<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 13, 1994
SECURITIES ACT FILE NO. 2-96581
INVESTMENT COMPANY ACT FILE NO. 811-4264
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 10
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 15
(CHECK APPROPRIATE BOX OR BOXES)
----------------
MERRILL LYNCH CALIFORNIA MUNICIPAL BOND FUND
OF MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES 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 CALIFORNIA MUNICIPAL SERIES TRUST 800 SCUDDERS MILL
ROAD, PLAINSBORO, NEW JERSEY MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW
JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
COUNSEL FOR THE TRUST: BROWN & WOOD
ONE WORLD TRADE CENTER NEW YORK, NEW PHILIP L. KIRSTEIN, ESQ. FUND ASSET
YORK 10048-0557 ATTENTION: THOMAS R. MANAGEMENT P.O. BOX 9011 PRINCETON,
SMITH, JR. NEW JERSEY 08543-9011
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[_] immediately upon filing pursuant to paragraph (b)
[X] on October 21, 1994 pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(i)
[_] On (date) pursuant to paragraph (a)(i)
[_] 75 days after filing pursuant to paragraph (a)(ii)
[_] on (date) pursuant to paragraph (a)(ii) of rule 485.
----------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS CLASS A, CLASS B,
CLASS C AND CLASS D 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 SEPTEMBER 28, 1994.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT OF SHARES OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED BEING REGISTERED PER UNIT OFFERING PRICE FEE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Beneficial In-
terest (par value
$.10 per share)........ 4,461,674 $11.39 $289,990* $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 year was 12,717,361 Shares of Beneficial Interest.
(3) 8,281,147 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) 4,436,214 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 CALIFORNIA MUNICIPAL BOND FUND
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
------------- --------
<C> <S> <C>
PART A
Item 1. Cover Page................... Cover Page
Item 2. Synopsis..................... Fee Table
Item 3. Condensed Financial
Information ................ Financial Highlights; Performance
Data
Item 4. General Description of
Registrant.................. Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund....... Fee Table; Management of the Trust;
Portfolio Transactions; Inside Back
Cover Page
Item 5A. Management's Discussion of
Fund Performance............ Not Applicable
Item 6. Capital Stock and Other
Securities.................. Cover Page; Additional Information
Item 7. Purchase of Securities Being
Offered..................... Cover Page; Merrill Lynch Select
Pricing SM System; Fee Table;
Purchase of Shares; Shareholder
Services; Additional Information;
Inside Back Cover Page
Item 8. Redemption or Repurchase..... Merrill Lynch Select Pricing SM
System; Fee Table; 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 Trust
Item 15. Control Persons and Principal
Holders of Securities....... Management of the Trust; Additional
Information
Item 16. Investment Advisory and Other
Services.................... Management of the Trust; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and
Other Practices............. Portfolio Transactions
Item 18. Capital Stock and Other
Securities.................. General Information--Description of
Series and Shares
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered..................... Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status................... Distributions and Taxes
Item 21. Underwriters................. Purchase of Shares
Item 22. Calculation of Performance
Data........................ Performance Data
Item 23. Financial Statements......... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
- ----------
OCTOBER 21, 1994
MERRILL LYNCH CALIFORNIA MUNICIPAL BOND FUND
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch California Municipal Bond Fund (the "Fund") is a diversified
mutual fund seeking to provide shareholders with as high a level of income
exempt from Federal and California income taxes as is consistent with prudent
investment management. The Fund invests primarily in a diversified portfolio
of long-term investment grade obligations exempt from Federal and California
income taxes ("California Municipal Bonds"). Dividends paid by the Fund are
exempt from Federal and California income taxes to the extent derived from
interest payments on California Municipal Bonds. There can be no assurance
that the investment objective of the Fund will be realized.
----------------
Pursuant to the Merrill Lynch Select Pricing SM 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 Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing SM System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9011, Princeton, New Jersey 08543-9011 [(609)
282-2800], or from securities dealers which have entered into selected dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000
and the minimum subsequent purchase is $50. Merrill Lynch may charge its
customers a processing fee (presently $4.85) for confirming purchases and
repurchases. Purchases and redemptions directly through the 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 October 21, 1994 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing the
Fund at the above telephone number or address. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus. The Fund
is a separate series of Merrill Lynch California Municipal Series Trust (the
"Trust"), an open-end management investment company organized as a
Massachusetts business trust.
----------------
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(c) CLASS D(c)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a
percentage of offer-
ing price)............ 4.00%(d) None None 4.00%(d)
Sales Charge Imposed
on Dividend Reinvest-
ments................. None None None None
Deferred Sales Charge None(e) None(e)
(as a percentage of
original 4.0% during the first year, 1.0% for
purchase price or re- decreasing 1.0% annually to one year
demption proceeds, 0.0% after the fourth year(b)
whichever
is lower).............
Exchange Fee........... None None None None
ANNUAL FUND OPERATING
EXPENSES (AS A PERCENT-
AGE OF
AVERAGE NET ASSETS(F):
Management Fees(g)..... 0.54% 0.54% 0.54% 0.54%
Rule 12b-1 Fees(h):
Account Maintenance
Fees................ None 0.25% 0.25% 0.10%
Distribution Fees.... None 0.25% 0.35% None
(Class B shares convert to
Class D shares automatically
after approximately ten years,
cease being subject to distribution
fees and are subject to reduced
account maintenance fees)
Other Expenses
Custodial Fees....... 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing
Costs(i)............ 0.02% 0.03% 0.03% 0.02%
Miscellaneous........ 0.05% 0.05% 0.05% 0.05%
---- ---------- ---- ----
TOTAL OTHER EXPENSES.... 0.08% 0.09% 0.09% 0.08%
---- -------- ---- ----
TOTAL FUND OPERATING EX-
PENSES................. 0.62% 1.13% 1.23% 0.72%
==== ======== ==== ====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and participants in certain investment programs. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class
D Shares"--page 22.
(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 24.
(c) Prior to the date of this Prospectus, the Fund has not offered its Class C
or Class D shares to the public.
(d) Reduced for purchases of $25,000 and over. 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 22.
(e) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that 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
up to 0.75% of amounts redeemed within the first year after purchase.
(f) Information for Class A and Class B shares is stated for the fiscal year
ended August 31, 1994. Information under "Other Expenses" for Class C and
Class D shares is estimated for the fiscal year ending August 31, 1995.
(g) See "Management of the Trust--Management and Advisory Arrangements"--page
18.
(h) See "Purchase of Shares--Distribution Plans"--page 27.
(i) See "Management of the Trust--Transfer Agency Services"--page 20.
2
<PAGE>
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 in-
cluding the maximum $40
front-end sales charge
(Class A and Class D
shares only) and assum-
ing (1) the Total Fund
Operating Expenses for
each class set forth
above, (2) a 5% annual
return throughout the
periods and (3) redemp-
tion at the end of the
period:
Class A................. $46 $59 $73 $114
Class B................. $52 $56 $62 $137
Class C................. $23 $39 $68 $149
Class D................. $47 $62 $78 $126
An investor would pay the
following expenses on
the same $1,000 invest-
ment assuming no redemp-
tion at the end of the
period:
Class A................. $46 $59 $73 $114
Class B................. $12 $36 $62 $137
Class C................. $13 $39 $68 $149
Class D................. $47 $62 $78 $126
</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
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR
ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF
THE EXAMPLE. Class B and Class C shareholders who hold their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charge permitted under the
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".
MERRILL LYNCH SELECT PRICING SM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing SM System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives, and
shares of Class B and 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, FAM. Funds advised by MLAM or the Manager 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, will be imposed directly against those classes
and not against all assets of the Fund and, accordingly, such charges will not
effect the net asset value of any other class or have any impact on investors
3
<PAGE>
choosing another sales charge option. Dividends paid by the Fund for each
class of shares will be calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Each class has different exchange privileges.
See "Shareholder Services--Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of 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
SALES MAINTENANCE DISTRIBUTION CONVERSION
CLASS CHARGE(1) FEE FEE FEATURE
- -----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
A Maximum 4.0% initial sales No No No
charge(/2/)(/3/)
- -----------------------------------------------------------------------------------------
B 0.25% 0.25% B shares convert to D
CDSC for a period of 4 years, at shares
a rate of 4.0% during the first automatically after
year, decreasing 1.0% annually approximately ten
to 0.0% years(/4/)
- -----------------------------------------------------------------------------------------
1.0% CDSC for one
C year 0.25% 0.35% No
- -----------------------------------------------------------------------------------------
Maximum 4.0% initial sales
D charge(/3/) 0.10% No No
</TABLE>
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. 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. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to up to a 1.00% CDSC for one year. See
"Class A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares is 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.
4
<PAGE>
Class A. Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class
A shares are offered to a limited group of investors and also will
be issued upon reinvestment of dividends on outstanding Class A
shares. Investors that currently own Class A shares in a shareholder
account are entitled to purchase additional Class A shares in that
account. In addition, Class A shares 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 MLAM, the Manager and certain other entities
directly or indirectly wholly-owned and controlled by ML & Co.) and
to members of the Boards of MLAM-advised mutual funds. The maximum
initial sales charge is 4.0%, which is reduced for purchases of
$25,000 and over. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived
such purchases will be subject to a CDSC of up to 1.00% 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%
and an ongoing distribution fee of 0.25% 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 a lower account
maintenance fee of 0.10% and no distribution fee; Class B shares of
certain other MLAM-advised mutual funds into which exchanges may be
made convert into Class D shares automatically after approximately
eight years. If Class B shares of 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, as will the Class D account maintenance fee of the acquired
fund upon the conversion and the holding period for the shares
exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once a month on the basis of the relative net
asset values of the shares of the two classes on the conversion
date, without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes.
Shares purchased through reinvestment of dividends on Class B shares
also will convert automatically to Class D shares. The conversion
period for dividend reinvestment shares and for certain retirement
plans is modified as described under "Purchase of Shares--Deferred
Sales Charge Alternatives--Class B and Class C Shares--Conversion of
Class B Shares to Class D Shares".
Class C. Class C shares 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 0.35% 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
5
<PAGE>
subject to distribution fees that will be imposed on Class C shares
for an indefinite period subject to annual approval by the Trust's
Board of Trustees and regulatory limitations.
Class D. Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.10% of
the Fund's average net assets attributable to Class D shares. Class
D shares are not subject to an ongoing distribution fee or any CDSC
when they are redeemed. Purchases of $1,000,000 or more may not be
subject to an initial sales charge but if the initial sales charge
is waived such purchases will be subject to a CDSC of up to 1.00% 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. 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 System that the investor believes is most beneficial under his or her
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because of the account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charges 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. Although some investors that
previously purchased Class A shares may no longer be eligible to purchase Class
A shares of other MLAM-advised mutual funds, those previously purchased Class A
shares, together with Class B, Class C and Class D share holdings, will count
toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will
cause Class B and Class C shares to have higher expense ratios, pay lower
dividends and have lower total returns than the initial sales charge shares.
The ongoing Class D account maintenance fees will cause Class D shares to have
a higher expense ratio, pay lower dividends and have a lower total return than
Class A shares.
Deferred Sales Charge 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 ten years, and
thereafter investors will be subject to lower ongoing fees.
6
<PAGE>
Certain investors may elect to purchase Class B shares if they determine it
to be 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 are subject to higher
distribution fees and 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 for the year ended
August 31, 1994 and the independent auditors' report thereon are included in
the Statement of Additional Information. The following per share data and
ratios have been derived from information provided in the Fund's audited
financial statements. Financial information is not presented for Class C or
Class D shares, since no shares of those classes are publicly issued as of the
date of this Prospectus. Further information about the performance of the Fund
is contained in the Fund's most recent annual report to shareholders which may
be obtained, without charge, by calling or by writing the Fund at the
telephone number or address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
INCREASE
(DECREASE) IN FOR THE YEAR ENDED AUGUST 31,
NET ASSET VALUE: ----------------------------------------------------
1994 1993 1992 1991 1990 1989+
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net Asset Value,
Beginning of
Period.......... $ 12.38 $ 11.80 $ 11.44 $ 11.03 $ 11.22 $ 11.02
------- ------- ------- ------- ------- -------
Investment
income--net..... .68 .70 .72 .74 .77 .63
Realized and
unrealized gain
(loss) on
investments--
net............. (.78) .78 .41 .41 (.19) .20
------- ------- ------- ------- ------- -------
Total from
investment
operations...... (.10) 1.48 1.13 1.15 .58 .83
------- ------- ------- ------- ------- -------
Less dividends
and
distributions:
Investment
income--net..... (.68) (.70) (.72) (.74) (.77) (.63)
Realized gain on
investments--
net............. (.19) (.20) (.05) -- -- --
In excess of
realized gain on
investments..... (.09) -- -- -- -- --
------- ------- ------- ------- ------- -------
Total dividends
and
distributions... (.96) (.90) (.77) (.74) (.77) (.63)
------- ------- ------- ------- ------- -------
Net asset value,
end of period... $ 11.32 $ 12.38 $ 11.80 $ 11.44 $ 11.03 $ 11.22
======= ======= ======= ======= ======= =======
TOTAL INVESTMENT
RETURN+++:
Based on net
asset value per
share........... (.92)% 13.21% 10.23% 10.73% 5.21% 7.96%++
======= ======= ======= ======= ======= =======
RATIOS TO
AVERAGE NET
ASSETS:
Expenses,
excluding
distribution
fees............ .62% .63% .63% .64% .65% .65%*
======= ======= ======= ======= ======= =======
Expenses........ .62% .63% .63% .64% .65% .65%*
======= ======= ======= ======= ======= =======
Investment
income--net..... 5.65% 5.87% 6.26% 6.57% 6.77% 6.80%*
======= ======= ======= ======= ======= =======
SUPPLEMENTAL
DATA:
Net Assets, End
of Period (in
thousands)...... $60,017 $64,526 $46,556 $37,499 $29,558 $19,451
======= ======= ======= ======= ======= =======
Portfolio
Turnover........ 75.66% 61.24% 52.31% 116.09% 119.66% 114.49%
======= ======= ======= ======= ======= =======
<CAPTION>
CLASS B
-----------------------------------------------------------------------------------------
INCREASE
(DECREASE) IN FOR THE YEAR ENDED AUGUST 31,
NET ASSET VALUE: -----------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986++
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net Asset Value,
Beginning of
Period.......... $ 12.38 $ 11.80 $ 11.44 $ 11.03 $ 11.23 $ 10.77 $ 10.96 $ 11.55 $ 10.00
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Investment
income--net..... .61 .64 .67 .68 .71 .71 .71 .72 .71
Realized and
unrealized gain
(loss) on
investments--
net............. (.78) .78 .41 .41 (.20) .46 (.19) (.54) 1.55
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total from
investment
operations...... (.17) 1.42 1.08 1.09 .51 1.17 .52 .18 2.26
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Less dividends
and
distributions:
Investment
income--net..... (.61) (.64) (.67) (.68) (.71) (.71) (.71) (.72) (.71)
Realized gain on
investments--
net............. (.19) (.20) (.05) -- -- -- -- (.05) --
In excess of
realized gain on
investments..... (.09) -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total dividends
and
distributions... (.89) (.84) (.72) (.68) (.71) (.71) (.71) (.77) (.71)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net asset value,
end of period... $ 11.32 $ 12.38 $ 11.80 $ 11.44 $ 11.03 $ 11.23 $ 10.77 $ 10.96 $ 11.55
========= ========= ========= ========= ========= ========= ========= ========= =========
TOTAL INVESTMENT
RETURN+++:
Based on net
asset value per
share........... (1.50)% 12.64% 9.68% 10.18% 4.58% 11.14% 5.05% 1.52% 23.19%++
========= ========= ========= ========= ========= ========= ========= ========= =========
RATIOS TO
AVERAGE NET
ASSETS:
Expenses,
excluding
distribution
fees............ .63% .63% .63% .65% .65% .66% .67% .65% .59%*
========= ========= ========= ========= ========= ========= ========= ========= =========
Expenses........ 1.13% 1.13% 1.13% 1.15% 1.15% 1.16% 1.16% 1.15% 1.09%*
========= ========= ========= ========= ========= ========= ========= ========= =========
Investment
income--net..... 5.15% 5.38% 5.76% 6.07% 6.27% 6.42% 6.63% 6.34% 6.90%*
========= ========= ========= ========= ========= ========= ========= ========= =========
SUPPLEMENTAL
DATA:
Net Assets, End
of Period (in
thousands)...... $726,888 $821,220 $729,569 $690,885 $663,551 $665,566 $611,454 $661,755 $478,320
========= ========= ========= ========= ========= ========= ========= ========= =========
Portfolio
Turnover........ 75.66% 61.24% 52.31% 116.09% 119.66% 114.49% 77.99% 69.23% 217.91%
========= ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
- ----
+ Class A Shares * Annualized.
commenced ++Aggregate total investment return.
operations on
October 25, 1988.
++ Class B Shares
commenced
operations on
September 30,
1985.
+++ Total investment
returns exclude
the effects of
sales loads.
8
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as high
a level of income exempt from Federal and California income taxes as is
consistent with prudent investment management. The Fund seeks to achieve its
objective while providing investors with the opportunity to invest in a
diversified portfolio of securities consisting primarily of long-term
obligations issued by or on behalf of the State of California, its political
subdivisions, agencies and instrumentalities and obligations of other
qualifying issuers located in Puerto Rico, the Virgin Islands and Guam.
Obligations exempt from Federal income taxes are referred to herein as
"Municipal Bonds" and obligations exempt from both Federal and California
income taxes are referred to herein as "California Municipal Bonds." Unless
otherwise indicated, references to Municipal Bonds shall be deemed to include
California Municipal Bonds. Under normal circumstances, at least 65% of the
Fund's total assets will be invested in California Municipal Bonds. The
investment objective of the Fund is a fundamental policy and may not be changed
without shareholder approval. At times, the Fund will seek to hedge its
portfolio through the use of futures transactions to reduce volatility in the
net asset value of Fund shares.
Municipal Bonds may include several types of bonds. The risks and special
considerations involved in investments in Municipal Bonds vary with the types
of instruments being acquired. Investments in Non-Municipal Tax-Exempt
Securities, as defined herein, may present similar risks, depending on the
particular product. Certain instruments in which the Fund may invest may be
characterized as derivative instruments. See "Description of Municipal Bonds"
and "Financial Futures Transactions and Options". The interest on Municipal
Bonds may bear a fixed rate or be payable at a variable or floating rate. At
least 80% of the Municipal Bonds purchased by the Fund will be what are
commonly referred to as "investment grade" securities, which are obligations
rated at the time of purchase within the four highest quality ratings as
determined by either Moody's Investors Service, Inc. ("Moody's") (currently
Aaa, Aa, A and Baa), Standard & Poor's Corporation ("Standard & Poor's")
(currently AAA, AA, A and BBB) or Fitch Investors Service, Inc. ("Fitch")
(currently, AAA, AA, A and BBB). If Municipal Bonds are unrated, such
securities will possess creditworthiness comparable, in the opinion of the
Manager, to obligations in which the Fund may invest. Municipal Bonds rated in
the fourth highest rating category, while considered "investment grade", have
certain speculative characteristics and are more likely to be downgraded to
non-investment grade than obligations rated in one of the top three rating
categories. See Appendix II--"Ratings of Municipal Bonds"--in the Statement of
Additional Information for more information regarding ratings of debt
securities. An issue of rated Municipal Bonds may cease to be rated or its
rating may be reduced below "investment grade" subsequent to its purchase by
the Fund. If an obligation is downgraded below investment grade, the Manager
will consider factors such as price, credit risk, market conditions, financial
condition of the issuer and interest rates to determine whether to continue to
hold the obligation in the Fund's portfolio.
The Fund may invest up to 20% of its total assets in Municipal Bonds that are
rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch or which,
in the Manager's judgment, possess similar credit characteristics. Such
securities, sometimes referred to as "high-yield" or "junk" bonds, are
predominantly speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the security and generally
involve a greater volatility of price than securities in higher rating
categories. The market prices of high-yielding, lower-rated securities may
fluctuate more than higher-rated securities and may decline significantly in
periods of general economic difficulty, which may follow periods
9
<PAGE>
of rising interest rates. In purchasing such securities, the Fund will rely on
the Manager's judgment, analysis and experience in evaluating the
creditworthiness of the issuer of such securities. The Manager will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of its management and regulatory matters. See "Investment Objective and
Policies" in the Statement of Additional Information for a more detailed
discussion of the pertinent risk factors involved in investing in "high yield"
or "junk" bonds and Appendix II--"Ratings of Municipal Bonds"--in the Statement
of Additional Information for additional information regarding ratings of debt
securities. The Fund does not intend to purchase debt securities that are in
default or which the Manager believes will be in default.
Certain Municipal Bonds may be entitled to the benefits of letters of credit
or similar credit enhancements issued by financial institutions. In such
instances, the Trustees and the Manager will take into account in assessing the
quality of such bonds not only the creditworthiness of the issuer of such
Municipal Bonds but also the creditworthiness of the financial institution.
The Fund's investments may also include variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a financial
institution. The VRDOs in which the Fund will invest are tax-exempt obligations
which contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest on a short notice
period not to exceed seven days. Participating VRDOs provide the Fund with a
specified undivided interest (up to 100%) of the underlying obligation and the
right to demand payment of the unpaid principal balance plus accrued interest
on the Participating VRDOs from the financial institution on a specified number
of days' notice, not to exceed seven days. There is, however, the possibility
that because of default or insolvency, the demand feature of VRDOs or
Participating VRDOs may not be honored. The Fund has been advised by its
counsel that the Fund should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment of the
unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed illiquid securities. A VRDO with a demand notice
period exceeding seven days will therefore be subject to the Fund's restriction
on illiquid investments unless, in the judgment of the Trustees, such VRDO is
liquid. The Trustees may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of such VRDOs. The Trustees,
however, will retain sufficient oversight and be ultimately responsible for
such determinations.
The Fund ordinarily does not intend to realize investment income from
securities other than California Municipal Bonds. However, to the extent that
suitable California Municipal Bonds are not available for investment by the
Fund, the Fund may purchase Municipal Bonds issued by other states, their
agencies and instrumentalities, the interest income on which is exempt, in the
opinion of bond counsel, from Federal, but not California, taxation. The Fund
also may invest in securities not issued by or on behalf of a state or
territory or by an agency or instrumentality thereof, if the Fund nevertheless
believes such securities to be exempt from Federal income taxation ("Non-
Municipal Tax-Exempt Securities"). Non-Municipal Tax-Exempt Securities may
include securities issued by other investment companies that invest in
municipal bonds, to the extent such investments are permitted by the Investment
Company Act of 1940, as amended
10
<PAGE>
(the "1940 Act"). Other Non-Municipal Tax-Exempt Securities could include trust
certificates or other derivative instruments evidencing interests in one or
more Municipal Bonds.
Under normal circumstances, except when acceptable securities are unavailable
as determined by the Manager, the Fund will invest at least 65% of its total
assets in California Municipal Bonds. For temporary defensive periods or to
provide liquidity, the Fund has the authority to invest as much as 35% of its
total assets in tax-exempt or taxable money market obligations with a maturity
of one year or less (such short-term obligations being referred to herein as
"Temporary Investments"), except that taxable Temporary Investments shall not
exceed 20% of the Fund's total assets. The Temporary Investments, VRDOs and
Participating VRDOs in which the Fund may invest will be in the following
rating categories at the time of purchase: MIG-1/VMIG-1 through MIG-4/VMIG-4
for notes and VRDOs and Prime-1 through Prime-3 for commercial paper (as
determined by Moody's), SP-1 or SP-2 for notes and A-1 through A-3 for VRDOs
and commercial paper (as determined by Standard & Poor's), or F-1 through F-3
for notes, VRDOs and commercial paper (as determined by Fitch) or, if unrated,
of comparable quality in the opinion of the Manager. The Fund at all times will
have at least 80% of its total assets invested in securities the interest on
which is exempt from Federal taxation. However, interest received on certain
otherwise tax-exempt securities which are classified as "private activity
bonds" (in general, bonds that benefit non-governmental entities) may be
subject to Federal alternative minimum tax. The percentage of the Fund's total
assets invested in "private activity bonds" will vary during the year. See
"Distributions and Taxes". In addition, the Fund reserves the right to invest
temporarily a greater portion of its assets in Temporary Investments for
defensive purposes, when, in the judgment of the Manager, market conditions
warrant. The investment objective of the Fund is a fundamental policy of the
Fund which may not be changed without a vote of a majority of the Fund's
outstanding voting securities, as defined in the 1940 Act. The Fund's hedging
strategies, which are described in more detail under "Financial Futures
Transactions and Options", are not fundamental policies and may be modified by
the Trustees of the Trust without the approval of the Fund's shareholders.
POTENTIAL BENEFITS
Investment in shares of the Fund offers several benefits. The Fund offers
investors the opportunity to receive income exempt from Federal and California
income taxes and to own shares in a professionally managed portfolio consisting
primarily of long-term California Municipal Bonds. The Fund also provides
liquidity because of its redemption features and relieves the investor of the
burdensome administrative details involved in managing a portfolio of tax-
exempt securities. The benefits of investing in the Fund are at least partially
offset by the expenses involved in operating an investment company. Such
expenses primarily consist of the management fee and operational costs and, in
the case of certain classes of shares, the account maintenance and distribution
fees.
SPECIAL AND RISK CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL BONDS
The Fund ordinarily will invest at least 65% of its total assets in
California Municipal Bonds, and therefore it is more susceptible to factors
adversely affecting issuers of California Municipal Bonds than is a municipal
bond mutual fund that is not concentrated in issuers of California Municipal
Bonds to this degree. Between November 1991 and the date of this Prospectus,
the State of California's bond ratings were lowered from AAA to A+ by S&P, from
AAA to AA by Fitch, and from Aaa to Aa1 by Moody's. S&P has also placed the
State of California on Credit Watch. California is experiencing its deepest
recession since the 1930s. For a discussion of economic and other conditions in
the State of California, see Appendix I. The Manager
11
<PAGE>
does not believe that the current economic conditions in California will have a
significant adverse effect on the Fund's ability to invest in high quality
California Municipal Bonds. See "Economic and Other Conditions in California"
in the Statement of Additional Information.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction and equipping of a wide range of public
facilities (including water, sewer, gas, electricity, solid waste, health care,
transportation, education and housing facilities), refunding of outstanding
obligations and obtaining funds for general operating expenses and loans to
other public institutions and facilities. In addition, certain types of
industrial development bonds are issued by or on behalf of public authorities
to finance or refinance various privately operated facilities, including
certain facilities for the local furnishing of electric energy or gas, sewage
facilities, solid waste disposal facilities and other specialized facilities.
For purposes of this Prospectus, such obligations are referred to as Municipal
Bonds even though such bonds may be "private activity bonds" as discussed
below.
In the case of certain community facilities district special tax (or "Mello-
Roos"), tax investment (or tax allocation) and assessment bonds, the payment of
the special tax, tax increment and assessments may be secured solely by
remedies against the land (such as by foreclosure) and not against the
individual property owner, which could be time-consuming and costly.
The two principal classifications of Municipal Bonds are "general obligation"
bonds and "revenue" bonds which latter category includes industrial development
bonds ("IDBs") and, for bonds issued after August 15, 1986, private activity
bonds. General obligation bonds are secured by the issuer's pledge of its
faith, credit and taxing power for the repayment of principal and the payment
of interest. The taxing power of any governmental entity may be limited,
however, by provisions of state constitutions or laws, and an entity's
creditworthiness will depend on many factors, including potential erosion of
its tax base due to population declines, natural disasters, declines in the
state's industrial or commercial base or inability to attract new industries or
businesses, economic limits on the ability to tax without eroding the tax base,
state legislative proposals or voter initiatives to limit ad valorem real
property taxes, and the extent to which the entity relies on Federal or state
aid, access to capital markets or other factors beyond the state's or entity's
control. Accordingly, the capacity of the issuer of a general obligation bond
as to the timely payment of interest and the repayment of principal when due is
affected by the size and stability of the issuer's tax base.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as payments from the
user of the facility being financed; accordingly, the timely payment of
interest and the repayment of principal in accordance with the terms of the
revenue or special obligation bond is a function of the economic viability of
such facility or such revenue source. The Fund may also invest in "moral
obligation" bonds, which are normally issued by special purpose public
authorities. If an issuer of moral obligation bonds is unable to meet its
obligations, the repayment of such bonds becomes a moral commitment but not a
legal obligation of the state or municipality in question.
The Fund may purchase IDBs and private activity bonds. IDBs and private
activity bonds are tax-exempt securities issued by states, municipalities or
public authorities to provide funds, usually through a loan or lease
arrangement, to a private entity for the purpose of financing construction or
improvement of a
12
<PAGE>
facility to be used by the entity. Such bonds are secured primarily by revenues
derived from loan repayments or lease payments due from the entity which may or
may not be guaranteed by a parent company or otherwise secured. Neither IDBs
nor private activity bonds are secured by a pledge of the taxing power of the
issuer of such bonds. In view of this, an investor should be aware that
repayment of such bonds depends on the revenues of a private entity and be
aware of the risks that such an investment may entail. Continued ability of an
entity to generate sufficient revenues for the payment of principal and
interest on such bonds will be affected by many factors including the size of
the entity, capital structure, demand for its products or services,
competition, general economic conditions, government regulation and the
corporation's dependence on revenues on the operation of the particular
facility being financed. The Fund may invest more than 25% of its total assets
in IDBs or private activity bonds.
The Fund may invest in Municipal Bonds (and Non-Municipal Tax-Exempt
Securities) the return on which is based on a particular index of value or
interest rates. For example, the Fund may invest in Municipal Bonds that pay
interest based on an index of Municipal Bond interest rates or based on the
value of gold or some other commodity. The principal amount payable upon
maturity of certain Municipal Bonds also may be based on the value of the
index. To the extent the Fund invests in these types of Municipal Bonds, the
Fund's return on such Municipal Bonds will be subject to risk with respect to
the value of the particular index. Also, the Fund may invest in so-called
"inverse floating obligations" or "residual interest bonds" on which the
interest rates typically decline as market rates increase and increase as
market rates decline. Such securities have the effect of providing a degree of
investment leverage, since they may increase or decrease in value in response
to changes, as an illustration, in market interest rates at a rate which is a
multiple (typically two) of the rate at which fixed-rate long term tax exempt
securities increase or decrease in response to such changes. As a result, the
market values of such securities will generally be more volatile than the
market values of fixed-rate tax exempt securities. To seek to limit the
volatility of these securities, the Fund may purchase inverse floating
obligations with shorter-term maturities or which contain limitations on the
extent to which the interest rate may vary. The Manager believes that indexed
and inverse floating obligations represent a flexible portfolio management
instrument for the Fund which allows the Manager to vary the degree of
investment leverage relatively efficiently under different market conditions.
Certain investments in such obligations may be illiquid. The Fund may not
invest in such illiquid obligations if such investments, together with other
illiquid investments, would exceed 10% of the Fund's total assets.
Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called
"lease obligations") relating to such equipment, land or facilities. Although
lease obligations do not constitute general obligations of the issuer for which
the issuer's unlimited taxing power is pledged, a lease obligation is
frequently backed by the issuer's covenant to budget for, appropriate and make
the payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the issuer has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Although "non-
appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that has not yet
developed the depth of marketability associated with more conventional
securities. Certain investments in lease obligations may be illiquid. The Fund
may not invest in illiquid lease obligations if such investments, together with
all other illiquid investments, would exceed 10% of the Fund's total assets.
The
13
<PAGE>
Fund may, however, invest without regard to such limitation in lease
obligations which the Manager, pursuant to guidelines which have been adopted
by the Board of Trustees and subject to the supervision of the Board,
determines to be liquid. The Manager will deem lease obligations to be liquid
if they are publicly offered and have received an investment grade rating of
Baa or better by Moody's, or BBB or better by Standard & Poor's or Fitch.
Unrated lease obligations, or those rated below investment grade, will be
considered liquid if the obligations come to the market through an underwritten
public offering and at least two dealers are willing to give competitive bids.
In reference to the latter, the Manager must, among other things, also review
the creditworthiness of the municipality obligated to make payment under the
lease obligation and make certain specified determinations based on such
factors as the existence of a rating or credit enhancement (such as insurance),
the frequency of trades or quotes for the obligation and the willingness of
dealers to make a market in the obligation.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation which may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Fund.
CALL RIGHTS
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to the maturity of
the related Municipal Bond will expire without value. The economic effect of
holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security. Certain investments in
such obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 10% of the Fund's total assets.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase or sell Municipal Bonds on a delayed delivery basis or
a when-issued basis at fixed purchase terms. These transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future. The purchase will be recorded on the date the Fund enters
into the commitment and the value of the obligation will thereafter be
reflected in the calculation of the Fund's net asset value. The value of the
obligation on the delivery date may be more or less than its purchase price. A
separate account of the Fund will be established with its custodian consisting
of cash, cash equivalents or high grade, liquid Municipal Bonds having a market
value at all times at least equal to the amount of the forward commitment.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
The Fund is authorized to purchase and sell certain exchange-traded financial
futures contracts ("financial futures contracts") solely for the purposes of
hedging its investments in Municipal Bonds against declines in value and
hedging against increases in the cost of securities it intends to purchase.
However, any transactions involving financial futures or options (including
puts and calls associated therewith) will be in accordance with the Fund's
investment policies and limitations. A financial futures contract obligates the
seller of a contract to deliver and the purchaser of a contract to take
delivery of the type of financial
14
<PAGE>
instrument covered by the contract, or in the case of index-based financial
futures contracts to make and accept a cash settlement, at a specific future
time for a specified price. A sale of financial futures contracts may provide a
hedge against a decline in the value of portfolio securities because such
depreciation may be offset, in whole or in part, by an increase in the value of
the position in the financial futures contracts. A purchase of financial
futures contracts may provide a hedge against an increase in the cost of
securities intended to be purchased, because such appreciation may be offset,
in whole or in part, by an increase in the value of the position in the futures
contracts. Distributions, if any, of net long-term capital gains from certain
transactions in futures or options are taxable at long-term capital gains rates
for Federal income tax purposes, regardless of the length of time the
shareholder has owned Fund shares. See "Distributions and Taxes--Taxes".
The Fund deals in financial futures contracts traded on the Chicago Board of
Trade based on The Bond Buyer Municipal Bond Index, a price-weighted measure of
the market value of 40 large, recently issued tax-exempt bonds. There can be no
assurance, however, that a liquid secondary market will exist to terminate any
particular financial futures contract at any specific time. If it is not
possible to close a financial futures position entered into by the Fund, the
Fund would continue to be required to make daily cash payments of variation
margin in the event of adverse price movements. In such a situation, if the
Fund has insufficient cash, it may have to sell portfolio securities to meet
daily variation margin requirements at a time when it may be disadvantageous to
do so. The inability to close financial futures positions also could have an
adverse impact on the Fund's ability to hedge effectively. 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 financial futures contract.
The Fund may purchase and sell financial futures contracts on U.S. Government
securities and write and purchase put and call options on such financial
futures contracts as a hedge against adverse changes in interest rates as
described more fully in the Statement of Additional Information. With respect
to U.S. Government securities, currently there are financial futures contracts
based on long-term U.S. Treasury bonds, U.S. Treasury notes, Government
National Mortgage Association ("GNMA") Certificates and three-month U.S.
Treasury bills.
Subject to policies adopted by the Trustees, the Fund also may engage in
other financial futures contracts transactions and options thereon, such as
financial futures contracts or options on other municipal bond indexes which
may become available if the Manager of the Fund and the Trustees of the Trust
should determine that there is normally a sufficient correlation between the
prices of such financial futures contracts and the Municipal Bonds in which the
Fund invests to make such hedging appropriate.
Utilization of financial futures transactions and options thereon involves
the risk of imperfect correlation in movements in the price of financial
futures contracts and movements in the price of the security which is the
subject of the hedge. If the price of the financial futures contract moves more
or less than the price of the security that is the subject of the hedge, the
Fund will experience a gain or loss which will not be completely offset by
movements in the price of such security. There is a risk of imperfect
correlation where the securities underlying financial futures contracts have
different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as a basis for a financial futures
contract. Finally, in the case of financial futures contracts on U.S.
Government securities and options on such financial futures contracts, the
anticipated correlation of price movements between the U.S. Government
securities underlying the futures or options and Municipal Bonds
15
<PAGE>
may be adversely affected by economic, political, legislative or other
developments which have a disparate impact on the respective markets for such
securities.
Under regulations of the Commodity Futures Trading Commission, the futures
trading activities described herein will not result in the Fund being deemed to
be a "commodity pool", as defined under such regulations, provided that the
Fund adheres to certain restrictions. In particular, the Fund may purchase and
sell financial futures contracts and options thereon (i) only for bona fide
hedging purposes, and (ii) for non-hedging purposes, if the aggregate initial
margins and premiums required to establish positions in such contracts and
options does not exceed 5% of the liquidation value of the Fund's portfolio
assets after taking into account unrealized profits and unrealized losses on
any such financial futures contracts and options. (However, as stated above,
the Fund intends to engage in options and financial futures transactions only
for hedging purposes.) Margin deposits may consist of cash or securities
acceptable to the broker and the relevant contract market.
When the Fund purchases a financial futures contract, or writes a put option
or purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., high-grade commercial paper and daily tender adjustable
notes) or short-term, high-grade, fixed-income securities in a segregated
account with the Fund's custodian, so that the amount so segregated plus the
amount of initial and variation margin held in the account of its broker equals
the market value of the financial futures contracts, thereby ensuring that the
use of such financial futures contract is unleveraged. It is not anticipated
that transactions in financial futures contracts will have the effect of
increasing portfolio turnover.
Although certain risks are involved in options and financial futures
transactions, the Manager believes that, because the Fund will engage in
financial futures transactions only for hedging purposes, the futures portfolio
strategies of the Fund will not subject the Fund to certain risks frequently
associated with speculation in futures transactions. The Fund must meet certain
Federal income tax requirements under the Internal Revenue Code of 1986, as
amended (the "Code"), in order to qualify for the special tax treatment
afforded regulated investment companies, including a requirement that less than
30% of its gross income be derived from the sale or other disposition of
securities held for less than three months. Additionally, the Fund is required
to meet certain diversification requirements under the Code.
The liquidity of a secondary market in a financial 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
reached and exceeded the daily limit on a number of consecutive trading days.
The successful use of transactions in financial futures also depends on the
ability of the Manager to forecast correctly the direction and extent of
interest rate movements within a given time frame. To the extent these rates
remain stable during the period in which a financial futures contract is held
by the Fund or moves in a direction opposite to that anticipated, the Fund may
realize a loss on the hedging transaction which is not fully or partially
offset by an increase in the value of portfolio securities. As a result, the
Fund's total return for such period may be less than if it had not engaged in
the hedging transaction. Furthermore, the
16
<PAGE>
Fund will only engage in hedging transactions from time to time and may not
necessarily be engaging in hedging transactions when movements in interest
rates occur.
Reference is made to the Statement of Additional Information for further
information on financial futures contracts and certain options thereon.
REPURCHASE AGREEMENTS
As Temporary Investments, the Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S.
Government securities, or an affiliate thereof. Under such agreements, the
seller agrees, upon entering into the contract, to repurchase the security from
the Fund at a mutually agreed upon time and price, thereby determining the
yield during the term of the agreement. This results in a fixed rate of return
insulated from market fluctuations during such period. The Fund may not invest
in repurchase agreements maturing in more than seven days if such investments,
together with the Fund's other illiquid investments, exceed 10% of the Fund's
total assets. 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 disposition of the underlying securities.
INVESTMENT RESTRICTIONS
Current Investment Restrictions. The Fund has adopted a number of
restrictions and policies relating to the investment of the Fund's assets and
its activities, which are fundamental policies of the Fund and may not be
changed without the approval of the holders of a majority of the Fund's
outstanding voting securities, as defined in the 1940 Act. Among the more
significant restrictions, the Fund may not:
(i) purchase any securities other than securities referred to under
"Investment Objective and Policies" herein;
(ii) invest more than 5% of its total assets (taken at market value at the
time of each investment) in the securities of any one issuer, except
that such restriction shall not apply to securities backed by the
United States Government or its agencies or instrumentalities [For
purposes of this restriction, the Trust will regard each state and
each political subdivision, agency or instrumentality of such state
and each multi-state agency of which such state is a member and each
public authority which issues securities on behalf of a private entity
as a separate issuer, except that if the security is backed only by
the assets and revenues of a non-government entity, then the entity
with the ultimate responsibility for the payment of interest and
principal may be regarded as the sole issuer];
(iii) borrow amounts in excess of 20% of its total assets taken at market
value (including the amount borrowed), and then only from banks as a
temporary measure for extraordinary or emergency purposes [Usually only
"leveraged" investment companies may borrow in excess of 5% of their
assets; however, the Fund will not purchase securities while borrowings
are outstanding. Interest paid on such borrowings will reduce net
income.];
17
<PAGE>
(iv) invest in securities with legal or contractual restrictions on resale
or for which no readily available market exists, including repurchase
agreements and purchase and sale contracts maturing in more than seven
days, if, regarding all such securities taken together, more than 10%
of its net assets (taken at market value) would be invested in such
securities; and
(v) invest more than 5% of its total assets (taken at market value at the
time of each investment) in industrial revenue bonds where the entity
supplying the revenues from which the issue is to be paid, including
predecessors, has a record of less than three years' continuous
business operation.
Proposed Investment Restrictions. The Board of Trustees of the Trust, at a
meeting held on August 3, 1994, approved certain changes to the fundamental and
non-fundamental investment restrictions of the Fund. These changes were
proposed in connection with the creation of a set of standard fundamental and
non-fundamental investment restrictions that would be adopted, subject to
shareholder approval, by all of the non-money market mutual funds advised by
MLAM or the Manager. The proposed uniform investment restrictions are designed
to provide each of these funds, including the Fund, with as much investment
flexibility as possible under the 1940 Act and applicable state securities
regulations, help promote operational efficiencies and facilitate monitoring of
compliance. The investment objective and policies of the Fund will be
unaffected by the adoption of the proposed investment restrictions.
The full text of the proposed investment restrictions is set forth under
"Investment Objective and Policies--Proposed Uniform Investment Restrictions"
in the Statement of Additional Information. Shareholders of the Fund are
currently considering whether to approve the proposed revised investment
restrictions. If such shareholder approval is obtained, the Fund's current
investment restrictions will be replaced by the proposed restrictions, and the
Fund's Prospectus and Statement of Additional Information will be supplemented
to reflect such change.
Investors are referred to the Statement of Additional Information for a
complete description of the Fund's investment restrictions.
MANAGEMENT OF THE TRUST
TRUSTEES
The Trustees of the Trust consist of six individuals, five of whom are not
"interested persons" of the Trust as defined in the 1940 Act. The Trustees are
responsible for the overall supervision of the operations of the Trust and the
Fund and perform the various duties imposed on the directors or trustees of
investment companies by the 1940 Act.
The Trustees are:
Arthur Zeikel*--President and Chief Investment Officer of the Manager and
MLAM; President and Director of Princeton Services, Inc.; Executive Vice
President of ML & Co.; Executive Vice President of Merrill Lynch; Director
of the Distributor.
Kenneth S. Axelson--Former Executive Vice President and Director, J.C.
Penney Company, Inc.
Herbert I. London--John M. Olin Professor of Humanities, New York
University.
18
<PAGE>
Robert R. Martin--Chairman, WTC Industries Inc.; former Chairman, Kinnard
Investments, Inc.
Joseph L. May--Attorney in private practice.
Andre F. Perold--Professor, Harvard Business School.
- --------
* Interested person, as defined in the 1940 Act, of the Trust.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Fund Asset Management, L.P. (the "Manager"), which is an affiliate of MLAM
and is owned and controlled by ML & Co., a financial services holding company,
acts as the Manager for the Fund and provides the Fund with management
services. The Manager or MLAM acts as the investment adviser to more than 100
other registered investment companies. MLAM also provides investment advisory
services to individual and institutional accounts. As of August 31, 1994, the
Manager and MLAM had a total of approximately $165.7 billion in investment
company and other portfolio assets under management, including accounts of
certain affiliates of the Manager.
Subject to the direction of the Trustees, the Manager is responsible for the
actual management of 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, subject to review by the Board of
Trustees. The Manager performs certain of the other administrative services and
provides all of the office space, facilities, equipment and necessary personnel
for management of the Trust and the Fund.
Vincent R. Giordano and Kenneth A. Jacob are the Portfolio Managers for the
Fund. Vincent R. Giordano has been a Portfolio Manager of the Manager and MLAM
since 1977 and a Senior Vice President of the Manager and MLAM since 1984.
Kenneth A. Jacob has been a Vice President of the Manager and MLAM since 1984.
Pursuant to the management agreement between the Manager and the Trust on
behalf of the Fund (the "Management Agreement"), the Manager is entitled to
receive compensation at the annual rate of 0.55% of the average daily net
assets of the Fund. Effective December 23, 1987, the Manager voluntarily agreed
to waive the amount of compensation set forth in the Management Agreement and
instead has agreed to receive from the Fund a monthly fee based upon the
average daily net assets of the Fund at the following annual rates: 0.55% of
the portion of the average daily net assets not exceeding $500 million; 0.525%
of the portion of the average daily net assets exceeding $500 million but not
exceeding $1.0 billion and 0.50% of the portion of the average daily net assets
exceeding $1.0 billion. For the fiscal year ended August 31, 1994, the total
fee payable by the Fund to the Manager was $4,567,938 (based upon average net
assets of approximately $846.3 million) and the effective rate was
approximately 0.54%.
The Management Agreement obligates the Trust and 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
19
<PAGE>
costs in connection with such services. For the year ended August 31, 1994, the
Fund reimbursed the Manager $101,015 for accounting services. For that period,
the annualized ratio of total expenses, excluding distribution fees to average
net assets was 0.62% for the Class A shares and 0.63% for the Class B shares;
no Class C shares or Class D shares had been issued during that year.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. ("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 an
annual fee of $11.00 per Class A or Class D shareholder account and $14.00 per
Class B or Class C shareholder account and the Transfer Agent is entitled to
reimbursement from the Fund for out-of-pocket expenses incurred by the Transfer
Agent under the Transfer Agency Agreement. For the fiscal year ended August 31,
1994, the Fund paid the Transfer Agent a total fee of $264,854 pursuant to the
Transfer Agency Agreement for providing transfer agency services.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
both 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.
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 upon the class
of shares selected by the investor under the Merrill Lynch Select Pricing
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 order by the Distributor. As to purchase orders received by
securities dealers prior to 4:15 P.M., New York time, which includes orders
received after the determination of the net asset value on the previous day,
the applicable offering price will be based on the net asset value determined
as of 4:15 P.M., New York time, on the day the orders are placed with the
Distributor, provided that the orders are received by the Distributor prior to
4:30 P.M., New York time, on that day. If the purchase orders are not received
by the Distributor prior to 4:30 P.M., New York time, such orders shall be
deemed received on the next business day. Any order may be rejected by the
Distributor or the Fund. The Fund or the Distributor may suspend the continuous
offering of the Fund's shares to the general public at any time in response to
conditions in the securities markets or otherwise and may thereafter resume
such offering from time to time. 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
Fund's Transfer Agent are not subject to the processing fee.
20
<PAGE>
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 CDSC and ongoing distribution fees. A
discussion of the factors that investors should consider in determining the
method of purchasing shares under the Merrill Lynch Select Pricing System is
set forth under the "Merrill Lynch Select Pricing System" on page 3.
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. 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, will be imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each
class of shares will be calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance
and/or distribution fees are paid. See "Distribution Plans" below. Each class
has different exchange privileges. See "Shareholder Services--Exchange
Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in
that the sales charges applicable to each class provide for the financing of
the distribution of the shares of the 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.
21
<PAGE>
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Select Pricing System.
<TABLE>
<CAPTION>
ACCOUNT
SALES MAINTENANCE DISTRIBUTION CONVERSION
CLASS CHARGE(1) FEE FEE FEATURE
- -----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
A Maximum 4.0% initial sales No No No
charge(/2/)(/3/)
- -----------------------------------------------------------------------------------------
B 0.25% 0.25% B shares convert to D
CDSC for a period of 4 years, at shares
a rate of 4.0% during the first automatically after
year, decreasing 1.0% annually approximately ten
to 0.0% years(/4/)
- -----------------------------------------------------------------------------------------
1.0% CDSC for one
C year 0.25% 0.35% No
- -----------------------------------------------------------------------------------------
Maximum 4.0% initial sales
D charge(/3/) 0.10% No No
</TABLE>
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs 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. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to up to a 1.00% CDSC for one year.
(4) The conversion period for dividend reinvestment shares is 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 C
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.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net
asset value plus varying sales charges (i.e., sales loads), as set forth
below.
<TABLE>
<CAPTION>
SALES LOAD AS DISCOUNT TO
SALES LOAD AS PERCENTAGE* OF SELECTED DEALERS
PERCENTAGE OF THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING 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>
22
<PAGE>
- --------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994. If the sales charge is
waived, such purchases will be subject to a CDSC of up to 1.0% if the shares
are redeemed within one year after purchase. Class A 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 rates: 0.75% on purchases of
$1,000,000 to $2,500,000; 0.40% on purchases of $2,500,001 to $3,500,000;
0.25% 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 initial 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.
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. During
the fiscal year ended August 31, 1994, the Fund sold 1,162,525 Class A shares
for aggregate net proceeds of $13,965,656. The gross sales charges for the sale
of Class A shares of the Fund for that year were $132,664, of which $13,053 and
$119,611 were received by the Distributor and Merrill Lynch, respectively. For
the fiscal year ended August 31, 1994, the Distributor received no CDSCs with
respect to redemption within one year after purchase of Class A 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. Investors that currently own Class A shares in a shareholder
account are entitled to purchase additional Class A shares in that account.
Class A shares are available at net asset value to corporate warranty insurance
reserve fund programs, provided that each program has $3 million or more
initially invested in MLAM-advised mutual funds. Also eligible to purchase
Class A shares at net asset value are participants in certain investment
programs including TMASM 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 ML & Co. and its
subsidiaries (the term "subsidiaries", when used herein, includes MLAM, the
Manager and certain other entities directly or indirectly owned or controlled
by ML & Co.) and their directors and employees and to members of the Boards of
MLAM-advised mutual funds, including the Fund. Certain persons who acquired
shares of certain MLAM-advised closed-end funds 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 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".
23
<PAGE>
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
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 in 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 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 and Class C
shares are subject to distribution fees of 0.25% and 0.35%, respectively, of
net assets as discussed below under "Distribution Plans". The proceeds from the
account maintenance fees are used to compensate Merrill Lynch for providing
continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for
selling Class B and Class C shares, from its own funds. The combination of the
CDSC and the ongoing distribution fee facilitates the ability of the Fund to
sell the Class B and Class C shares without a sales charge being deducted at
the time of purchase. Approximately ten years after issuance, Class B shares
will convert automatically into Class D shares of the Fund, which are subject
to a lower account maintenance fee and no distribution fee; Class B shares of
certain other MLAM-advised mutual funds into which exchanges may be made
convert into Class D shares automatically after approximately eight years. If
Class B shares of 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.
24
<PAGE>
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.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
YEAR SINCE OF DOLLAR AMOUNT
PURCHASE SUBJECT TO
PAYMENT MADE CHARGE
------------ ----------------
<S> <C>
0-1..................................................... 4.00%
1-2..................................................... 3.00%
2-3..................................................... 2.00%
3-4..................................................... 1.00%
4 and thereafter........................................ None
</TABLE>
For the fiscal year ended August 31, 1994, the distributor received CDSCs of
$704,845 with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch.
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 account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchases 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 or her 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).
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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. 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.
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 0.10% 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.
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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 1940 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
rates of 0.25%, 0.25% and 0.10%, respectively, of the average daily net assets
of the Fund attributable to shares of the relevant class in order to compensate
the Distributor and Merrill Lynch (pursuant to a sub-agreement) in connection
with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rates of 0.25%
and 0.35%, 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 1.0% of average
daily net assets of the Class B shares of the Fund under a 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 year ended August 31, 1994, the Fund paid the Distributor account
maintenance fees of $1,955,444 and distribution fees of $1,955,444 under the
Class B Distribution Plan. The Fund did not begin to offer shares of Class C or
Class D publicly until the date of this Prospectus. Accordingly, no payments
have been made pursuant to the Class C or Class D Distribution Plans prior to
the date of this Prospectus.
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 distribution-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
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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 CDSC 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, direct cash revenues for the period since
commencement of the offering of Class B shares exceeded direct cash expenses by
$18,048,454 (2.5% of Class B net assets at that date). At December 31, 1993,
the fully allocated accrual expenses incurred by the Distributor and Merrill
Lynch with respect to Class B shares for the period September 30, 1985, through
December 31, 1993 exceeded fully allocated accrual revenues for such period by
approximately $8,967,000 (1.1% of Class B net assets at that date).
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 Trustees of the Trust will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Trustees will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not
be used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those
Class B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class
D Shares".
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the 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 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.
----------------
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REDEMPTION OF SHARES
The Trust 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 redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value
of shares at the time of redemption may be more or less than the shareholder's
costs, 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, Financial Data Services, Inc., Transfer Agency
Mutual Fund Operations, P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations, 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.
The notice in either event requires the signature(s) of all persons in whose
name(s) the shares are registered, signed exactly as such name(s) appear(s) on
the Transfer Agent's register. The signature(s) on the redemption request must
be guaranteed by an "eligible guarantor institution" as such is defined in Rule
17Ad-15 under the Securities and Exchange Act of 1934, as amended, the
existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. Notarized signatures are not sufficient. In
certain instances, the Transfer Agent may require additional documents such as,
but not limited to, trust instruments, death certificates, appointments as
executor or administrator, or certificates of corporate authority. For
shareholders redeeming directly with the Transfer Agent, payments will be
mailed within seven days of receipt of a proper notice of redemption.
At various times the Trust may be requested to redeem Fund shares for which
it has not yet received good payment (e.g., cash, Federal Funds or certified
check drawn on a United States bank). The Trust may delay or cause to be
delayed the mailing of a redemption check until such time as it has assured
itself that good payment has been collected for the purchase of such Fund
shares which may take up to 10 days.
REPURCHASE
The Trust also will repurchase Fund shares through a shareholder's listed
securities dealer. The Trust normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after receipt of the order by the dealer, provided that the
request for repurchase is received by the dealer prior to the regular close of
business on the New York Stock Exchange on the day received and is received by
the Fund from such dealer not later than 4:30 P.M., New York time, on the same
day.
Dealers have the responsibility of submitting such repurchase requests to the
Trust not later than 4:30 P.M., New York time, in order to obtain that day's
closing price. These repurchase arrangements are for the
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<PAGE>
convenience of shareholders and do not involve a charge by the Trust (other
than any applicable CDSC). Securities firms that do not have selected dealer
agreements with the Distributor, however, may impose a charge on the
shareholder for transmitting the notice of repurchase to the Trust. Merrill
Lynch may charge its customers a processing fee (presently $4.85) to confirm a
repurchase of shares to such customers. Redemptions directly through the
Transfer Agent are not subject to the processing fee. The Trust reserves the
right to reject any order for repurchase, which right of rejection might
adversely affect shareholders seeking redemption through the repurchase
procedure. However, a shareholder whose order for repurchase is rejected by the
Trust may redeem Fund shares as set forth above.
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 Trust offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Fund. Full details as to
each of such services and instructions as to how to participate in the various
services or plans, or to change options with respect thereto can be obtained
from the Trust by calling the telephone number on the cover page hereof or from
the Distributor or Merrill Lynch. Included in such services are the following:
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an "Investment Account" and will receive statements, at
least quarterly, from the Transfer Agent. These statements will serve as
transaction confirmations for automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gains
distributions. These statements also will 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 gains distributions. A shareholder may make
additions to his or her Investment Account at any time by mailing a check
directly to the Transfer Agent. Shareholders 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
may be opened at the Transfer Agent. Shareholders considering transferring
their Class A or Class D shares from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the Class A or
Class D shares are to be transferred will not take delivery of shares of the
Fund, a shareholder either must redeem the Class A or Class D shares (paying
any applicable CDSC) so that the cash proceeds can be transferred to the
account at the new firm or such shareholder must continue to maintain
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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.
Exchange Privilege. Shareholders of each class of shares of the Fund each
have an exchange privilege with certain other MLAM-advised mutual funds. There
is currently no limitation on the number of times a shareholder may exercise
the exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing 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 will be exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC will be exchangeable on the
basis of relative net asset value per share without the payment of any CDSC
that might otherwise be due upon redemption of the shares of the 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 will be exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of 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.
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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 privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services--Exchange
Privilege" in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of Class
A and Class D shares under the Merrill Lynch Mutual Fund Adviser ("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 Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund, without a sales charge, at the net asset
value per share at the close of business on the monthly payment date for such
dividends and distributions. A shareholder may at any time, by notifying the
Transfer Agent in writing or by telephone (1-800-MER-FUND), elect to have
subsequent dividends or both dividends and capital gains distributions paid in
cash, rather than reinvested, in which event payment will be mailed monthly.
Cash payments can also be directly deposited to the shareholders 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 or her Investment Account
through automatic payment by check or through automatic payment by direct
deposit to his or her bank account on either a monthly or quarterly basis. A
Class A or Class D shareholder whose shares are held within a CMA(R) or CBA(R)
Account may elect to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the 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 pre-arranged
charges of $50 or more to his or her regular bank account. Alternatively,
investors who maintain CMA (R) accounts may arrange to have periodic
investments made in the Fund in their CMA (R) accounts or in certain related
accounts in amounts of $100 or more through the CMA (R) Automated Investment
Program.
PORTFOLIO TRANSACTIONS
Subject to the policies established by the Trustees of the Trust, the Manager
is primarily responsible for the execution of the Fund's portfolio
transactions. The Trust has no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities of the Fund.
Municipal Bonds and other securities in which the Fund invests are traded
primarily in the over-the-counter market. Where possible, the Trust deals
directly with the dealers who make a market in the securities involved except
in those circumstances where better prices and execution are available
elsewhere. It is the policy of the Trust to obtain the best net results in
conducting portfolio transactions for the Fund, taking into account such
factors
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<PAGE>
as price (including the applicable dealer spread or commission), the size, type
and difficulty of the transaction involved, the firm's general execution and
operational facilities, 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 sale of
shares of the Fund may be taken into consideration as a factor in the selection
of brokers or dealers to execute portfolio transactions for the Fund. The
portfolio securities of the Fund are generally traded on a principal basis and
do not normally 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 1940 Act, persons affiliated with the
Trust, including Merrill Lynch, are prohibited from dealing with the Trust as a
principal in the purchase and sale of securities unless such trading is
permitted by an exemptive order issued by the Commission. The Trust has
obtained an exemptive order permitting it to engage in certain principal
transactions with Merrill Lynch involving high quality short-term Municipal
Bonds subject to certain conditions. In addition, the Trust may not purchase
securities, including Municipal Bonds, for the Fund during the existence of any
underwriting syndicate of which Merrill Lynch is a member except pursuant to
procedures approved by the Trustees of the Trust which comply with rules
adopted by the Commission. Affiliated persons of the Trust may serve as its
broker in over-the-counter transactions conducted by the Fund on an agency
basis only.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The net investment income of the Fund is declared as dividends following the
normal close of trading on the New York Stock Exchange (currently 4:00 P.M.)
prior to the determination of the net asset value on that day. The net
investment income of the Fund for dividend purposes consists of interest earned
on portfolio securities, less expenses, in each case computed since the most
recent determination of net asset value. Expenses of the Fund, including the
management fees and the account maintenance and distribution fees, are accrued
daily. Dividends of net investment income are declared daily and reinvested
monthly in the form of additional full and fractional shares of the Fund at net
asset value unless the shareholder elects to receive such dividends in cash.
Shares will accrue dividends as long as they are issued and outstanding. Shares
are issued and outstanding from the settlement date of a purchase order to the
day prior to the settlement date of a redemption order.
All net realized long- or short-term capital gains, if any, are declared and
distributed to the Fund's shareholders at least annually. Capital gains
distributions will be automatically invested in shares unless the shareholder
elects to receive such distributions in cash.
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".
See "Shareholder Services" for information as to how to elect either dividend
reinvestment or cash payments. Portions of dividends and distributions which
are taxable to shareholders as described below are subject to income tax
whether they are reinvested in shares of the Fund or received in cash.
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TAXES
The Trust intends to continue to qualify the Fund 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, in any
taxable year in which it distributes at least 90% of its taxable net income and
90% of its tax-exempt net income, the Fund (but not its shareholders) will not
be subject to Federal income tax to the extent that it distributes (see below)
its net investment income and net realized capital gains. The Trust intends to
cause the Fund to distribute substantially all of such income.
To the extent that the dividends distributed to the Fund's Class A, Class B,
Class C and Class D shareholders (together the "shareholders") are derived from
interest income exempt from Federal tax and are properly designated as "exempt-
interest dividends" by the Trust, they will be excludable from a shareholder's
gross income for Federal income tax purposes. Exempt-interest dividends are
included, however, in determining the portion, if any, of a person's social
security and railroad retirement benefits subject to Federal income taxes. The
portion of such exempt-interest dividends paid from interest received by the
Fund from California Municipal Bonds will be exempt from California income
taxes if, at the close of each quarter of the Fund's taxable year, at least 50%
of the value of the Fund's total assets consists of California Municipal Bonds.
The Trust intends to invest at least 50% of the Fund's assets in California
Municipal Bonds at all times. Shareholders subject to income taxation by states
other than California will realize a lower after-tax rate of return than
California shareholders since the dividends distributed by the Fund will
generally not be exempt, to any significant degree, from income taxation by
such other states. The Trust will inform shareholders annually as to the
portion of the Fund's distributions which constitutes exempt-interest dividends
and the portion which is exempt from California income taxes. Interest on
indebtedness incurred or continued to purchase or carry Fund shares is not
deductible for Federal or California personal income tax purposes to the extent
attributable to exempt-interest dividends. Persons who may be "substantial
users" (or "related persons" of substantial users) of facilities financed by
industrial development bonds or private activity bonds held by the Fund should
consult their tax advisers before purchasing Fund shares.
Exempt-interest dividends paid to a corporate shareholder will be subject to
California state franchise tax.
To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for Federal and California state income tax
purposes. Such distributions are not eligible for the dividends-received
deduction for corporations. Distributions, if any, of net long-term capital
gains from the sale of securities or from certain transactions in futures or
options ("capital gain dividends") are taxable as long-term capital gains for
Federal income tax purposes, regardless of the length of time the shareholder
has owned Fund shares and, for California income tax purposes, are treated as
capital gains which are taxed at ordinary income tax rates. Under the Revenue
Reconciliation Act of 1993, all or a portion of the Fund's gain from the sale
or redemption of tax-exempt obligations purchased at a market discount will be
treated as ordinary income rather than capital gain. This rule may increase the
amount of ordinary income dividends received by shareholders. Distributions in
excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming the shares are
held as a capital asset). Any loss upon the sale or exchange of Fund shares
held for six months or less will be treated as long-term
34
<PAGE>
capital loss to the extent of any capital gain dividends received by the
shareholder. In addition, such loss will be disallowed to the extent of any
exempt-interest dividends received by the shareholder. 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.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies
to interest received on "private activity bonds" issued after August 7, 1986.
Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units (e.g.,
bonds used for industrial development or housing purposes). Income received on
such bonds is classified as an item of "tax preference", which could subject
investors in such bonds, including shareholders of the Fund, to an alternative
minimum tax. The Fund will purchase such "private activity bonds", and the
Trust will report to shareholders within 60 days after the Fund's taxable year-
end, the portion of the Fund's dividends declared during the year which
constitutes an item of tax preference for alternative minimum tax purposes. The
Code further provides that corporations are subject to an alternative minimum
tax based, in part, on certain differences between taxable income as adjusted
for other tax preferences and "adjusted current earnings" (which more closely
reflect a corporation's economic income). Because an exempt-interest dividend
paid by the Fund will be included in adjusted current earnings, a corporate
shareholder may be required to pay alternative minimum tax on exempt-interest
dividends paid by the Fund.
The Revenue Reconciliation Act of 1993 has added new marginal tax brackets of
36% and 39.6% for individuals and has created a graduated structure of 26% and
28% for the alternative minimum tax applicable to individual taxpayers. These
rate increases may affect an individual investor's after-tax return from an
investment in the Fund as compared with such investor's return from taxable
investments.
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 such 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 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.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
35
<PAGE>
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and applicable California income
tax laws. For the complete provisions, reference should be made to the
pertinent Code sections, Treasury regulations promulgated thereunder and
California income tax laws. The Code and the Treasury regulations, as well as
the California tax laws, are subject to change by legislative or administrative
action either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding the
availability of any exemptions from state and local taxes (other than those
imposed by California) and with specific questions as to Federal, foreign,
state or local taxes.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return, yield
and tax equivalent yield for various specified time periods in advertisements
or information furnished to present or prospective shareholders. Average annual
total return, yield and tax equivalent yield are computed separately for 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 will 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 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
36
<PAGE>
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 or to reduced sales charges in the case of Class A
or Class D shares, the performance data may take into account the reduced, and
not the maximum, sales charge or may not take into account the CDSC and
therefore may reflect greater total return since, due to the reduced sales
charges or waiver of the CDSC, a lower amount of expenses is deducted. See
"Purchase of Shares". 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 will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per
share on the last day of the period. Tax equivalent yield quotations will be
computed by dividing (a) the part of the Fund's yield that is tax-exempt by (b)
one minus a stated tax rate and (c) adding the result to that part, if any, of
the Fund's yield that is not tax-exempt. The yield for the 30-day period ended
August 31, 1994, was 5.49% for Class A shares and 5.22% for Class B shares and
tax-equivalent yield for the same period (based on a Federal income tax rate of
28%) was 7.63% for Class A shares and 7.25% for Class B shares; no shares of
Class C or Class D shares had been issued during that period.
Total return, yield and tax equivalent yield figures are based on the Fund's
historical performance and are not intended to indicate future performance. The
Fund's total return, yield and tax equivalent yield will vary depending on
market conditions, the securities comprising the 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 performance data
published by Lipper Analytical Services, Inc., Morningstar Publications, Inc.
("Morningstar"), and CDA Investment Technology, Inc., or to data contained in
publications such as Money Magazine, U.S. News & World Report, Business Week,
Forbes Magazine and Fortune Magazine. From time to time, the Fund may include
the Fund's Morningstar risk-adjusted performance ratings in advertisements 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.
ADDITIONAL INFORMATION
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 4:15 P.M., New York time, on each day during which
the New York Stock Exchange is open for trading. 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 management fees and distribution fees, are accrued daily.
37
<PAGE>
The per share net asset value of the 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 asset value of the
classes will tend to converge immediately after the payment of dividends or
distributions which will differ by approximately the amount of the expense
accrual differentials between the classes.
ORGANIZATION OF THE TRUST
The Trust is an unincorporated business trust organized on March 20, 1985
under the laws of Massachusetts. It is an open-end investment company comprised
of separate series ("Series"), each of which is a separate portfolio offering
shares to selected groups of purchasers. On December 22, 1987, the Fund changed
its name from "Merrill Lynch California Tax-Exempt Fund" to "Merrill Lynch
California Municipal Bond Fund". The Trustees are authorized to create an
unlimited number of Series and, with respect to each Series, to issue an
unlimited number of full and fractional shares of different classes.
Shareholder approval is not required for the authorization of additional Series
or classes of a Series of the Trust. At the date of this Prospectus, the shares
of the Fund are divided into Class A, Class B, Class C and Class D Shares.
Class A, Class B, Class C and Class D shares represent interests in the same
assets of the 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
associated with such shares, and Class B and Class C shares bear certain
expenses related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to account maintenance and
distribution expenditures as applicable. See "Purchase of Shares". The Trust
has received an order from the Commission permitting the issuance and sale of
multiple classes of shares. The order permits the Trust to issue additional
classes of shares of any Series if the Board of Trustees deems such issuance to
be in the best interests of the Trust.
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Trustees (to the
extent hereafter provided) and on other matters submitted to the vote of
shareholders. There normally will be no meetings of shareholders for the
purpose of electing Trustees unless and until such time as less than a majority
of the Trustees holding office have been elected by shareholders, at which time
the Trustees then in office will call a shareholders' meeting for the election
of Trustees. Shareholders 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 Trust will be required to call a special
meeting of shareholders of a Series in accordance with the requirements of the
1940 Act to seek approval of new management and advisory arrangements, of a
material increase in distribution fees or of a change in the fundamental
policies, objectives or restrictions of a Series. Except as set forth above,
the Trustees shall continue to hold office and appoint successor Trustees. Each
issued and outstanding share is entitled to participate equally in dividends
and distributions declared by the respective Series and in net assets of such
Series upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities except that, as noted above, the Class B, Class C and
Class D shares bear certain additional expenses. The obligations and
liabilities of a particular Series are restricted to the assets of that Series
and do not extend to the assets of the Trust generally. The shares of each
Series, when issued, will be fully-paid and non-assessable by the Trust.
38
<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
copies of each report and communication for all of the shareholder's related
accounts the shareholder should notify in writing:
Financial Data Services, Inc. Attn: TAMFO 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 Financial Data Services,
Inc. at 800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Trust at the address or
telephone number set forth on the cover page of this Prospectus.
----------------
The Declaration of Trust establishing the Trust, dated March 20, 1985, 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 "Merrill Lynch California Municipal Series Trust" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to their
private property for the satisfaction of any obligation or claim of the Trust,
but the "Trust Property" (as defined in the Declaration) only shall be liable.
39
<PAGE>
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40
<PAGE>
MERRILL LYNCH CALIFORNIA MUNICIPAL BOND FUND--AUTHORIZATION FORM (PART 1)
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[_] Class A shares[_] Class B shares[_] Class C
shares [_] Class D shares
of Merrill Lynch California Municipal Bond Fund and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $ . . . . . . payable to 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 OPTION
Ordinary Income Dividends Long-Term Capital
Gains
Select One:
[_] Reinvest
Select One:
[_] Reinvest
[_] Cash
[_] 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 California Municipal Bond Fund
Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE) [_] CHECKING [_] SAVINGS
Name on your account .....................................................
Bank Name ................................................................
Bank Number ................. Account Number .......................
Bank Address .............................................................
I agree that this authorization will remain in effect until I provide written
notification to 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.
41
<PAGE>
MERRILL LYNCH CALIFORNIA MUNICIPAL BOND FUND--AUTHORIZATION FORM (PART 1) --
(CONTINUED)
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed in the prospectus
under "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 UNDERREPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
................................ ................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
Dear Sir/Madam:
.............., 19......
Date of Initial Purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch California Municipal Bond Fund 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 California
Municipal Bond Fund 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 California Municipal Bond Fund 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:
Merrill Lynch California Municipal
Bond Fund ................................
c/o Financial Data Services, Inc. Dealer Name and Address
Transfer Agency Mutual Funds Operations
P.O. Box 45289 By .............................
Jacksonville, Florida 32232-5289 Authorized Signature of Dealer
[ ][ ][ ] [ ][ ][ ][ ] .............
Branch-Code F/C No. F/C Last Name
[ ][ ][ ] [ ][ ][ ][ ][ ]
Dealer's Customer A/C No.
42
<PAGE>
MERRILL LYNCH CALIFORNIA MUNICIPAL BOND FUND--AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR
AUTOMATIC INVESTMENT PLANS 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 CLASS 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 California
Municipal Bond Fund, at cost or current offering price. Withdrawals to 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 FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING
THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name of your Account......................................................
Bank Name.................................................................
Bank Number................... Account Number.......................
Bank Address..............................................................
..........................................................................
Signature of Depositor............................ Date.............
Signature of Depositor....................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
43
<PAGE>
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account described below each month
to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch California Municipal Bond Fund subject to the terms set forth
below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
AUTHORIZATION TO HONOR ACH DEBITS
FINANCIAL DATA SERVICES, INC. DRAWN BY FINANCIAL DATA SERVICES,
INC.
You are hereby authorized to draw an
ACH debit each month on my bank
account for investment in Merrill
Lynch Healthcare Fund, Inc. as
indicated below:
To..........................Bank
Amount of each check or ACH debit
$............................ (Investor's Bank)
Bank Address....................
Account Number ..............
City.... State.... Zip Code....
Please date and invest ACH debits on As a convenience to me, I hereby
the 20th of each month beginning request and authorize you to pay and
charge to my account ACH debits
drawn on my account by and payable
to Financial Data Services, Inc., I
agree that your rights in respect to
each such debit shall be the same as
if it were a check drawn on you and
signed personally by me. This
authority is to remain in effect
until revoked by me in writing.
Until you receive such notice, you
shall be fully protected in honoring
any such debit. I further agree that
if any such debit be dishonored,
whether with or without cause and
whether intentionally or
inadvertently, you shall be under no
liability.
Please date and invest ACH debits on
the 20th of each month beginning
................................
...........(month)
or as soon thereafter as possible.
I agree that you are drawing these
ACH debits voluntarily at my request
and that you shall not be liable for
any loss arising from any delay in
preparing or failure to prepare any
such check or debit. If I change
banks or desire to terminate or
suspend this program, I agree to
notify you promptly in writing. I
hereby authorize you to take any
action to correct erroneous ACH
debits of my bank account or
purchases of fund shares including
liquidating shares of the Fund and
crediting my bank account. I further
agree that if a debit is not honored
upon presentation, 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
....... ................
Bank Signature of Depositor
Account
Number
(If joint account,
both must sign)
....... ................
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.
44
<PAGE>
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45
<PAGE>
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46
<PAGE>
MANAGER
Fund Asset Management
Administrative Offices: 800 Scudders Mill Road Plainsboro, New Jersey
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 9011 Princeton, New Jersey 08543-9011
CUSTODIAN
The Bank of New York 90 Washington Street, 12th Floor New York, New York 10268
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices: Transfer Agency Mutual Fund Operations 4800 Deer Lake
Drive East Jacksonville, Florida 32246-6484
Mailing Address: P.O. Box 45289Jacksonville, 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
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE TRUST, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Merrill Lynch Select Pricing SM System..................................... 3
Financial Highlights....................................................... 8
Investment Objective and Policies.......................................... 9
Potential Benefits........................................................ 11
Special and Risk Considerations Relating to California Municipal Bonds.... 11
Description of Municipal Bonds............................................ 12
Call Rights............................................................... 14
When-Issued Securities and Delayed Delivery Transactions.................. 14
Financial Futures Transaction and Options................................. 14
Repurchase Agreements .................................................... 17
Investment Restrictions................................................... 17
Management of the Trust.................................................... 18
Trustees.................................................................. 18
Management and Advisory Arrangements...................................... 19
Transfer Agency Services.................................................. 20
Purchase of Shares......................................................... 20
Initial Sales Charge Alternatives--
Class A and Class D Shares............................................... 22
Deferred Sales Charge Alternatives--
Class B and Class C Shares............................................... 24
Distribution Plans......................................................... 27
Limitations on the Payment of Deferred Sales Charges....................... 28
Redemption of Shares....................................................... 29
Redemption................................................................ 29
Repurchase................................................................ 29
Reinstatement Privilege--
Class A and Class D Shares............................................... 30
Shareholder Services....................................................... 30
Portfolio Transactions..................................................... 32
Distributions and Taxes.................................................... 33
Distributions............................................................. 33
Taxes..................................................................... 34
Performance Data........................................................... 36
Additional Information..................................................... 37
Determination of Net Asset Value.......................................... 37
Organization of the Trust................................................. 38
Shareholder Reports....................................................... 39
Shareholder Inquiries..................................................... 39
Authorization Form......................................................... 41
</TABLE>
Code #10327-1094
Prospectus
(ART)
- --------------------------------------------------------------------------------
MERRILL LYNCH
CALIFORNIA
MUNICIPAL BOND
FUND
MERRILL LYNCH
CALIFORNIA MUNICIPAL
SERIES TRUST
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
- -----------------------------------
MERRILL LYNCH CALIFORNIA MUNICIPAL BOND FUND
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch California Municipal Bond Fund (the "Fund") is a series of
Merrill Lynch California Municipal Series Trust (the "Trust"), an open-end
investment company organized as a Massachusetts business trust. The investment
objective of the Fund is to provide shareholders with as high a level of
income exempt from Federal and California income taxes as is consistent with
prudent investment management. The Fund seeks to achieve its objective, while
providing investors with the opportunity to invest primarily in a diversified
portfolio of long-term obligations issued by or on behalf of the State of
California, its political subdivision agencies and instrumentalities
("California Municipal Bonds"). There can be no assurance that the investment
objective of the Fund will be realized.
----------------
Pursuant to the Merrill Lynch Select Pricing SM 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 Pricing System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
----------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated October
21, 1994 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into
the Prospectus. Capitalized terms used but not defined herein have the same
meanings as in the Prospectus.
----------------
FUND ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
----------------
The date of this Statement of Additional Information is October 21, 1994
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide shareholders with as high
a level of income exempt from Federal and California income taxes as is
consistent with prudent investment management. The Fund seeks to achieve its
objective while providing investors with the opportunity to invest in a
portfolio of securities consisting primarily of long-term obligations issued by
or on behalf of the State of California, its political subdivisions, agencies
and instrumentalities and obligations of other qualifying issuers, such as
issuers located in Puerto Rico, the Virgin Islands and Guam, which pay interest
exempt, in the opinion of bond counsel to the issuer, from Federal and
California income taxes. Obligations exempt from Federal income taxes are
referred to herein as "Municipal Bonds" and obligations exempt from both
Federal and California income taxes are referred to as "California Municipal
Bonds". Unless otherwise indicated, references to Municipal Bonds shall be
deemed to include California Municipal Bonds. Under normal circumstances, at
least 65% of the Fund's total assets will be invested in California Municipal
Bonds. At times, the Fund will seek to hedge its portfolio through the use of
futures transactions to reduce volatility in the net asset value of Fund
shares. Reference is made to "Investment Objective and Policies" in the
Prospectus for a discussion of the investment objective and policies of the
Fund.
Municipal Bonds may include general obligation bonds of the State and its
political subdivisions, revenue bonds of utility systems, highways, bridges,
port and airport facilities, colleges, hospitals, housing facilities, etc., and
industrial development bonds or private activity bonds. The interest on such
obligations may bear a fixed rate or be payable at a variable or floating rate.
At least 80% of the Municipal Bonds purchased by the Fund will be what are
commonly referred to as "investment grade" securities, which are obligations
rated at the time of purchase within the four highest quality ratings as
determined by either Moody's Investors Service, Inc. ("Moody's") (currently
Aaa, Aa, A and Baa), Standard & Poor's Corporation ("Standard & Poor's")
(currently AAA, AA, A and BBB) or Fitch Investors Service, Inc. ("Fitch")
(currently AAA, AA, A and BBB). If unrated, such securities will possess
creditworthiness comparable, in the opinion of the manager of the Fund, Fund
Asset Management, L.P. (the "Manager"), to other obligations in which the Fund
may invest.
The Fund ordinarily does not intend to realize investment income from
securities other than California Municipal Bonds. However, to the extent that
suitable California Municipal Bonds are not available for investment by the
Fund, the Fund may purchase Municipal Bonds issued by other states, their
agencies and instrumentalities, the interest income on which is exempt, in the
opinion of bond counsel, from Federal taxation. The Fund also may invest in
securities not issued by or on behalf of a state or territory or by an agency
or instrumentality thereof, if the Fund nevertheless believes such securities
to be exempt from Federal income taxation ("Non-Municipal Tax-Exempt
Securities"). Non-Municipal Tax-Exempt Securities may include securities issued
by other investment companies that invest in municipal bonds, to the extent
permitted by the Investment Company Act of 1940, as amended (the "1940 Act").
Non-Municipal Tax-Exempt Securities also could include trust certificates or
other derivative instruments evidencing interests in one or more Municipal
Bonds.
Except when acceptable securities are unavailable as determined by the
Manager, the Fund, under normal circumstances, will invest at least 65% of the
Fund's total assets in California Municipal Bonds. For temporary periods or to
provide liquidity, the Fund has the authority to invest as much as 35% of its
total assets in tax-exempt or taxable money market obligations with a maturity
of one year or less (such short-term obligations being referred to herein as
"Temporary Investments"), except that taxable Temporary
2
<PAGE>
Investments shall not exceed 20% of the Fund's total assets. Accordingly, the
Fund at all times will have at least 80% of its total assets invested in
securities exempt from Federal income taxation. However, interest received on
certain otherwise tax-exempt securities which are classified as "private
activity bonds" (in general bonds that benefit non-governmental entities) may
be subject to an alternative minimum tax. The Fund may purchase such private
activity bonds. See "Distributions and Taxes". In addition, the Fund reserves
the right to invest temporarily a greater portion of its total assets in
Temporary Investments for defensive purposes, when, in the judgment of the
Manager, market conditions warrant. The investment objective of the Fund set
forth in this paragraph are fundamental policies of the Fund which may not be
changed without a vote of a majority of the outstanding voting securities, as
defined in the 1940 Act, of the Fund. The Fund's hedging strategies are not
fundamental policies and may be modified by the Trustees of the Trust without
the approval of the Fund's shareholders.
Municipal Bonds may at times be purchased or sold on a delayed delivery basis
or on a when-issued basis. These transactions arise when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future, often a month or more after the purchase. The payment obligation and
the interest rate are each fixed at the time the buyer enters into the
commitment. The Fund will make only commitments to purchase such securities
with the intention of actually acquiring the securities, but the Fund may sell
these securities prior to the settlement date if it is deemed advisable.
Purchasing Municipal Bonds on a when-issued basis involves the risk that the
yields available in the market when the delivery takes place may actually be
higher than those obtained in the transaction itself; if yields so increase,
the value of the when-issued obligation generally will decrease. The Fund will
maintain a separate account at its custodian bank consisting of cash, cash
equivalents or high-grade, liquid Municipal Bonds or Temporary Investments
(valued on a daily basis) equal at all times to the amount of the when-issued
commitment.
The Fund may invest in Municipal Bonds (and Non-Municipal Tax-Exempt
Securities) the return on which is based on a particular index of value or
interest rates. For example, the Fund may invest in Municipal Bonds that pay
interest based on an index of Municipal Bond interest rates or based on the
value of gold or some other commodity. The principal amount payable upon
maturity of certain Municipal Bonds also may be based on the value of an index.
To the extent the Fund invests in these types of Municipal Bonds, the Fund's
return on such Municipal Bonds will be subject to risk with respect to the
value of the particular index. Also, the Fund may invest in so-called "inverse
floating obligations" or "residual interest bonds" on which the interest rates
typically decline as market rates increase and increase as market rates
decline. Such securities have the effect of providing a degree of investment
leverage, since they may increase or decrease in value in response to changes,
as an illustration, in market interest rates at a rate which is a multiple
(typically two) of the rate at which fixed-rate long-term tax exempt securities
increase or decrease in response to such changes. As a result, the market
values of such securities will generally be more volatile than the market
values of fixed-rate tax exempt securities. To seek to limit the volatility of
these securities, the Fund may purchase inverse floating obligations with
shorter term maturities or which contain limitations on the extent to which the
interest rate may vary. The Manager believes that indexed and inverse floating
obligations represent a flexible portfolio management instrument for the Fund
which allows the Manager to vary the degree of investment leverage relatively
efficiently under different market conditions. Certain investments in such
obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 10% of the Fund's total assets.
The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a "Call
Right"). A holder of a Call Right may exercise such right to
3
<PAGE>
require a mandatory tender for the purchase of related Municipal Bonds, subject
to certain conditions. A Call Right that is not exercised prior to maturity of
the related Municipal Bond will expire without value. The economic effect of
holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security. Certain investments in
such obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 10% of the Fund's total assets.
The Fund may invest up to 20% of its total assets in Municipal Bonds which
are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch or
which, in the Manager's judgment, possess similar credit characteristics ("high
yield securities"). See Appendix II--"Ratings of Municipal Bonds"--for
additional information regarding ratings of debt securities. The Manager
considers the ratings assigned by Standard & Poor's, Moody's or Fitch as one of
several factors in its independent credit analysis of issuers.
High yield securities are considered by Standard & Poor's, Moody's and Fitch
to have varying degrees of speculative characteristics. Consequently, although
high yield securities can be expected to provide higher yields, such securities
may be subject to greater market price fluctuations and risk of loss of
principal than lower yielding, higher rated debt securities. Investments in
high yield securities will be made only when, in the judgment of the Manager,
such securities provide attractive total return potential relative to the risk
of such securities, as compared to higher quality debt securities. The Fund
generally will not invest in debt securities in the lowest rating categories
(those rated CC or lower by Standard & Poor's or Fitch or Ca or lower by
Moody's) unless the Manager believes that the financial condition of the issuer
or the protection afforded the particular securities is stronger than would
otherwise be indicated by such low ratings. The Fund does not intend to
purchase debt securities that are in default or which the Manager believes will
be in default.
Issuers of high yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if
such issuers or obligors are highly leveraged. During such periods, such
issuers may not have sufficient revenues to meet their interest payment
obligations. The issuer's ability to service its debt obligations also may be
adversely affected by specific issuer developments, or the issuer's inability
to meet specific projected business forecasts, or the unavailability of
additional financing. The risk of loss due to default by the issuer is
significantly greater for the holders of high yield securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
High yield securities frequently have call or redemption features that would
permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all high yield securities, there is no established
secondary market for many of these securities, and the Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. To the extent that a secondary trading market for high
yield securities does exist, it generally is not as liquid as the secondary
market for higher rated securities. Reduced secondary market liquidity may have
an adverse impact on market price
4
<PAGE>
and the Fund's ability to dispose of particular issues when necessary to meet
the Fund's liquidity needs or in response to a specific economic event such as
a deterioration in the creditworthiness of the issuer. Reduced secondary market
liquidity for certain securities also may make it more difficult for the Fund
to obtain accurate market quotations for purposes of valuing the Fund's
portfolio. Market quotations are generally available on many high yield
securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.
It is expected that a significant portion of the high yield securities
acquired by the Fund will be purchased upon issuance, which may involve special
risks because the securities so acquired are new issues. In such instances the
Fund may be a substantial purchaser of the issue and therefore have the
opportunity to participate in structuring the terms of the offering. Although
this may enable the Fund to seek to protect itself against certain of such
risks, the considerations discussed herein would nevertheless remain
applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to adversely affect the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent that it is required to seek recovery upon a default on a portfolio
holding or participate in the restructuring of the obligation.
The portfolio turnover for the fiscal years ended August 31, 1992, 1993 and
1994 were 52.31%, 61.24% and 75.66%, respectively. High portfolio turnover
involves correspondingly greater transaction costs in the form of dealer
spreads and brokerage commissions, which are borne directly by the Fund.
DESCRIPTION OF MUNICIPAL BONDS AND TEMPORARY INVESTMENTS
Set forth below is a description of the Municipal Bonds and Temporary
Investments in which the Fund may invest. Information with respect to ratings
assigned to tax-exempt obligations which the Fund may purchase is set forth in
Appendix II to this Statement of Additional Information.
DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction of a wide range of public facilities,
refunding of outstanding obligations and obtaining funds for general operating
expenses and loans to other public institutions and facilities. In addition,
certain types of industrial development bonds ("IDBs") or private activity
bonds are issued by or on behalf of public authorities to finance or refinance
various privately owned or operated facilities, including certain facilities
for the local furnishing of electric energy or gas, sewage facilities, solid
waste disposal facilities and other specialized facilities. Such obligations
are included within the term California Municipal Bonds if the interest paid
thereon is, in the opinion of bond counsel, excluded from gross income for
Federal income tax purposes and such obligations are issued by the State of
California, its political subdivisions, agencies and instrumentalities or are
obligations of other qualifying issuers. Other types of IDBs or private
activity bonds, the proceeds of which are used for the construction, equipment
or improvement of privately operated industrial or commercial facilities, may
constitute Municipal Bonds, although the current Federal tax laws place
substantial limitations on the size of such issues.
In the case of certain community facilities district special tax (or "Mello-
Roos"), tax increment (or tax allocation) and assessment bonds, the payment of
the special tax, tax increment and assessments may be
5
<PAGE>
secured solely by remedies against the land (such as by foreclosure) and not
against the individual property owner, which could be time-consuming and
costly.
The two principal classifications of Municipal Bonds are "general obligation"
bonds and "revenue" bonds. General obligation bonds are secured by the issuer's
pledge of faith, credit and taxing power for the repayment of principal and the
payment of interest. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special or limited tax or other specific revenue source such as
payments from the user of the facility being financed. IDBs and, in the case of
bonds issued after April 15, 1986, private activity bonds, are in most cases
revenue bonds and generally do not constitute the pledge of the credit or
taxing power of the issuer of such bonds. Generally, the repayment of the
principal of and the payment of the interest on such IDBs and private activity
bonds depends solely on the ability of the user of the facility financed by the
bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment unless a line of
credit, bond insurance or other security is furnished. The Fund also may invest
in "moral obligation" bonds. If an issuer of moral obligation bonds is unable
to meet its obligations, the repayment of such bonds becomes a moral
commitment, but not a legal obligation, of the state or municipality in
question.
Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called
"lease obligations") relating to such equipment, land or facilities. Although
lease obligations do not constitute general obligations of the issuer for which
the issuer's unlimited taxing power is pledged, a lease obligation is
frequently backed by the issuer's covenant to budget for, appropriate and make
the payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses, which provide that the issuer has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Although "non-
appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that has not yet
developed the depth of marketability associated with more conventional
securities. Certain investments in lease obligations may be illiquid. The Fund
may not invest in illiquid lease obligations if such investments together with
all other illiquid investments, would exceed 10% of the Fund's total assets.
The Fund may, however, invest without regard to such limitation in lease
obligations which the Manager, pursuant to the guidelines which have been
adopted by the Trustees and subject to the supervision of the Board of
Trustees, determines to be liquid. The Manager will deem lease obligations
liquid if they are publicly offered and have received an investment grade
rating of Baa or better by Moody's, or BBB or better by Standard & Poor's or
Fitch. Unrated lease obligations, or those rated below investment grade, will
be considered liquid if the obligations come to the market through an
underwritten public offering and at least two dealers are willing to give
competitive bids. In reference to the latter, the Manager must, among other
things, also review the creditworthiness of the municipality obligated to make
payment under the lease obligation and make certain specified determinations
based on such factors as the existence of a rating or credit enhancement (such
as insurance), the frequency of trades or quotes for the obligation and the
willingness of dealers to make a market in the obligation.
Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the money market and of the municipal bond market, the
size of a particular offering, the financial condition of the issuer, the
general conditions of the Municipal Bond market, the maturity of the
obligation, and the rating
6
<PAGE>
of the issue. The ability of the Fund to achieve its investment objective is
also dependent on the continuing ability of the issuers of the bonds in which
the Fund invests to meet their obligations for the payment of interest and
principal when due. There are variations in the risks involved in holding
Municipal Bonds, both within a particular classification and between
classifications, depending on numerous factors. Furthermore, the rights of
owners of Municipal Bonds and the obligations of the issuer of such Municipal
Bonds may be subject to applicable bankruptcy, insolvency and similar laws and
court decisions affecting the rights of creditors generally.
DESCRIPTION OF TEMPORARY INVESTMENTS
The Fund may invest in short-term tax-free and taxable securities subject to
the limitations set forth under "Investment Objective and Policies". The tax-
exempt money market securities may include municipal notes, municipal
commercial paper, municipal bonds with a remaining maturity of less than one
year, variable rate demand notes and participations therein. Municipal notes
include tax anticipation notes, bond anticipation notes and grant anticipation
notes. Anticipation notes are sold as interim financing in anticipation of tax
collection, bond sales, government grants or revenue receipts. Municipal
commercial paper refers to short-term unsecured promissory notes generally
issued to finance short-term credit needs. The taxable money market securities
in which the Fund may invest as Temporary Investments consist of U.S.
Government securities, U.S. Government agency securities, domestic bank or
savings institution certificates of deposit and bankers' acceptances, short-
term corporate debt securities such as commercial paper, and repurchase
agreements. These Temporary Investments must have a stated maturity not in
excess of one year from the date of purchase.
Variable rate demand obligations ("VRDOs") are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period not to exceed seven days. There is, however, the possibility that
because of default or insolvency the demand feature of VRDOs and Participating
VRDOs, described below, may not be honored. The interest rates are adjustable
at intervals (ranging from daily to up to one year) to some prevailing market
rate for similar investments, such adjustment formula being calculated to
maintain the market value of the VRDO at approximately the par value of the
VRDOs on the adjustment date. The adjustments typically are based upon the
prime rate of a bank or some other appropriate interest rate adjustment index.
The Fund may invest in all types of tax-exempt instruments currently
outstanding or to be issued in the future which satisfy the short-term maturity
and quality standards of the Fund.
The Fund also may invest in VRDOs in the form of participation interests
("Participating VRDOs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank. Participating VRDOs provide
the Fund with a specified undivided interest (up to 100%) of the underlying
obligation and the right to demand payment of the unpaid principal balance plus
accrued interest on the Participating VRDOs from the financial institution upon
a specified number of days' notice, not to exceed seven days. In addition, a
Participating VRDO is backed by an irrevocable letter of credit or guaranty of
the financial institution. The Fund would have an undivided interest in the
underlying obligation and thus participate on the same basis as the financial
institution in such obligation except that the financial institution typically
retains fees out of the interest paid on the obligation for servicing the
obligation, providing the letter of credit
7
<PAGE>
and issuing the repurchase commitment. The Fund has been advised by its counsel
that the Fund should be entitled to treat the income received on Participating
VRDOs as interest from tax-exempt obligations.
VRDOs that contain an unconditional right of demand to receive payment of the
unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed to be illiquid securities. A VRDO with a demand notice
period exceeding seven days will therefore be subject to the Fund's restriction
on illiquid investments unless, in the judgment of the Trustees, such VRDO is
liquid. The Trustees may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of such VRDOs. The Trustees,
however, will retain sufficient oversight and will be ultimately responsible
for such determination.
The Trust has established the following standards with respect to money
market securities and VRDOs in which the Fund invests. Commercial paper
investments at the time of purchase must be rated A-1 through A-3 by Standard &
Poor's, Prime-1 through Prime-3 by Moody's or F-1 through F-3 by Fitch or, if
not rated, issued by companies having an outstanding debt issue rated at least
"A" by Standard & Poor's, Fitch or Moody's. Investments in corporate bonds and
debentures (which must have maturities at the date of purchase of one year or
less) must be rated at the time of purchase at least A by Standard & Poor's,
Moody's or Fitch. Notes and VRDOs at the time of purchase must be rated SP-1/A-
1 through SP-2/A-3 by Standard & Poor's, MIG-1/VMIG-1 through MIG-4/VMIG-4 by
Moody's or F-1 through F-3 by Fitch. Temporary Investments, if not rated, must
be of comparable quality to securities rated in the above rating categories in
the opinion of the Manager. The Fund may not invest in any security issued by a
commercial bank or a savings institution unless the bank or institution is
organized and operating in the United States, has total assets of at least one
billion dollars and is a member of the Federal Deposit Insurance Corporation
(the "FDIC"), except that up to 10% of the Fund's total assets may be invested
in certificates of deposit of small institutions if such certificates are fully
insured by the FDIC.
REPURCHASE AGREEMENTS
The Fund may invest in securities pursuant to repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or a primary dealer in U.S. Government securities, or an
affiliate thereof. Under such agreements, the seller agrees, upon entering into
the contract, to repurchase the security at a mutually agreed upon time and
price, thereby determining the yield during the term of the agreement. This
results in a fixed rate of return insulated from market fluctuations during
such period. In the case of repurchase agreements, the prices at which the
trades are conducted do not reflect accrued interest on the underlying
obligations. Such agreements usually cover short periods, such as under one
week. Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In 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.
In the event of default by the seller under a repurchase agreement construed to
be a collateralized loan, the underlying securities are not owned by 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. In the
event of a default under such a repurchase agreement, instead of the
contractual fixed rate of return, the rate of return to the Fund will depend on
intervening fluctuations of the market value of such security and the accrued
interest on the security. In such event, the Fund would have
8
<PAGE>
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. The Fund may not invest in repurchase agreements maturing in more than
seven days if such investments, together with all other illiquid investments,
would exceed 10% of the Fund's total assets.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold". Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest. However, it is likely that income from such arrangements also will
not be considered tax-exempt interest.
FINANCIAL FUTURES TRANSACTIONS AND OPTIONS
Reference is made to the discussion concerning futures transactions under
"Investment Objective and Policies" in the Prospectus. Set forth below is
additional information concerning these transactions.
As described in the Prospectus, the Fund may purchase and sell exchange-
traded financial futures contracts ("financial futures contracts") to hedge its
portfolio of Municipal Bonds against declines in the value of such securities
and to hedge against increases in the cost of securities the Fund intends to
purchase. However, any transactions involving financial futures or options (or
puts and calls associated therewith) will be in accordance with the Fund's
investment policies and limitations. See "Investment Objective and Policies--
Investment Restrictions" in the Prospectus. To hedge its portfolio, the Fund
may take an investment position in a financial futures contract which will move
in the opposite direction from the portfolio position being hedged. While the
Fund's use of hedging strategies is intended to moderate capital changes in
portfolio holdings and thereby reduce the volatility of the net asset value of
Fund shares, the Fund anticipates that its net asset value will fluctuate. Set
forth below is information concerning futures transactions.
Description of Financial Futures Contracts. A financial futures contract is
an agreement between two parties to buy and sell a security, or in the case of
an index-based financial futures contract, to make and accept a cash settlement
for a set price on a future date. A majority of transactions in financial
futures contracts, however, do not result in the actual delivery of the
underlying instrument or cash settlement, but are settled through liquidation,
i.e., by entering into an offsetting transaction. Financial futures contracts
have been designed by boards of trade which have been designated "contracts
markets" by the Commodity Futures Trading Commission (the "CFTC").
The purchase or sale of a financial futures contract differs from the
purchase or sale of a security in that no price or premium is paid or received.
Instead, an amount of cash or securities acceptable to the broker and the
relevant contract market, which varies, but is generally about 5% of the
contract amount must be deposited with the broker. This amount is known as
"initial margin" and represents a "good faith" deposit assuring the performance
of both the purchaser and seller under the financial futures contract.
Subsequent payments to and from the broker, called "variation margin", are
required to be made on a daily basis as the price of the financial futures
contract fluctuates making the long and short positions in the financial
futures contract more or less valuable, a process known as "mark to the
market". At any time prior to the settlement date of the financial futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the financial futures contract. A
final determination of variation margin is then made, additional cash is
required to be paid to or released by the broker and the purchase realizes a
loss or gain. In addition, a nominal commission is paid on each completed sale
transaction.
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The Fund deals in financial futures contracts based on a long-term municipal
bond index developed by the Chicago Board of Trade (the "CBT") and The Bond
Buyer (the "Municipal Bond Index"). The Municipal Bond Index is comprised of 40
tax-exempt municipal revenue bonds and general obligation bonds. Each bond
included in the Municipal Bond Index must be rated A or higher by Moody's or
Standard & Poor's and must have a remaining maturity of 19 years or more. Twice
a month new issues satisfying the eligibility requirements are added to, and an
equal number of old issues are deleted from, the Municipal Bond Index. The
value of the Municipal Bond Index is computed daily according to a formula
based on the price of each bond in the Municipal Bond Index, as evaluated by
six dealer-to-dealer brokers.
The Municipal Bond Index financial futures contract is traded only on the
CBT. Like other contract markets, the CBT assures performance under financial
futures contracts through a clearing corporation, a non-profit organization
managed by the exchange membership which is also responsible for handling daily
accounting of deposits or withdrawals of margin.
As described in the Prospectus, the Fund may purchase and sell financial
futures contracts on U.S. Government securities as a hedge against adverse
changes in interest rates as described below. With respect to U.S. Government
securities, currently there are financial futures contracts based on long-term
U.S. Treasury bonds, U.S. Treasury notes, Government National Mortgage
Association ("GNMA") Certificates and three-month U.S. Treasury bills. The Fund
may purchase and write call and put options on financial futures contracts on
U.S. Government securities in connection with its hedging strategies.
Subject to policies adopted by the Trustees, the Fund also may engage in
other financial futures contracts transactions such as financial futures
contracts on other municipal bond indices which may become available if the
Manager and the Trustees should determine that there is normally a sufficient
correlation between the prices of such futures contracts and the Municipal
Bonds in which the Fund invests to make such hedging appropriate.
Futures Strategies. The Fund may sell a financial futures contract (i.e.,
assume a short position) in anticipation of a decline in the value of its
investments in Municipal Bonds resulting from an increase in interest rates or
otherwise. The risk of decline could be reduced without employing futures as a
hedge by selling such Municipal Bonds and either reinvesting the proceeds in
securities with shorter maturities or by holding assets in cash. This strategy,
however, entails increased transaction costs in the form of dealer spreads and
typically would reduce the average yield of the Fund's portfolio securities as
a result of the shortening of maturities. The sale of financial futures
contracts provides an alternative means of hedging against declines in the
value of its investments in Municipal Bonds. As such values decline, the value
of the Fund's positions in the financial futures contracts will tend to
increase, thus offsetting all or a portion of the depreciation in the market
value of the Fund's Municipal Bond investments which are being hedged. While
the Fund will incur commission expenses in selling and closing out financial
futures positions, commissions on financial futures transactions are lower than
transaction costs incurred in the purchase and sale of Municipal Bonds. In
addition, the ability of the Fund to trade in the standardized contracts
available in the financial futures markets may offer a more effective defensive
position than a program to reduce the average maturity of the portfolio
securities due to the unique and varied credit and technical characteristics of
the municipal debt instruments available to the Fund. Employing futures as a
hedge also may permit the Fund to assume a
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defensive posture without reducing the yield on its investments beyond any
amounts required to engage in futures trading.
When the Fund intends to purchase Municipal Bonds, the Fund may purchase
financial futures contracts as a hedge against any increase in the cost of such
Municipal Bonds, resulting from an increase in interest rates or otherwise,
that may occur before such purchases can be effected. Subject to the degree of
correlation between the Municipal Bonds and the financial futures contracts,
subsequent increases in the cost of Municipal Bonds should be reflected in the
value of the futures held by the Fund. As such purchases are made, an
equivalent amount of financial futures contracts will be closed out. Due to
changing market conditions and interest rate forecasts, however, a futures
position may be terminated without a corresponding purchase of portfolio
securities.
Call Options on Financial Futures Contracts. The Fund also may purchase and
sell exchange-traded call and put options on financial futures contracts on
U.S. Government securities. The purchase of a call option on a financial
futures contract is analogous to the purchase of a call option on an individual
security. Depending on the pricing of the option compared to either the
financial futures contract on which it is based, or on the price of the
underlying debt securities, it may or may not be less risky than ownership of
the financial futures contract or underlying debt securities. Like the purchase
of a financial futures contract, the Fund will purchase a call option on a
financial futures contract to hedge against a market advance when the Fund is
not fully invested.
The writing of a call option on a financial futures contract constitutes a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the financial futures contract. If the futures price at
expiration is below the exercise price, 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 Financial Futures Contracts. The purchase of options on a
financial futures contract is analogous to the purchase of protective put
options on portfolio securities. The Fund will purchase put options on
financial futures contracts to hedge the Fund's portfolio against the risk of
rising interest rates.
The writing of a put option on a financial futures contract constitutes a
partial hedge against increasing prices of the securities which are deliverable
upon exercise of the financial futures contract. If the futures price at
expiration is higher than the exercise price, the Fund will retain the full
amount of the option premium which provides a partial hedge against any
increase in the price of Municipal Bonds which the Fund intends to purchase.
The writer of an option on a financial futures contract is required to
deposit initial and variation margin pursuant to requirements similar to those
applicable to financial futures contracts. Premiums received from the writing
of an option will be included in initial margin. The writing of an option on a
financial futures contract involves risks similar to those relating to
financial futures contracts.
----------------
The Trust has received an order from the Securities and Exchange Commission
(the "Commission") exempting it from the provisions of Section 17(f) and
Section 18(f) of the 1940 Act in connection with its strategy of investing in
financial futures contracts. Section 17(f) relates to the custody of securities
and other
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<PAGE>
assets of an investment company and may be deemed to prohibit certain
arrangements between the Trust and commodities brokers with respect to initial
and variation margin. Section 18(f) of the 1940 Act prohibits an open-end
investment company such as the Trust from issuing a "senior security" other
than a borrowing from a bank. The staff of the Commission has in the past
indicated that a financial futures contract may be a "senior security" under
the 1940 Act.
Restrictions on Use of Futures Transactions. Regulations of the CFTC
applicable to the Fund require that all of the Fund's futures transactions
constitute bona fide hedging transactions and that the Fund purchase and sell
financial futures contracts and options thereon (i) for bona fide hedging
purposes, and (ii) for non-hedging purposes, if the aggregate initial margin
and premiums required to establish positions in such contracts and options does
not exceed 5% of the liquidation value of the Fund's portfolio assets after
taking into account unrealized profits and unrealized losses on any such
contracts and options. (However, the Fund intends to engage in options and
futures transactions only for hedging purposes.) Margin deposits may consist of
cash or securities acceptable to the broker and the relevant contract market.
When the Fund purchases financial futures contracts or a call option with
respect thereto or writes a put option on a financial futures contract, an
amount of cash, cash equivalents or short-term, high-grade, fixed income
securities will be deposited in a segregated account with the Fund's custodian
so that the amount so segregated, plus the amount of initial and variation
margin held in the account of its broker, equals the market value of the
futures contract, thereby ensuring that the use of such futures is unleveraged.
Risk Factors in Futures Transactions and Options. Investment in financial
futures contracts involves the risk of imperfect correlation between movements
in the price of the financial futures contract and the price of the security
being hedged. The hedge will not be fully effective when there is imperfect
correlation between the movements in the prices of two financial instruments.
For example, if the price of the financial futures contract moves more than the
price of the hedged security, the Fund will experience either a loss or gain on
the financial futures contract which is not completely offset by movements in
the price of the hedged securities. To compensate for imperfect correlations,
the Fund may purchase or sell financial futures contracts in a greater dollar
amount than the hedged securities if the volatility of the hedged securities is
historically greater than the volatility of the financial futures contracts.
Conversely, the Fund may purchase or sell fewer financial futures contracts if
the volatility of the price of the hedged securities is historically less than
that of the financial futures contracts.
The particular municipal bonds comprising the index underlying the Municipal
Bond Index financial futures contract may vary from the bonds held by the Fund.
As a result, the Fund's ability to hedge effectively all or a portion of the
value of its Municipal Bonds through the use of such financial futures
contracts will depend in part on the degree to which price movements in the
index underlying the financial futures contract correlate with the price
movements of Municipal Bonds held by the Fund. The correlation may be affected
by disparities in the average maturity, ratings, geographical mix or structure
of the Fund's investments as compared to those comprising the Municipal Bond
Index, and general economic or political factors. In addition, the correlation
between movements in the value of the Municipal Bond Index may be subject to
change over time as additions to and deletions from the Municipal Bond Index
alter its structure. The correlation between financial futures contracts on
U.S. Government securities and the Municipal Bonds held by the Fund may be
adversely affected by similar factors and the risk of imperfect correlation
between movements in the prices of such financial futures contracts and the
prices of the Municipal Bonds held by the Fund may be greater.
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<PAGE>
The Fund expects to liquidate a majority of the financial futures contracts
it enters into through offsetting transactions on the applicable contract
market. There can be no assurance, however, that a liquid secondary market will
exist for any particular financial futures contract at any specific time. Thus,
it may not be possible to close out a futures position. In the event of adverse
price movements, 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 be required to sell portfolio securities to meet daily variation
margin requirements at a time when it may be disadvantageous to do so. The
inability to close out futures positions also could have an adverse impact on
the Fund's ability to hedge effectively its investments in Municipal Bonds. The
Fund will enter into a financial futures position only if, in the judgment of
the Manager, there appears to be an actively traded secondary market for such
financial futures contracts.
The successful use of transactions in futures and related options also
depends on the ability of the Manager to forecast correctly the direction and
extent of interest rate movements within a given time frame. To the extent
interest rates remain stable during the period in which a financial futures
contract or option is held by the Fund or such rates move in a direction
opposite to that anticipated, the Fund may realize a loss on the hedging
transaction which is not fully or partially offset by an increase in the value
of portfolio securities. As a result, the Fund's total return for such period
may be less than if it had not engaged in the hedging transaction.
Because of low initial margin deposits made on the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the financial futures contracts can
result in substantial unrealized gains or losses. Because the Fund will engage
in the purchase and sale of financial futures contracts solely for hedging
purposes, however, any losses incurred in connection therewith should, if the
hedging strategy is successful, be offset in whole or in part by increases in
the value of securities held by the Fund or decreases in the price of
securities the Fund intends to acquire.
The amount of risk the Fund assumes when it purchases an option on a
financial futures contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above, the
purchase of an option on a financial futures contract also entails the risk
that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option purchased.
Municipal Bond Index financial futures contracts have only recently been
approved for trading and therefore have little trading history. It is possible
that trading in such financial futures contracts will be less liquid than that
in other financial futures contracts. The trading of financial futures
contracts also is subject to certain market risks, such as inadequate trading
activity, which could at times make it difficult or impossible to liquidate
existing positions.
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<PAGE>
INVESTMENT RESTRICTIONS
Current Investment Restrictions. The Trust has adopted a number of
restrictions and policies relating to the investment of its assets and its
activities, which are fundamental policies and 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 1940 Act means the lesser of
(i) 67% of the Fund's shares present at a meeting at which more than 50% of the
outstanding shares of the Fund are represented or (ii) more than 50% of the
Fund's outstanding shares). The Fund may not:
(1) purchase any securities other than securities referred to under
"Investment Objective and Policies" herein and in the Prospectus and under
"Description of Municipal Bonds and Temporary Investments" herein;
(2) invest more than 5% of its total assets (taken at market value at the time
of each investment) in the securities of any one issuer, except that such
restriction shall not apply to securities backed by the United States
Government or its agencies or instrumentalities [For purposes of this
restriction, the Trust will regard each state and each political
subdivision, agency or instrumentality of such state and each multi-state
agency of which such state is a member and each public authority which
issues securities on behalf of a private entity as a separate issuer,
except that if the security is backed only by the assets and revenues of a
non-government entity, then the entity with the ultimate responsibility
for the payment of interest and principal may be regarded as the sole
issuer]:
(3) invest more than 5% of its total assets (taken at market value at the time
of each investment) in industrial revenue bonds where the entity supplying
the revenues from which the issue is to be paid, including predecessors,
has a record of less than three years of continuous operation;
(4) make investments for the purpose of exercising control or management;
(5) purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization;
(6) purchase or sell real estate (provided that such restriction shall not
apply to securities secured by real estate or interests therein or issued
by companies which invest in real estate or interests therein),
commodities or commodity contracts (except that the Fund may purchase and
sell financial futures contracts), interests in oil, gas or other mineral
exploration or development programs;
(7) purchase any securities on margin, except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities
(the deposit or payment by the Fund of initial or variation margin in
connection with financial futures contracts is not considered the purchase
of a security on margin);
(8) make short sales of securities or maintain a short position or invest in
put, call, straddle or spread options (this restriction does not apply to
options on financial futures contracts);
(9) make loans to other persons, provided that the Fund may purchase a portion
of an issue of tax-exempt securities (the acquisition of a portion of an
issue of tax-exempt securities or bonds, debentures or other debt
securities which are not publicly distributed is considered to be the
making of a loan under the 1940 Act);
(10) borrow amounts in excess of 20% of its total assets taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes [Usually only "leveraged"
investment companies may borrow in excess of 5% of their assets; however,
the Fund will not borrow to increase income but only to meet redemption
requests which might otherwise require untimely dispositions of portfolio
securities. The Fund will not purchase securities while borrowings are
outstanding. Interest paid on such borrowings will reduce net income.];
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<PAGE>
(11) mortgage, pledge, hypothecate or in any manner transfer as security for
indebtedness any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in (10) above, and then
such mortgaging, pledging or hypothecating may not exceed 10% of its total
assets, taken at market value or except as may be necessary in connection
with transactions in financial futures contracts;
(12) invest in securities with legal or contractual restrictions on resale or
for which no readily available market exists, including repurchase
agreements maturing in more than seven days, if, regarding all such
securities more than 10% of its total assets (taken at market value)
would be invested in such securities; and
(13) act as an underwriter of securities, except to the extent that the Trust
may technically be deemed an underwriter when engaged in the activities
described in (9) above or insofar as the Trust may be deemed an
underwriter under the Securities Act of 1933, as amended, in selling
portfolio securities.
Proposed Uniform Investment Restrictions. As discussed in the Prospectus
under "Investment Objective and Policies--Investment Restrictions", the Board
of Trustees of the Trust has approved the replacement of the Fund's existing
investment restrictions with the fundamental and non-fundamental investment
restrictions set forth below. These uniform investment restrictions have been
proposed for adoption by all of the non-money market mutual funds advised by
the Manager or its affiliate, Merrill Lynch Asset Management, L.P. ("MLAM").
The investment objective and policies of the Fund will be unaffected by the
adoption of the proposed investment restrictions.
Shareholders of the Fund are currently considering whether to approve the
proposed revised investment restrictions. If such shareholder approval is
obtained, the Fund's current investment restrictions will be replaced by the
proposed restrictions, and the Fund's Prospectus and Statement of Additional
Information will be supplemented to reflect such change.
Under the proposed fundamental investment restrictions, 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.
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.
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<PAGE>
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 1940 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 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. Underwrite 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 commodity pool
operator under the Commodity Exchange Act.
Under the proposed 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 that cannot be readily resold because of legal or
contractual restrictions or that cannot otherwise be marketed, redeemed or
put to the issuer or a third party, if at the time of acquisition more than
15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Trustees of the Trust has otherwise
determined to be liquid pursuant to applicable law. 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).
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 the 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.
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<PAGE>
f. Purchase or retain the securities of any issuer, if those individual
officers and trustees of the Trust, the officers and general partner of the
Manager, the directors of such general partner or the officers and
directors of any subsidiary thereof each owning beneficially more than one-
half of one percent of the securities of such issuer own in the aggregate
more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that 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
amounts in excess of 20% of its total assets, taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes such as the redemption of
Fund shares. In addition, the Fund will not purchase securities while
borrowings are outstanding.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Trust, the Trust is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the 1940 Act involving only usual
and customary commissions or transactions pursuant to an exemptive order under
the 1940 Act. Included among such restricted transactions will be purchases
from or sales to Merrill Lynch of securities in transactions in which it acts
as principal. See "Portfolio Transactions". An exemptive order has been
obtained which permits the Trust to effect principal transactions with Merrill
Lynch in high quality, short-term, tax-exempt securities subject to conditions
set forth in such order.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Trust and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each Trustee and executive officer is P.O. Box
9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel -- President and Trustee(1)(2) -- President and Chief
Investment Officer of the Manager (which term, as used herein, includes the
Manager's corporate predecessors) since 1977; President of MLAM (which term, as
used herein, includes MLAM's corporate predecessors) since 1977 and Chief
Investment Officer since 1976; 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 since 1990 and a Senior Vice President thereof from 1985 to 1990;
Director of Merrill Lynch Funds Distributor, Inc. (the "Distributor").
Kenneth S. Axelson -- Trustee(2) -- 75 Jameson Point Road, Rockland, Maine
04841. Executive Vice President and Director, J.C. Penney Company, Inc. until
1982; Director, UNUM Corporation, Protection Mutual Insurance Company, Zurn
Industries, Inc., and, until 1992, Central Maine Power Company and Key Trust
Company of Maine and until 1994, Grumman Corporation; Trustee, The Chicago Dock
and Canal Trust.
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<PAGE>
Herbert I. London -- Trustee(2) -- New York University -- Gallatin Division,
113-115 University Place, New York, New York 10003. John M. Olin Professor of
Humanities, New York University since 1993 and Professor thereof since 1973;
Dean, Gallatin Division of New York University from 1978 to 1993 and Director
from 1975 to 1976; Distinguished Fellow, Herman Kahn Chair, Hudson Institute
from 1984 to 1985; Director, Damon Corporation since 1991; Overseer, Center for
Naval Analyses.
Robert R. Martin -- Trustee(2) -- 513 Grand Hill, St. Paul, Minnesota 55102.
Chairman, WTC Industries, Inc. since 1994; Chairman and Chief Executive
Officer, Kinnard Investments, Inc. from 1990 to 1993; Executive Vice President,
Dain Bosworth from 1974 to 1989; Director, Carnegie Capital Management from
1977 to 1985 and Chairman thereof in 1979; Director, Securities Industry
Association from 1981 to 1982 and Public Securities Association from 1979 to
1980; Trustee, Northland College since 1992.
Joseph L. May -- Trustee(2) -- 424 Church Street, Suite 2000, Nashville,
Tennessee 37219. Attorney in private practice since 1984; President, May and
Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to 1983;
Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The May
Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
Andre F. Perold -- Trustee(2) -- Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund, since 1989;
Director, Quantec Limited since 1991 and Teknekron Software Systems since 1994.
Terry K. Glenn -- 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.
Vincent R. Giordano -- Vice President and Portfolio Manager(1)(2) --
Portfolio Manager of the Manager and MLAM since 1977 and Senior Vice President
of the Manager and MLAM since 1984; Vice President of MLAM from 1980 to 1984;
Senior Vice President of Princeton Services since 1993.
Kenneth A. Jacob -- Vice President and Portfolio Manager(1)(2) -- Vice
President of the Manager and MLAM since 1984.
Donald C. Burke -- 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 -- Treasurer(1)(2) -- Senior Vice President and Treasurer
of the Manager and MLAM since 1984; Treasurer of the Distributor since 1984 and
Vice President since 1981; Senior Vice President and Treasurer of Princeton
Services since 1993.
Jerry Weiss -- Secretary(1)(2) -- Vice President of MLAM since 1990; Attorney
in private practice from 1982 to 1990.
- --------
(1) Interested person, as defined in the 1940 Act, of the Trust.
(2) Such Trustee or officer is a director or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser or manager.
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<PAGE>
At October 1, 1994, the Trustees and officers of the Trust as a group (12
persons) owned an aggregate of less than 1/4 of 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 Trust pays each Trustee not affiliated with the Manager a fee of $5,000
per year plus $500 per meeting attended, together with such Trustee's actual
out-of-pocket expenses relating to attendance at meetings. The Trust also
compensates members of its audit and nominating committee, which consists of
all of the non-affiliated Trustees, a fee of $1,000 per year plus $250 per
meeting attended. For the fiscal year ended August 31, 1994, fees and expenses
paid to the non-affiliated Trustees aggregated $42,928.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Trust -- Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory agreements of the Trust.
Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory 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 manager 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.
The Trust has entered into a management agreement (the "Management
Agreement") with the Manager. As discussed in the Prospectus, the Manager
receives for its services to the Fund monthly compensation at the annual rate
of 0.55% of the average daily net assets of the Fund. As discussed in the
Prospectus, effective December 23, 1987, the Manager has voluntarily agreed to
waive the amount of compensation set forth in the Management Agreement and
instead has agreed to receive from the Fund a monthly fee based upon the
average daily net assets of the Fund at the following annual rates: 0.55% of
the portion of the average daily net assets not exceeding $500 million; 0.525%
of the portion of the average daily net assets exceeding $500 million but not
exceeding $1.0 billion and 0.50% of the portion of the average daily net assets
exceeding $1.0 billion. For the fiscal years ended August 31, 1992, 1993 and
1994, the total advisory fees paid by the Fund to the Manager aggregated
$4,035,577, $4,391,540 and $4,567,938, respectively.
The State of California imposes limitations on the expenses of the Fund. At
the date of this Statement of Additional Information, these annual expense
limitations require that the Manager reimburse the Fund in an amount necessary
to prevent the aggregate ordinary operating expenses (excluding taxes,
brokerage fees and commissions, distribution fees and extraordinary charges
such as litigation costs) from exceeding in any fiscal year 2.5% of the Fund's
first $30,000,000 of average daily net assets, 2.0% of the next $70,000,000 of
average daily net assets and 1.5% of the remaining average net assets. The
Manager's obligation to reimburse the Fund is limited to the amount of the
management fee. Expenses not covered by the limitation are interest, taxes,
brokerage commissions and other items such as extraordinary legal expenses. No
fee payments will be made to the Manager during any fiscal year which will
cause such expenses to exceed the expense limitation at the time of such
payment. No fee reimbursements were made during the years ended August 31,
1992, 1993 and 1994 pursuant to these operating expense limitations.
19
<PAGE>
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 Trust connected with investment and economic research,
trading and investment management of the Trust, as well as the fees of all
Trustees of the Trust who are affiliated persons of the Manager or any of its
subsidiaries. The Fund pays all other expenses incurred in its operation and,
if other series should be added ("Series"), a portion of the Trust's general
administrative expenses will be allocated on the basis of the asset size of the
respective Series. Expenses that will be borne directly by the Series include
redemption expenses, expenses of portfolio transactions, expenses or
registering the shares under Federal and state securities laws, pricing costs
(including the daily calculation of net asset value), expenses of printing
shareholder reports, prospectuses and statements of additional information
(except to the extent paid by the Distributor as described below), fees for
legal and auditing services, Commission fees, interest, certain taxes, and
other expenses attributable to a particular Series. Expenses which will be
allocated on the basis of asset size of the respective Series include fees and
expenses of unaffiliated Trustees, state franchise taxes, costs of printing
proxies and other expenses related to shareholder meetings, and other expenses
properly payable by the Trust. The organizational expenses of the Trust were
paid by the Trust, and if additional Series are added to the Trust, the
organizational expenses will be allocated among the Series in a manner deemed
equitable by the Trustees. Accounting services are provided to the Trust by the
Manager and the Trust reimburses the Manager for its costs in connection with
such services. For the year ended August 31, 1994, the Trust paid the Manager
$101,105 for such services. Depending upon the nature of a lawsuit, litigation
costs may be assessed to the specific Series to which the lawsuit relates or
allocated on the basis of the asset size of the respective Series. The Trustees
have determined that this is an appropriate method of allocation of expenses.
Certain expenses in connection with the account maintenance and distribution of
shares will be financed by the Trust pursuant to the Distribution Plans in
compliance with Rule 12b-1 under the 1940 Act. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares--Distribution
Plan".
The Manager is a limited partnership, the partners of which are ML & Co.,
Fund Asset Management, Inc. and Princeton Services.
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 Trust 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 1940 Act) of any such
party. Such contracts are not assignable and may be terminated without penalty
on 60 days' written notice at the option of either party thereto or by vote of
the shareholders of the 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 Pricing
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
20
<PAGE>
additional incremental transfer agency costs resulting from the deferred sales
charge arrangements. Class B, Class C and Class D shares each have exclusive
voting rights with respect to the Rule 12b-1 distribution plan adopted with
respect to such class pursuant to which account maintenance and/or
distribution fees are paid. Each class has different exchange privileges. See
"Shareholder Services -- Exchange Privilege".
The Merrill Lynch Select Pricing SM System is used by more than 50 mutual
funds advised by the Manager or its affiliate, FAM. Funds advised by the
Manager or FAM 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 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 ALTERNATIVE--CLASS A AND CLASS D SHARES
The gross sales charges for the sale of Class A shares for the fiscal year
ended August 31, 1992 were $212,587, of which the Distributor received $22,174
and Merrill Lynch received $190,413. The gross sales charges for the sale of
Class A shares for the fiscal year ended August 31, 1993 were $213,810, of
which the Distributor received $14,961 and Merrill Lynch received $198,849.
The gross sales charges for the sale of Class A shares for the fiscal year
ended August 31, 1994 were $132,664, of which the Distributor received $13,053
and Merrill Lynch received $119,611.
The term "purchase", as used in the Prospectus and in 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 or her spouse and their children
under the age of 21 years purchasing shares for his or her or their own
account and to single purchases by a trustee or other fiduciary purchasing
shares for a single trust estate or single fiduciary account although more
than one beneficiary is involved. The term "purchase" also includes purchases
by any "company" as that term is defined in the 1940 Act, but does not include
purchases by any such company which has not been in existence for at least six
months or which has no purpose other than the purchase of shares of the Fund
or shares of other registered investment companies at a discount; provided,
however, that it shall not include purchases by any group of individuals whose
sole organizational nexus is that the participants therein are credit
cardholders of a company, policyholders of an insurance company, customers of
either a bank or broker-dealer or clients of an investment adviser.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase
shares of 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, by the purchaser or the purchaser's
securities dealer, with sufficient information to permit confirmation of
21
<PAGE>
qualification. Acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time. Shares held in the name of a nominee or custodian under pension, profit-
sharing or other employee benefit plans may not be combined with other shares
to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the 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 record-keeping 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 and 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, but the reduced
sales charge applicable to the amount covered by such Letter will be applied
only to new purchases. If the total amount of shares does not equal the amount
stated in the Letter of Intention (minimum of $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 at least five
percent of the intended amount will be held in escrow during the thirteen-
month period (while remaining registered in the name of the purchaser) for
this purpose. The first purchase under the Letter of Intention must be at
least five percent of the dollar amount of such Letter. If during the term of
such Letter, a purchase brings the total amount invested to an amount equal to
or in excess of the amount indicated in the Letter, the purchaser will be
entitled on that purchase and subsequent purchases to the reduced percentage
sales charge which would be applicable to a single purchase equal to the total
dollar value of the Class A or Class D shares then being purchased under such
Letter, but there will be no retroactive reduction of the sales charge 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.
TMA SM Managed Trusts. Class A shares are offered to TMA SM Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services
at net asset value.
Purchase Privilege of Certain Persons. Trustees of the Trust, directors and
trustees of other directors and employees of ML & Co. and its subsidiaries
(the term "subsidiaries," when used herein with respect to ML & Co., includes
MLAM, the Manager and certain other entities directly or indirectly wholly-
owned and controlled by ML & Co.), 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
22
<PAGE>
firm within six months prior to the date of purchase by such investor, if the
following conditions are satisfied. First, the investor must advise Merrill
Lynch that it will purchase Class D shares of the Fund with proceeds from a
redemption of a mutual fund that was sponsored by the financial consultant's
previous firm and was subject to a sales charge either at the time of purchase
or on a deferred basis. Second, the investor also must establish that such
redemption had been made within 60 days prior to the investment in the Fund,
and the proceeds from the redemption had been maintained in the interim in cash
or a money market fund.
Class D shares of the Fund are also offered at net asset value, without sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund sponsored by a non-
Merrill Lynch company for which Merrill Lynch has served as a selected dealer
and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: First, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and such fund
was subject to a sales charge either at the time of purchase or on a deferred
basis. Second, such purchase of Class D shares must be made within 90 days
after such notice.
Class D shares of the Fund will be offered at net asset value, without 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. 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.
Closed-End Fund Investment Option. Class A shares of the Fund and other MLAM-
advised mutual funds (the "Eligible Class A shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or
MLAM who purchased such closed-end fund shares prior to October 21, 1994 and
wish to reinvest the net proceeds of a sale of their closed-end fund shares of
common stock in Eligible Class A shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994 and wish to reinvest the net proceeds from
a sale of their closed-end fund shares are offered Class A shares (if eligible
to 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 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 have either 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.
23
<PAGE>
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.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares 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 public or private investment company. The value 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 required 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 sale 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
1940 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 1940 Act. Among other things, each
Distribution Plan provides that the Distributor shall provide and the Trustees
shall review quarterly reports of the disbursement of the account maintenance
fees and/or distribution fees paid to the Distributor. In their consideration
of each Distribution Plan, the Trustees 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 Trustees who are not "interested persons" of the
Trust, as defined in the 1940 Act (the "Independent Trustee"), shall be
committed to the discretion of the Independent Trustees then in office. In
approving each Distribution Plan in accordance with Rule 12b-1, the Independent
Trustees concluded that there is 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 Trustees 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
Trustees, including a majority of the Independent Trustees 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 Trust
preserve copies of each Distribution Plan and any report made pursuant to such
plan for a period of not less than six years from the date of such Distribution
Plan or such report, the first two years in an easily accessible place.
24
<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. (the "NASD") imposes a limitation of
certain asset-based sales charges such as the distribution fee and the
contingent deferred sales charge ("CDSC") borne by the Class B and Class A
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
fees 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, 1994
with respect to the Class B shares of the Fund indicating the maximum
allowable payments that can be made under the NASD maximum sales charge rule
and the Distributor's voluntary maximum for the period September 30, 1985
(commencement of the public offering of Class B shares) to August 31, 1994.
Since Class C shares of the Fund had not been publicly issued prior to the
date of this Statement of Additional Information, information concerning Class
C shares is not yet provided below.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF AUGUST 31, 1994
----------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE AMOUNTS FEE AT
AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
ELIGIBLE GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------------- --------- ---------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $1,369,953 $85,622 $52,641 $138,263 $26,369 $111,895 $1,817
Under Distributor's
Voluntary Waiver....... $1,369,953 $85,622 $ 6,850 $ 92,472 $26,369 $ 66,103 $1,817
</TABLE>
- --------
(1) Purchase price of all eligible Class B shares sold since September 30,
1985 (commencement of the public offering of Class B shares) other than
shares acquired through dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0% as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made prior to July 6, 1993 under a prior plan at
the 1.0% rate, 0.75% 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 CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum or the NASD
maximum.
25
<PAGE>
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.
DEFERRED SALES CHARGE--CLASS B 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 following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies
are any partial or complete redemptions following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended (the "Code")) of a
Class B shareholder (including one who owns the Class B shares as joint tenant
with his or her spouse), provided the redemption is requested within one year
of the death or initial determination of disability. For the years ended August
31, 1992, 1993 and 1994 the Distributor received CDSCs of $778,159, $591,941
and $704,845, respectively, all of which was paid to Merrill Lynch.
PORTFOLIO TRANSACTIONS
Reference is made to "Investment Objective and Policies -- Other Investment
Policies and Practices" in Prospectus.
Under the 1940 Act, persons affiliated with the Trust are prohibited from
dealing with the Fund as principal in the purchase and sale of securities
unless such trading is permitted by an exemptive order issued by the
Commission. Since over-the-counter transactions are usually principal
transactions, affiliated persons of the Fund, including Merrill Lynch, may not
serve as dealer in connection with transactions with the Fund, absent an
exemptive order from the Commission. The Trust has obtained an exemptive order
permitting it to engage in certain principal transactions with Merrill Lynch
involving high quality short-term Municipal Bonds subject to certain
conditions. During the year ended August 31, 1992, the Fund engaged in 3
transactions pursuant to such order aggregating approximately $15,475,000.
During the years ended August 31, 1993 and 1994, the Fund engaged in no
transactions pursuant to such order. During the year ended August 31, 1994, the
Fund engaged in no transactions pursuant to such order. Affiliated persons of
the Fund may serve as its broker in over-the-counter transactions conducted on
an agency basis. Certain court decisions have raised questions as to the extent
to which investment companies should seek exemptions under the 1940
26
<PAGE>
Act in order to seek to recapture underwriting and dealer spreads from
affiliated entities. The Trustees have considered all factors deemed relevant
and have made a determination not to seek such recapture at this time. The
Trustees will reconsider this matter from time to time.
Under the 1940 Act, the Fund may not purchase securities during the existence
of any underwriting syndicate of which Merrill Lynch is a member except
pursuant to an exemptive order or rules adopted by the Commission. Rule 10f-3
under the 1940 Act sets forth conditions under which the Fund may purchase
municipal bonds in such transactions. The rule sets forth requirements relating
to, among other things, the terms of an issue of municipal bonds purchased by
the Fund, the amount of municipal bonds which may be purchased in any one issue
and the assets of the Fund which may be invested in a particular issue.
The Fund does not expect to use any particular dealer in the execution of
transactions but, subject to obtaining the best net results, dealers who
provide supplemental investment research (such as information concerning tax-
exempt securities, economic data and market forecasts) to the Manager may
receive orders for transactions by the Fund. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Manager under its Management Agreement and the expense of the Manager will not
necessarily be reduced as a result of the receipt of such supplemental
information.
The Trust has no obligation to deal with any broker in the execution of
transactions for the Fund's portfolio securities. In addition, consistent with
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. and policies established by the Trustees of the Trust, 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.
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such action, for defensive or other reasons, appears
advisable to its Manager. While it is not possible to predict turnover rates
with any certainty, at present it is anticipated that the Fund's annual
portfolio turnover rate, under normal circumstances after the Fund's portfolio
is invested in accordance with its investment objective, will be less than
100%. (The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by
the monthly average of the value of the portfolio securities owned by the Fund
during the particular fiscal year. For purposes of determining this rate, all
securities whose maturities at the time of acquisition are one year or less are
excluded.) The portfolio turnover for the fiscal years ended August 31, 1992,
1993 and 1994 were 52.31%, 61.24% and 75.66%, respectively.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. 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 a statement setting forth 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.
27
<PAGE>
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined by the Manager once daily,
Monday through Friday, as of 4:15 P.M., New York time, on each day during which
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. 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 fees payable to the Manager and any account maintenance
and/or distribution fees, are accrued daily. The net asset value per share of
the Class A shares and the net asset value per share of the Class B, Class C
and Class D shares are expected to be equivalent. Under certain circumstances,
however, the per share net asset value of the Class B, Class C and Class D
shares may 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 the Class B and Class C shares generally will be lower than the
per share net asset value of its Class D shares, reflecting the daily expense
accruals of the distribution fees and higher transfer agency fees applicable
with respect to the Class B and Class C shares of the Fund. However, the per
share net asset value of the four classes eventually will tend to converge
immediately after the payment of dividends, which will differ by approximately
the amount of the expense accrual differential between the classes.
The Municipal Bonds and other portfolio securities in which the Fund invests
are traded primarily in over-the-counter municipal bond and money markets and
are valued at the last available bid price in the over-the-counter market or on
the basis of yield equivalents as obtained from one or more dealers that make
markets in the securities. One bond is the "yield equivalent" of another bond
when, taking into account market price, maturity, coupon rate, credit rating
and ultimate return of principal, both bonds will theoretically produce an
equivalent return to the bondholder. Financial futures contracts and options
thereon, which are traded on exchanges, are valued at their settlement prices
as of the close of such exchanges. Short-term investments with a remaining
maturity of 60 days or less are valued on an amortized cost basis, which
approximates market value. Securities and assets for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of the Trustees of the Trust, including valuations
furnished by a pricing service retained by the Trust, which may utilize a
matrix system for valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Trust under the general
supervision of the Trustees.
SHAREHOLDER SERVICES
The Trust offers a number of shareholder services described below which are
designed to facilitate investment in shares of the Fund. Full details as to
each of such services and copies of the various plans described below can be
obtained from the Trust, the Distributor or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
"Investment Account" and will receive, at least quarterly, statements from the
Transfer Agent. The statements will serve as transaction
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confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends, and long-term capital gains distributions. The
statements also will show any other activity in the account since the previous
statement. Shareholders will receive separate transaction confirmations for
each purchase or sale transaction other than automatic investment purchases and
the reinvestment of ordinary income dividends, and long-term capital gains
distributions. 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 may make additions to their
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 who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if an eligible Class A investor as described in the
Prospectus) or Class B, Class C or Class D shares at the applicable public
offering price either through the shareholder's securities dealer, or by mail
directly to the Transfer Agent, acting as agent for such securities dealer.
Voluntary accumulation 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. Alternatively,
investors who maintain CMA (R) accounts may arrange to have periodic
investments made in the Fund, in the CMA(R) accounts or in certain related
accounts in amounts of $100 or more through the CMA(R) Automated Investment
Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically 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 monthly payment date for such dividends and distributions.
Shareholders may elect in writing to receive either their income dividends or
capital gains distributions, or both, in cash, in which event payment will be
mailed 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 capital gains distributions reinvested in
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<PAGE>
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 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 are
available for shareholders with Class A or Class D shares with such a value of
$10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D shares
are redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his or her Class A or
Class D shares. Redemptions will be made at net asset value as determined at
the normal close of business on the New York Stock Exchange (currently 4:00
P.M., New York City time) on the 24th day of each month or the 24th day of the
last month of each quarter, whichever is applicable. If the New York Stock
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 for the
withdrawal payment will be made, on the next business day following redemption.
When a shareholder is making systematic withdrawals, dividends and
distributions on all Class A or Class D shares in the Investment Account are
reinvested automatically in the Fund's Class A or Class D shares, respectively.
A shareholder's Systematic Withdrawal Plan may be terminated at any time,
without charge or penalty, by the shareholder, the Fund, the Transfer Agent or
the Distributor. Withdrawal payments should not be considered as dividends,
yield or income. Each withdrawal is a taxable event. If periodic withdrawals
continuously exceed reinvested dividends, the shareholder's original investment
may be reduced correspondingly. Purchases of additional 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 or Class D 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) or
CBA(R) Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the 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
Systematic Redemption Program is not available if Company shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Merrill Lynch financial consultant.
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<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 SM Pricing 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, but does not hold Class A shares of the second fund in
his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class
D shares of the second fund as a result of the exchange. Class D shares also
may be exchanged for Class A shares of a second MLAM-advised mutual fund at
any time as long as, at the time of the exchange, the shareholder holds Class
A shares of the second fund in the account in which the exchange is made or is
otherwise eligible to purchase Class A shares of the second fund. Class B,
Class C and Class D shares will be exchangeable with shares 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 will be exchangeable for
shares of certain MLAM-advised money market funds specifically designated
below as available for exchange by holders of Class A, Class B, Class C or
Class D shares. Shares with a net asset value of at least $100 are required to
qualify for the exchange privilege, and any shares utilized in an exchange
must have been held by the shareholder for 15 days.
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 charges paid with respect to such Class A or Class D shares in the
initial purchase and any subsequent exchange. Class A or Class D shares issued
pursuant to dividend reinvestment are sold on a no-load basis in each of the
funds offering Class A or Class D shares. For purposes of the exchange
privilege, Class A or Class D shares acquired through dividend reinvestment
will be exchanged into the Class A or Class D shares of the other funds or
into shares of the Class A or Class D money market funds without a sales
charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its outstanding
Class B or Class C shares for Class B or Class C shares, respectively ("new
Class B shares") of another MLAM-advised mutual fund on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through
use of the exchange privilege will be subject to the Fund's CDSC schedule if
such schedule is higher than the deferred sales charge schedule relating to
the Class B shares of the fund from which the exchange has been made. For
purposes of computing the sales load that may be payable on a
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disposition of the new Class B shares, the holding period for the outstanding
Class B shares is "tacked" to the holding period of the new Class B shares. For
example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Global Resources Trust after having held the Fund's Class B
shares for two and a half years. The 2% sales load 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 Merrill Lynch Global Resources Trust
and receive cash. There will be no contingent deferred sales load due on this
redemption, since by "tacking" the two and a half year holding period of the
Fund's Class B shares to the three year holding period for the Merrill Lynch
Global Resources Trust Class B shares, the investor will be deemed to have held
the new Class B shares for more than five years.
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, toward 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 after
having held the Class B shares for two and a half years and three years later
decide to redeem the shares of Merrill Lynch 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
Merrill Lynch 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.
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 Western
Hemisphere (i.e., North and South
America and the surrounding waters).
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Merrill Lynch ArizonaLimited
Maturity Municipal Bond Fund........
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide as high a
level of income exempt 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 Municipal Series Trust, a series
fund, whose objective is to provide 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 Municipal Series Trust, a series
fund, whose objective is to provide 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, consist
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
changing market and economic trends.
Merrill Lynch Asset Income Fund, A high level of current income through
Inc. .......................... investment primarily in United States
fixed income securities.
Merrill Lynch Balanced Fund for
Investment and Retirement .........
As high a level of total investment
return as is consistent with a
reasonable level of risk by investing
in common stocks and other types of
securities, including fixed income
securities and convertible securities.
Merrill Lynch Basic Value Fund, Capital appreciation and, secondarily,
Inc. ............................... income, by investing in securities,
primarily equities, that are
undervalued and therefore represent
basic investment value.
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<PAGE>
Merrill Lynch California Insured
Municipal Bond Fund.................
A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund
whose objective is to provide 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 insured
California Municipal Bonds.
Merrill Lynch CaliforniaLimited
Maturity Municipal Bond Fund........
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide 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 intermediate-
term investment grade California
Municipal Bonds.
Merrill Lynch Capital Fund, Inc. .... The highest total investment return
consistent with prudent risk through a
fully managed investment policy
utilizing equity, debt and convertible
securities.
Merrill Lynch ColoradoMunicipal Bond
Fund................................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Colorado income taxes as
is consistent with prudent investment
management.
Merrill Lynch ConnecticutMunicipal
Bond Fund......................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Connecticut income
taxes as is consistent with prudent
investment management.
Merrill Lynch Corporate Bond Fund, Current income from three separate
Inc. ............................... diversified portfolios of fixed income
securities.
Merrill Lynch Developing Capital
Markets Fund, Inc. .................
Long-term appreciation through
investment in securities, principally
equities, of issuers in countries
having smaller capital markets.
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<PAGE>
Merrill Lynch Dragon Fund, Inc. .....
Capital appreciation primarily through
investment in equity and debt
securities of issuers domiciled in
developing Asia-Pacific countries,
which include all countries in Asia
and the Pacific Basin.
Merrill Lynch EuroFund...............
Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
Merrill Lynch Federal Securities
Trust............................... High current return through investment
in U.S. Government and Government
agency securities, including GNMA
mortgage-backed certificates and other
mortgage-backed Government securities.
Merrill Lynch Florida Limited
Maturity Municipal Bond Fund........
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide 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 securities exempt
from Florida intangible personal
property taxes through investment in a
portfolio primarily of intermediate-
term investment grade Florida
Municipal Bonds.
Merrill Lynch Florida Municipal Bond
Fund................................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide 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 securities
exempt from Florida intangible
personal property taxes.
Merrill Lynch Fund For Tomorrow, Long-term growth through investment in
Inc. ............................... a portfolio of good quality
securities, primarily 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
investment in a diversified portfolio
of equity securities placing
particular emphasis on companies that
have exhibited an above-average growth
rate in earnings.
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<PAGE>
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 from
investment in a global portfolio of
debt instruments denominated in
various currencies and multi-national
currency units.
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 warrants or options.
Merrill Lynch Global Holdings, Inc.
(residents of Arizona must meet
investor suitability standards) ....
The highest total investment return
consistent with prudent risk through
worldwide investment in an
internationally diversified portfolio
of securities.
Merrill Lynch Global Resources
Trust..........................
Long-term growth and protection of
capital from investment in securities
of foreign and domestic companies that
possess substantial natural resource
assets.
Merrill Lynch Global SmallCap Fund,
Inc. ..........................
Long-term growth of capital by
investing primarily 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 that are primarily
engaged in the ownership or operation
of facilities used to generate,
transmit or distribute electricity,
telecommunications, 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 emphasis
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
investment in equity securities of
companies that derive or are expected
to derive a substantial portion of
their sale from products 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 securities.
Merrill Lynch Maryland Municipal
Bond Fund...........................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Maryland income taxes as
is consistent with prudent investment
management.
Merrill Lynch MassachusettsLimited
Maturity Municipal Bond Fund........
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide as high a
level of income exempt from Federal
and Massachusetts income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-
term investment grade Massachusetts
Municipal Bonds.
Merrill Lynch Massachusetts
Municipal Bond Fund.................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Massachusetts income taxes
as is consistent with prudent
investment management.
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<PAGE>
Merrill Lynch MichiganLimited
Maturity Municipal Bond Fund........
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide as high a
level of income exempt from Federal
and Michigan income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-
term investment grade Michigan
Municipal Bonds.
Merrill Lynch Michigan Municipal
Bond Fund...........................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide 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 Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Minnesota income taxes as
is consistent with prudent investment
management.
Merrill Lynch Municipal Bond Fund,
Inc. ...............................
Tax-exempt income from three separate
diversified 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 as
high a level as possible of income
exempt from Federal income taxes by
investing in investment grade
obligations with a dollar weighted
average maturity of five to twelve
years.
Merrill Lynch New JerseyLimited
Maturity Municipal Bond Fund........
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide as high a
level of income exempt from Federal
and New Jersey income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily 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 Municipal Series Trust, a series
fund, whose objective is to provide 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 Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and New Mexico income taxes as
is consistent with prudent investment
management.
Merrill Lynch New YorkLimited
Maturity Municipal Bond Fund........
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide 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
investment in a portfolio primarily of
intermediate-term investment grade New
York Municipal Bonds.
Merrill Lynch New York Municipal
Bond Fund...........................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide 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.
Merrill Lynch North Carolina
Municipal Bond Fund.................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and North Carolina income
taxes as is consistent with prudent
investment management.
Merrill Lynch Ohio Municipal Bond
Fund................................ A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide 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 Municipal Series Trust, a series
fund, whose objective is to provide 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, including Japan,
Australia, Hong Kong and Singapore.
Merrill Lynch PennsylvaniaLimited
Maturity Municipal Bond Fund........
A portfolio of Merrill Lynch Multi-
State Limited Maturity Municipal
Series Trust, a series fund, whose
objective is to provide as high a
level of income exempt from Federal
and Pennsylvania income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of intermediate-
term investment grade Pennsylvania
Merrill Lynch Pennsylvania Municipal Municipal Bonds.
Bond Fund...........................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide as
high a level of income exempt from
Federal and Pennsylvania income taxes
as is consistent with prudent
investment management.
Merrill Lynch Phoenix Fund, Inc. .... Long-term growth of capital by
investing in equity and fixed income
securities, including tax-exempt
securities, of issuers in weak
financial condition or experiencing
poor operating results believed to be
undervalued relative to the current or
prospective condition of such issuer.
Merrill Lynch Short-Term Global
Income Fund, Inc. ..................
As high a level of current income as is
consistent with prudent investment
management from a global portfolio of
high quality debt securities
denominated in various currencies and
multi-national currency units and
having remaining maturities not
exceeding three years.
Merrill Lynch Special Value Fund,
Inc. ............................... Long-term growth of capital from
investment in securities, primarily
common stocks, of relatively small
companies believed to have special
investment value and emerging growth
companies regardless of size.
40
<PAGE>
Merrill Lynch Strategic Dividend
Fund................................ Long-term total return from investment
in dividend paying common stocks that
yield more than Standard & Poor's 500
Composite Stock Price Index.
Merrill Lynch Technology, Fund, Capital appreciation through worldwide
Inc. ............................... investment in equity securities of
companies that derive or are expected
to derive a substantial portion of
their sales from products and services
in technology.
Merrill Lynch Texas Municipal Bond
Fund................................
A portfolio of Merrill Lynch Multi-
State Municipal Series Trust, a series
fund, whose objective is to provide 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 Utility Income Fund,
Inc. ............................... High current income through investment
in equity and debt securities issued
by companies that are primarily
engaged in the ownership or operation
of facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
Merrill Lynch World Income Fund, High current income by investing in a
Inc. ............................... global portfolio of fixed income
securities denominated in various
currencies, including multinational
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 current income, preservation
of capital and liquidity available
from investment in a diversified
portfolio of short-term money market
securities.
41
<PAGE>
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 repurchase agreements
relating to such securities.
Merrill Lynch U.S Treasury Money Preservation of capital, liquidity and
Fund........................... current income through investment
exclusively in a diversified portfolio
of short-term marketable securities
which are direct obligations of the
U.S. Treasury.
Class B, Class C and Class D Share Money Market Funds:
Merrill Lynch Government Fund...
A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income consistent with liquidity and
security of principal from investment
in securities issued or guaranteed by
the U.S. Government, its agencies and
instrumentalities and in repurchase
agreements secured by such
obligations.
Merrill Lynch Institutional Fund..... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objectives is to provide 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
Institutions Series, a series fund,
whose objectives is to provide current
income exempt from Federal income
taxes, preservation of capital and
liquidity available from investment in
a diversified portfolio of short-term,
high quality municipal bonds.
Merrill Lynch Treasury Fund..... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objectives is to provide current
income consistent with liquidity and
security of principal from investment
in direct obligations of the U.S.
Treasury and up to 10% of its total
assets in repurchase agreements
secured by such obligations.
42
<PAGE>
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
Exercise of the exchange privilege is treated as a sale for Federal income tax
purposes and, depending on the circumstances, a short- or long-term capital
gain or loss may be realized. In addition, a shareholder exchanging shares of
any of the funds may be subject to a backup withholding tax unless such
shareholder certifies under penalty of perjury that the taxpayer identification
number on file with any such fund is correct and that such investor is not
otherwise subject to backup withholding. See "Dividends, Distributions and
Taxes" below.
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.
This exchange privilege may be modified or terminated in accordance with the
rules of the Commission. The Fund reserves the right to limit the number of
times an investor may exercise the exchange privilege. Certain funds may
suspend the continuous offering of their shares to the general public at any
time and may thereafter resume such offering from time to time. The exchange
privilege is available only to U.S. shareholders in states where the exchange
legally may be made.
DISTRIBUTIONS AND TAXES
The Trust intends to continue to qualify the Fund 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, in any
taxable year in which it distributes at least 90% of its taxable net income and
90% of its tax exempt net income, the Fund (but not its shareholders) will not
be subject to Federal income tax to the extent that it distributes (see below)
its net investment income and net realized capital gains. The Trust intends to
cause the Fund to distribute substantially all of such income.
As discussed in the Fund's Prospectus, the Trust has established another
series in addition to the Fund (together with the Fund, the "Series"). Each
Series of the Trust is treated as a separate corporation for Federal income tax
purposes. Each Series therefore is considered to be a separate entity in
determining its treatment under the rules for RICs described in the Prospectus.
Losses in one Series do not offset gains in another Series and the requirements
(other than certain organizational requirements) for qualifying for RIC status
will be determined at the Series level rather than at the Trust level.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from
43
<PAGE>
previous years. The required distributions, however, are based only on the
taxable income of a RIC. The excise tax, therefore, generally will not apply to
the tax-exempt income of a RIC, such as the Fund, that pays exempt-interest
dividends.
The Trust intends to qualify the Fund to pay "exempt-interest dividends" as
defined in Section 852(b)(5) of the Code. Under such section if, at the close
of each quarter of its taxable year, at least 50% of the value of the Fund's
total assets consists of obligations exempt from Federal income tax ("tax-
exempt obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be qualified
to pay exempt-interest dividends to its Class A, Class B, Class C and Class D
shareholders (together the "shareholders"). Exempt-interest dividends are
dividends or any part thereof paid by the Fund which are attributable to
interest on tax-exempt obligations and designated by the Trust as exempt-
interest dividends in a written notice mailed to the Fund's shareholders within
60 days after the close of the Fund's taxable year. For this purpose, the Fund
will allocate interest from tax-exempt obligations (as well as ordinary income,
capital gains and tax preference items discussed below) among the Class A,
Class B, Class C and Class D shareholders according to a method (which it
believes is consistent with the Commission's exemptive order permitting the
issuance and sale of multiple classes of stock) that is based on the gross
income allocable to the Class A, Class B, Class C and Class D shareholders
during the taxable year, or such other method as the Internal Revenue Service
may prescribe. To the extent that the dividends distributed to the Fund's
shareholders are derived from interest income exempt from Federal income tax
under Code Section 103(a) and are properly designated as "exempt-interest
dividends", they will be excludable from a shareholder's gross income for
Federal income tax purposes. Exempt-interest dividends are included, however,
in determining the portion, if any, of a person's social security benefits and
railroad retirement benefits subject to Federal income taxes. Interest on
indebtedness incurred or continued to purchase or carry shares of a RIC paying
exempt-interest dividends, such as the Fund, will not be deductible by the
investor for Federal or California personal income tax purposes to the extent
attributable to exempt-interest dividends. Shareholders are advised to consult
their tax advisers with respect to whether exempt-interest dividends retain the
exclusion under Code Section 103(a) if such shareholder would be treated as a
"substantial user" or "related person" under Code Section 147(a) with respect
to property financed with the proceeds of an issue of "industrial development
bonds" or "private activity bonds", if any, held by the Fund.
The portion of the Fund's exempt-interest dividends paid from interest
received by the Fund from California Municipal Bonds will be exempt from
California income taxes if, at the close of each quarter of the Fund's taxable
year, at least 50% of the value of the Fund's total assets consists of
California Municipal Bonds. The Trust intends to invest at least 50% of the
Fund's assets in California Municipal Bonds at all times. Shareholders subject
to income taxation in states other than California will realize a lower after
tax rate of return than California shareholders since the dividends distributed
by the Fund will generally not be exempt, to any significant degree, from
taxation by such other states. The Trust will inform shareholders annually
regarding the portion of the Fund's distributions which constitutes exempt-
interest dividends and the portion which is exempt from California income
taxes. The Fund will allocate exempt-interest dividends among the Class A,
Class B, Class C and Class D shareholders for California income tax purposes
based on a method similar to that described above for Federal income tax
purposes.
Distributions from investment income and capital gains, including exempt-
interest dividends, may be subject to the California state franchise tax if
received by a corporation subject to such tax, and may be subject
44
<PAGE>
to state taxes in states other than California and to local taxes in cities
other than those in California. Accordingly, investors in the Fund including,
in particular, corporate investors which may be subject to the California
franchise tax should consult their tax advisers with respect to the application
of such taxes to the receipt of Fund dividends and as to their California tax
situation in general.
To the extent the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for Federal income tax purposes. Such distributions
are not eligible for the dividends-received deduction for corporations.
Distributions, if any, of net long-term capital gains from the sale of
securities or from certain transactions in futures or options ("capital gain
dividends") are taxable as long-term capital gains for Federal income tax
purposes, regardless of the length of time the shareholder has owned Fund
shares and, for California income tax purposes, will be treated as capital
gains which are taxed at ordinary income tax rates. Under the Revenue
Reconciliation Act of 1993, all or a portion of the Fund's gain from the sale
or redemption of tax-exempt obligations purchased at a market discount will be
treated as ordinary income rather than capital gain. This rule may increase the
amount of ordinary income dividends received by shareholders. Any loss upon the
sale or exchange of 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. In addition, such loss will be disallowed to the extent of any
exempt-interest 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). 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 such year.
Ordinary income dividends paid by the Fund 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 advisers concerning the applicability of the United
States withholding tax.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies
to interest received on "private activity bonds" issued after August 7, 1986.
Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference", which could subject investors in such bonds, including
shareholders of the Fund, to an alternative minimum tax. The Fund will purchase
such "private activity bonds", and the Trust will report to shareholders within
60 days after the Fund's taxable year-end, the portion of the Fund's dividends
declared during the year which are a tax preference item for alternative
minimum tax purposes. The Code further provides that corporations are subject
to an alternative minimum tax based, in part, on certain differences between
taxable income as adjusted for other tax preferences and the corporation's
"adjusted current earnings" (which more closely reflect a corporation's
economic income). Because an exempt-interest dividend paid by the Fund will be
included in adjusted current earnings, a corporate shareholder may be required
to pay alternative minimum tax on exempt-interest dividends paid by the Fund.
45
<PAGE>
The Revenue Reconciliation Act of 1993 has added new marginal tax brackets of
36% and 39.6% for individuals and has created a graduated structure of 26% and
28% for the alternative minimum tax applicable to individual taxpayers. These
rate increases may affect an individual investor's after-tax return from an
investment in the Fund as compared with such investor's return from taxable
investments.
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 such 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 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.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
ENVIRONMENTAL TAX
The Code imposes a deductible tax (the "Environmental Tax") on a
corporation's alternative minimum taxable income (computed without regard to
the alternative tax net operating loss deduction and the deduction for the
Environmental Tax) at a rate of $12 per $10,000 (0.12%) of alternative minimum
taxable income in excess of $2,000,000. The Environmental Tax is imposed for
taxable years beginning after December 31, 1986 and before January 1, 1996. The
Environmental Tax will be imposed even if the corporation is not required to
pay an alternative minimum tax because the corporation's regular income tax
liability exceeds its minimum tax liability. The Code provides, however, that a
RIC such as the Fund is not subject to the Environmental Tax. However, exempt-
interest dividends paid by the Fund that create alternative minimum taxable
income for corporate shareholders under the Code (as described above) may
subject corporate shareholders of the Fund to the Environmental Tax.
46
<PAGE>
TAX TREATMENT OF FUTURES AND OPTION TRANSACTIONS
The Fund may write, purchase or sell municipal bond index futures contracts
and interest rate futures contracts on U.S. Government securities ("financial
futures contracts"). The Fund may also purchase and write call and put options
on such financial futures contracts. In general, unless an election is
available to the Fund or an exception applies, such options and financial
futures contracts that are "Section 1256 contracts" will be "marked to market"
for Federal income tax purposes at the end of each taxable year, i.e., each
such option or financial futures contract will be treated as sold for its fair
market value on the last day of the taxable year, and any gain or loss
attributable to Section 1256 contracts will be 60% long-term and 40% short-term
capital gain or loss. Application of these rules to Section 1256 contracts held
by the Fund may alter the timing and character of distributions to
shareholders.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in financial futures contracts and related
options. Under Section 1092, the Fund may be required to postpone recognition
for tax purposes of losses incurred in certain closing transactions in
financial futures contracts or the related options.
One of the requirements for qualification as a RIC is that less than 30% of
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 closing transactions within three months
after entering into an option or financial futures contract.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and applicable California tax laws
presently in effect. For the complete provisions, reference should be made to
the pertinent Code sections, the Treasury regulations promulgated thereunder
and the applicable California tax laws. The Code and the Treasury regulations,
as well as the California tax laws, are subject to change by legislative or
administrative action either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding the
availability of any exemptions from state or local taxes (other than those
imposed by California) and with specific questions as to Federal, foreign,
state or local taxes.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield and tax-equivalent yield, in
advertisements or information furnished to present or prospective shareholders.
Total return, yield and tax-equivalent yield figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return, yield and tax equivalent yield are determined
separately for Class A, Class B, Class C and Class D shares in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to
47
<PAGE>
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) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.
48
<PAGE>
Set forth below is total return, yield and tax-equivalent yield information
for the Class A and Class B shares of the Fund for the periods indicated. Since
Class C and Class D shares have not been issued prior to the date of this
Statement of Additional Information, performance information concerning Class C
and Class D shares is not yet provided.
<TABLE>
<CAPTION>
CLASS A SHARES* CLASS B SHARES
----------------------------------- -----------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
$1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ended August
31, 1994............... (4.88)% $ 951.20 (5.15)% $ 948.50
Five Years Ended August
31, 1994............... 6.70 % $1,382.90 7.00 % $1,402.30
Inception (September 30,
1985) to August 31,
1994................... 8.36 % $2,047.40
Inception (October 25,
1988) to August 31,
1994................... 7.09% $1,493.00
<CAPTION>
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charges)
<S> <C> <C> <C> <C>
Year Ended August 31,
1994................... (.92)% $ 990.80 (1.50)% $ 985.00
1993................... 13.21 % $1,132.10 12.64 % $1,126.40
1992................... 10.23 % $1,102.30 9.68 % $1,096.80
1991................... 10.73 % $1,107.30 10.18 % $1,101.80
1990................... 5.21 % $1,052.10 4.58 % $1,045.80
1989................... 11.14 % $1,111.40
1988................... 5.05 % $1,050.50
1987................... 1.52 % $1,015.20
Inception (September 30,
1985) to August 31,
1986................... 23.19 % $1,231.90
October 25, 1988 to Au-
gust 31, 1989.......... 7.96% $1,079.60
<CAPTION>
AGGREGATE TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
Inception (September 30,
1985) to August 31,
1994................... 104.74 % $2,047.40
October 25, 1988 to Au-
gust 31, 1994.......... 49.30 % $1,493.00
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ending on August
31, 1994............... 5.49 % 5.22 %
<CAPTION>
TAX-EQUIVALENT YIELD**
<S> <C> <C> <C> <C>
30 days ending on August
31, 1994............... 7.63 % 7.25 %
</TABLE>
- --------
* Information as to Class A shares is presented only for the period October 25,
1988 to August 31, 1994. Prior to October 25, 1988, no Class A shares were
publicly issued.
** Based on a Federal income tax rate of 28%.
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
49
<PAGE>
maximum, sales charge or may take into account the CDSC 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 SERIES AND SHARES
The Declaration of Trust provides that the Trust shall be comprised of
separate series ("Series") each of which will consist of a separate portfolio
which will issue separate shares. The Trust is presently comprised of the Fund
and Merrill Lynch California Insured Municipal Bond Fund. The Trustees are
authorized to create an unlimited number of Series and, with respect to each
Series, to issue an unlimited number of full and fractional shares of
beneficial interest, par value $.10 per share, of different classes and to
divide or combine the shares into a greater or lesser number of shares without
thereby changing the proportionate beneficial interests in the Series.
Shareholder approval is not necessary for the authorization of additional
Series or classes of a Series of the Trust. At the date of this Statement of
Additional Information, the shares of the Fund are divided into Class A, Class
B, Class C and Class D shares. Class A, Class B, Class C and Class D shares
represent interests in the same assets of the Fund and are identical in all
respects 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. See "Purchase of Shares".
The Trust has received an order from the Commission permitting the issuance and
sale of multiple classes of shares. The order permits the Trust to issue
additional Classes of shares of any Series if the Board of Trustees deems such
issuance to be in the best interests of the Trust.
All shares of the Trust have equal voting rights, except that only shares of
the respective Series are entitled to vote on matters concerning only that
Series and, as noted above, Class B, Class C and Class D shares have exclusive
voting rights with respect to matters relating to the account maintenance
and/or distribution expenses 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 respective Series and in net assets
of such Series upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities, except that, as noted above, expenses related to the
account maintenance and/or distribution of the Class B, Class C and Class D
shares will be borne solely by such class. There will normally be no meetings
of shareholders for the purpose of electing Trustees unless and until such time
as less than a majority of the Trustees holding office have been elected by
shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Shareholders 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 Trust will be required to call a special meeting of shareholders in
accordance with the requirements of the 1940 Act to seek approval of new
management and advisory arrangements, of a material increase in distribution
fees or of a change in the fundamental policies, objectives or restrictions of
a Series.
The obligations and liabilities of a particular Series are restricted to the
assets of that Series and do not extend to the assets of the Trust generally.
The shares of each Series, when issued, will be fully paid and nonassessable,
have no preference, preemptive, conversion, exchange or similar rights, and are
freely transferable. Holders of shares of any Series are entitled to redeem
their shares as set forth elsewhere herein and in the Prospectus. Shares do not
have cumulative voting rights and the holders of more than 50% of the
50
<PAGE>
shares of the Trust voting for the election of Trustees can elect all of the
Trustees if they choose to do so and in such event the holders of the remaining
shares would not be able to elect any Trustees. No amendments may be made to
the Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Trust.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares of the Fund for $100,000. Such shares were acquired for investment and
can only be disposed of by redemption. The organizational expenses of the Fund
were paid by the Fund and were amortized over a period not exceeding five
years. The proceeds realized by the Manager upon the redemption of any of the
shares initially purchased by it will be reduced by the proportionate amount of
any remaining unamortized organizational expenses which the number of shares
redeemed bears to the number of shares initially purchased. Such organizational
expenses include certain of the initial organizational expenses of the Trust
which have been allocated to the Fund by the Trustees. If additional Series are
added to the Trust, the organizational expenses will be allocated among the
Series in a manner deemed equitable by the Trustees.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A and
Class B shares of the Fund, based on the Fund's net assets and number of shares
outstanding as of August 31, 1994, is set forth below. Information is not
provided for Class C or Class D shares since no Class C or Class D shares were
publicly offered prior to the date of this Statement of Additional Information.
<TABLE>
<CAPTION>
AUGUST 31, 1994
------------------------
CLASS A CLASS B
----------- ------------
<S> <C> <C>
Net Assets............................................ $60,017,051 $726,888,049
=========== ============
Number of Shares Outstanding.......................... 5,303,875 64,217,894
=========== ============
Net Asset Value Per Share (net assets divided by
number of shares outstanding)........................ $ 11.32 $ 11.32
Sales Charge (for Class A shares: 4.00% of offering
price (4.17% of net asset value per share))*......... $ .47 **
----------- ------------
Offering Price........................................ $ 11.79 $ 11.32
=========== ============
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption. See "Purchase of Shares--Deferred
Sales Charge Alternatives--Class B and Class C Shares" in the Prospectus.
INDEPENDENT AUDITORS
Deloitte & Touche llp, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Trust. The selection of
independent auditors is subject to ratification by the
51
<PAGE>
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 Trust at a meeting called for the purpose of terminating such
employment. The independent auditors are responsible for auditing the annual
financial statements of the Trust.
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
Financial Data Services, Inc., 4800 Deer Lake Drive, Jacksonville, Florida
32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "Management of
the Trust--Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Trust.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on August 31 of each year. The Trust 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 of the information set forth in the Registration Statement and the exhibit
relating thereto, which the Trust has filed with the Commission, Washington,
D.C., under the Securities Act of 1933 and the Investment Company Act of 1940,
to which reference is hereby made.
----------------
The Declaration of Trust establishing the Trust dated March 20, 1985, 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 California Municipal Series Trust" refers to the
Trustees under the Declaration collectively as Trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to their
private property for the satisfaction of any obligation or claim of the Trust,
but the "Trust Property" (as defined in the Declaration) only shall be liable.
To the knowledge of the Trust, no person or entity owned beneficially 5% or
more of the Fund's shares on September 30, 1994.
52
<PAGE>
APPENDIX I
ECONOMIC AND OTHER CONDITIONS IN CALIFORNIA
The following information as to certain California considerations is given to
investors in view of the Fund's policy of concentrating its investments in
California issuers. The Fund is therefore susceptible to political, economic,
regulatory or other factors affecting issuers of California municipal
securities. The following information constitutes only a brief summary of a
number of the complex factors which may have an impact on issuers of California
municipal securities and does not purport to be a complete or exhaustive
description of all adverse conditions to which issuers of California municipal
securities may be subject. Additionally, many factors, including national,
economic, social and environmental policies and conditions, which are not
within the control of such issuers, could have an adverse impact on the
financial condition of such issuers. The Fund cannot predict whether or to what
extent such factors or other factors may affect the issuers of California
municipal securities, the market value or marketability of such securities or
the ability of the respective issuers of such securities acquired by the Fund
to pay interest on or principal of such securities. Further, the
creditworthiness of obligations issued by local California issuers may be
unrelated to the creditworthiness of obligations issued by the State of
California. The summary is based primarily upon one or more publicly available
offering statements relating to debt offerings of state issuers; however, it
has not been updated nor will it be updated during the year. The Trust has not
independently verified the information.
ECONOMIC CONDITIONS
California's economy is the largest among the 50 states and one of the
largest in the world. Total employment is about 14 million, the majority of
which is in the service, trade and manufacturing sectors.
Since the start of the 1990-91 fiscal year (July 1-June 30), the State of
California (sometimes referred to as the "State") has faced the worst economic,
fiscal and budget conditions since the 1930s. Construction, manufacturing
(especially aerospace), exports and financial services, among others, have all
been severely affected.
Job losses have been the worst of any post-war recession and have continued
through the end of 1993. The State Department of Finance (the "Department of
Finance") projects that non-farm employment levels will be stable in 1994 and
show modest growth in 1995, but pre-recession job levels are not expected to be
reached for several more years. Unemployment is expected to remain well above
the national average through 1994. The Department of Finance foresees slow
recovery from the recession in California beginning in 1994. Both the
California and national economic recoveries are much weaker than in previous
business cycles, and could be harmed by several factors, including rising
interest rates.
California has lost over 850,000 payroll jobs, making this by far the longest
and deepest downturn of the post-World War II era. By contrast, in both the
1969-70 and 1981-82 recessions, the State had recovered its job losses by two
years after the start of the recession.
Major cuts in federal defense spending are now recognized as the main source
of the recession and the largest obstacle to recovery. This year and for the
next several years to come, the principal question in the California outlook is
when and whether other elements in the State's economy can muster sufficient
strength to overcome the continuing drag of defense cuts.
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<PAGE>
The State's tax revenue experience clearly reflects sharp declines in
employment, income and retail sales on a scale not seen in over 50 years. The
May 1994 Revision to the 1994-95 Governor's Budget, released May 20, 1994 (the
"May Revision"), assumes the State will start to recover from recessionary
conditions in 1994, with a modest upturn beginning in 1994 and continuing in
1995, a year later than predicted in the May 1993 Department of Finance
economic projection. Pre-recession job levels are not expected to be reached
until 1997. The following are excerpts from the May Revision discussion of
economic conditions.
Nation--Economic recovery is apparently proceeding at a steady pace for the
nation as a whole. The May Revision economic forecast for the United States is
moderately higher, reflecting both improved prospects and upward revisions in
several major data series.
The recovery gained momentum in the last quarter of 1993, with GDP expanding
at a 7 percent rate. This was stronger than assumed for the Budget forecast in
January, 1993. Strength in the recovery has been reflected in car sales,
housing starts, job gains, industrial production and corporate profits.
Business investment in equipment has strengthened beyond that expected for the
Budget forecast. Inflation remains under control, and appears to be coming in
lower than previously forecast.
On the down side, investment in nonresidential structures is coming in weaker
than anticipated. Federal spending for both defense and nondefense programs has
fallen more rapidly than forecast previously, and a surge in imports has
contributed to a large foreign trade deficit. California's Northridge
Earthquake was reflected in national data, although the effect was far smaller
and more temporary for the U.S. than it will be for the State.
The May Revision forecast has incorporated these developments. Gross domestic
product (GDP) for the first quarter 1994 grew at essentially the rate forecast
late last year. For all of 1994, however, real GDP is now expected to grow by
3.6 percent, compared to the 2.8 percent forecast in the Budget. Growth for
1995 is expected to be reduced as concerns mount over the impact of higher
interest rates.
Although assumptions underlying the Budget forecast included rising interest
rates, policy moves by the Federal Reserve in recent weeks have pushed rates up
faster than expected. The mortgage rate is of particular concern. There are
reports that housing activity--resales, refinancings, and new building--is
already slowing down. It will be difficult to keep recovery going if rates edge
higher in coming months.
Another downside risk is the as yet unresolved issue of health care coverage
and costs. Both interest rates and the health care question are critical
factors for job creation. Small businesses, in particular, could be adversely
affected by rising health costs, and it is this sector which creates many of
the new jobs during an economic upturn.
The May Revision shows stronger employment gains in 1994, but renewed
weakness in 1995. Even so, the recovery is still quite moderate by historical
standards, and the unemployment rate--essentially the same as forecast for the
Budget--will remain a concern.
California--There is growing evidence that California is showing signs of an
economic turnaround, and the May Revision forecast is revised up from the
January Budget forecast. Since the January Budget forecast, 1993 nonfarm
employment has been revised upward by 31,000. Employment in the early months of
1994 has shown encouraging signs of growth, several months sooner than was
contemplated in the January Budget forecast. Between December and April,
payrolls were up by 50,000 jobs. The Northridge Earthquake may
54
<PAGE>
have dampened economic activity briefly during late January and February, but
the rebuilding effects are now adding a small measure of stimulus.
Sectors which are contributing to California's recovery include construction
and related manufacturing, wholesale and retail trade, transportation and
several service industries such as amusements and recreation, business services
and management consulting. Electronics is showing modest growth and the rate of
decline in aerospace manufacturing is slowly diminishing. These trends are
expected to continue, and by next year, much of the restructuring in the
finance and utilities industries should be nearly completed. Thus, the State's
recovery should gain momentum over the next two years.
As a result of these factors, average 1994 nonfarm employment is now forecast
to maintain 1993 levels compared to a projected 0.6 percent decline in the
January budget. 1995 employment is expected to be up 1.6 percent, compared to
0.7 percent in the January budget.
The Northridge Earthquake resulted in a downward revision of this year's
personal income growth--from 4.0 percent in the January Budget to 3.6 percent.
However, this decline is more than explained by the $5.5 billion charge against
rental and proprietors' incomes--equal to 0.8 percent of total income--
reflecting uninsured damage from the quake. Next year, without the quake
effects, incomes grow 6.1 percent, compared to 5 percent in the January Budget.
Without these quake effects, income growth was little changed in the May
Revision compared to the January forecast contained in the Governor's Proposed
Budget.
The housing forecast remains essentially unchanged. Although existing home
sales have strengthened and subdivision surveys indicated increased new home
sales, building permits are up only slightly from recession lows. Gains are
expected in the months ahead, but higher mortgage interest rates will dampen
the upturn. Essentially, the earthquake adds a few thousand units to the
forecast, but this effect is offset by higher interest rates.
Interest rates represent one of several downside risks to the forecast. The
rise in interest rates has occurred more rapidly than contemplated in the
January Budget forecast. In addition to affecting housing, higher rates may
also dampen consumer spending, given the high proportion of California
homeowners with adjustable-rate mortgages. The May Revision forecast includes a
further rise in the Federal Funds rate to nearly 5 percent by the beginning of
1995. Should rates rise more steeply, housing and consumer spending would be
adversely affected.
The employment upturn is still tenuous. The Employment Development Department
revised down February's employment gain and March was revised to a small
decline. Unemployment rates in California have historically been volatile since
January ranging from a high of 10.1 percent to a low of 8.6 percent. The small
sample size coupled with changes made to the survey instrument in January
contribute to this volatility.
The State. The recession has seriously affected State tax revenues, which
basically mirror economic conditions. It has also caused increased expenditures
for health and welfare programs. The State has also been facing a structural
imbalance in its budget with the largest programs supported by the General
Fund--K-12 schools and community colleges, health and welfare, and
corrections--growing at rates higher than the growth rates for the principal
revenue sources of the General Fund. As a result, the State has experienced
recurring budget deficits. The State Controller reports that expenditures
exceeded revenues for four of the five fiscal years ending with 1991-92 and
were essentially equal in 1992-93. By June 30, 1993, according to the
Department of Finance, the State's Special Fund for Economic Uncertainties had
a deficit, on a budget
55
<PAGE>
basis, of approximately $2.8 billion. The 1993-94 Budget Act incorporated a
Deficit Retirement and Reduction Plan to repay this deficit over two fiscal
years. The original budget for 1993-94 reflected revenues which exceeded
expenditures by approximately $2.0 billion. As a result of the continuing
recession, the excess of revenues over expenditures for the fiscal year is now
expected to be only about $500 million. Thus the accumulated budget deficit at
June 30, 1994 is now estimated by the Department of Finance to be approximately
$2.0 billion, and the deficit will not be retired by June 30, 1995 as planned.
The accumulated budget deficits over the past several years, together with
expenditures for school funding, which have not been reflected in the budget,
and reduction of available internal borrowable funds, have combined to
significantly deplete the State's cash resources to pay its ongoing expenses.
In order to meet its cash needs, the State has had to rely for several years on
a series of external borrowings, including borrowings past the end of a fiscal
year. Such borrowings are expected to continue in the future, provided that the
State may not issue any revenue anticipation notes, reimbursement warrants or
other registered warrants which by their terms are due and payable on or prior
to April 26, 1996, the maturity date of the 1994 Revenue Anticipation Warrants,
other than the Notes and the 1994 Revenue Anticipation Warrants. See "The
Notes", "Cash Management Plan" and "State Indebtedness--Short Term Borrowings".
Administration reports during the course of the 1993-94 Fiscal Year have
indicated that while economic recovery appears to have started in the second
half of the fiscal year, recessionary conditions continued longer than had been
anticipated when the 1993-94 Budget Act was adopted. Overall, revenues for the
1993-94 Fiscal Year were approximately $800 million lower than original
projections, and expenditures were approximately $780 million higher, primarily
because of higher health and welfare caseloads, lower property taxes which
require greater State support for K-14 education to make up the shortfall, and
lower than anticipated federal government payments for immigration-related
costs. The most recent reports, however, in May and June, 1994, indicated that
revenues in the second half of the 1993-94 Fiscal Year have been very close to
the projections made in the Governor's Budget of January 10, 1994, which is
consistent with a slow turnaround in the economy.
During the 1993-94 Fiscal Year, the State implemented the Deficit Retirement
and Reduction Plan, which was part of the 1993-94 Budget Act, by issuing $1.2
billion of revenue anticipation warrants in February 1994 maturing December 21,
1994. This borrowing reduced the cash deficit at the end of the 1993-94 Fiscal
Year. Nevertheless, because of the $1.5 billion variance from the original
Budget Act assumptions, the General Fund ended the Fiscal Year at June 30,
1994, carrying forward an accumulated deficit of approximately $2 billion.
Because of the revenue shortfall and the State's reduced internal borrowable
cash resources, in addition to the $1.2 billion of revenue anticipation
warrants issued as part of the Deficit Retirement and Reduction Plan, the State
issued an additional $2.0 billion of revenue anticipation warrants which were
needed to fund the State's obligations and expenses through the end of the
1993-94 Fiscal Year.
Northridge Earthquake. On January 17, 1994, a major earthquake measuring an
estimated 6.8 on the Richter Scale struck Los Angeles. Significant property
damage to private and public facilities occurred in a four-county area
including northern Los Angeles County, Ventura County, and parts of Orange and
San Bernardino Counties. These areas were declared as State and federal
disaster areas by January 18. Current estimates of total property damage
(private and public) are in the range of $20 billion, but these estimates are
subject to change.
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<PAGE>
Despite such damage, on the whole, the vast majority of structures in the
areas, including large manufacturing and commercial buildings and all modern
high-rise offices, survived the earthquake with minimal or no damage,
validating the cumulative effect of strict building codes and thorough
preparation for such an emergency by the State and local agencies.
Damage to State-owned facilities included transportation corridors and
facilities such as Interstate Highways 5 and 10 and State Highways 14, 118 and
210. Most of the major highways (Interstates 5 and 10) have now been reopened.
The campus at California State University--Northridge (very near the epicenter)
suffered an estimated $350 million damage, resulting in temporary closure of
the campus. The campus has reopened on a reduced operating basis using borrowed
facilities elsewhere in the area and many temporary structures. There was also
some damage to University of California at Los Angeles. Overall, except for the
temporary road and bridge closures, and CSU-Northridge, the earthquake did not
and is not expected to significantly affect State government operations.
The President immediately allocated some available disaster funds, and
Congress has approved additional funds for a total of at least $9.5 billion of
federal funds for earthquake relief, including assistance to homeowners and
small businesses, and costs for repair of damaged public facilities. The
Governor has announced that the State's share for transportation projects would
come from existing Department of Transportation funds (thereby delaying other,
non-earthquake related projects), the State's share for certain other costs
(including local school building repairs) would come from reallocating existing
bond funds, and that a proposed program for homeowner and small business aid
supplemental to federal aid would have to be abandoned. Some other costs will
be borrowed from the federal government in a manner similar to that used by the
State of Florida after Hurricane Andrew. Pursuant to Senate Bill 2383,
repayment will have to be addressed in 1995-96 or beyond.
1994-95 Budget Act. The 1994-95 Fiscal Year represents the fourth consecutive
year the Governor and Legislature were faced with a very difficult budget
environment to produce a balanced budget. Many program cuts and budgetary
adjustments have already been made in the last three years. The Governor's
Budget Proposal, as updated in May and June, 1994, recognized that the
accumulated deficit could not be repaid in one year, and proposed a two-year
solution. The budget proposal sets forth revenue and expenditure forecasts and
revenue and expenditure proposals which result in operating surpluses for the
budget for 1994-95, and lead to the elimination of the accumulated budget
deficit, estimated at about $2.0 billion at June 30, 1994, by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8, 1994, projects
revenues and transfers of $41.9 billion, $2.1 billion higher than revenues in
1993-94. This reflects the Administration's forecast of an improving economy.
Also included in this figure is a projected receipt of about $360 million from
the Federal Government to reimburse the State's cost of incarcerating
undocumented immigrants. The State will not know how much the Federal
Government will actually provide until the Federal Fiscal Year 1995 Budget is
completed, which is expected to be by October, 1994. The Legislature took no
action on a proposal in the January Governor's Budget to undertake an expansion
of the transfer of certain programs to counties, which would also have
transferred to counties 0.5% of the State's current sales tax.
The 1994-95 Budget Act contains no tax increases. Under legislation enacted
for the 1993-94 Budget, the renters' tax credit was suspended for two years
(1993 and 1994). A ballot proposition to permanently restore the renters' tax
credit after this year failed at the June, 1994 election. The Legislature
enacted a further one year suspension of the renters' tax credit, for 1995,
saving approximately $390 million in the 1995-96
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<PAGE>
Fiscal Year. Subsequent to the enactment of the 1994-95 Budget Act, the State
of California's bond rating was lowered to A by Standard & Poor's Corporation
and to A by Fitch Investors Service, Inc. Moody's Investors Service, Inc. also
lowered the State of California's long-term rating to A1.
Certain issuers of California Municipal Bonds receive subventions from the
State which are eligible to be used to make payments on said Bonds. No
prediction can be made as to what effect continued decreases in subventions may
have on the ability of some issuers to make such payments.
CONSTITUTIONAL AND STATUTORY LIMITATIONS; RECENT INITIATIVES; PENDING
LITIGATION
Article XIIIA of the California Constitution (which resulted from the voter-
approved Proposition 13 in 1978) limits the taxing powers of California public
agencies. Article XIIIA provides that the maximum ad valorem tax on real
property cannot exceed 1% of the "full cash value" of the property, and
effectively prohibits the levying of any other ad valorem property tax for
general purposes. However, on May 3, 1986, Proposition 46, an amendment to
Article XIIIA, was approved by the voters of the State of California, creating
a new exemption under Article XIIIA permitting an increase in ad valorem taxes
on real property in excess of 1% for bonded indebtedness approved by two-thirds
of the voters voting on the proposed indebtedness. "Full cash value" is defined
as "the County Assessor's valuation of real property as shown on the 1975-76
tax bill under "full cash value" or, thereafter, the appraised value of real
property when purchased, newly constructed, or a change in ownership has
occurred after the 1975 assessment". The "full cash value" is subject to annual
adjustment to reflect increases (not to exceed 2%) or decreases in the consumer
price index or comparable local data, or to reflect reductions in property
value caused by damage, destruction or other factors.
Article XIIIB of the California Constitution limits the amount of
appropriations of the State and of local governments to the amount of
appropriations of the entity for the prior year, adjusted for changes in the
cost of living, population and the services that the local government has
financial responsibility for providing. To the extent the revenues of the state
and/or local government exceed its appropriations, the excess revenues must be
rebated to the public either directly or through a tax decrease. Expenditures
for voter-approved debt services are not included in the appropriations limit.
In 1986, California voters approved an initiative statute known as
Proposition 62. This initiative (i) required that any tax for general
governmental purposes imposed by local governments be approved by a majority of
the electorate of the government entity, (ii) required that any special tax
(defined as taxes levied for other than general government purposes) imposed by
a local government entity be approved by a two-thirds vote of the voters within
that jurisdiction, (iii) restricted the use of revenues from a special tax to
the purposes or for the service for which the special tax is imposed, (iv)
prohibited the imposition of ad valorem taxes on real property by local
governmental entities except as permitted by Article XIIIA, (v) prohibited the
imposition of transaction taxes and sales taxes on the sale of real property by
local governments, (vi) required that any tax imposed by a local government on
or after August 1, 1985 be ratified by a majority vote of the electorate within
two years of the adoption of the initiative or be terminated by November 15,
1988, (vii) required that, in the event a local government fails to comply with
the provisions of this measure, a reduction in the amount of property tax
revenues allocated to such local government occur in an amount equal to the
revenues received by such entity attributable to the tax levied in violation of
the initiative, and (viii) permitted those provisions to be amended exclusively
by the voters of the State of California. While several recent decisions of the
California Courts of Appeal have held that all or portions of Proposition 62
are unconstitutional, the California Supreme Court has yet to consider the
matter.
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<PAGE>
At the November 9, 1988 general election, California voters approved an
initiative known as Proposition 98. This initiative amends Article XIIIB to
require that (i) the California Legislature establish a prudent state reserve
fund in an amount as it shall deem reasonable and necessary and (ii) revenues
in excess of amounts permitted to be spent and which would otherwise be
returned pursuant to Article XIIIB by revision of tax rates or fee schedules,
be transferred and allocated (up to a maximum of 40%) to the State School Fund
and be expended solely for purposes of instructional improvement and
accountability. Proposition 98 also amends Article XVI to require that the
State of California provide a minimum level of funding for public schools and
community colleges. Commencing with the 1988-89 fiscal year, money to be
applied by the State for the support of school districts and community college
districts shall not be less than the greater of: (i) the amount which, as a
percentage of the State general fund revenues which may be appropriated
pursuant to Article XIIIB, equals the percentage of such State general fund
revenues appropriated for school districts and community college districts,
respectively, in fiscal year 1986-87 or (ii) the amount required to ensure that
the total allocations to school districts and community college districts from
the State general fund proceeds of taxes appropriated pursuant to Article XIIIB
and allocated local proceeds of taxes shall not be less than the total amount
from these sources in the prior year, adjusted for increases in enrollment and
adjusted for changes in the costs of living pursuant to the provisions of
Article XIIIB. The initiative permits the enactment of legislation, by a two-
thirds vote, to suspend the minimum funding requirement for one year. As a
result of Proposition 98, funds that the State might otherwise make available
to its political subdivisions may be allocated instead to satisfy such minimum
funding level.
On November 3, 1992, voters approved an initiative statute, Proposition 163,
which exempts certain food products, including candy and other snack foods,
from California's sales tax. The sales tax had been broadened to include those
items as part of the 1991-92 budget legislation.
Article XIIIA, Article XIIIB and a number of propositions were adopted
pursuant to California's constitutional initiative process. From time to time,
other initiative measures could be adopted by California voters. The adoption
of any such initiatives may cause California issuers to receive reduced
revenues, or to increase expenditures, or both.
Recent Initiatives. In July 1991, California increased taxes by adding two
new marginal tax rates, at 10% and 11%, effective for tax years 1991 through
1995. After 1995, the maximum personal income tax rate is scheduled to return
to 9.3%, and the alternative minimum tax rate is scheduled to drop from 8.5% to
7%. In addition, legislation in July 1991 raised the sales tax by 1.25%, of
which 0.5% was a permanent addition. This tax increase will be cancelled if a
court rules that such tax increase violates any constitutional requirements.
Although 0.5% of the State tax rate was scheduled to expire on June 30, 1993,
such amount was extended for six months for the benefit of counties and cities.
On November 2, 1993, voters approved extension of this 0.5% levy as a permanent
source of funding for local government.
The November 2, 1993 special election ballot also contained an initiative
constitutional amendment providing parental choice regarding education. This
initiative would have required to state to allocate every school-age child a
scholarship in an amount equal to at least 50% of the prior year's per-pupil
State and local government expenditure for kindergarten through twelfth grade
education. Such scholarships would have been redeemable by public or private
schools. If passed, the parental choice initiative could have threatened the
fiscal stability of any school district in which a significant number of
students withdraw and enrolls elsewhere. Although the initiative failed, other
parental choice initiatives have already been filed in an attempt to qualify
them for future voter consideration.
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<PAGE>
Pending Litigation. On June 20, 1994, the United States Supreme Court, in two
companion cases, upheld the validity of California's prior method of taxing
multinational corporations under a "unitary" method of accounting for their
worldwide earnings. Barclays Bank PLC v. Franchise Tax Board concerned foreign
corporations, and Colgate-Palmolive v. Franchise Tax Board concerned domestic
corporations.
In the spring of 1991, the Richmond Unified School District ("RUSD") Board of
Directors attempted to end classes six weeks early because of a fiscal crisis.
In response to lawsuits, a lower court judge, in a case called Butt v. State of
California, ordered the State, over objections from the Governor, to provide
funding to allow the school year to be completed, and an emergency loan was
arranged by the State Controller. On appeal, the California Supreme Court in
late December, 1992 upheld the lower court's action, ruling that the State
Constitution's guarantee of public education required the State to ensure a
full year's education in all school districts. The Court, however, overturned a
portion of the original order relating to the source of funds for RUSD's
emergency loan; the decision leaves unclear just where the State must find
funds to make any future loans of this kind.
In Parr v. State of California, a complaint was filed in federal court
claiming that payment of wages in registered warrants violated the Fair Labor
Standards Act ("FLSA"). The federal court held that the issuance of registered
warrants does violate the FLSA. The next phase of the trial will focus on the
issue of damages. The maximum amount of damages is the amount of the salary
originally owed or approximately $350 million.
The State is involved in a lawsuit seeking reimbursement for alleged state-
mandated costs. In Thomas Hayes v. Commission on State Mandates, the state
director of finance is appealing a 1984 decision by the State Board of Control.
The Board of Control decided in favor of local school districts' claims for
reimbursement for special education programs for handicapped students; however,
funds have not been appropriated. The amount of potential liability to the
State, if all potentially eligible school districts pursue timely claims, has
been estimated by the Department of Finance at over $1 billion.
The State is involved in two lawsuits related to contamination at the
Stringfellow toxic waste site. In one suit, the State is one of approximately
130 defendants in Penny Newman v. J. B. Stringfellow, et al. in which 3,800
plaintiffs are claiming damages of $850 million arising from contamination at
the Stringfellow toxic waste site. A conservative estimate of the State's
potential liability is $250 million to $550 million. A group of 17 of the
plaintiffs has received a verdict of $159,000 against the State. In a separate
lawsuit, United States, People of the State of California v. J. B.
Stringfellow, Jr. et al. the State is seeking recovery for past costs of
cleanup of the site, a declaration that the defendants are jointly and
severally liable for future costs, and an injunction ordering completion of the
cleanup. However, the defendants have filed a counterclaim against the State
for alleged negligent acts. Because the State is the present owner of the site,
the State may be found liable. Present estimates of the cleanup range from $200
million to $800 million.
In 1992 the State, as part of an experimental work incentive program, reduced
welfare payments to approximately 2.7 million people who receive Aid to
Families with Dependent Children. The State's reduction in welfare payments was
challenged in federal court. In a recent United States Court of Appeals ruling,
the Court held that the State welfare cuts were improper. To date, the decision
has not been appealed. The Court's decision could cost the State approximately
$202 million a year in increased welfare benefit costs. In such event, the
State may shift some or all of the increased burden to local governments.
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APPENDIX II
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MUNICIPAL BOND RATINGS OF MOODY'S INVESTORS SERVICE, INC.
("MOODY'S")
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
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Short-term Notes: The four ratings of Moody's for short-term notes are MIG
1/VMIG1, MIG 2/VMIG2, MIG 3/VMIG3 and MIG 4/VMIG4; MIG 1/VMIG1 denotes "best
quality. . . strong protection by established cash flows"; MIG 2/VMIG2 denotes
"high quality" with ample margins of protection; MIG 3/VMIG3 notes are of
"favorable quality. . .but. . . lacking the undeniable strength of the
preceding grades"; MIG 4/VMIG4 notes are of "adequate quality. . . [p]rotection
commonly regarded as required of an investment security is present. . . there
is specific risk."
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa--judged
to be the best quality, carry the smallest degree of investment risk; Aa--
judged to be of high quality by all standards; A--possess many favorable
investment attributes and are to be considered as upper medium grade
obligations; Baa considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF MUNICIPAL DEBT RATINGS OF STANDARD & POOR'S CORPORATION
("STANDARD & POOR'S")
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
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The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only
in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than for debt in higher rated categories.
BB B CCC CC C
Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on
balance, as predominately speculative with respect to capacity
to pay interest and repay principal in accordance with the
terms of the obligations. "BB" indicates the lowest degree of
speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties
or major exposures to adverse conditions.
CI The rating "CI" is reserved for income bonds on which no
interest is being paid.
D Debt rated "D" is in payment default. The "D" rating category
is used when interest payments of principal payments are not
made on the date due even if the applicable grace period has
not expired, unless Standard & Poor's believes that such
payments will be made during such grace period. The "D" rating
also will be used upon the filing of a bankruptcy petition if
debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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DESCRIPTION OF STANDARD & POOR'S CORPORATE BOND RATINGS
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt
rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong. Debt rated "AA" has a
very strong capacity to pay interest and to repay principal and differs from
the highest rated issues only in small degree. Debt rated "A" has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt of a higher rated category. Debt rated "BBB" is regarded
as having an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
The ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A-1"
for the highest quality obligations to "D" for the lowest. These categories are
as follows:
A-1
This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.
A-2
Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1".
A-3
Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
B
Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C
This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D
Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
A Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
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A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive
a note rating. Notes maturing beyond 3 years will most likely receive a long-
term debt rating. The following criteria will be used in making that
assessment.
--Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
--Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be given a
"+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
Standard & Poor's may continue to rate note issues with a maturity greater
than three years in accordance with the same rating scale currently employed
for municipal bond ratings.
Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuers belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date information to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
DESCRIPTION OF INVESTMENT GRADE BOND RATINGS OF FITCH INVESTORS SERVICE, INC.
("FITCH")
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and of any
guarantor, as well as the economic and political environment that might affect
the issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
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Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other obligors,
underwriters, their experts, and other sources Fitch believes to be reliable.
Fitch does not audit or verify the truth or accuracy of such information.
Ratings may be changed, suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely
to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+".
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes
in economic conditions and circumstances, however, are more
likely to have adverse impact on these bonds, and therefore,
impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than
for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
Credit Trend Indicator: Credit trend indicators show whether credit
fundamentals are improving, stable, declining, or uncertain, as follows:
Improving UP ARROW
Stable LEFT/RIGHT ARROW
Declining DOWN ARROW
Uncertain UP/DOWN ARROW
Credit trend indicators are not predictions that any rating change will occur,
and have a longer-term time frame than issues placed on FitchAlert.
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NR indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
SUSPENDED: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN: A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive," indicating a potential
upgrade, "Negative," for potential downgrade, or "Evolving," where ratings may
be raised or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by
adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor
in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C
Bonds are in imminent default in payment of interest or
principal.
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DDD, DD and D Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest
potential for recovery on these bonds, and "D" represents the
lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "DDD", "DD", or "D" categories.
DESCRIPTION OF FITCH INVESTMENT GRADE SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch short-term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated "F-1+".
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned "F-1+"
and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate, however, near-term adverse changes
could cause these securities to be rated below investment
grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol "LOC" indicates that the rating is based on a
letter of credit issued by a commercial bank.
INS
The symbol "INS" indicates that the rating is based on an
insurance policy or financial guaranty issued by an insurance
company.
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INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders, Merrill Lynch California Municipal Bond
Fund of Merrill Lynch California Municipal Series Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch California Municipal Bond Fund of
Merrill Lynch California Municipal Series Trust as of August 31, 1994, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at August
31, 1994 by correspondence with the custodian. 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
California Municipal Bond Fund of Merrill Lynch California Municipal Series
Trust as of August 31, 1994, 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
September 29, 1994
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To simplify the listings of Merrill Lynch California Municipal Bond
Fund's portfolio holdings in the Schedule of Investments, we have
abbreviated the names of many of the securities according to the
list below and at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
DATES Daily Adjustable Tax-Exempt Securities
GO General Obligation Bonds
HFA Housing Finance Authority
IDR Industrial Development Revenue Bonds
INFLOS Inverse Floating Rate Municipal Bonds
M/F Multi-Family
RIB Residual Interest Bonds
RITES Residual Interest Tax-Exempt Securities
RITR Residual Interest-Trust Receipts
S/F Single-Family
TRAN Tax Revenue Anticipation Notes
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California--96.8%
<S> <S> <C> <S> <C>
AAA Aaa $16,500 Anaheim, California, Public Financing Authority Revenue Bonds (Electric
Utility--San Juan), 2nd Series, 5.75% due 10/01/2022 (e) $ 15,517
AAA Aaa 3,000 Anaheim, California, Public Financing Authority, Tax Allocation Revenue
Bonds, RITES, 9.37% due 12/28/2018 (c)(j) 3,142
Antioch, California, Improvement Bonds (1915 Assessment District No.27 Lone
Tree), Series D:
NR NR 565 5.75% due 9/02/2000 569
NR NR 595 6% due 9/02/2001 597
NR NR 630 6.20% due 9/02/2002 635
NR NR 670 6.40% due 9/02/2003 679
NR NR 5,000 7.30% due 9/02/2013 5,155
Brea, California, Public Financing Authority, Tax Allocation Revenue Bonds
(Redevelopment Project), Series A (c):
AAA Aaa 3,145 6.75% due 8/01/2001 (a) 3,512
AAA Aaa 2,970 6.75% due 8/01/2022 3,096
AAA Aaa 5,155 Brea, California, Public Financing Authority, Water Revenue Bonds, Series B,
6.25% due 7/01/2021 (e) 5,167
Brea, California, Redevelopment Agency, Tax Allocation Revenue Refunding Bonds
(Redevelopment Project) (c):
AAA Aaa 15,000 6.125% due 8/01/2013 15,052
AAA Aaa 5,500 5.75% due 8/01/2023 5,169
AAA Aaa 2,025 Brentwood, California, Unified School District Revenue Bonds, 6.85% due
8/01/2016 (d) 2,111
California Educational Facilities Authority Revenue Bonds:
AAA Aaa 18,430 (Stanford University), Series J, 6% due 11/01/2016 18,316
AA Aa 1,000 (University of Southern California Project), Series B, 6.75% due 10/01/2015 1,035
California Health Facilities Financing Authority Revenue Bonds, Series A:
BBB Baa1 5,150 (Health Dimensions), 7.50% due 5/01/2015 5,294
BBB Baa1 6,000 (Health Dimensions), 7% due 5/01/2020 5,950
AA Aa2 4,350 (Kaiser Permanente), 7% due 10/01/2018 4,605
AAA Aaa 4,000 (Scripps Memorial Hospital), 6.25% due 10/01/2013(c) 4,034
NR A 5,780 (Scripps Research Institute), 6.625% due 7/01/2014 5,763
</TABLE>
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<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (continued)
<S> <S> <C> <S> <C>
California HFA, Home Mortgage Revenue Bonds:
A+ Aa $ 535 AMT, Series B, 8% due 8/01/2029 $ 550
A+ Aa 995 AMT, Series C, 7.45% due 8/01/2011 1,038
A+ Aa 900 AMT, Series G, 8.15% due 8/01/2019 927
A+ Aa 2,435 Series A, 8.125% due 8/01/2019 2,508
A+ Aa 3,085 Series D, 7.25% due 8/01/2017 3,154
AA Aa 145 California HFA, Home Ownership Mortgage Revenue Bonds, Series A, 9.20%
due 8/01/2015 (f) 150
California HFA, Revenue Bonds, AMT:
A+ Aa 4,300 RIB, 9.111% due 8/01/2023(j) 4,133
AAA Aaa 1,000 Series A, 7.20% due 2/01/2026(c) 1,028
A+ Aa 115 California HFA, S/F Home Mortgage Revenue Bonds, Series B, 10.375% due 2/01/2002 117
California Pollution Control Financing Authority, Resource Recovery Revenue
Bonds, AMT, VRDN (b):
NR P1 2,100 (Delano Project), 3.25% due 8/1/2019 2,100
NR Aa3 300 Refunding (Honey Lake Power Project), 3.25% due 9/01/2018 300
NR P1 500 Refunding (Ultra Power Malaga), Series B, 3.30% due 4/01/2017 500
California State Department of Water Resources, Central Valley Project,
Revenue Refunding Bonds (Water Systems), Series L:
AA Aa 3,000 5.70% due 12/01/2016 2,789
AA Aa 6,000 5.75% due 12/01/2019 5,578
California State, GO, UT:
A A1 3,000 10.50% due 10/01/2000 3,840
A A1 2,000 10% due 2/01/2010 2,785
AA A1 16,300 California State, GO, Veterans' Revenue Bonds, Series AW, AMT, UT, 7.70% due
4/01/2009 17,825
A- A 3,555 California State, Public Works Board, High Technology Facilities, Lease Revenue
Bonds (San Jose Facilities), Series A, 7.75% due 8/01/2006 3,995
California State, Public Works Board, Lease Revenue Bonds, Series A (d):
AAA Aaa 3,500 (Secretary of State), 6.60% due 12/01/2009 3,664
AAA Aaa 7,625 (Various Universities of California Projects), 6.40% due 12/01/2016 7,779
AAA Aaa 5,000 Central Coast, California, Water Authority Revenue Bonds (State Water Project
Regional Facilities), 6.60% due 10/01/2022 (d) 5,140
BBB NR 1,000 Contra Costa County, California, Public Financing Authority, Tax Allocation
Revenue Refunding Bonds, Series A, 7.10% due 8/01/2022 1,019
Corona, California, COP, Corona Community (a):
AAA Aaa 1,915 8% due 3/01/2009 2,318
AAA Aaa 2,065 8% due 3/01/2010 2,494
AAA Aaa 2,230 8% due 3/01/2011 2,690
AAA Aaa 2,410 8% due 3/01/2012 2,922
AAA Aaa 2,605 8% due 3/01/2013 3,176
AAA Aaa 2,810 8% due 3/01/2014 3,443
AAA Aaa 3,035 8% due 3/01/2015 (i) 3,725
AAA Aaa 3,000 Coronado, California, Community Development Agency, Tax Allocation Revenue
Bonds (Coronado Community Development Project), 6.30% due 9/01/2022 (c) 3,022
AAA Aaa 9,000 Culver City, California, Redevelopment Finance Authority, Revenue Refunding
Bonds (Tax Allocation), 5.50% due 11/01/2014(d) 8,353
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (continued)
<S> <S> <C> <S> <C>
NR Aaa $ 4,635 Cypress, California, S/F Residential Mortgage Revenue Refunding Bonds, Series
A, 7.10% due 1/01/2011 (i) $ 5,089
AA- A1 13,340 East Bay, California, Municipal Utilities District, Water System Subordinate
Revenue Refunding Bonds, 6% due 6/01/2012 13,082
AA- Aa 1,950 East Bay, California, Regional Park District, GO, Series B, UT, 6.30% due
9/01/2009 1,988
AAA Aaa 5,000 El Cajon, California, Redevelopment Agency, Tax Allocation Revenue Bonds (El
Cajon Redevelopment Project), 6.60% due 10/01/2022 (d) 5,162
AAA Aaa 2,230 Irvine, California, GO, Unified School District, Special Tax Community
Facilities Bonds (District No. 86-1), Series A, 8.10% due 11/15/2013 (c) 2,532
A-1 VMIG1 700 Irvine, California, Improvement Board Act of 1915 Revenue Bonds (Assessment
District No 94-15), VRDN, 3.15% due 9/02/2020 (b) 700
Irvine Ranch, California, Water District Revenue Refunding Bonds, Series B (b):
A1 NR 1,600 DATES, 2.85% due 10/01/2004 1,600
SP1+ VMIG1 1,500 VRDN, 3.05% due 8/01/2009 1,500
NR NR 4,670 Lodi, California, Unified School District Revenue Bonds (Education Support
Center Project), 7.875% due 3/01/1999 (a) 5,320
Long Beach, California, Improvement Bonds (1915 Assessment District 90-2):
NR NR 465 7% due 9/02/2001 479
NR NR 495 7.05% due 9/02/2002 510
NR NR 530 7.10% due 9/02/2003 546
NR NR 570 7.15% due 9/02/2004 587
NR NR 610 7.20% due 9/02/2005 628
NR NR 655 7.25% due 9/02/2006 675
NR NR 4,065 7.50% due 9/02/2011 4,191
NR NR 5,695 Long Beach, California, M/F Redevelopment Agency Revenue Bonds (Housing-Pacific
Court Apartments), Issue B, AMT, 6.95% due 9/01/2023 5,632
NR NR 4,545 Long Beach, California, Special Tax Community Facilities District No.3-Pine
Avenue, 6.375% due 9/01/2023 4,200
AAA Aaa 5,225 Los Angeles, California, Community Redevelopment Agency, Housing Revenue
Refunding Bonds, Series A, 6.45% due 7/01/2017 (d) 5,306
Los Angeles, California, Community Redevelopment Agency, Tax Allocation Refunding
Bonds (Bunker Hill Project):
AAA Aaa 3,595 Series C, 9% due 12/01/2001 (c)(i) 4,418
AAA Aaa 5,150 Series H, 6.50% due 12/01/2016 (k) 5,305
AAA Aaa 17,050 Los Angeles, California, Convention and Exhibition Center Authority, COP, 9% due
12/01/2005 (a) 22,122
Los Angeles, California, Department of Water and Power, Electric Plant Revenue
Bonds:
AA Aa 5,000 Refunding, 5.75% due 9/01/2013 4,767
AA Aa 10,000 Registered RITR, 8.618% due 2/01/2020 (j) 10,037
AAA Aaa 5,000 Los Angeles, California, Department of Water and Power, Waterworks Revenue Bonds,
6.30% due 7/01/2024 (c) 5,037
AAA NR 14,300 Los Angeles, California, Harbor Department Revenue Bonds, 7.60% due 10/01/2018
(i) 16,124
AAA NR 1,985 Los Angeles, California, M/F Housing Revenue Bonds (Mahal Apartments Project),
Series G, 9% due 3/20/2017 (f)(h) 2,084
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (continued)
<S> <S> <C> <S> <C>
A+ A1 $ 7,860 Los Angeles, California, Municipal Improvement Corporation, Lease Revenue
Refunding Bonds (Central Library Project), Series A, 6.35% due 6/01/2020 $ 7,761
AAA Aaa 7,890 Los Angeles, California, Wastewater System Revenue Bonds, Series D, 6.625% due
12/01/2012 (c) 8,190
NR NR 8,000 Los Angeles County, California, COP (Marina Del Rey), Series A, 6.50% due
7/01/2008 8,061
A1+ VMIG1 2,700 Los Angeles County, California, Metropolitan Transportation Authority, Sales
Tax Revenue Refunding Bonds (Proposition C-Second Senior), Series A, VRDN, 2.85%
due 7/01/2020 (b)(c) 2,700
AAA Aaa 5,000 Los Angeles County, California, Public Works Financing Authority, Lease Revenue
Bonds (Multiple Capital Facilities Project-IV), 5.25% due 12/01/2016 (c) 4,397
SPl+ MIG1++ 2,500 Los Angeles County, California, TRAN, UT, 4.50% due 6/30/1995 2,509
Los Angeles County, California, Transportation Commission, Sales Tax Revenue
Bonds, Series A:
AA- Aaa 5,400 6.90% due 7/01/2001 (a) 6,071
AAA Aaa 10,000 (Proposition C--Second Senior), 6% due 7/01/2023 (c) 9,719
AAA Aaa 4,750 Marysville, California, Hospital Revenue Bonds (Fremont-Rideout Health Group),
Series A, 6.30% due 1/01/2022 (d) 4,767
Metropolitan Water District, Southern California, Waterworks Revenue Bonds:
AA NR 4,650 6.75% due 7/01/2001 (a) 5,188
AA Aa 3,000 6.625% due 7/01/2012 3,121
AA Aa 5,000 RIB, 7.811% due 8/05/2022 (j) 4,500
A- A 6,970 Northern California Power Agency, Public Power Revenue Bonds (Hydroelectric
Project No.1), Series E, 7.15% due 7/01/2024 7,221
Ontario, California, Redevelopment Financing Authority Revenue Bonds (Cimarron
Project No.1) (c):
AAA Aaa 3,000 6.25% due 8/01/2015 3,025
AAA Aaa 5,635 6.375% due 8/01/2020 5,708
AAA Aaa 7,485 Ontario, California, Redevelopment Financing Authority Revenue Bonds (Ontario
Redevelopment Project No. 1), 6% due 8/01/2015 (c) 7,371
Orange County, California, Community Facilities District No. 87-3, Special Tax
Revenue Bonds, Series A (a):
NR A 3,750 7.80% due 8/15/2000 4,337
NR A 2,485 (Mission Viejo), 8.125% due 8/15/1998 2,824
Orange County, California, Local Transportation Authority, Sales Tax Revenue
Bonds, RIB (j):
AA Aa 5,000 8.161% due 2/14/2011 5,081
AAA Aaa 10,150 Second Series, 8.111% due 2/14/2011 (e) 10,239
A+ A 2,000 Orange County, California, Public Facilities Corporation, COP (Solid Waste
Management), 7.875% due 12/01/2013 2,214
A Aaa 5,000 Palmdale, California, Civic Authority, Revenue Refunding Bonds (Merged
Redevelopment Project), Series A, 6.60% due 9/01/2034 5,173
A+ A1 8,000 Pasadena, California, COP, Refunding Bonds (Old Pasadena Parking Facility
Project), 6.25% due 1/01/2018 7,864
AA- Aa 3,090 Pasadena, California, Water Revenue Bonds, 6% due 7/01/2013 3,028
AAA Aaa 11,620 Pittsburg, California, Redevelopment Agency, Residential Mortgage Revenue
Bonds, 9.60% due 6/01/2016 (i) 16,644
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (continued)
<S> <S> <C> <S> <C>
NR NR $ 4,915 Pleasanton, California, Joint Powers Financing Authority, Revenue Reassessment
Bonds, Sub-series B, 6.75% due 9/02/2017 $ 4,858
AAA Aaa 2,000 Port Oakland, California, Port Revenue Bonds, AMT, Series E, 6.40% due
11/01/2022 (c) 2,030
AAA Aaa 3,450 Rancho, California, Water District Financing Authority Revenue Bonds, RITES,
9.724% due 8/15/2021 (a)(d)(j) 4,088
AAA Aaa 1,500 Redding, California, Electric System Revenue Bonds, COP, RIB, 9.125% due
7/01/2022 (c)(j) 1,584
Redwood City, California, Public Financing Authority, Local Agency Revenue
Bonds:
AAA Aaa 1,500 Refunding, Series A, 6.50% due 7/15/2011 (d) 1,545
A- NR 2,500 Series B, 7.25% due 7/15/2011 2,651
NR Baa 1,000 Riverside, California, M/F Redevelopment Agency Revenue Bonds (First and
Market Project), Series A, AMT, 7.75% due 9/01/1994 (a) 1,000
Riverside, California, Water Revenue Bonds:
AA Aa 2,830 9% due 10/01/2001 3,492
AA Aa 3,100 9% due 10/01/2002 3,890
BBB NR 2,430 Riverside County, California, Redevelopment Agency Bonds (Tax Allocation
Redevelopment Project No. 4), Series A, 7.50% due 10/01/2026 2,535
AAA Aaa 3,000 Rohnert Park, California, Community Development Agency, Tax Allocation
Refunding Bonds (Rohnert Park Redevelopment Project), 6.50% due 8/01/2020 (d) 3,061
A+ Aaa 5,385 Sacramento, California, City Financing Authority Revenue Bonds, 6.80% due
11/01/2001 (a) 6,045
Sacramento, California, Municipal Utility District, Electric Revenue Bonds:
AAA Aaa 5,000 INFLOS, 9.224% due 8/15/2018 (e)(j) 5,056
AAA Aaa 14,025 Series B, 6.375% due 8/15/2022 (c) 14,257
A- A 10,000 Series E, 5.75% due 5/15/2022 9,209
AA Aa 2,500 San Bernardino, California, Health Care System Revenue Bonds (Sisters of
Charity), Series A, 7% due 7/01/2021 2,638
A+ Aa3 5,000 San Diego, California, IDR, Refunding (San Diego Gas & Electric), Series C,
5.90% due 9/01/2018 4,736
AAA Aaa 7,550 San Diego, California, Sewer Revenue Bonds, Series A, 5.25% due 5/15/2020 (d) 6,521
AAA Aaa 1,200 San Diego County, California, COP, RITES, 9.446% due 11/18/2019 (c)(j) 1,218
AAA Aaa 8,500 San Francisco, California, City and County Airport Commission, International
Airport Revenue Refunding Bonds, Second Series, Issue 1, 6.30% due 5/01/2011 (d) 8,672
AA- A1 1,000 San Francisco, California, City and County Public Safety Improvement Project,
UT, Series F, 6.50% due 6/15/2011 1,025
NR NR 1,280 San Francisco, California, City and County Redevelopment Agency, Community
Facilities District, Special Tax No. 1 Revenue Bonds (South Beach), 8.20%
due 8/01/2013 1,394
A A 5,000 San Francisco, California, City and County Redevelopment Financing Authority, Tax
Allocation Revenue Bonds (Redevelopment Project), Series C, 5.40% due 8/01/2021 4,391
San Joaquin Hills, California, Transportation Corridor Agency, Toll Road
Revenue Bonds (Senior Lien):
NR NR 2,965 7% due 1/01/2030 2,969
NR NR 15,000 6.75% due 1/01/2032 14,523
AAA Aaa 4,150 Santa Clara, California, Electric Revenue Bonds, Series A, 6.50% due 7/01/2021
(c) 4,244
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (continued)
<S> <S> <C> <S> <C>
AA A1 $ 1,000 Santa Clara County, California, Transportation District, Sales Tax Revenue
Bonds, Series A, 6.75% due 6/01/2011 $ 1,047
SP1+ NR 1,000 Santa Cruz County, California, TRAN, 4.50% due 8/01/1995 999
AAA Aaa 2,000 Santa Fe Springs, California, Redevelopment Agency, Tax Allocation Revenue Bonds
(Construction Redevelopment Project), Series A, 6.40% due 9/01/2022 (c) 2,037
AAA Aaa 2,750 South Coast Air Quality Management, District Building Corporation, California,
Institutional Sale Revenue Bonds, Series B, 9.75% due 8/01/l999 (d)(i) 3,324
Southern California Home Financing Authority, S/F Mortgage Revenue Bonds,
AMT (h):
AAA NR 4,380 Series A, 7.625% due 10/01/2023 4,549
AAA NR 2,450 Series A, 7.35% due 9/01/2024 (g) 2,539
AAA NR 1,195 Series B, 7.75% due 3/01/2024 (g) 1,240
AA Aa 5,415 Southern California Public Power Authority, Power Project Revenue Refunding Bonds,
Series A, 5.50% due 7/01/2012 5,003
Southern California Public Power Authority, Transmission Project, Revenue
Refunding Bonds:
AA- Aa 10,300 RIB, 8.012% due 7/01/2012(j) 9,759
AA- Aa 11,470 (Southern Transmission Project), 6.125% due 7/01/2018 11,292
BBB+ NR 21,800 Stanislaus, California, Waste-to-Energy Financing Agency, Solid Waste Facility
Revenue Refunding Bonds (Ogden Martin System Inc. Project), 7.625% due 1/01/2010 23,086
AAA Aaa 10,000 Stockton, California, East Water District Revenue Refunding Bonds, COP (1990
Project), Series A, 6.40% due 4/01/2022 (d) 10,122
AAA Aaa 4,000 Tri-City, California, Hospital District Revenue Bonds (Tri-City Hospital),
7.50% due 2/01/2017 (c) 4,465
BBB NR 3,600 Turlock, California, COP, Health Facility Revenue Refunding Bonds (Emanuel
Medical Center Inc.), 5.625% due 10/15/2013 3,113
BBB Baa1 4,790 Ukiah, California, Unified School District, COP, Refunding Bonds (Capital
Projects), Series A, 6% due 9/01/2010 4,518
A+ NR 50 University of California, Facility Mortgage Revenue Bonds, 1985 Series, 9.20%
due 1/01/2018 51
University of California, Revenue Bonds (Multiple-Purpose Projects):
A- A 14,700 Refunding, Series A, 6.875% due 9/01/2002 (a) 16,614
AAA Aaa 8,000 Series D, 6.25% due 9/01/2012 (c) 8,101
AAA Aaa 10,375 Series D, 6.375% due 9/01/2024 (c) 10,516
AAA Aaa 2,000 Vacaville, California, Public Financing Authority, Tax Allocation Revenue
Refunding Bonds (Vacaville Redevelopment Projects), 6.35% due 9/01/2022 (c) 2,020
AAA Aaa 8,465 West and Central Basin, California, Financing Authority Revenue Bonds,
6.125% due 8/01/2022 (d) 8,370
West Covina, California, COP, GO (Queen of the Valley Hospital):
A A 4,310 6.50% due 8/15/2019 4,237
A A 5,000 6.95% due 8/15/2023 5,143
AAA Aaa 6,000 West Sacramento, California, Redevelopment Agency, Tax Allocation Revenue
Bonds (West Sacramento Redevelopment Project), 6.25% due 9/01/2010 (c) 6,107
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (concluded)
<S> <S> <C> <S> <C>
Westminster, California, Redevelopment Agency, Tax Allocation Revenue Bonds
(Commercial Redevelopment Project No. 1):
BBB+ Baa1 $ 4,380 6.20% due 8/01/2023 $ 4,034
BBB+ Baa1 4,000 Refunding, Series A, 7.30% due 8/01/2021 4,170
NR Aaa 1,850 Whittier, California, Educational Facilities Revenue Bonds (Whittier
College), Series A, 7% due 12/01/1996 (a) 1,885
Puerto Rico--2.0%
A Baa1 6,580 Puerto Rico Commonwealth, GO, UT, 6.45% due 7/01/2017 6,727
A Baa1 8,465 Puerto Rico Commonwealth, Highway and Transportation Authority, Highway
Revenue Bonds, Series T, 6.625% due 7/01/2018 8,802
Total Investments (Cost--$760,026)--98.8% 777,296
Other Assets Less Liabilities--1.2% 9,609
--------
Net Assets--100.0% $786,905
========
<FN>
(a)Prerefunded.
(b)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at August 31, 1994.
(c)MBIA Insured.
(d)AMBAC Insured.
(e)FGIC Insured.
(f)FHA Insured.
(g)FNMA Collateralized.
(h)GNMA Collateralized.
(i)Escrowed to Maturity.
(j)The interest rate is subject to change periodically and inversely
to prevailing market rates. The interest rate shown is the rate in
effect at August 31, 1994.
(k)FSA Insured.
++Highest short-term rating by Moody's Investors Service, Inc.
NR--Not Rated.
Ratings of issues shown have not been audited by Deloitte & Touche
LLP.
See Notes to Financial Statements.
</TABLE>
76
<PAGE>
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statement of Assets and Liabilities as of August 31, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$760,025,870)(Note 1a) $777,295,775
Receivables:
Interest $ 13,088,370
Beneficial interest sold 915,352 14,003,722
------------
Prepaid registration fees and other assets (Note 1e) 129,727
------------
Total assets 791,429,224
------------
Liabilities: Payables:
Beneficial interest redeemed 1,467,284
Dividends to shareholders (Note 1f) 1,038,074
Investment adviser (Note 2) 361,973
Distributor (Note 2) 309,068 3,176,399
------------
Accrued expenses and other liabilities 1,347,725
------------
Total liabilities 4,524,124
------------
Net Assets: Net assets $786,905,100
============
Net Assets Class A Shares of beneficial interest, $.10 par value,
Consist of: unlimited number of shares authorized $ 530,388
Class B Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 6,421,789
Paid-in capital in excess of par 769,254,869
Accumulated distributions in excess of realized capital
gains--net (6,571,851)
Unrealized appreciation on investments--net 17,269,905
------------
Net assets $786,905,100
============
Net Asset Value: Class A--Based on net assets of $60,017,051 and 5,303,875 shares
of beneficial interest outstanding $ 11.32
============
Class B--Based on net assets of $726,888,049 and 64,217,894
shares of beneficial interest outstanding $ 11.32
============
See Notes to Financial Statements.
</TABLE>
77
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended August 31, 1994
<S> <S> <C>
Investment Interest and amortization of premium and discount earned $ 53,118,732
Income
(Note 1d):
Expenses: Investment advisory fees (Note 2) 4,567,938
Distribution fees--Class B (Note 2) 3,910,887
Transfer agent fees--Class B (Note 2) 247,303
Printing and shareholder reports 102,012
Accounting services (Note 2) 101,015
Custodian fees 82,314
Professional fees 58,354
Registration fees (Note 1e) 44,460
Trustees' fees and expenses 42,928
Pricing fees 23,698
Transfer agent fees--Class A (Note 2) 17,551
Amortization of organization expenses (Note 1e) 1,342
Other 10,930
------------
Total expenses 9,210,732
------------
Investment income--net 43,908,000
------------
Realized & Realized gain on investments--net 4,109,882
Unrealized Change in unrealized appreciation on investments--net (61,534,369)
Gain (Loss) on ------------
Investments-- Net Decrease in Net Assets Resulting from Operations $(13,516,487)
Net (Notes ============
1d & 3)
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 43,908,000 $ 43,990,556
Realized gain on investments--net 4,109,882 16,936,508
Change in unrealized appreciation on investments--net (61,534,369) 37,162,803
------------ ------------
Net increase (decrease) in net assets resulting from operations (13,516,487) 98,089,867
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (3,624,918) (3,035,522)
Shareholders Class B (40,283,082) (40,955,034)
(Note 1f): Realized gain on investments--net:
Class A (1,039,120) (770,830)
Class B (12,643,710) (12,593,158)
In excess of realized gain on investments--net:
Class A (499,088) --
Class B (6,072,763) --
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (64,162,681) (57,354,544)
------------ ------------
Beneficial Net increase (decrease) in net assets derived from beneficial
Interest interest transactions (21,161,878) 68,885,437
Transactions ------------ ------------
(Note 4):
Net Assets: Total increase (decrease) in net assets (98,841,046) 109,620,760
Beginning of year 885,746,146 776,125,386
------------ ------------
End of year $786,905,100 $885,746,146
============ ============
See Notes to Financial Statements.
</TABLE>
78
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
<CAPTION>
Financial Highlights
The following per share data and ratios have been derived
from information provided in the financial statements. Class A
For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 12.38 $ 11.80 $ 11.44 $ 11.03 $ 11.22
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .68 .70 .72 .74 .77
Realized and unrealized gain (loss)
on investments--net (.78) .78 .41 .41 (.19)
--------- --------- --------- --------- ---------
Total from investment operations (.10) 1.48 1.13 1.15 .58
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net (.68) (.70) (.72) (.74) (.77)
Realized gain on investments--net (.19) (.20) (.05) -- --
In excess of realized gain on
investments--net (.09) -- -- -- --
--------- --------- --------- --------- ---------
Total dividends and distributions (.96) (.90) (.77) (.74) (.77)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 11.32 $ 12.38 $ 11.80 $ 11.44 $ 11.03
========= ========= ========= ========= =========
Total Investment Based on net asset value per share (.92%) 13.21% 10.23% 10.73% 5.21%
Return:* ========= ========= ========= ========= =========
Ratios to Expenses .62% .63% .63% .64% .65%
Average Net ========= ========= ========= ========= =========
Assets: Investment income--net 5.65% 5.87% 6.26% 6.57% 6.77%
========= ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $ 60,017 $ 64,526 $ 46,556 $ 37,499 $ 29,558
Data: ========= ========= ========= ========= =========
Portfolio turnover 75.66% 61.24% 52.31% 116.09% 119.66%
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class B
For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 12.38 $ 11.80 $ 11.44 $ 11.03 $ 11.23
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .61 .64 .67 .68 .71
Realized and unrealized gain (loss)
on investments--net (.78) .78 .41 .41 (.20)
--------- --------- --------- --------- ---------
Total from investment operations (.17) 1.42 1.08 1.09 .51
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net (.61) (.64) (.67) (.68) (.71)
Realized gain on investments--net (.19) (.20) (.05) -- --
In excess of realized gain on
investments--net (.09) -- -- -- --
--------- --------- --------- --------- ---------
Total dividends and distributions (.89) (.84) (.72) (.68) (.71)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 11.32 $ 12.38 $ 11.80 $ 11.44 $ 11.03
========= ========= ========= ========= =========
Total Investment Based on net asset value per share (1.50%) 12.64% 9.68% 10.18% 4.58%
Return:* ========= ========= ========= ========= =========
Ratios to Average Expenses, excluding distribution fees
Net Assets: and net of reimbursement . .63% .63% .63% .65% .65%
========= ========= ========= ========= =========
Expenses 1.13% 1.13% 1.13% 1.15% 1.15%
========= ========= ========= ========= =========
Investment income--net 5.15% 5.38% 5.76% 6.07% 6.27%
========= ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $ 726,888 $ 821,220 $ 729,569 $ 690,885 $ 663,551
Data: ========= ========= ========= ========= =========
Portfolio turnover 75.66% 61.24% 52.31% 116.09% 119.66%
========= ========= ========= ========= =========
<FN>
*Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
79
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch California Municipal Bond Fund (the "Fund") is part of
Merrill Lynch California Municipal Series Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company. The Fund offers
both Class A and Class B Shares. Class A Shares are sold with a
front-end sales charge. Class B Shares may be subject to a
contingent deferred sales charge. Both classes of shares have
identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B Shares bear certain
expenses related to the distribution of such shares and have
exclusive voting rights with respect to matters relating to such
distribution expenditures. On September 27, 1994, shareholders
approved the implementation of the Merrill Lynch Select PricingSM
System, which will offer two new classes of shares, Class C and
Class D. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Municipal bonds and other portfolio
securities in which the Fund invests are traded primarily in the
over-the-counter municipal bond and money markets and are valued at
the last available bid price in the over-the-counter market or on
the basis of yield equivalents as obtained from one or more dealers
that make markets in the securities. Financial futures contracts and
options thereon, which are traded on exchanges, are valued at their
settlement prices as of the close of such exchanges. Short-term
investments with remaining maturities of sixty days or less are
valued at amortized cost, which approximates market value.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Trustees of the Trust, including
valuations furnished by a pricing service retained by the Trust,
which may utilize a matrix system for valuations. The procedures of
the pricing service and its valuations are reviewed by the officers
of the Trust under the general supervision of the Trustees.
(b) Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as re-
quired by the exchange on which the transaction is effected.
Pursuant to the contract, the Fund agrees to receive from or pay to
the broker an amount of cash equal to the daily fluctuation in value
of the contract. Such receipts or payments are known as variation
margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the value of the contract at
the time it was opened and the value at the time it was closed.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(f) Dividends and distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates. Distributions in excess
of realized capital gains are due primarily to differing tax
treatments for futures transactions and post October losses.
80
<PAGE>
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). Effective January 1, 1994, the
investment advisory business of FAM was reorganized from a
corporation to a limited partnership. Both prior to and after the
reorganization, ultimate control of FAM was vested with Merrill
Lynch & Co., Inc. ("ML & Co."). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of ML & Co. The limited partners are ML & Co. and Fund
Asset Management, Inc. ("FAMI"), which is also an indirect wholly-
owned subsidiary of ML & Co.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee based upon the average daily
value of the Fund's net assets at the following annual rates: 0.55%
of the Fund's average daily net assets not exceeding $500 million;
0.525% of average daily net assets in excess of $500 million but not
exceeding $1 billion; and 0.50% of average daily net assets in
excess of $1 billion. The Investment Advisory Agreement obligates
FAM to reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and
commissions, and extraordinary items) exceed 2.5% of the Fund's
first $30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets, and 1.5% of the remaining
average net assets. FAM's obligation to reimburse the Fund is
limited to the amount of the management fee. No fee payment will be
made during any fiscal year which will cause such expenses to exceed
expense limitations at the time of such payment.
The Fund has entered into a Distribution Agreement and Distribution
Plan with Merrill Lynch Funds Distribution, Inc. ("MLFD"), an
indirect wholly-owned subsidiary of ML & Co.
Pursuant to a distribution plan (the "Distribution Plan") adopted by
the Fund in accordance with Rule 12b-1 under the Investment Company
Act of 1940, the Fund pays MLFD an ongoing account maintenance fee
and distribution fee, which are accrued daily and paid monthly at
the annual rates of 0.25% and 0.25%, respectively, of the average
daily net assets of the Class B Shares of the Fund. Pursuant to a
sub-agreement with MLFD, Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance and distribution services to the Fund. The ongoing
account maintenance fee compensates MLFD and MLPF&S for providing
account maintenance services to Class B shareholders. The ongoing
distribution fee compensates MLFD and MLPF&S for providing
shareholder and distribution services and bearing certain distri-
bution-related expenses for the Fund.
For the year ended July 31, 1994, MLFD earned underwriting discounts
of $13,053, and MLPF&S earned dealer concessions of $119,611 on
sales of the Fund's Class A Shares.
MLPF&S also received contingent deferred sales charges of $704,845
relating to Class B Share transactions during the year.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, FAMI, PSI, MLFD, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1994 were $621,159,504 and
$631,284,706, respectively.
Net realized and unrealized gains (losses) as of August 31, 1994
were as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $ 700,995 $ 17,269,905
Short-term investments (1,250,285) --
Financial futures contracts 4,659,172 --
------------ -------------
Total $ 4,109,882 $ 17,269,905
============ =============
81
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
As of August 31, 1994, net unrealized appreciation for Federal
income tax purposes aggregated $17,255,943, of which $27,459,906
related to appreciated securities and $10,203,963 related to
depreciated securities. The aggregate cost of investments at August
31, 1994 for Federal income tax purposes was $760,039,832.
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial
interest transactions was $(21,161,878) and $68,885,437 for the year
ended August 31, 1994 and August 31, 1993, respectively.
Transactions in shares of beneficial interest for Class A and Class
B Shares were as follows:
Class A Shares for the Year Dollar
Ended August 31, 1994 Shares Amount
Shares sold 1,162,525 $ 13,965,656
Shares issued to share-
holders in reinvestment of
dividends and distributions 216,094 2,566,392
------------ -------------
Total issued 1,378,619 16,532,048
Shares redeemed (1,287,071) (15,074,976)
------------ -------------
Net increase 91,548 $ 1,457,072
============ =============
Class A Shares for the Year Dollar
Ended August 31, 1993 Shares Amount
Shares sold 2,240,788 $ 26,776,133
Shares issued to share-
holders in reinvestment of
dividends and distributions 157,460 1,866,087
------------ -------------
Total issued 2,398,248 28,642,220
Shares redeemed (1,132,321) (13,376,681)
------------ -------------
Net increase 1,265,927 $ 15,265,539
============ =============
Class B Shares for the Year Dollar
Ended August 31, 1994 Shares Amount
Shares sold 7,118,622 $ 84,446,664
Shares issued to share-
holders in reinvestment of
dividends and distributions 2,212,118 26,273,099
------------ -------------
Total issued 9,330,740 110,719,763
Shares redeemed (11,430,290) (133,338,713)
------------ -------------
Net decrease (2,099,550) $ (22,618,950)
============ =============
Class B Shares for the Year Dollar
Ended August 31, 1993 Shares Amount
Shares sold 10,100,868 $ 120,680,105
Shares issued to share-
holders in reinvestment of
dividends and distributions 2,063,845 24,426,884
------------ -------------
Total issued 12,164,713 145,106,989
Shares redeemed (7,672,695) (91,487,091)
------------ -------------
Net increase 4,492,018 $ 53,619,898
============ =============
82
<PAGE>
[This page intentionally left blank]
83
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
Description of Municipal Bonds and Temporary Investments................... 5
Description of Municipal Bonds........................................... 5
Description of Temporary Investments..................................... 7
Repurchase Agreements.................................................... 8
Financial Futures Transactions and Options............................... 9
Investment Restrictions.................................................... 14
Management of the Trust.................................................... 17
Trustees and Officers.................................................... 17
Management and Advisory Arrangements..................................... 19
Purchase of Shares......................................................... 20
Alternative Sales Arrangements........................................... 20
Initial Sales Charge Alternative--Class A and Class D Shares............. 21
Reduced Initial Sales Charges............................................ 21
Distribution Plans....................................................... 24
Limitations on the Payment of Deferred Sales Charges..................... 25
Redemption of Shares....................................................... 26
Deferred Sales Charges--Class B Shares................................... 26
Portfolio Transactions..................................................... 26
Determination of Net Asset Value........................................... 28
Shareholder Services....................................................... 28
Investment Account....................................................... 28
Automatic Investment Plan................................................ 29
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 29
Systematic Withdrawal Plans--Class A and Class D Shares.................. 30
Exchange Privilege....................................................... 31
Distributions and Taxes.................................................... 43
Environmental Tax........................................................ 46
Tax Treatment of Futures and Options Transactions........................ 47
Performance Data........................................................... 47
General Information........................................................ 50
Description of Series and Shares......................................... 50
Computation of Offering Price Per Share.................................. 51
Independent Auditors..................................................... 51
Custodian................................................................ 52
Transfer Agent........................................................... 52
Legal Counsel............................................................ 52
Reports to Shareholders.................................................. 52
Additional Information................................................... 52
Appendix I
Economic and other Conditions in
California.............................................................. 53
Appendix II
Ratings of Municipal Bonds............................................... 61
Independent Auditors' Report............................................... 69
Financial Statements....................................................... 70
</TABLE>
Code #10328-1094
Statement of
Additional Information
[ART]
- --------------------------------------------------------------------------------
MERRILL LYNCH CALIFORNIA MUNICIPAL BOND FUND
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
October 21, 1994
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 eight-year period
ended August 31, 1994 and for the period September 30, 1985
(commencement of operations) to August 31, 1986.
Contained in Part B:
Schedule of Investments as of August 31, 1994.
Statement of Assets and Liabilities as of August 31, 1994.
Statement of Operations for the year ended August 31, 1994.
Statements of Changes in Net Assets for the years ended August 31,
1994 and August 31, 1993.
Financial Highlights for each of the years in the five-year period
ended August 31, 1994.
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1(a) --Declaration of Trust of the Registrant, dated March 20, 1985(a).
(b) --Amendment to the Declaration of Trust, dated July 25, 1985(a).
(c) --Amendment to Declaration of Trust, dated October 3, 1988(d).
(d) --Instrument establishing Merrill Lynch California Municipal Bond
Fund (the "Fund") as a Series of the Registrant(a).
(e) --Instrument establishing Class A shares and Class B shares of the
Fund(d).
2 --By-Laws of the Registrant(b).
3 --None.
4 --Portions of the Declaration of Trust, Establishment and
Designation and By-Laws of the Registrant defining the rights of
holders of the Fund as a series of the Registrant(f).
5(a) --Management Agreement between the Registrant and Fund Asset
Management, Inc. (now known as Fund Asset Management, L.P.)(c).
(b) --Supplement to the Management Agreement between the Registrant and
Fund Asset Management L.P.
6(a) --Form of Class A Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.
(b) --Class B Distribution Agreement between the Registrant and Merrill
Lynch Funds Distributor, Inc.(c).
(c) --Form of Class C Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.
(d) --Form of Class D Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.
(e) --Letter Agreement between the Fund and Merrill Lynch Funds
Distributor, Inc., dated September 15, 1993, in connection with the
Merrill Lynch Mutual Fund Adviser program(h).
7 --None.
8 --Custody Agreement between the Registrant and The Bank of New
York(c).
9 --Transfer Agency Agreement between the Registrant and Merrill Lynch
Financial Data Service, Inc. (now known as Financial Data Services,
Inc.)(d).
10 --Opinion of Brown & Wood, counsel to the Registrant.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 --None.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
13 --Certificate of Fund Asset Management, Inc. (now known as Fund
Asset Management, L.P.)(c).
14 --None.
15(a) --Amended and Restated Class B Distribution Plan and Amended and
Restated Class B Shares Distribution Plan Sub-Agreement of the
Registrant(h).
(b) --Form of Class C Shares Distribution Plan and Class C Shares
Distribution Plan Sub-Agreement of the Registrant.
(c) --Form of Class D Shares Distribution Plan and Class D Shares
Distribution Plan Sub-Agreement of the Registrant.
16(a) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
A shares(e).
(b) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
B shares(d).
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
</TABLE>
- --------
(a) Filed on July 26, 1985 as an Exhibit to Pre-Effective Amendment No. 1 to
the Registrant's Registration Statement under the Securities Act of 1933.
(b) Filed on March 21, 1985 as an Exhibit to the Registrant's Registration
Statement under the Securities Act of 1933.
(c) Filed on August 15, 1985 as an Exhibit to Pre-Effective Amendment No. 2 to
the Registrant's Registration Statement under the Securities Act of 1933.
(d) Filed on October 12, 1988 as an Exhibit to Post-Effective Amendment No. 4
to the Registrant's Registration Statement under the Securities Act of
1933.
(e) Filed on December 29, 1989 as an Exhibit to Post-Effective Amendment No. 5
to the Registrant's Registration Statement under the Securities Act of
1933.
(f) Reference is made to Article II, Section 2.3 and Articles V, VI, VIII, IX,
X and XI of the Registrant's Declaration of Trust, previously filed as
Exhibit 1(a) to the Registration Statement referred to in paragraph (a)
above; to the Certificates of Establishment and Designation establishing
the Fund as a series of the Registrant and establishing Class A and Class B
shares of beneficial interest of the Fund, which will be filed as Exhibits
1(d) and 1(e), respectively, to the Registration Statement; and to Articles
I, V and VI of the Registrant's By-Laws, previously filed as Exhibit 2 to
the Registration Statement referred to in paragraph (a) above.
(g) Filed on December 29, 1992 as an Exhibit to Post-Effective Amendment No. 8
to the Registrant's Registration Statement under the Securities Act of
1933.
(h) Filed on December 23, 1993 as an Exhibit to Post-Effective Amendment No. 9
to the Registrant's Registration Statement 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 RECORD
HOLDERS AT
TITLE OF CLASS SEPTEMBER 30, 1994
-------------- ------------------
<S> <C>
Class A shares of beneficial interest, par value
$0.10 per share..................................... 53
Class B shares of beneficial interest, par value
$0.10 per share..................................... 1413
Class C shares of beneficial interest, par value
$0.10 per share..................................... -0-
Class D shares of beneficial interest, par value
$0.10 per share..................................... -0-
</TABLE>
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 interests of the Trust, had been adjudicated, it
would have been adjudicated in favor of such person. The rights accruing to
any Person under these provisions shall not exclude any other right to
which he may be lawfully entitled; provided that no Person may satisfy any
right in indemnity or reimbursement granted herein or in Section 5.1 or to
which he may be otherwise entitled except out of the property of the Trust,
and no Shareholder shall be personally liable to any Person with respect to
any claim for indemnity or reimbursement or otherwise. The Trustees may
make advance payments in connection with indemnification under this Section
5.3, provided that the indemnified person shall have given a written
undertaking to reimburse the Trust in the event it is subsequently
determined that he is not entitled to such indemnification."
Insofar as the conditional advancing of indemnification monies for actions
based upon the Investment Company Act of 1940, as amended, may be concerned,
such payments will be made only on the following conditions: (i) the advances
must be limited to amounts used, or to be used, for the preparation or
presentation of a defense to the action, including costs connected with the
preparation of a settlement; (ii) advances may be made only upon receipt of a
written promise by, or on behalf of, the recipient to repay that amount of the
advance which exceeds the amount which it is ultimately determined 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 Distribution Agreements relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933, as amended (the "1933 Act"), against certain types of
civil liabilities arising in connection with the Registration Statement or
Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and 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
C-3
<PAGE>
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933
Act and will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Manager") acts as the investment adviser
for the following registered investment companies: Apex Municipal Fund, Inc.,
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., Corporate High Yield Fund, Inc., Corporate
High Yield Fund II, Inc., Emerging Tigers Fund, Inc., Financial Institutions
Series Trust, Income Opportunities Fund 1999, Inc., Income Opportunities Fund
2000, Inc., 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., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The
Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured
Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California
Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund,
Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc.,
MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield
Arizona Fund II, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc.,
MuniYield New York Insured Fund II, Inc., MuniYield New York Insured Fund III,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., Senior High Income
Portfolio II, Inc., Senior Strategic Income Fund, Inc., Taurus MuniCalifornia
Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and Worldwide DollarVest
Fund, Inc. Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate Manager,
acts as the investment adviser for the following companies: Convertible
Holdings, Inc., Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill
Lynch Americas Income Fund, Inc., Merrill Lynch Asset Growth Fund, Inc.,
Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Balanced Fund for
Investment and Retirement, Merrill Lynch Capital Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch
Fundamental Growth Fund, 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 High Income
Municipal Bond Fund, Inc., Merrill Lynch Institutional Intermediate Fund,
Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund,
Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust,
Merrill Lynch Senior Floating Rate Fund, Inc., 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. The address of
each of these investment companies is Box P.O. 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 and MLAM is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
and Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial Center,
C-4
<PAGE>
North Tower, 250 Vesey Street, New York, New York 10281. The address of
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 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 substantially all of the investment
companies described in the preceding paragraph, and Messrs. Durnin, Giordano,
Harvey, Hewitt, Kirstein, Monagle and Ms. Griffin are directors or officers of
one or more of such companies.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
POSITIONS WITH BUSINESS, PROFESSION,
NAME MANAGER VOCATION OR EMPLOYMENT
---- -------------- ----------------------
<S> <C> <C>
Merrill Lynch & Co., Limited Partner Financial Services Holding Company;
Inc. ("ML & Co.")...... Limited Partner of MLAM
Fund Asset Management, Limited Partner
Inc.................... Investment Advisory Services
Princeton Services...... General Partner General Partner of MLAM
Arthur Zeikel........... President President of MLAM; Director of Mer-
rill Lynch Funds Distributor, Inc.
("MLFD"); President and Director of
Princeton Services, Inc. ("Princeton
Services"); Executive Vice President
of ML & Co.; and Executive Vice
President of Merrill Lynch
Terry K. Glenn.......... Executive Vice President Executive Vice President of MLAM;
President and Director of MLFD;
Executive Vice President and Director
of Princeton Services; Director of
FDS; President of Princeton
Administrators, L.P.
Bernard J. Durnin....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Vincent R. Giordano..... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Elizabeth Griffin....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
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
Philip L. Kirstein...... Senior Vice President, Senior Vice President, General
General Counsel and Counsel, Secretary and Director of
Secretary MLAM; Senior Vice President, General
Counsel, Director and Secretary of
Princeton Services; Director of MLFD
Ronald M. Kloss......... Senior Vice President Senior Vice President and Controller
and Controller of MLAM; Senior Vice President and
Controller of Princeton Services
Joseph T. Monagle....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
POSITIONS WITH BUSINESS, PROFESSION,
NAME MANAGER VOCATION OR EMPLOYMENT
---- -------------- ----------------------
<S> <C> <C>
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of
and Treasurer MLAM; Senior Vice President and Trea-
surer of Princeton Services; Vice
President and Treasurer of MLFD
Richard L. Rufener...... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services;
Vice President of MLFD
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 and for each of
the investment companies referred to in the first paragraph of Item 28 except
Apex Municipal Fund, Inc., 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., 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., MuniAssets Fund, Inc., MuniBond Income Fund,
Inc., The Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc.,
MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest
California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured
Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund,
Inc., MuniVest Pennsylvania Fund, MuniYield Arizona Fund, Inc., MuniYield
Arizona Fund, II, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund,
MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Insured Fund II,
Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc.,
MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II,
Inc., MuniYield New York Insured Fund III, Inc., MuniYield Pennsylvania Fund,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc., Senior High Income Portfolio II, Inc., Senior Strategic
Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork
Holdings, Inc. and Worldwide DollarVest Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Crook,
Aldrich, Breen, Fatseas, Graczyk and Wasel is One Financial Center, 15th floor,
Boston, Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(1) (2) (3)
POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH MLFD WITH REGISTRANT
---- --------------------- ---------------------
<S> <C> <C>
Terry K. Glenn........ President and Director Executive Vice President
Arthur Zeikel......... Director President and Trustee
Philip L. Kirstein.... Director None
William E. Aldrich.... Senior Vice President None
Robert W. Crook....... Senior Vice President None
Kevin Boman........... Vice President None
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
(1) (2) (3)
POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH MLFD WITH REGISTRANT
---- --------------------- ---------------------
<S> <C> <C>
Michael J. Brady........ Vice President None
William M. Breen........ Vice President None
Sharon Creveling........ Vice President and Assistant
Treasurer None
Kevin P. Boman.......... Vice President
Mark A. DeSario......... Vice President None
James T. Fatseas........ Vice President None
Stanley Graczyk......... Vice President None
Michelle T. Lau......... Vice President None
Deborah W. Landsman-
Yaros.................. Vice President None
Gerald M. Richard....... Vice President and Treasurer Treasurer
Richard L. Rufener...... Vice President None
Salvatore Venezia....... Vice President None
William Wasel........... Vice President None
Robert Harris........... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the Rules
thereunder are maintained at the offices of the Registrant and Financial Data
Services, Inc.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Trust--
Management and Advisory Arrangements" in the Prospectus constituting Part A of
the Registration Statement and under "Management of the Trust--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 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 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 13TH DAY OF OCTOBER,
1994.
Merrill Lynch California Municipal
Series 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.
SIGNATURE TITLE DATE
/s/ Arthur Zeikel President and
- ------------------------------------- Trustee (Principal October 13,
(ARTHUR ZEIKEL) Executive Officer) 1994
/s/ Gerald M. Richard Treasurer (Principal
- ------------------------------------- Financial and October 13,
(GERALD M. RICHARD) Accounting Officer) 1994
Kenneth S. Axelson* Trustee
- -------------------------------------
(KENNETH S. AXELSON)
Herbert I. London* Trustee
- -------------------------------------
(HERBERT I. LONDON)
Robert R. Martin* Trustee
- -------------------------------------
(ROBERT R. MARTIN)
Joseph L. May* Trustee
- -------------------------------------
(JOSEPH L. MAY)
Andre F. Perold* Trustee
- -------------------------------------
(ANDRE F. PEROLD)
/s/ Arthur Zeikel
*By__________________________________ October 13,
(ARTHUR ZEIKEL) 1994
ATTORNEY-IN-FACT
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
5(b) --Supplement to Management Agreement between the Registrant and
Fund Asset Management, L.P.
6(a) --Form of Class A Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc. (including Form of
Selected Dealers Agreement)
6(c) --Form of Class C Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc. (including Form of
Selected Dealers Agreement)
6(d) --Form of Class D Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc. (including Form of
Selected Dealers Agreement)
10 --Opinion of Brown & Wood, counsel to the Registrant
11 --Consent of Deloitte & Touche LLP, independent auditors for
Registrant
15(b) --Form of Class C Distribution Plan and Class C Distribution
Plan Sub-Agreement of the Registrant
15(c) --Form of Class D Distribution Plan and Class D Distribution
Plan Sub-Agreement of the Registrant
17(a) --Financial Data Schedule for Class A Shares
17(b) --Financial Data Schedule for Class B Shares
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted from
this 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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NAME> CLASS A
<NUMBER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1994
<PERIOD-START> SEP-01-1993
<PERIOD-END> AUG-31-1994
<INVESTMENTS-AT-COST> 760025869
<INVESTMENTS-AT-VALUE> 777295775
<RECEIVABLES> 14003722
<ASSETS-OTHER> 129727
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 791429224
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4524124
<TOTAL-LIABILITIES> 4524124
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 776207046
<SHARES-COMMON-STOCK> 5303875
<SHARES-COMMON-PRIOR> 5212327
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6571851)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17269905
<NET-ASSETS> 60017051
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 53118732
<OTHER-INCOME> 0
<EXPENSES-NET> 9210732
<NET-INVESTMENT-INCOME> 43908000
<REALIZED-GAINS-CURRENT> 4109882
<APPREC-INCREASE-CURRENT> (61534369)
<NET-CHANGE-FROM-OPS> (13516487)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3624918
<DISTRIBUTIONS-OF-GAINS> 1538208
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1162525
<NUMBER-OF-SHARES-REDEEMED> 1287071
<SHARES-REINVESTED> 216094
<NET-CHANGE-IN-ASSETS> (98841046)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 9572948
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4567938
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9210732
<AVERAGE-NET-ASSETS> 64151257
<PER-SHARE-NAV-BEGIN> 12.38
<PER-SHARE-NII> .68
<PER-SHARE-GAIN-APPREC> (.78)
<PER-SHARE-DIVIDEND> .68
<PER-SHARE-DISTRIBUTIONS> .28
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.32
<EXPENSE-RATIO> .62
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NAME> CLASS B
<NUMBER> 2
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1994
<PERIOD-START> SEP-01-1993
<PERIOD-END> AUG-31-1994
<INVESTMENTS-AT-COST> 760,025,869
<INVESTMENTS-AT-VALUE> 777,295,775
<RECEIVABLES> 14,003,722
<ASSETS-OTHER> 129,727
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 791,429,224
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,524,124
<TOTAL-LIABILITIES> 4,524,124
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 776,207,046
<SHARES-COMMON-STOCK> 64,217,894
<SHARES-COMMON-PRIOR> 66,317,444
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,571,851)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17,269,905
<NET-ASSETS> 726,888,049
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 53,118,732
<OTHER-INCOME> 0
<EXPENSES-NET> 9,210,732
<NET-INVESTMENT-INCOME> 43,908,000
<REALIZED-GAINS-CURRENT> 4,109,882
<APPREC-INCREASE-CURRENT> (61,534,369)
<NET-CHANGE-FROM-OPS> (13,516,487)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 40,283,082
<DISTRIBUTIONS-OF-GAINS> 18,716,473
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,118,622
<NUMBER-OF-SHARES-REDEEMED> 11,430,290
<SHARES-REINVESTED> 2,212,118
<NET-CHANGE-IN-ASSETS> (98,841,046)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 9,572,948
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,567,938
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9,210,732
<AVERAGE-NET-ASSETS> 782,177,460
<PER-SHARE-NAV-BEGIN> 12.38
<PER-SHARE-NII> .61
<PER-SHARE-GAIN-APPREC> (.78)
<PER-SHARE-DIVIDEND> .61
<PER-SHARE-DISTRIBUTIONS> .28
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.23
<EXPENSE-RATIO> 1.13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.5(b)
SUPPLEMENT TO INVESTMENT ADVISORY AGREEMENT
WITH
FUND ASSET MANAGEMENT
As of January 1, 1994 Fund Asset Management was reorganized as a limited
partnership, formally known as Fund Asset Management, L.P. ("FAM"). The general
partner of FAM is Princeton Services, Inc. and the limited partners are Fund
Asset Management, Inc. and Merrill Lynch & Co, Inc. Pursuant to Rule 202(a)(1)-
1 under the Investment Advisors Act of 1940 and Rule 2a-6 under the Investment
Company Act of 1940 such reorganization did not constitute an assignment of this
investment advisory agreement since it did not involve a change of control or
management of the investment adviser. Pursuant to the requirements of Section
205 of the Investment Advisers Act of 1940, however, Fund Asset Management
hereby supplements this investment advisory agreement by undertaking to advise
you of any change in the membership of the partnership within a reasonable time
after any such change occurs.
By /s/ Arthur Zeikel
------------------
Dated: January 3, 1994
<PAGE>
EXHIBIT 99.6(a)
CLASS A SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ____ day of October, 1994, between MERRILL LYNCH
CALIFORNIA MUNICIPAL SERIES TRUST, a Massachusetts business trust (the "Trust"),
and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the
"Distributor").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Trust 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 Trust to offer its shares for
sale continuously; and
WHEREAS, the Trustees of the Trust (the "Trustees") are authorized to
establish separate series (the "Series") relating to separate portfolios of
securities, each of which will offer separate classes of shares of beneficial
interest, par value $0.10 per share (collectively referred to as "shares") to
selected groups of purchasers; and
WHEREAS, the Trustees have established and designated the Merrill Lynch
[State] Municipal Bond Fund (the "Fund") as a series of the Trust; 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
<PAGE>
WHEREAS, the Trust and the Distributor wish to enter into an agreement with
each other with respect to the continuous offering of the Class A shares of
beneficial interest in the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Trust hereby appoints the
------------------------------
Distributor as the principal underwriter and distributor of the Trust to sell
Class A shares of beneficial interest in the Fund (sometimes herein referred to
as "Class A shares") to eligible investors (as defined below) and hereby agrees
during the term of this Agreement to sell Class A 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 Trust to act as principal underwriter and
distributor, except that:
(a) The Trust may, upon written notice to the Distributor, from time to
time designate other principal underwriters and distributors of Class A 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 A 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.
2
<PAGE>
(b) The exclusive right granted to the Distributor to purchase Class A
shares from the Trust shall not apply to Class A shares issued in connection
with the merger or consolidation of any other investment company or personal
holding company with the Trust or the acquisition by purchase or otherwise of
all (or substantially all) the assets or the outstanding Class A shares of any
such company by the Trust.
(c) Such exclusive right also shall not apply to Class A shares issued
pursuant to reinvestment of dividends or capital gains distributions.
(d) Such exclusive right also shall not apply to Class A shares issued
pursuant to any conversion, exchange or reinstatement privilege afforded
redeeming shareholders or to any other Class A shares as shall be agreed between
the Trust and the Distributor from time to time.
Section 3. Purchase of Class A shares from the Trust.
-----------------------------------------
(a) The Distributor shall have the right to buy from the Trust the Class A
shares needed, but not more than the Class A shares needed (except for clerical
errors in transmission) to fill unconditional orders for Class A shares of the
Fund placed with the Distributor by eligible investors or securities dealers.
Investors eligible to purchase Class A shares shall be those persons so
identified in the currently effective prospectus and statement of additional
information of the Fund (the "prospectus" and "statement of additional
information", respectively) under the Securities Act of 1933, as amended (the
"Securities Act"),
3
<PAGE>
relating to such Class A shares ("eligible investors"). The price which the
Distributor shall pay for the Class A shares so purchased from the Trust shall
be the net asset value, determined as set forth in Section 3(d) hereof, used in
determining the public offering price on which such orders were based.
(b) The Class A shares are to be resold by the Distributor to eligible
investors at the public offering price, 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 public offering price(s) of the Class A shares, i.e., the price
- -
per share at which the Distributor or selected dealers may sell Class A shares
to eligible investors, shall be the public offering price as set forth in the
prospectus and statement of additional information relating to such Class A
shares, but not to exceed the net asset value at which the Distributor is to
purchase the Class A shares, plus a sales charge not to exceed 4.00% of the
public offering price (4.17% of the net amount invested), subject to reductions
for volume purchases. Class A shares may be sold to certain Trustees, officers
and employees of the Trust, directors and employees of Merrill Lynch & Co., Inc.
and its subsidiaries, and to certain other persons described in the prospectus
and statement of additional information, without a sales charge or at a reduced
sales charge, upon terms and conditions set forth in the prospectus and
statement of additional information. If the
4
<PAGE>
public offering price does not equal an even cent, the public offering price may
be adjusted to the nearest cent. All payments to the Trust hereunder shall be
made in the manner set forth in Section 3(f).
(d) The net asset value of Class A shares shall be determined by the Trust
or any agent of the Trust in accordance with the method set forth in the
prospectus and statement of additional information of the Fund and guidelines
established by the Trustees.
(e) The Trust shall have the right to suspend the sale of its Class A
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Trust shall also have the right to suspend
the sale of its Class A 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 Trust, makes it impracticable or inadvisable to sell the
Class A shares.
(f) The Trust, or any agent of the Trust designated in writing by the
Trust, shall be promptly advised of all purchase orders for Class A shares
received by the Distributor. Any order may be rejected by the Trust; provided,
however, that the Trust will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class A shares from eligible
investors. The Trust (or its agent) will confirm orders upon their receipt,
will make appropriate book entries and, upon
5
<PAGE>
receipt by the Trust (or its agent) of payment therefor, will deliver deposit
receipts or certificates for such Class A shares pursuant to the instructions of
the Distributor. Payment shall be made to the Trust in New York Clearing House
funds. The Distributor agrees to cause such payment and such instructions to be
delivered promptly to the Trust (or its agent).
Section 4. Repurchase or Redemption of Class A shares by the Trust.
-------------------------------------------------------
(a) Any of the outstanding Class A shares may be tendered for redemption
at any time, and the Trust agrees to repurchase or redeem the Class A 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. The price to be paid to redeem or repurchase the Class A shares
shall be equal to the net asset value calculated in accordance with the
provisions of Section 3(d) hereof, less any contingent deferred sales charge
("CDSC"), redemption fee or other charge(s), if any, set forth in the prospectus
and statement of additional information of the Fund. All payments by the Trust
hereunder shall be made in the manner set forth below. The redemption or
repurchase by the Trust of any of the Class A shares purchased by or through the
Distributor will not affect the sales charge secured by the Distributor or any
selected dealer in the course of the original sale, except that if any Class A
shares are tendered for redemption or repur-
6
<PAGE>
chase within seven business days after the date of the confirmation of the
original purchase, the right to the sales charge shall be forfeited by the
Distributor and the selected dealer which sold such Class A shares.
The Trust shall pay the total amount of the redemption price as defined in
the above paragraph pursuant to the instructions of the Distributor in New York
Clearing House funds 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 Trust as follows: (i) any applicable
CDSC shall be paid to the Distributor, and (ii) the balance shall be paid to or
for the account of the shareholder, in each case in accordance with the
applicable provisions of the prospectus and statement of additional information.
(b) Redemption of Class A shares or payment may be suspended at times when
the New York Stock Exchange is closed, when trading on said Exchange is
suspended, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Trust of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Trust fairly
to determine the value of the net assets of the Fund, or during any other period
when the Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Trust.
-------------------
(a) The Trust shall furnish to the Distributor copies of all information,
financial statements and other papers which the
7
<PAGE>
Distributor may reasonably request for use in connection with the distribution
of Class A shares of the Fund, and this shall include, upon request by the
Distributor, one certified copy of all financial statements prepared for the
Trust by independent public accountants. The Trust shall make available to the
Distributor such number of copies of the prospectus and statement of additional
information relating to the Fund as the Distributor shall reasonably request.
(b) The Trust shall take, from time to time, but subject to any necessary
approval of the Class A shareholders, all necessary action to fix the number of
authorized Class A shares and such steps as may be necessary to register the
same under the Securities Act, to the end that there will be available for sale
such number of Class A shares as the Distributor may reasonably be expected to
sell.
(c) The Trust shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class A shares for sale under the
securities laws of such states as the Distributor and the Trust may approve. Any
such qualification may be withheld, terminated or withdrawn by the Trust 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 Trust. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Trust in connection with such
qualification.
8
<PAGE>
(d) The Trust 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 A shares of the Fund but shall not be obligated to sell any
specific number of Class A shares. The services of the Distributor to the Trust
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.
(b) In selling the Class A 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 Trust 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 Trust.
(c) The Distributor shall adopt and follow procedures, as approved by the
officers of the Trust, for the confirmation of sales to eligible investors and
selected dealers, the collection of amounts payable by eligible investors and
selected dealers on
9
<PAGE>
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 Dealers Agreements.
---------------------------
(a) The Distributor shall have the right to enter into selected dealers
agreements with securities dealers of its choice ("selected dealers") for the
sale of Class A shares and fix therein the portion of the sales charge which may
be allocated to the selected dealers; provided that the Trust shall approve the
forms of agreements with dealers and the dealer compensation set forth therein.
Class A shares sold to selected dealers shall be for resale by such dealers only
at the public offering price(s) set forth in the prospectus and statement of
additional information. The form of agreement with selected dealers to be used
during the continuous offering of the Class A shares is attached hereto as
Exhibit A.
(b) Within the United States, the Distributor shall offer and sell Class A
shares only to such selected dealers as are members in good standing of the
NASD.
Section 8. Payment of Expenses.
-------------------
(a) The Trust 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
10
<PAGE>
Act, the Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy materials to Class A
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 which are to be used in connection
with the offering of Class A shares to selected dealers or eligible 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 A shares for sale to eligible investors and any
expenses of advertising incurred by the Distributor in connection with such
offering.
(c) The Trust shall bear the cost and expenses of qualification of the
Class A shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of qualifying the Trust as a broker or dealer
in such states of the United States or other jurisdictions as shall be selected
by the
11
<PAGE>
Trust 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 Trust shall indemnify and hold harmless the Distributor and each
person, if any, who controls the Distributor 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 A 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 relating
to the Fund, as from time to time amended and supplemented, or an annual or
interim report to 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 Trust in connection therewith by or on behalf of
the Distributor; provided, however, that in no case (i) is the indemnity of the
Trust 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
12
<PAGE>
liability to the Trust 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 Trust to be liable under its indemnity agreement
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 Trust 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 Trust 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 Trust 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 Trust 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 Trust elects to assume the defense of any such suit
and retain
13
<PAGE>
such counsel, the Distributor or such controlling person or persons, defendant
or defendants in the suit shall bear the fees and expenses of any additional
counsel retained by them, but in case the Trust does not elect to assume the
defense of any such suit, it will reimburse the Distributor or such controlling
person or persons, defendant or defendants in the suit, for the reasonable fees
and expenses of any counsel retained by them. The Trust 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 A shares.
(b) The Distributor shall indemnify and hold harmless the Trust and each
of its Trustees and officers and each person, if any, who controls the Trust
against any loss, liability, claim, damage or expense 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 Trust 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 Class A shareholders. In case any action shall be brought
against the Trust 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 Trust, and the Trust and each person so indemnified
14
<PAGE>
shall have the rights and duties given to the Distributor by the provisions of
subsection (a) of this Section 9.
Section 10. Merrill Lynch Mutual Fund Adviser Program. In connection with
-----------------------------------------
the Merrill Lynch Mutual Fund Adviser Program, the Distributor and its
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated, are authorized to
offer and sell shares of the Fund, as agent for the Fund, to participants in
such program. The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid to the Fund,
the duties of the Distributor, the payment of expenses and indemnification
obligations of the Fund and the Distributor.
Section 11. Duration and Termination of this Agreement. This Agreement
------------------------------------------
shall become effective as of the date first above written and shall remain in
force until October __, 1996 and thereafter, but only for 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 A 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 Class A
voting securities of the Fund, or by the Distributor, on sixty days' written
notice to the other
15
<PAGE>
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 12. 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 Class A voting securities
of the Fund and (ii) by the vote of a majority of those Trustees of the Trust
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.
Section 13. 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 14. This Agreement supersedes the prior Distribution Agreement
entered into by the parties hereto with respect to the Class A shares of the
Fund.
Section 15. Personal Liability. The Declaration of Trust establishing
------------------
Merrill Lynch California Municipal Series Trust,
16
<PAGE>
dated August 2, 1985, 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 California Municipal Series
Trust" refers to the Trustees under the Declaration collectively as trustees,
but not as individuals or personally; and no Trustee, shareholder, officer,
employee or agent of said 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.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
By_____________________________________
Title:
MERRILL LYNCH TRUSTS DISTRIBUTOR, INC.
By_____________________________________
Title:
17
<PAGE>
EXHIBIT A
MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
CLASS A SHARES OF BENEFICIAL INTEREST
SELECTED DEALERS AGREEMENT
--------------------------
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an agreement
with MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST, a Massachusetts business
trust (the "Trust"), pursuant to which it acts as the distributor for the sale
of Class A shares of beneficial interest, par value $0.10 per share (herein
referred to as "Class A shares"), of the Trust relating to Merrill Lynch [State]
Municipal Bond Fund (the "Fund"), and as such has the right to distribute Class
A shares of the Fund for resale. The Trust is an open-end investment company
registered under the Investment Company Act of 1940, as amended, and the Fund's
Class A shares are registered under the Securities Act of 1933, as amended. You
have received a copy of the Class A shares Distribution Agreement (the
"Distribution Agreement") between ourself and the Trust and reference is made
herein to certain provisions of such Distribution Agreement. The terms
"Prospectus" and "Statement of Additional Information" 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. We offer to sell to you, as a member of the Selected Dealers Group,
Class A shares of the Fund for resale to investors identified in the Prospectus
and Statement of Additional Information as eligible to purchase Class A shares
("eligible investors") upon the following terms and conditions:
1. In all sales of these Class A shares to eligible investors, you shall
act as dealer for your own account and in no transaction shall you have any
authority to act as agent for the Trust, for us or for any other member of the
Selected Dealers Group, except in connection with the Merrill Lynch Mutual Fund
Adviser program and such other special programs as we from time to time agree,
in which case you shall have authority to offer and sell shares, as agent for
the Trust, to participants in such program.
<PAGE>
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 5 hereof and instructions
which we or the Trust shall forward from time to time to you. All orders are
subject to acceptance or rejection by the Distributor or the Trust 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.
3. The sales charges for sales to eligible investors, computed as
percentages of the public offering price and the amount invested, and the
related discount to Selected Dealers are as follows:
<TABLE>
<CAPTION>
Discount to
Sales Charge Selected
Sales Charge as Percentage* Dealers as
as Percentage of the Net Percentage
of the Amount of the
Amount of Purchase Offering Price Invested 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.
** Initial sales charges may be waived for certain classes of offerees as set
forth in the current Prospectus and Statement of Additional Information of the
Fund. Such purchase may be subject to a contingent deferred sales
A-2
<PAGE>
charge as set forth in the current Prospectus and Statement of Additional
Information.
The term "purchase" 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 Class A shares for his or their own account and to
single purchases by a trustee or other fiduciary purchasing Class A shares for a
single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company" as that term is defined in the Investment Company Act of 1940, as
amended, 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 Class A shares of the Fund or Class A 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 reduced sales charges are applicable through a right of accumulation under
which certain eligible investors are permitted to purchase Class A shares of the
Fund 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 Class A, Class B, Class C and Class D shares of the Fund
and of any other investment company with an initial sales charge for which the
Distributor acts as the distributor. For any such right of accumulation to be
made available, the Distributor must be provided at the time of purchase, by the
purchaser or you, with sufficient information to permit confirmation of
qualification, and acceptance of the purchase order is subject to such
confirmation.
The reduced sales charges are applicable to purchases aggregating $25,000 or
more of Class A shares or of Class D shares of any other investment company with
an initial sales charge for which the Distributor acts as the distributor made
through you within a thirteen-month period starting with the first purchase
pursuant to a Letter of Intention in the form provided in the Prospectus. A
purchase not originally made pursuant to a Letter of Intention may be included
under a subsequent letter executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period. If
the
A-3
<PAGE>
intended amount of shares is not purchased within the thirteen-month period, an
appropriate price adjustment will be made pursuant to the terms of the Letter of
Intention.
You agree to advise us promptly at our request as to amounts of any sales made
by you to eligible investors qualifying for reduced sales charges. Further
information as to the reduced sales charges pursuant to the right of
accumulation or a Letter of Intention is set forth in the Prospectus and
Statement of Additional Information.
4. You shall not place orders for any of the Class A shares unless you have
already received purchase orders for such Class A 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 A 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 A 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 A 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 Trust.
5. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Trust for Class A 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 subject to the
compensation provisions of Section 3 hereof and (ii) to tender Class A shares
directly to the Trust or its agent for redemption subject to the applicable
terms and conditions set forth in Section 4 of the Distribution Agreement.
6. 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.
7. If any Class A shares sold to you under the terms of this Agreement are
repurchased by the Trust or by us for the account of the Trust or are tendered
for redemption within seven
A-4
<PAGE>
business days after the date of the confirmation of the original purchase by
you, it is agreed that you shall forfeit your right to, and refund to us, any
discount received by you on such Class A shares.
8. No person is authorized to make any representations concerning Class A
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 Trust as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class A
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 Trust, and you agree that the Trust shall have no
liability or responsibility to you in these respects unless expressly assumed in
connection therewith.
9. You agree to deliver to each of the purchasers making purchases from you
a copy of the then current Prospectus and, if 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.
10. We reserve the right in our discretion, without notice, to suspend sales
or withdraw the offering of Class A shares entirely or to certain persons or
entities in a class or classes specified by us. Each party hereto has the right
to cancel this agreement upon notice to the other party.
11. 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
A-5
<PAGE>
amended, or of the rules and regulations of the Securities and Exchange
Commission issued thereunder.
12. 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.
13. Upon application to us, we will inform you as to the states in which we
believe the Class A 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 A shares
in any jurisdiction. We will file with the Department of State in New York a
Further State Notice with respect to the Class A shares, if necessary.
14. 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.
15. Your first order placed pursuant to this Agreement for the purchase of
Class A shares of the Fund will represent your acceptance of this Agreement.
MERRILL LYNCH TRUSTS DISTRIBUTOR, INC.
By __________________________________
(Authorized Signature)
A-6
<PAGE>
Please return one signed copy
of this agreement to:
MERRILL LYNCH TRUSTS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.
-------------------------------------------
By: -------------------------------------------
Address: 800 Scudders Mill Road
-----------------------------
Plainsboro, New Jersey 08536
----------------------------------------
Date: , 1994
-----------------------------------------
A-7
<PAGE>
EXHIBIT 99.6(c)
CLASS C SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ______ day of October, 1994, between MERRILL LYNCH
CALIFORNIA MUNICIPAL SERIES TRUST, a Massachusetts business trust (the "Trust"),
and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the
"Distributor").
W I T N E S S E T H :
-------------------
WHEREAS, the Trust 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 Trust to offer its shares for
sale continuously; and
WHEREAS, the Trustees of the Trust (the "Trustees") are authorized to
establish separate series (the "Series") relating to separate portfolios of
securities, each of which will offer separate classes of shares of beneficial
interest, par value $0.10 per share (collectively referred to as "shares") to
selected groups of purchasers; and
WHEREAS, the Trustees have established and designated the Merrill Lynch
[State] Municipal Bond Fund (the "Fund") as a series of the Trust; and
<PAGE>
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 Trust and the Distributor wish to enter into an agreement with
each other with respect to the continuous offering of the Fund's Class C shares
in order to promote the growth of the Fund and facilitate the distribution of
its Class C shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Trust hereby appoints the
------------------------------
Distributor as the principal underwriter and distributor of the Trust to sell
Class C shares of beneficial interest in the Fund (sometimes herein referred to
as "Class C 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 Trust to act as principal underwriter and
distributor of the Class C shares of the Fund, except that:
(a) The Trust may, upon written notice to the Distributor, from time to
time designate other principal underwriters and distributors of Class C 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
2
<PAGE>
Agreement to sell Class C 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 right granted to the Distributor to purchase Class C
shares from the Trust shall not apply to Class C shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Trust or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding Class C
shares of any such company by the Trust.
(c) Such exclusive right also shall not apply to Class C shares issued
pursuant to reinvestment of dividends or capital gains distributions.
(d) Such exclusive right also shall not apply to Class C shares issued
pursuant to any conversion, exchange or reinstatement privilege afforded
redeeming shareholders or to any other Class C shares as shall be agreed between
the Trust and the Distributor from time to time.
Section 3. Purchase of Class C Shares from the Trust.
-----------------------------------------
(a) The Distributor shall have the right to buy from the Trust the Class C
shares needed, but not more than the Class C shares needed (except for clerical
errors in transmission) to fill unconditional orders for Class C shares of the
Fund placed with the Distributor by eligible investors or securities dealers.
3
<PAGE>
Investors eligible to purchase Class C shares shall be those persons so
identified in the currently effective prospectus and statement of additional
information of the Fund (the "prospectus" and "statement of additional
information", respectively) under the Securities Act of 1933, as amended (the
"Securities Act"), relating to such Class C shares. The price which the
Distributor shall pay for the Class C shares so purchased from the Trust shall
be the net asset value, determined as set forth in Section 3(c) hereof.
(b) The Class C 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 C shares of the Fund shall be determined
by the Trust or any agent of the Trust in accordance with the method set forth
in the prospectus and statement of additional information and guidelines
established by the Board of Trustees.
(d) The Trust shall have the right to suspend the sale of its Class C
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Trust shall also have the right to suspend
the sale of its Class C shares if trading on the New York Stock Exchange shall
have been suspended, if a banking moratorium shall have been declared by
4
<PAGE>
Federal or New York authorities, or if there shall have been some other event,
which, in the judgment of the Trust, makes it impracticable or inadvisable to
sell the Class C shares.
(e) The Trust, or any agent of the Trust designated in writing by the
Trust, shall be promptly advised of all purchase orders for Class C shares
received by the Distributor. Any order may be rejected by the Trust; provided,
however, that the Trust will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class C shares. The Trust (or
its agent) will confirm orders upon their receipt, will make appropriate book
entries and, upon receipt by the Trust (or its agent) of payment therefor, will
deliver deposit receipts or certificates for such Class C shares pursuant to the
instructions of the Distributor. Payment shall be made to the Trust in New York
Clearing House funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Trust (or its agent).
Section 4. Repurchase or Redemption of Class C Shares by the Trust.
--------------------------------------------- ---------
(a) Any of the outstanding Class C shares may be tendered for redemption
at any time, and the Trust agrees to repurchase or redeem the Class C 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
5
<PAGE>
of additional information of the Fund. The price to be paid to redeem or
repurchase the Class C shares shall be equal to the net asset value calculated
in accordance with the provisions of Section 3(c) hereof, less any contingent
deferred sales charge ("CDSC"), redemption fee or other charge(s), if any, set
forth in the prospectus and statement of additional information of the Fund.
All payments by the Trust hereunder shall be made in the manner set forth below.
The Trust 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 Trust as follows:
(i) any applicable CDSC shall be paid to the Distributor, and (ii) the balance
shall be paid to or for the account of the shareholder, in each case in
accordance with the applicable provisions of the prospectus and statement of
additional information.
(b) Redemption of Class C shares or payment may be suspended at times when
the New York Stock Exchange is closed, when trading on said Exchange is
suspended, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Trust of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Trust fairly
to determine the value of the net assets of the
6
<PAGE>
Fund, or during any other period when the Securities and Exchange Commission, by
order, so permits.
Section 5. Duties of the Trust.
-------------------
(a) The Trust 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 C shares of the
Fund, and this shall include, upon request by the Distributor, one certified
copy of all financial statements prepared for the Trust by independent public
accountants. The Trust shall make available to the Distributor such number of
copies of the prospectus and statement of additional information relating to the
Fund as the Distributor shall reasonably request.
(b) The Trust shall take, from time to time, but subject to any 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 end that there will be available for sale such number
of Class C shares as the Distributor reasonably may be expected to sell.
(c) The Trust shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class C shares for sale under the
securities laws of such states as the Distributor and the Trust may approve.
Any such qualification may be withheld, terminated or withdrawn by the Trust at
any time in its discretion. As provided in Section 8(c) hereof, the
7
<PAGE>
expense of qualification and maintenance of qualification shall be borne by the
Trust. The Distributor shall furnish such information and other material
relating to its affairs and activities as may be required by the Trust in
connection with such qualification.
(d) The Trust 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 C shares of the Fund but shall not be obligated to sell any
specific number of shares. The services of the Distributor to the Trust
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.
(b) In selling the Class C 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 Trust to give any information or to make any
representations, other than those contained in the registration statement or
related prospectus and statement of
8
<PAGE>
additional information and any sales literature specifically approved by the
Trust.
(c) The Distributor shall adopt and follow procedures, as approved by the
officers of the Trust, 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 C shares; provided, that the Trust shall approve the forms of
agreements with dealers. Class C shares sold to selected dealers shall be for
resale by such dealers only at net asset value determined as set forth in
Section 3(c) hereof. The 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 C
shares only to such selected dealers that are members in good standing of the
NASD.
Section 8. Payment of Expenses.
-------------------
9
<PAGE>
(a) The Trust 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 C
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 which are to be used in connection
with the offering of Class C 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 C shares for sale to the public and any expenses of advertising
incurred by the Dis-
10
<PAGE>
tributor in connection with such offering. It is understood and agreed that so
long as the Fund's Class C 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 Trust shall bear the cost and expenses of qualification of the
Class C shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of qualifying the Trust as a broker or dealer
in such states of the United States or other jurisdictions as shall be selected
by the Trust 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 Trust decides to discontinue such qualification pursuant to Section
5(c) hereof.
Section 9. Indemnification.
---------------
(a) The Trust shall indemnify and hold harmless the Distributor and each
person, if any, who controls the Distributor 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 C 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
11
<PAGE>
related prospectus and statement of additional information relating to the Fund,
as from time to time amended and supplemented, or an annual or interim report to
Class C 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 Trust in connection therewith by or on behalf of
the Distributor; provided, however, that in no case (i) is the indemnity of the
Trust 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 Trust 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 Trust to be liable under its indemnity agreement
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 Trust 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
12
<PAGE>
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 Trust 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 Trust 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 Trust 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 Trust 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 Trust does
not elect to assume the defense of any such suit, it will reimburse the
Distributor or such controlling person or persons, defendant or defendants in
the suit, for the reasonable fees and expenses, as incurred, of any counsel
retained by them. The Trust 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 C
shares.
13
<PAGE>
(b) The Distributor shall indemnify and hold harmless the Trust and each
of its Trustees and officers and each person, if any, who controls the Trust
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 Trust 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 Trust 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 Trust, and the Trust 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. Merrill Lynch Mutual Fund Adviser Program. In connection with
-----------------------------------------
the Merrill Lynch Mutual Fund Adviser Program, the Distributor and its
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated, are authorized to
offer and sell shares of the Fund, as agent for the Fund, to participants in
such program. The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid to the Fund,
the duties of the Distributor, the payment of
14
<PAGE>
expenses and indemnification obligations of the Fund and the Distributor.
Section 11. Duration and Termination of this Agreement. This Agreement
------------------------------------------
shall become effective as of the date first above written and shall remain in
force until October __, 1996 and thereafter, but only for 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 C 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 Class C
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 12. 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
15
<PAGE>
of outstanding Class C voting securities of the Fund and (ii) by the vote of a
majority of those Trustees of the Trust 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.
Section 13. 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 14. Personal Liability. The Declaration of Trust establishing
------------------
Merrill Lynch California Municipal Series Trust, dated August 2, 1985, 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 California Municipal Series Trust" refers to the
Trustees under the Declaration collectively as trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of said
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.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
MERRILL LYNCH CALIFORNIA MUNICIPAL
SERIES TRUST
By ____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By ____________________________________
Title:
17
<PAGE>
EXHIBIT A
---------
MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
CLASS C SHARES OF BENEFICIAL INTEREST
SELECTED DEALER AGREEMENT
-------------------------
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an agreement
with Merrill Lynch California Municipal Series Trust, a Massachusetts business
trust (the "Trust"), pursuant to which it acts as the distributor for the sale
of Class C shares of beneficial interest, par value $0.10 per share (herein
referred to as the "Class C shares"), of the Trust relating to Merrill Lynch
[State] Municipal Bond Fund (the "Fund") and as such has the right to distribute
Class C shares of the Fund for resale. The Trust is an open-end investment
company registered under the Investment Company Act of 1940, as amended, and the
Fund's Class C shares being offered to the public are registered under the
Securities Act of 1933, as amended. You have received a copy of the Class C
Shares Distribution Agreement (the "Distribution Agreement") between ourself and
the Trust 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. We offer to sell to you, as a member of
the Selected Dealers Group, Class C shares of the Fund upon the following terms
and conditions:
1. In all sales of these Class C 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 Trust, for us or for any other member of the Selected
Dealers Group, except in connection with the Merrill Lynch Mutual Fund Adviser
program and such other special programs as we from time to time agree, in which
case you shall have authority to offer and sell shares, as agent for the Trust,
to participants in such program.
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
<PAGE>
which we or the Trust shall forward from time to time to you. All orders are
subject to acceptance or rejection by the Distributor or the Trust 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.
3. You shall not place orders for any of the Class C shares unless you
have already received purchase orders for such Class C 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 C 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 C 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 C 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 Trust.
4. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Trust for Class C 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 C shares directly to the Trust 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 C
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 Trust as information supplemental to such
Prospectus and Statement of Additional Information. In purchasing Class C
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
A-2
<PAGE>
proxy solicitation material is our sole responsibility and not the
responsibility of the Trust, and you agree that the Trust 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 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 C shares entirely or to certain persons or
entities in a class or classes specified by us. 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 C 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 C shares
in any jurisdiction. We will file with the Department of State in New York a
Further State Notice with respect to the Class C shares, if necessary.
A-3
<PAGE>
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.
13. Your first order placed pursuant to this Agreement for the purchase of
Class C shares of the Fund will represent your acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By __________________________________
(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: Merrill Lynch, Pierce, Fenner & Smith Inc.
--------------------------------------------
By: ___________________________________________________
Address: 800 Scudders Mill Road
----------------------------------------------
Plainsboro, New Jersey 08536
-------------------------------------------------------
Date: , 1994
-------------------------------------------------
A-4
<PAGE>
EXHIBIT 99.6(d)
CLASS D SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ____ day of October, 1994, between MERRILL LYNCH
CALIFORNIA MUNICIPAL SERIES TRUST, a Massachusetts business trust (the "Trust"),
and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware corporation (the
"Distributor").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Trust 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 Trust to offer its shares for
sale continuously;
and
WHEREAS, the Trustees of the Trust (the "Trustees") are authorized to
establish separate series (the "Series") relating to separate portfolios of
securities, each of which will offer separate classes of shares of beneficial
interest, par value $0.10 per share (collectively referred to as "shares") to
selected groups of purchasers; and
WHEREAS, the Trustees have established and designated the Merrill Lynch
[State] Municipal Bond Fund (the "Fund") as a series of the Trust; 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
<PAGE>
WHEREAS, the Trust and the Distributor wish to enter into an agreement with
each other with respect to the continuous offering of the Class D shares of
beneficial interest in the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Trust hereby appoints the
------------------------------
Distributor as the principal underwriter and distributor of the Trust to sell
Class D shares of beneficial interest in the Fund (sometimes herein referred to
as "Class D shares") to the public and hereby agrees during the term of this
Agreement to sell Class D 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 Trust to act as principal underwriter and
distributor of the Class D shares of the Fund, except that:
(a) The Trust may, upon written notice to the Distributor, from time to
time designate other principal underwriters and distributors of Class D 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 D 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.
2
<PAGE>
(b) The exclusive right granted to the Distributor to purchase Class D
shares from the Trust shall not apply to Class D shares issued in connection
with the merger or consolidation of any other investment company or personal
holding company with the Trust or the acquisition by purchase or otherwise of
all (or substantially all) the assets or the outstanding Class D shares of any
such company by the Trust.
(c) Such exclusive right also shall not apply to Class D shares issued
pursuant to reinvestment of dividends or capital gains distributions.
(d) Such exclusive right also shall not apply to Class D shares issued
pursuant to any conversion, exchange or reinstatement privilege afforded
redeeming shareholders or to any other Class D shares as shall be agreed between
the Trust and the Distributor from time to time.
Section 3. Purchase of Class D Shares from the Trust.
-----------------------------------------
(a) The Distributor shall have the right to buy from the Trust the Class D
shares needed, but not more than the Class D shares needed (except for clerical
errors in transmission) to fill unconditional orders for Class D shares of the
Fund placed with the Distributor by eligible investors or securities dealers.
Investors eligible to purchase Class D shares shall be those persons so
identified in the currently effective prospectus and statement of additional
information of the Fund (the "prospectus" and "statement of additional
information", respectively) under the Securities Act of 1933, as amended (the
"Securities Act"),
3
<PAGE>
relating to such Class D shares. The price which the Distributor shall pay for
the Class D shares so purchased from the Trust shall be the net asset value,
determined as set forth in Section 3(d) hereof, used in determining the public
offering price on which such orders were based.
(b) The Class D shares are to be resold by the Distributor to investors at
the public offering price, 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 public offering price(s) of the Class D shares, i.e., the price
- -
per share at which the Distributor or selected dealers may sell Class D shares
to the public, shall be the public offering price as set forth in the prospectus
and statement of additional information relating to such Class D shares, but not
to exceed the net asset value at which the Distributor is to purchase the Class
D shares, plus a sales charge not to exceed 4.00% of the public offering price
(4.17% of the net amount invested), subject to reductions for volume purchases.
Class D shares may be sold to certain Trustees, officers and employees of the
Trust, directors and employees of Merrill Lynch & Co., Inc. and its
subsidiaries, and to certain other persons described in the prospectus and
statement of additional information, without a sales charge or at a reduced
sales charge, upon terms and conditions set forth in the prospectus and
statement of additional information. If the
4
<PAGE>
public offering price does not equal an even cent, the public offering price may
be adjusted to the nearest cent. All payments to the Trust hereunder shall be
made in the manner set forth in Section 3(f).
(d) The net asset value of Class D shares shall be determined by the Trust
or any agent of the Trust in accordance with the method set forth in the
prospectus and statement of additional information of the Fund and guidelines
established by the Trustees.
(e) The Trust shall have the right to suspend the sale of its Class D
shares at times when redemption is suspended pursuant to the conditions set
forth in Section 4(b) hereof. The Trust shall also have the right to suspend
the sale of its Class D 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 Trust, makes it impracticable or inadvisable to sell the
Class D shares.
(f) The Trust, or any agent of the Trust designated in writing by the
Trust, shall be promptly advised of all purchase orders for Class D shares
received by the Distributor. Any order may be rejected by the Trust; provided,
however, that the Trust will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class D shares. The Trust (or
its agent) will confirm orders upon their receipt, will make appropriate book
entries and, upon receipt by the Trust (or its
5
<PAGE>
agent) of payment therefor, will deliver deposit receipts or certificates for
such Class D shares pursuant to the instructions of the Distributor. Payment
shall be made to the Trust in New York Clearing House funds. The Distributor
agrees to cause such payment and such instructions to be delivered promptly to
the Trust (or its agent).
Section 4. Repurchase or Redemption of Class D Shares by the Trust.
-------------------------------------------------------
(a) Any of the outstanding Class D shares may be tendered for redemption
at any time, and the Trust agrees to repurchase or redeem the Class D 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. The price to be paid to redeem or repurchase the Class D shares
shall be equal to the net asset value calculated in accordance with the
provisions of Section 3(d) hereof, less any contingent deferred sales charge
("CDSC"), redemption fee or other charge(s), if any, set forth in the prospectus
and statement of additional information of the Fund. All payments by the Trust
hereunder shall be made in the manner set forth below. The redemption or
repurchase by the Trust of any of the Class D shares purchased by or through the
Distributor will not affect the sales charge secured by the Distributor or any
selected dealer in the course of the original sale, except that if any Class D
shares are tendered for redemption or repur-
6
<PAGE>
chase within seven business days after the date of the confirmation of the
original purchase, the right to the sales charge shall be forfeited by the
Distributor and the selected dealer which sold such Class D shares.
The Trust shall pay the total amount of the redemption price as defined in
the above paragraph pursuant to the instructions of the Distributor in New York
Clearing House funds 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 Trust as follows: (i) any applicable
CDSC shall be paid to the Distributor, and (ii) the balance shall be paid to or
for the account of the shareholder, in each case in accordance with the
applicable provisions of the prospectus and statement of additional information.
(b) Redemption of Class D shares or payment may be suspended at times when
the New York Stock Exchange is closed, when trading on said Exchange is
suspended, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Trust of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Trust fairly
to determine the value of the net assets of the Fund, or during any other period
when the Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Trust.
-------------------
(a) The Trust shall furnish to the Distributor copies of all information,
financial statements and other papers which the
7
<PAGE>
Distributor may reasonably request for use in connection with the distribution
of Class D shares of the Fund, and this shall include, upon request by the
Distributor, one certified copy of all financial statements prepared for the
Trust by independent public accountants. The Trust shall make available to the
Distributor such number of copies of the prospectus and statement of additional
information relating to the Fund as the Distributor shall reasonably request.
(b) The Trust shall take, from time to time, but subject to any necessary
approval of the Class D shareholders, all necessary action to fix the number of
authorized Class D shares and such steps as may be necessary to register the
same under the Securities Act, to the end that there will be available for sale
such number of Class D shares as the Distributor may reasonably be expected to
sell.
(c) The Trust shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Class
D shares for sale under the securities laws of such states as the Distributor
and the Trust may approve. Any such qualification may be withheld, terminated
or withdrawn by the Trust 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 Trust. The Distributor shall furnish such information and other
material relating to its affairs and activities as may be required by the Trust
in connection with such qualification.
8
<PAGE>
(d) The Trust 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 D shares of the Fund but shall not be obligated to sell any
specific number of Class D shares. The services of the Distributor to the Trust
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.
(b) In selling the Class D 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 Trust 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 Trust.
(c) The Distributor shall adopt and follow procedures, as approved by the
officers of the Trust, for the confirmation of sales to investors and selected
dealers, the collection of amounts payable by investors and selected dealers on
such sales,
9
<PAGE>
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 Dealers Agreements.
---------------------------
(a) The Distributor shall have the right to enter into selected dealers
agreements with securities dealers of its choice ("selected dealers") for the
sale of Class D shares and fix therein the portion of the sales charge which may
be allocated to the selected dealers; provided that the Trust shall approve the
forms of agreements with dealers and the dealer compensation set forth therein.
Class D shares sold to selected dealers shall be for resale by such dealers only
at the public offering price(s) set forth in the prospectus and statement of
additional information. The form of agreement with selected dealers to be used
during the continuous offering of the Class D shares is attached hereto as
Exhibit A.
(b) Within the United States, the Distributor shall offer and sell Class D
shares only to such selected dealers as are members in good standing of the
NASD.
Section 8. Payment of Expenses.
-------------------
(a) The Trust 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
10
<PAGE>
Act, the Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy materials to Class D
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 which are to be used in connection
with the offering of Class D 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 D 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 D Shares Distribution Plan pursuant
to Rule 12b-1 under the Investment Company Act remains in effect, any expenses
incurred by the Distributor hereunder in connection with account maintenance
activities may
11
<PAGE>
be paid from amounts recovered by it from the Fund under such plan.
(c) The Trust shall bear the cost and expenses of qualification of the
Class D shares for sale pursuant to this Agreement and, if necessary or
advisable in connection therewith, of qualifying the Trust as a broker or dealer
in such states of the United States or other jurisdictions as shall be selected
by the Trust 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 Trust decides to discontinue such qualification pursuant to Section
5(c) hereof.
Section 9. Indemnification.
---------------
(a) The Trust shall indemnify and hold harmless the Distributor and each
person, if any, who controls the Distributor 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 D 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 relating
to the Fund, as from time to time amended and supplemented, or an annual or
interim report to 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
12
<PAGE>
the statements therein not misleading, unless such statement or omission was
made in reliance upon, and in conformity with, information furnished to the
Trust in connection therewith by or on behalf of the Distributor; provided,
however, that in no case (i) is the indemnity of the Trust 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
Trust 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 Trust to be liable under its indemnity agreement 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 Trust 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 Trust 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 Trust will be
13
<PAGE>
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 Trust 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 Trust
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 of any additional counsel retained by
them, but in case the Trust does not elect to assume the defense of any such
suit, it will reimburse the Distributor or such controlling person or persons,
defendant or defendants in the suit, for the reasonable fees and expenses of any
counsel retained by them. The Trust 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
D shares.
(b) The Distributor shall indemnify and hold harmless the Trust and each
of its Trustees and officers and each person, if any, who controls the Trust
against any loss, liability, claim, damage or expense 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 Trust in writing by or on behalf of the Distributor
for use in connection with the
14
<PAGE>
registration statement or related prospectus and statement of additional
information, as from time to time amended, or the annual or interim reports to
Class D shareholders. In case any action shall be brought against the Trust 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
Trust, and the Trust 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. Merrill Lynch Mutual Fund Adviser Program. In connection with
-----------------------------------------
the Merrill Lynch Mutual Fund Adviser Program, the Distributor and its
affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated, are authorized to
offer and sell shares of the Fund, as agent for the Fund, to participants in
such program. The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid to the Fund,
the duties of the Distributor, the payment of expenses and indemnification
obligations of the Fund and the Distributor.
Section 11. Duration and Termination of this Agreement. This Agreement
------------------------------------------
shall become effective as of the date first above written and shall remain in
force until October __, 1996 and thereafter, but only for 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 D voting securities of the Fund
and (ii) by the vote of a majority of
15
<PAGE>
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 Class D
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 12. 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 Class C voting securities
of the Fund and (ii) by the vote of a majority of those Trustees of the Trust
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.
Section 13. 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
16
<PAGE>
of the provisions herein, conflict with the applicable provisions of the
Investment Company Act, the latter shall control.
Section 14. Personal Liability. The Declaration of Trust establishing
------------------
Merrill Lynch California Municipal Series Trust, dated August 2, 1985, 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 California Municipal Series Trust" refers to the
Trustees under the Declaration collectively as trustees, but not as individuals
or personally; and no Trustee, shareholder, officer, employee or agent of said
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.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
By_____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
17
<PAGE>
EXHIBIT A
MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
CLASS D SHARES OF BENEFICIAL INTEREST
SELECTED DEALERS AGREEMENT
--------------------------
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an agreement
with MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST, a Massachusetts business
trust (the "Trust"), pursuant to which it acts as the distributor for the sale
of Class D shares of beneficial interest, par value $0.10 per share (herein
referred to as "Class D shares"), of the Trust relating to Merrill Lynch [State]
Municipal Bond Fund (the "Fund"), and as such has the right to distribute Class
D shares of the Fund for resale. The Trust is an open-end investment company
registered under the Investment Company Act of 1940, as amended, and the Fund's
Class D shares being offered to the public are registered under the Securities
Act of 1933, as amended. You have received a copy of the Class D Shares
Distribution Agreement (the "Distribution Agreement") between ourself and the
Trust and reference is made herein to certain provisions of such Distribution
Agreement. The terms "Prospectus" and "Statement of Additional Information"
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. We offer to sell to you, as a member of the Selected
Dealers Group, Class D shares of the Fund upon the following terms and
conditions:
1. In all sales of these Class D 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 Trust, for us or for any other member of the Selected
Dealers Group, except in connection with the Merrill Lynch Mutual Fund Adviser
program and such other special programs as we from time to time agree, in which
case you shall have authority to offer and sell shares, as agent for the Trust,
to participants in such program.
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
A-1
<PAGE>
of orders shall be subject to Section 5 hereof and instructions which we or the
Trust shall forward from time to time to you. All orders are subject to
acceptance or rejection by the Distributor or the Trust 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.
3. The sales charges for sales to the public, computed as percentages of
the public offering price and the amount invested, and the related discount to
Selected Dealers are as follows:
<TABLE>
<CAPTION>
Discount to
Sales Charge Selected
Sales Charge as Percentage* Dealers as
as Percentage of the Net Percentage
of the Amount of the
Offering Price Invested Offering Price
Amount of Purchase --------------- --------------- ---------------
- --------------------
<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 0.00% 0.00% 0.00%
over**.............
</TABLE>
___________________
* Rounded to the nearest one-hundredth percent.
** Initial sales charges will be waived for certain classes of offerees as set
forth in the current Prospectus and Statement of Additional Information of the
Fund. Such purchase may be subject to a contingent deferred sales charge as set
forth in the current Prospectus and Statement of Additional Information.
The term "purchase" 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
A-2
<PAGE>
spouse and their children under the age of 21 years purchasing Class D shares
for his or their own account and to single purchases by a trustee or other
fiduciary purchasing Class D shares for a single trust estate or single
fiduciary account although more than one beneficiary is involved. The term
"purchase" also includes purchases by any "company" as that term is defined in
the Investment Company Act of 1940, as amended, 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 Class D shares of the Fund or
Class D 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 reduced sales charges are applicable through a right of accumulation under
which eligible investors are permitted to purchase Class D shares of the Fund at
the offering price applicable to the total of (a) the dollar amount 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 Class A, Class B,
Class C and Class D shares of the Fund and of any other investment company with
an initial sales charge for which the Distributor acts as the distributor. For
any such right of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or you, with sufficient
information to permit confirmation of qualification, and acceptance of the
purchase order is subject to such confirmation.
The reduced sales charges are applicable to purchases aggregating $25,000 or
more of Class A shares or of Class D shares of any other investment company with
an initial sales charge for which the Distributor acts as the distributor made
through you within a thirteen-month period starting with the first purchase
pursuant to a Letter of Intention in the form provided in the Prospectus. A
purchase not originally made pursuant to a Letter of Intention may be included
under a subsequent letter executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period. If
the intended amount of shares is not purchased within the thirteen-month period,
an appropriate price adjustment will be made pursuant to the terms of the Letter
of Intention.
You agree to advise us promptly at our request as to amounts of any sales made
by you to the public qualifying for reduced sales charges. Further information
as to the reduced sales charges pursuant to the right of accumulation or a
Letter of
A-3
<PAGE>
Intention is set forth in the Prospectus and Statement of Additional
Information.
4. You shall not place orders for any of the Class D shares unless you have
already received purchase orders for such Class D 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 D 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 D 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 D 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 Trust.
5. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Trust for Class D 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 subject to the
compensation provisions of Section 3 hereof and (ii) to tender Class D shares
directly to the Trust or its agent for redemption subject to the applicable
terms and conditions set forth in Section 4 of the Distribution Agreement.
6. 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.
7. If any Class D shares sold to you under the terms of this Agreement are
repurchased by the Trust or by us for the account of the Trust or are tendered
for redemption within seven business days after the date of the confirmation of
the original purchase by you, it is agreed that you shall forfeit your right to,
and refund to us, any discount received by you on such Class D shares.
8. No person is authorized to make any representations concerning Class D
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 Trust as information supplemental to such
Prospectus and
A-4
<PAGE>
Statement of Additional Information. In purchasing Class D 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 Trust, and you agree that the Trust shall have no liability or
responsibility to you in these respects unless expressly assumed in connection
therewith.
9. You agree to deliver to each of the purchasers making purchases from you
a copy of the then current Prospectus and, if 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.
10. We reserve the right in our discretion, without notice, to suspend sales
or withdraw the offering of Class D shares entirely or to certain persons or
entities in a class or classes specified by us. Each party hereto has the right
to cancel this agreement upon notice to the other party.
11. 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.
12. 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.
13. Upon application to us, we will inform you as to the states in which we
believe the Class D 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 D
A-5
<PAGE>
shares in any jurisdiction. We will file with the Department of State in New
York a Further State Notice with respect to the Class D shares, if necessary.
14. 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.
15. Your first order placed pursuant to this Agreement for the purchase of
Class D shares of the Fund will represent your acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By __________________________________
(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: Merrill Lynch, Pierce, Fenner & Smith Inc.
--------------------------------------------
By: ___________________________________________
Address: 800 Scudders Mill Road
-----------------------------
Plainsboro, New Jersey 08536
--------------------------------------------------
Date: , 1994
----------------------------------------------------
A-6
<PAGE>
EXHIBIT 99.10
BROWN & WOOD
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
TELEPHONE: 212-839-5300
FACSIMILE: 212-839-5599
October 11, 1994
Merrill Lynch California Municipal
Bond Fund of
Merrill Lynch California Municipal Series Trust
P.O. Box 9011
Princeton, New Jersey 08543-9011
Ladies and Gentlemen:
This opinion is furnished in connection with the registration by Merrill
Lynch California Municipal Bond Fund of Merrill Lynch California Municipal
Series Trust, a Massachusetts business trust (the "Fund"), of shares of
beneficial interest, par value $0.10 per share (the "Shares"), under the
Securities Act of 1933 pursuant to a registration statement on Form N-1A (File
No. 2-96581), as amended (the "Registration Statement"), in the amount set forth
on the facing page of 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.
<PAGE>
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par value thereof, will be legally issued, fully
paid and non-assessable shares of beneficial interest of the Trust.
In rendering this opinion, we have relied as to matters of Massachusetts
law upon an opinion previously rendered to the Trust by Bingham, Dana & Gould.
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 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch California Municipal Bond Fund of
Merrill Lynch California Municipal Series Trust:
We consent to the use in Post-Effective Amendment No. 10 to Registration
Statement No. 2-96581 of our report dated September 29, 1994 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
October 10, 1994
<PAGE>
EXHIBIT 99.15(b)
CLASS C DISTRIBUTION PLAN
OF
MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the day of October, 1994, by and between
Merrill Lynch California Municipal Series Trust, a Massachusetts business trust
(the "Trust"), and Merrill Lynch Funds Distributor, Inc., a Delaware corporation
("MLFD").
W I T N E S S E T H:
-------------------
WHEREAS, the Trust is engaged in business as an open-end investment company
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"); and
WHEREAS, the Trust is authorized to establish separate ("Series") each of
which will offer separate classes of shares of beneficial interest par value
$0.10 per share (the "Shares") to selected groups of purchasers; and
WHEREAS, MLFD 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 Trust proposes to enter into a Class C Shares Distribution
Agreement with MLFD, pursuant to which MLFD will act as the exclusive
distributor and representative of the Trust in the offer and sale of Class C
shares of beneficial interest, par value $0.10 per share (the "Class C shares"),
of the Merrill Lynch [State] Municipal Bond Fund (the "Fund") series of the
Trust to the public; and
WHEREAS, the Trust desires to adopt this Class C Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to
which the Trust will pay an account maintenance fee and a distribution fee to
MLFD with respect to the Fund's Class C shares; and
WHEREAS, the Trustees of the Trust have determined that there is a
reasonable likelihood that adoption of the Plan will benefit the Fund and its
shareholders.
NOW, THEREFORE, the Trust hereby adopts, and MLFD hereby agrees to the
terms of, the Plan in accordance with Rule 12b-1
<PAGE>
under the Investment Company Act on the following terms and conditions:
1. The Trust shall pay MLFD an account maintenance fee under the Plan at
the end of each month at the annual rate of 0.25% of average daily net assets of
the Fund relating to Class C shares to compensate MLFD and securities firms with
which MLFD enters into related agreements pursuant to Paragraph 3 hereof ("Sub-
Agreements") for providing account maintenance activities with respect to Class
C shareholders of the Fund. Expenditures under the Plan may consist of payments
to financial consultants for maintaining accounts in connection with Class C
shares of the Fund and payment of expenses incurred in connection with such
account maintenance activities including the costs of making services available
to shareholders including assistance in connection with inquiries related to
shareholder accounts.
2. The Trust shall pay MLFD a distribution fee under the Plan at the end
of each month at the annual rate of 0.35% of average daily net assets of the
Fund relating to Class C shares to compensate MLFD and securities firms with
which MLFD enters into related Sub-Agreements for providing sales and
promotional activities and services. Such activities and services will relate
to the sale, promotion and marketing of the Class C shares of the Fund. Such
expenditures may consist of sales commissions to financial consultants for
selling Class C shares of the Fund, compensation, sales incentives and payments
to sales and marketing personnel, and the payment of expenses incurred in its
sales and promotional activities, including advertising expenditures related to
the Fund and the costs of preparing and distributing promotional materials. The
distribution fee may also be used to pay the financing costs of carrying the
unreimbursed expenditures described in this Paragraph 2. Payment of the
distribution fee described in this Paragraph 2 shall be subject to any
limitations set forth in any applicable regulation of the National Association
of Securities Dealers, Inc.
3. The Trust hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities and services of the type referred to in Paragraphs 1 and 2
hereof. MLFD may reallocate all or a portion of its account maintenance fee or
distribution fee to such Securities Firms as compensation for the above-
mentioned activities and services. Such Sub-Agreement shall provide that the
Securities Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting requirements set forth in
Paragraph 4 hereof.
2
<PAGE>
4. MLFD shall provide the Trust for review by the Board of Trustees, and
the Trustees shall review, at least quarterly, a written report complying with
the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period.
5. This Plan shall not take effect until it has been approved by a vote of
at least a majority, as defined in the Investment Company Act, of the
outstanding Class C voting securities of the Fund.
6. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Trustees of
the Trust and (b) those Trustees of the Trust who are not "interested persons"
of the Trust, as defined in the Investment Company Act, and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-1 Trustees cast in person at a meeting or meetings
called for the purpose of voting on the Plan and such related agreements.
7. The Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
the Plan in Paragraph 6.
8. The Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding Class C voting
securities of the Fund.
9. The Plan may not be amended to increase materially the rate of payments
provided for herein unless such amendment is approved by at least a majority, as
defined in the Investment Company Act, of the outstanding Class C voting
securities of the Fund, and by the Trustees of the Trust in the manner provided
for in Paragraph 6 hereof, and no material amendment to the Plan shall be made
unless approved in the manner provided for approval and annual renewal in
Paragraph 6 hereof.
10. While the Plan is in effect, the selection and nomination of Trustees
who are not interested persons, as defined in the Investment Company Act, of the
Trust shall be committed to the discretion of the Trustees who are not
interested persons.
11. The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Paragraph 4 hereof, for a period of not less
than six years from the date of the Plan, or the agreements or such report, as
the case may be, the first two years in an easily accessible place.
3
<PAGE>
12. The Declaration of Trust establishing the Trust, dated August 2, 1985,
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 California Municipal Series Trust" refers
to the Trustees under the Declaration collectively as trustees, but not as
individuals or personally; and no Trustee, shareholder, officer, employee or
agent of the Trust shall be held to any personal liability, nor shall resort be
had to their private property for the satisfaction of any obligation or claim or
otherwise in connection with the affairs of the Trust, but the "Trust Property"
only shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed this Distribution Plan
as of the date first above written.
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
By_____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
4
<PAGE>
CLASS C SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the day of October, 1994, by and between
Merrill Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD"), and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation
("Securities Firm").
W I T N E S S E T H :
--------------------
WHEREAS, MLFD has entered into an agreement with Merrill Lynch
California Municipal Series Trust, a Massachusetts business trust (the "Trust"),
pursuant to which it acts as the exclusive distributor for the sale of Class C
shares of beneficial interest, par value $0.10 per share (the "Class C shares"),
of the Merrill Lynch [State] Municipal Bond Fund (the "Fund") series of the
Trust; and
WHEREAS, MLFD and the Trust have entered into a Class C Shares
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "Act"), pursuant to which MLFD receives an
account maintenance fee from the Fund at the annual rate of 0.25% of average
daily net assets of the Fund relating to Class C shares for account maintenance
activities related to Class C shares of the Fund and a distribution fee from the
Fund at the annual rate of 0.35% of average daily net assets of the Fund
relating to Class C shares for providing sales and promotional activities and
services related to the distribution of Class C shares of the Fund; and
WHEREAS, MLFD desires the Securities Firm to perform certain account
maintenance activities and sales and promotional activities and services for the
Fund's Class C shareholders and the Securities Firm is willing to perform such
activities and services;
NOW, THEREFORE, in consideration of the mutual
covenants contained herein, the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance activities
and services with respect to the Class C shares of the Fund and incur
expenditures in connection with such activities and services of the types
referred to in Paragraph 1 of the Plan.
2. The Securities Firm shall provide sales and promotional activities
and services with respect to the sale of the Class C shares of the Fund, and
incur distribution expenditures, of the types referred to in Paragraph 2 of the
Plan.
<PAGE>
3. As compensation for its activities and services performed under
this Agreement, MLFD shall pay the Securities Firm an account maintenance fee
and a distribution fee at the end of each calendar month in an amount agreed
upon by the parties hereto.
4. The Securities Firm shall provide MLFD, at least quarterly, such
information as reasonably requested by MLFD to enable MLFD to comply with the
reporting requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period referred to in
Paragraph 4 of the Plan.
5. This Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Trustees of the Trust and (b) those Trustees
of the Trust who are not "interested persons" of the Trust, as defined in the
Act, and have no direct or indirect financial interest in the operation of the
Plan, this Agreement or any agreements related to the Plan or this Agreement
(the "Rule 12b-1 Trustees"), cast in person at a meeting or meetings called for
the purpose of voting on this Agreement.
6. This Agreement shall continue in effect for as long as such
continuance is specifically approved at least annually in the manner provided
for approval of the Plan in Paragraph 6.
7. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have
executed and delivered this Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By_____________________________________
Title:
2
<PAGE>
EXHIBIT 99.15(c)
CLASS D DISTRIBUTION PLAN
OF
MERRILL LYNCH [STATE] MUNICIPAL BOND FUND
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the day of October, 1994, by and between
Merrill Lynch California Municipal Series Trust, a Massachusetts business trust
(the "Trust"), and Merrill Lynch Funds Distributor, Inc., a Delaware corporation
("MLFD").
W I T N E S S E T H :
--------------------
WHEREAS, the Trust is engaged in business as an open-end investment company
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"); and
WHEREAS, the Trust is authorized to establish separate ("Series") each of
which will offer separate classes of shares of beneficial interest par value
$0.10 per share (the "Shares") to selected groups of purchasers; and
WHEREAS, MLFD 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 Trust proposes to enter into a Class D Shares Distribution
Agreement with MLFD, pursuant to which MLFD will act as the exclusive
distributor and representative of the Trust in the offer and sale of Class D
shares of beneficial interest, par value $0.10 per share (the "Class D shares"),
of the Merrill Lynch [State] Municipal Bond Fund (the "Fund") series of the
Trust to the public; and
WHEREAS, the Trust desires to adopt this Class D Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to
which the Trust will pay an account maintenance fee to MLFD with respect to the
Fund's Class D shares; and
WHEREAS, the Trustees of the Trust have determined that there is a
reasonable likelihood that adoption of the Plan will benefit the Fund and its
shareholders.
NOW, THEREFORE, the Trust hereby adopts, and MLFD hereby agrees to the
terms of, the Plan in accordance with Rule 12b-1
<PAGE>
under the Investment Company Act on the following terms and conditions:
1. The Trust shall pay MLFD an account maintenance fee under the Plan at
the end of each month at the annual rate of 0.10% of average daily net assets of
the Fund relating to Class D shares to compensate MLFD and securities firms with
which MLFD enters into related agreements ("Sub-Agreements") pursuant to
Paragraph 2 hereof for providing account maintenance activities with respect to
Class D shareholders of the Fund. Expenditures under the Plan may consist of
payments to financial consultants for maintaining accounts in connection with
Class D shares of the Fund and payment of expenses incurred in connection with
such account maintenance activities including the costs of making services
available to shareholders including assistance in connection with inquiries
related to shareholder accounts.
2. The Trust hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities of the type referred to in Paragraph 1. MLFD may reallocate all
or a portion of its account maintenance fee to such Securities Firms as
compensation for the above-mentioned activities. Such Sub-Agreement shall
provide that the Securities Firms shall provide MLFD with such information as is
reasonably necessary to permit MLFD to comply with the reporting requirements
set forth in Paragraph 3 hereof.
3. MLFD shall provide the Trust for review by the Board of Trustees, and
the Trustees shall review, at least quarterly, a written report complying with
the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee during such period.
4. This Plan shall not take effect until it has been approved by a vote of
at least a majority, as defined in the Investment Company Act, of the
outstanding Class D voting securities of the Fund.
5. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Trustees of
the Trust and (b) those Trustees of the Trust who are not "interested persons"
of the Trust, as defined in the Investment Company Act, and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-1 Trustees"), cast in person at a meeting or
meetings called for the purpose of voting on the Plan and such related
agreements.
2
<PAGE>
6. The Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
the Plan in Paragraph 5.
7. The Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding Class D voting
securities of the Fund.
8. The Plan may not be amended to increase materially the rate of payments
provided for in Paragraph 1 hereof unless such amendment is approved by at least
a majority, as defined in the Investment Company Act, of the outstanding Class D
voting securities of the Fund, and by the Trustees of the Trust in the manner
provided for in Paragraph 5 hereof, and no material amendment to the Plan shall
be made unless approved in the manner provided for approval and annual renewal
in Paragraph 5 hereof.
9. While the Plan is in effect, the selection and nomination of Trustees
who are not interested persons, as defined in the Investment Company Act, of the
Trust shall be committed to the discretion of the Trustees who are not
interested persons.
10. The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Paragraph 3 hereof, for a period of not less
than six years from the date of the Plan, or the agreements or such report, as
the case may be, the first two years in an easily accessible place.
11. The Declaration of Trust establishing the Trust, dated August 2, 1985,
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 California Municipal Series Trust" refers
to the Trustees under the Declaration collectively as trustees, but not as
individuals or personally; and no Trustee, shareholder, officer, employee or
agent of the Trust shall be held to any personal liability, nor shall resort be
had to their private property for the satisfaction of any obligation or claim or
otherwise in connection with the affairs of the Trust, but the "Trust Property"
only shall be liable.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Distribution Plan
as of the date first above written.
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
By_____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
4
<PAGE>
CLASS D SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the day of October, 1994, by and between Merrill
Lynch Funds Distributor, Inc. a Delaware corporation ("MLFD"), and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, a Delaware corporation ("Securities
Firm").
W I T N E S S E T H :
--------------------
WHEREAS, MLFD has entered into an agreement with Merrill Lynch California
Municipal Series Trust, a Massachusetts business trust (the "Trust"), pursuant
to which it acts as the exclusive distributor for the sale of Class D shares of
beneficial interest, par value $0.10 per share (the "Class D shares"), of the
Merrill Lynch [State] Municipal Bond Fund (the "Fund") series of the Trust; and
WHEREAS, MLFD and the Trust have entered into a Class D Shares Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended (the "Act"), pursuant to which MLFD receives an account
maintenance fee from the Fund at the annual rate of 0.10% of average daily net
assets of the Fund relating to Class D shares for providing account maintenance
activities and services with respect to Class D shares; and
WHEREAS, MLFD desires the Securities Firm to perform certain account
maintenance activities and services, including assistance in connection with
inquiries related to shareholder accounts, for the Fund's Class D shareholders
and the Securities Firm is willing to perform such services;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance activities and
services with respect to the Class D shares of the Fund and incur expenditures
in connection with such activities and services, of the types referred to in
Paragraph 1 of the Plan.
2. As compensation for its services performed under this Agreement, MLFD
shall pay the Securities Firm a fee at the end of each calendar month in an
amount agreed upon by the parties hereto.
3. The Securities Firm shall provide MLFD, at least quarterly, such
information as reasonably requested by MLFD to enable MLFD to comply with the
reporting requirements of Rule
<PAGE>
12b-1 regarding the disbursement of the fee during such period referred to in
Paragraph 3 of the Plan.
4. This Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Trustees of the Trust and (b) those Trustees
of the Trust who are not "interested persons" of the Trust, as defined in the
Act, and have no direct or indirect financial interest in the operation of the
Plan, this Agreement or any agreements related to the Plan or this Agreement
(the "Rule 12b-1 Trustees"), cast in person at a meeting or meetings called for
the purpose of voting on this Agreement.
5. This Agreement shall continue in effect for as long as such continuance
is specifically approved at least annually in the manner provided for approval
of the Plan in Paragraph 5.
6. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By_____________________________________
Title:
2
