
Princeton, New Jersey 08543-9011
Dear Sirs:
This opinion is furnished in connection with the registration by Merrill
Lynch Federal Securities Trust, a Massachusetts business trust (the "Trust"), of
113,269,709 shares of beneficial interest, par value $0.10 per share (the
"Shares"), of the Trust, under the Securities Act of 1933 pursuant to a
registration statement on Form N-1A (File No. 2-92366), as amended (the
"Registration Statement").
As counsel for the Trust, we are familiar with the proceedings taken by it
in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Declaration of Trust of the
Trust, as amended, the By-Laws of the Trust and such other documents as we have
deemed relevant to the matters referred to in this opinion.
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par
<PAGE>
value thereof, will be legally issued, fully paid and nonassessable shares of
beneficial interest, except that shareholders of the Trust may under certain
circumstances be held personally liable for the Trust's obligations.
In rendering this opinion, we have relied as to matters of Massachusetts
law upon an opinion of Bingham, Dana & Gould rendered to the Trust.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus and
Statement of Additional Information constituting parts thereof.
Very truly yours,
/s/ Brown & Wood
2
<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Federal Securities Trust:
We consent to the use in Post-Effective Amendment No. 12 to Registration
Statement No. 2-92366 of our report dated October 2, 1995 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
December 20, 1995
<PAGE>
EXHIBIT 16(a)
Federal Securities Trust - Class A
10/21/94 - 08/31/95
<TABLE>
<CAPTION>
Since Since
Inception Inception
Average Annual Total
Total Return Return*
-------------- --------------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Initial Maximum Offering Price 9.54
---------
Divided by Net Asset Value 9.16
---------
Equals Shares Purchased 104.803 109.170
Plus Shares Acquired through
Dividend Reinvestment 6.404 6.671
--------- ---------
Equals Shares Held at 08/31/95 111.207 115.841
Multiplied by Net Asset Value at 08/31/95 9.63 9.63
--------- ---------
Equals Ending Redeemable Value at
$1000 Investment (ERV) at 08/31/95 1,070.92 1,115.55
Divided by $1,000 (P) 1.0709 1.1156
Subtract 1 0.0709 0.1156
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) 7.09%
=========
Expressed as a percentage equals the
Aggregate Total Return for the Period 11.56%
=========
ERV divided by P 1.0709
Raise to the power of 1.1624
Equals 1.0829
Subtract 1 0.0829
Expressed as a percentage equals the
Average Annualized Total Return 8.29%
=========
</TABLE>
* Does not include sales charge for the period.
<PAGE>
EXHIBIT 16(c)
Federal Securities Trust - Class C
10/21/94 - 08/31/95
<TABLE>
<CAPTION>
Since Since
Inception Inception
Average Annual Total
Total Return Return*
-------------- --------------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Net Asset Value 9.16 9.16
--------- ---------
Equals Shares Purchased 109.170 109.170
Plus Shares Acquired through
Dividend Reinvestment 5.885 5.885
--------- ---------
Equals Shares Held at 08/31/95 115.055 115.055
Multiplied by Net Asset Value at 08/31/95 9.63 9.63
--------- ---------
Equals Ending Value before deduction for
contingent deferred sales charge 1,107.98 1,107.98
Less deferred sales charge (10.00) 0.00
--------- ---------
Equals Ending Redeemable Value at
$1000 Investment (ERV) at 08/31/95 1,097.98 1,107.98
--------- ---------
Divided by $1,000 (P) 1.0980 1.1080
Subtract 1 0.0980 0.1080
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) 9.80%
=========
Expressed as a percentage equals the
Aggregate Total Return for the Period 10.80%
=========
</TABLE>
