<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 29, 1995
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.
/ /POST-EFFECTIVE AMENDMENT NO. 11
/X/AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
/X/AMENDMENT NO. 17
/X/(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)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
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:
<TABLE>
<S> <C>
COUNSEL FOR THE TRUST:
BROWN & WOOD PHILIP L. KIRSTEIN, ESQ.
ONE WORLD TRADE CENTER FUND ASSET MANAGEMENT
NEW YORK, NEW YORK 10048-0557 P.O. BOX 9011
ATTENTION: THOMAS R. SMITH, JR. PRINCETON, NEW JERSEY 08543-9011
</TABLE>
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
/ / this post-effective amendment designates a new effective date for
a
previously filed post-effective amendment.
------------------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF
BENEFICIAL INTEREST UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2
UNDER THE INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR
THE REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON OCTOBER 24, 1995.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
AMOUNT OF PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES SHARES BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Beneficial Interest (par
value $.10 per share)........... 16,944,460 $12.14 $289,988* $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 17,598,058 Shares of Beneficial Interest.
(3) 677,485 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) 16,920,573 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> 2
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
- ------------- ---------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page............................... Cover Page
Item 2. Synopsis................................. Fee Table
Item 3. Condensed Financial Information.......... Financial Highlights; Performance Data
Item 4. General Description of Registrant........ Investment Objectives 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; Merrill Lynch Select
Pricing(SM) System; 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.......... Additional Information
Item 13. Investment Objectives and Policies....... Investment Objectives 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
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE> 3
PROSPECTUS
DECEMBER 29, 1995
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 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 ("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. For more information on the Fund's
investment objective and policies, see "Investment Objective and Policies" on
page 11.
------------------------
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 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from securities dealers which have entered into selected dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000 and the
minimum subsequent purchase is $50. Merrill Lynch may charge its customers a
processing fee (presently $4.85) for confirming purchases and repurchases.
Purchases and redemptions directly through the Fund's transfer agent are not
subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be retained
for future reference. A statement containing additional information about the
Fund, dated December 29, 1995 (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 Merrill Lynch California
Municipal Series Trust (the "Trust") 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 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> 4
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(A) CLASS B(B) CLASS C CLASS D
----------- ----------------------- ------------ --------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases (as
a percentage of offering price)............ 4.00%(c) None None 4.00%(c)
Sales Charge Imposed on Dividend
Reinvestments.............................. None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower).............. None(d) 4.0% during the first 1.0% for one None(d)
year, decreasing 1.0% year
annually to 0.0% after
the fourth year
Exchange Fee................................. None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS)(E):
Management Fees(f)........................... 0.54% 0.54% 0.54% 0.54%
Rule 12b-1 Fees(g):
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 become
subject to
lower account
maintenance fees)
Other Expenses:
Custodial Fees........................... 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing Costs(h)........... 0.04% 0.05% 0.05% 0.03%
Miscellaneous............................ 0.06% 0.06% 0.07% 0.08%
-------- ----- ----- ------
Total Other Expenses................. 0.11% 0.12% 0.13% 0.12%
-------- ----- ----- ------
TOTAL FUND OPERATING EXPENSES................ 0.65% 1.16% 1.27% 0.76%
======== ===== ===== =====
</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 25.
(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 27.
(c) Reduced for purchases of $25,000 and over. Class A and 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 25.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge (a "CDSC"), except that certain purchases of $1,000,000 or more which
may not be subject to an initial sales charge will instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year after purchase.
(e) Information for Class A and Class B shares is stated for the fiscal year
ended August 31, 1995. Information under "Other Expenses" for Class C and
Class D shares is stated for the period October 21, 1994 (commencement of
operations) to August 31, 1995.
(f) See "Management of the Trust--Management and Advisory Arrangements"--page
21.
(g) See "Purchase of Shares--Distribution Plans"--page 29.
(h) See "Management of the Trust--Transfer Agency Services"--page 22.
2
<PAGE> 5
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD
OF:
----------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment including the maximum $40 front-end
sales charge (Class A and Class D shares only) and
assuming (1) the Total Fund Operating Expenses for
each class set forth above, (2) a 5% annual return
throughout the periods and (3) redemption at the end
of the period:
Class A........................................... $ 46 $60 $75 $118
Class B........................................... $ 52 $57 $64 $141
Class C........................................... $ 23 $40 $70 $153
Class D........................................... $ 47 $63 $81 $130
An investor would pay the following expenses on the
same $1,000 investment assuming no redemption at the
end of the period:
Class A........................................... $ 46 $60 $75 $118
Class B........................................... $ 12 $37 $64 $141
Class C........................................... $ 13 $40 $70 $153
Class D........................................... $ 47 $63 $81 $130
</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".
3
<PAGE> 6
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
the Class D shares, are imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges 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. Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is most beneficial under his or her particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase of
Shares".
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.0% initial sales
charge(2)(3) No No No
-------------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, at a
rate of 4.0% during the first B shares convert to D shares
year, decreasing 1.0% annually automatically after
to 0.0% 0.25% 0.25% approximately ten years(4)
-------------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.35% No
-------------------------------------------------------------------------------------------------------------
D Maximum 4.0% initial sales
charge(3) 0.10% No No
-------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(Footnotes on following page)
4
<PAGE> 7
(Footnotes for preceding page)
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more. 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 if redeemed within
one year. See "Class A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares was modified. Also,
Class B shares of certain other MLAM-advised mutual funds into which
exchanges may be made have an eight year conversion period. If Class B
shares of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares acquired
in the exchange will apply, and the holding period for the shares exchanged
will be tacked onto the holding period for the shares acquired.
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 their directors and
employees, 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 1.00% if the
shares are redeemed within one year after purchase. Sales charges are
also 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 Class B shares as well as 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".
5
<PAGE> 8
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 subject to distribution fees and higher account maintenance
fees that will be imposed on Class C shares for an indefinite period
subject to annual approval by the Trust's Board of Trustees and
regulatory limitations.
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 may be subject to a CDSC of 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(SM) System that the investor believes is most beneficial under his or
her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales 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
6
<PAGE> 9
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.
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> 10
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, 1995 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 presented for Class C and Class D
shares only for the period October 21, 1994 (commencement of operations) to
August 31, 1995. 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 Trust at the telephone
number or address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------
FOR THE YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989+
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................. $ 11.32 $ 12.38 $ 11.80 $ 11.44 $ 11.03 $ 11.22 $ 11.02
------- ------- ------- ------- ------- ------- -------
Investment income--net........................... .64 .68 .70 .72 .74 .77 .63
Realized and unrealized gain (loss) on
investments--net............................... .08 (.78) .78 .41 .41 (.19) .20
------- ------- ------- ------- ------- ------- -------
Total from investment operations..................... .72 (.10) 1.48 1.13 1.15 .58 .83
------- ------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net........................... (.64) (.68) (.70) (.72) (.74) (.77) (.63)
Realized gain on investments--net................ -- (.19) (.20) (.05) -- -- --
In excess of realized gain on investments--net... -- (.09) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total dividends and distributions.................... (.64) (.96) (.90) (.77) (.74) (.77) (.63)
------- ------- ------- ------- ------- ------- -------
Net asset value, end of period....................... $ 11.40 $ 11.32 $ 12.38 $ 11.80 $ 11.44 $ 11.03 $ 11.22
======= ======= ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................... 6.77% (.92)% 13.19% 10.23% 10.73% 5.21% 7.96%#
======= ======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................. .65% .62% .63% .63% .64% .65% .65%*
======= ======= ======= ======= ======= ======= =======
Investment income--net............................... 5.83% 5.65% 5.87% 6.26% 6.57% 6.77% 6.80%*
======= ======= ======= ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............. $44,228 $60,017 $64,526 $46,556 $37,499 $29,558 $19,451
======= ======= ======= ======= ======= ======= =======
Portfolio turnover................................... 53.40% 75.66% 61.24% 52.31% 116.09% 119.66% 114.49%
======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
+ Class A Shares commenced operations on October 25, 1988.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
8
<PAGE> 11
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------
FOR THE YEAR ENDED AUGUST 31,
-------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................... $ 11.32 $ 12.38 $ 11.80 $ 11.44 $ 11.03
------- ------- ------- ------- -------
Investment income--net......... .59 .61 .64 .67 .68
Realized and unrealized gain
(loss) on investments--net... .08 (.78) .78 .41 .41
------- ------- ------- ------- -------
Total from investment operations... .67 (.17) 1.42 1.08 1.09
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net......... (.59) (.61) (.64) (.67) (.68)
Realized gain on
investments--net............. -- (.19) (.20) (.05) --
In excess of realized gain on
investments--net............. -- (.09) -- -- --
------- ------- ------- ------- -------
Total dividends and distributions.. (.59) (.89) (.84) (.72) (.68)
------- ------- ------- ------- -------
Net asset value, end of period..... $ 11.40 $ 11.32 $ 12.38 $ 11.80 $ 11.44
======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share............................ 6.28% (1.50)% 12.62% 9.68% 10.18%
======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account
maintenance and distribution
fees............................. .66% .63% .63% .63% .65%
======= ======= ======= ======= =======
Expenses........................... 1.16% 1.13% 1.13% 1.13% 1.15%
======= ======= ======= ======= =======
Investment income--net............. 5.32% 5.15% 5.38% 5.76% 6.07%
======= ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)....................... $ 616,199 $ 726,888 $ 821,220 $ 729,569 $ 690,885
======= ======= ======= ======= =======
Portfolio turnover................. 53.40% 75.66% 61.24% 52.31% 116.09%
======= ======= ======= ======= =======
<CAPTION>
1990 1989 1988 1987 1986+
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................... $ 11.23 $ 10.77 $ 10.96 $ 11.55 $ 10.00
------- -------- ------- ------- -------
Investment income--net......... .71 .71 .71 .72 .71
Realized and unrealized gain
(loss) on investments--net... (.20) .46 (.19) (.54) 1.55
------- -------- ------- ------- -------
Total from investment operations... .51 1.17 .52 .18 2.26
------- -------- ------- ------- -------
Less dividends and distributions:
Investment income--net......... (.71) (.71) (.71) (.72) (.71)
Realized gain on
investments--net............. -- -- -- (.05) --
In excess of realized gain on
investments--net............. -- -- -- -- --
------- -------- ------- ------- -------
Total dividends and distributions.. (.71) (.71) (.71) (.77) (.71)
------- -------- ------- ------- -------
Net asset value, end of period..... $ 11.03 $ 11.23 $ 10.77 $ 10.96 $ 11.55
======= ======== ======= ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share............................ 4.58% 11.14% 5.05% 1.52% 23.19%#
======= ======== ======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account
maintenance and distribution
fees............................. .65% .66% .67% .65% .59%*
======= ======== ======= ======= =======
Expenses........................... 1.15% 1.16% 1.16% 1.15% 1.09%*
======= ======== ======= ======= =======
Investment income--net............. 6.27% 6.42% 6.63% 6.34% 6.90%*
======= ======== ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)....................... $ 663,551 $ 665,566 $ 611,454 $ 661,755 $ 478,320
======= ======== ======= ======= =======
Portfolio turnover................. 119.66% 114.49% 77.99% 69.23% 217.91%
======= ======== ======= ======= =======
</TABLE>
- ---------------
+ Class B Shares commenced operations on September 30, 1985.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
9
<PAGE> 12
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C CLASS D
------------------- -------------------
FOR THE PERIOD FOR THE PERIOD
OCTOBER 21, 1994+ OCTOBER 21, 1994+
TO TO
AUGUST 31, 1995 AUGUST 31, 1995
------------------- -------------------
<S> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................................................ $ 10.94 $ 10.94
------- -------
Investment income--net.......................................................... .49 .54
Realized and unrealized gain (loss) on investments--net......................... .46 .46
------- -------
Total from investment operations.................................................... .95 1.00
------- -------
Less dividends from investment income--net.......................................... (.49) (.54)
------- -------
Net asset value, end of period...................................................... $ 11.40 $ 11.40
======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................................................. 8.96%# 9.42%#
======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account maintenance and distribution fees....................... .67%* .66%*
======= =======
Expenses............................................................................ 1.27%* .76%*
======= =======
Investment income--net.............................................................. 5.04%* 5.59%*
======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............................................ $ 3,131 $ 3,846
======= =======
Portfolio turnover.................................................................. 53.40% 53.40%
======= =======
</TABLE>
- ---------------
+ Commencement of operations.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
10
<PAGE> 13
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 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 Ratings Group ("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 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
11
<PAGE> 14
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 value of Municipal Bonds may fall when interest rates rise and rise
when interest rates fall. In general, Municipal Bonds with longer maturities
will be subject to greater volatility resulting from interest rate fluctuations
than will similar obligations with shorter maturities.
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 (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.
12
<PAGE> 15
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. Under normal conditions, it is
generally anticipated that the Fund's average weighted maturity would be in
excess of ten years. 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+
through SP-2 for notes and A-1+ through A-3 for VRDOs and commercial paper (as
determined by Standard & Poor's), or F-1+ through F-3 for notes, VRDOs and
commercial paper (as determined by Fitch) or, if unrated, of comparable quality
in the opinion of the Manager. 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 MUNICIPAL 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 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".
Moreover, 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
13
<PAGE> 16
a municipal bond mutual fund that is not concentrated in issuers of California
Municipal Bonds to this degree. Since the start of the 1990-91 fiscal year, the
State of California has faced the worst economic, fiscal and budget conditions
since the 1930's. On July 5, 1994, all three of the rating agencies rating the
State of California's long-term debt lowered their ratings of the State of
California's general obligation bonds. Moody's lowered its rating from "Aa" to
"A1", Standard & Poor's lowered its rating from "A+" to "A" and termed its
outlook as "stable", and Fitch lowered its rating from "AA" to "A". No assurance
can be given that such ratings will not be lowered in the future. Although a
steady upturn has been underway since 1994, pre-recession job levels are not
expected to be reached until later in the decade. The Manager 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. For a discussion of economic and other conditions in the State
of California, see Appendix I 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 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
14
<PAGE> 17
viability of such facility or such revenue source. The Fund will not invest in
IDBs, where the entity supplying the revenues from which the issuer is paid,
including predecessors, has a record of less than three years of continuous
business operations if such investments, together with investments in other
unseasoned issuers, would exceed 5% of the Fund's total assets. Investments
involving entities with less than three years of continuous business operations
may pose somewhat greater risks due to the lack of a substantial operating
history for such entities. The Manager believes, however, that the potential
benefits of such investments outweigh the potential risks, particularly given
the Fund's limitations on such investments.
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 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 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 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. Interest and principal payable on the Municipal Bonds
may also be based on relative changes among particular indices. 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. The Fund's return on such types of
Municipal Bonds (and Non-Municipal Tax-Exempt Securities) will be subject to
risk with respect to the value of the particular index, which may include
reduced or eliminated interest payments and losses of invested principal. 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.
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 15% of the Fund's total assets (however, in accordance
with the
15
<PAGE> 18
provisions of certain state laws, the Fund currently will not invest in excess
of 10% of its total assets in illiquid securities). The Manager believes,
however, that indexed and inverse floating obligations represent flexible
portfolio management instruments for the Fund which allow the Fund to seek
potential investment rewards, to hedge other portfolio positions or to vary the
degree of investment leverage relatively efficiently under different market
conditions.
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 15% (10% to the extent required by certain state laws)
of the Fund's total assets. The 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 obligations rated below investment grade, 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 that of
holding a Municipal Bond as a non-callable security. Certain investments in such
obligations may be illiquid. The Fund
16
<PAGE> 19
may not invest in such illiquid obligations if such investments, together with
other illiquid investments, would exceed 15% (10% to the extent required by
certain state laws) 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 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
17
<PAGE> 20
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 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
18
<PAGE> 21
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 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 15% (10% to the extent required by
certain state laws) 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
The Fund's investment activities are subject to further restrictions that
are described in the Statement of Additional Information. Investment
restrictions and policies which are fundamental policies of the Fund 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 its fundamental
policies, the Fund may not: (i) invest more than 25% of its total assets, taken
at market value at the time of each investment, in securities of issuers in any
particular industry (excluding the U.S. Government and its agencies and
instrumentalities) (For purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry);
19
<PAGE> 22
and (ii) borrow money, except that (a) 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), (b) the Fund may borrow up to an additional 5% of its
total assets for temporary purposes, (c) the Fund may obtain such short-term
credit as may be necessary for the clearance of purchases and sales of portfolio
securities and (d) 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 the 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.
Among its non-fundamental policies, the Fund may not (i) purchase
securities of other investment companies, except to the extent such purchases
are permitted by applicable law; (ii) invest in securities which cannot be
readily resold because of legal or contractual restrictions or which cannot
otherwise be marketed, redeemed or put to the issuer or a third party, if at the
time of acquisition more than 15% of its total assets would be invested in such
securities [This restriction (ii) 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]; and (iii) invest
in securities or 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 (iii) shall not
apply to mortgaged-backed securities, asset-backed securities or obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
The Fund's investments will be limited so as to qualify for the special tax
treatment afforded regulated investment companies under the Code. See
"Distributions and Taxes--Taxes". To qualify, among other requirements, the
Trust will limit the Fund's investments so that, at the close of each quarter of
the taxable year, (i) not more than 25% of the market value of the Fund's total
assets will be invested in the securities of a single issuer, and (ii) with
respect to 50% of the market value of its total assets, not more than 5% of the
market value of its total assets will be invested in the securities of a single
issuer and the Fund will not own more than 10% of the outstanding voting
securities of a single issuer. For purposes of this restriction, the Fund will
regard each state and each political subdivision, agency or instrumentality of
such state and each multi-state agency of which such state is a member and each
public authority which issues securities on behalf of a private entity as a
separate issuer, except that if the security is backed only by the assets and
revenues of a non-government entity then the entity with the ultimate
responsibility for the payment of interest and principal may be regarded as the
sole issuer. These tax-related limitations may be changed by the Trustees of the
Trust to the extent necessary to comply with changes to the Federal tax
requirements. The Fund is "diversified" under the 1940 Act and must satisfy the
foregoing 5% and 10% requirements with respect to 75% of its total assets.
Investors are referred to the Statement of Additional Information for a
complete description of the Fund's investment restrictions.
20
<PAGE> 23
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 of the Manager and MLAM; President and Director
of Princeton Services, Inc.; Executive Vice President of ML & Co.; Director of
the Distributor.
JAMES H. BODURTHA--Chairman and Chief Executive Officer, China Enterprise
Management Corporation.
HERBERT I. LONDON--John M. Olin Professor of Humanities, New York
University.
ROBERT R. MARTIN--Director, WTC Industries 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
FAM, 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 130 other registered investment companies. MLAM
also provides investment advisory services to individual and institutional
accounts. As of November 30, 1995, the Manager and MLAM had a total of
approximately $194.2 billion in investment company and other portfolio assets
under management, 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.
Walter O'Connor became the Portfolio Manager of the Fund in 1995. He has
been a Vice President of MLAM since 1993 and was an Assistant Vice President
thereof from 1991 to 1993. Prior thereto, he was an Assistant Vice President of
Prudential Securities from 1984 to 1991.
21
<PAGE> 24
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 year ended August 31, 1995, the total fee paid by the Fund
to the Manager was $3,828,093 (based on average net assets of approximately
$705.9 million).
The Management Agreement obligates the Trust on behalf of the Fund to pay
certain expenses incurred in its operations, including among other things, the
management fee, legal and audit fees, unaffiliated Trustees' fees and expenses,
registration fees, custodian and transfer agency fees, accounting and pricing
costs, and certain of the costs of printing proxies, shareholder reports,
prospectuses and statements of additional information. Accounting services are
provided to the Fund by the Manager and the Fund reimburses the Manager for its
costs in connection with such services. For the year ended August 31, 1995, the
Fund reimbursed the Manager $64,518 for accounting services. For that period,
the ratio of total expenses, net of account maintenance and distribution fees,
to average net assets was .65% for the Class A shares and .66% for the Class B
shares. For the period October 21, 1994 (commencement of operations) to August
31, 1995, the annualized ratio of total expenses, net of account maintenance and
distribution fees, to average net assets was .67% for Class C shares and .66%
for Class D shares.
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics under Rule
17j-1 of the 1940 Act which incorporates the Code of Ethics of the Manager
(together, the "Codes"). The Codes significantly restrict the personal investing
activities of all employees of the Manager and, as described below, impose
additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security which at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Manager.
Furthermore, the Codes provide for trading "blackout periods" which prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. ("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
22
<PAGE> 25
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 year ended August 31, 1995, the Fund paid the
Transfer Agent a total fee of $313,732 pursuant to the Transfer Agency Agreement
for providing transfer agency services. At November 30, 1995, the Fund had 1,044
Class A shareholder accounts, 12,744 Class B shareholder accounts, 181 Class C
shareholder accounts and 1,814 Class D shareholder accounts. At this level of
accounts, the annual fee payable to the Transfer Agent would aggregate
approximately $212,388, plus out-of-pocket expenses.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
the Manager, MLAM 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(SM), 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 the close of business on the New York
Stock Exchange (generally, 4:00 P.M., New York time), which includes orders
received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined as of 15 minutes
after the close of business on the New York Stock Exchange on that day,
provided the Distributor in turn receives the order from the securities dealer
prior to 30 minutes after the close of business on the New York Stock Exchange,
on that day. If the purchase orders are not received by the Distributor prior
to 30 minutes after the close of business on the New York Stock Exchange, 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.
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 and higher account
maintenance fees.
23
<PAGE> 26
A discussion of the factors that investors should consider in determining the
method of purchasing shares under the Merrill Lynch Select Pricing(SM) System is
set forth under the "Merrill Lynch Select Pricing(SM) System" on page 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.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.0% initial sales
charge(2)(3) No No No
-----------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, at a
rate of 4.0% during the first
year, decreasing 1.0% annually to B shares convert to D
0.0% 0.25% 0.25% shares
automatically after
approximately ten years(4)
-----------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.35% No
-----------------------------------------------------------------------------------------------
D Maximum 4.0% initial sales charge(3) 0.10% No No
-----------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs 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".
24
<PAGE> 27
(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 if redeemed within
one year.
(4) The conversion period for dividend reinvestment shares was modified. Also,
Class B shares of certain other MLAM-advised mutual funds into which
exchanges may be made have an eight-year conversion period. If Class 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 SALES LOAD AS DISCOUNT TO
PERCENTAGE OF PERCENTAGE* OF SELECTED DEALERS
OFFERING THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED THE OFFERING PRICE
- ------------------------------------------------- ------------- -------------- ------------------
<S> <C> <C> <C>
Less than $25,000................................ 4.00% 4.17% 3.75%
$25,000 but less than $50,000.................... 3.75 3.90 3.50
$50,000 but less than $100,000................... 3.25 3.36 3.00
$100,000 but less than $250,000.................. 2.50 2.56 2.25
$250,000 but less than $1,000,000................ 1.50 1.52 1.25
$1,000,000 and over**............................ 0.00 0.00 0.00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994 (the date Class D shares
were initially offered to the public). If the sales charge is waived in
connection with a purchase of $1,000,000 or more, such purchases will be
subject to a CDSC of 1.0% if the shares are redeemed within one year after
purchase. Class A 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 year ended August 31, 1995, the Fund sold 356,036 Class A shares for
aggregate net proceeds of $3,948,528. The gross sales charges for the sale of
Class A shares of the Fund for that year were $30,995, of which $2,220 and
$28,775 were received by the Distributor and Merrill Lynch, respectively. For
the year ended August 31, 1995, 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. For the period October 21, 1994 (commencement
of operations) to August 31, 1995, the Fund sold 383,812 Class D shares for
aggregate net proceeds of $4,170,592. The gross sales charges for the sale of
Class D shares of the Fund for the stated period were $22,241, of which $1,704
and $20,537 were received by the Distributor and Merrill Lynch, respectively.
For the period October 21, 1994 (commencement of operations) to August 31, 1995,
the Distributor received no CDSCs with respect to
25
<PAGE> 28
redemption within one year after purchase of Class D shares purchased subject to
a front-end sales charge waiver.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account are entitled to purchase additional Class A shares
of the Fund 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 are 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 Trust. 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".
Class A and Class D shares are offered at net asset value to certain
employer sponsored retirement or savings plans and to Employee Access AccountsSM
available through employers which provide such plans.
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares of the Fund are offered at net asset value to shareholders
of Merrill Lynch Municipal Strategy Fund, Inc. ("Municipal Strategy Fund") and
Merrill Lynch High Income Municipal Bond Fund, Inc. ("High Income Municipal Bond
Fund") who wish to reinvest the net proceeds from a sale of certain of their
shares of common stock of Municipal Strategy Fund and High Income Municipal Bond
Fund, respectively, in shares of the Fund. Similarly, 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 the sale of certain of their shares of common stock of Senior
Floating Rate Fund in shares of the Fund.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
26
<PAGE> 29
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 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.
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 fees 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
27
<PAGE> 30
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 PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
--------------------------------------------------------------- -----------------
<S> <C>
0-1...................................................... 4.00%
1-2...................................................... 3.00
2-3...................................................... 2.00
3-4...................................................... 1.00
4 and thereafter......................................... None
</TABLE>
For the fiscal year ended August 31, 1995, the Distributor received CDSCs of
$866,830 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).
In the event that Class B shares are exchanged by certain retirement plans
for Class A shares in connection with a transfer to the Merrill Lynch Mutual
Fund Adviser ("MFA") program, the time period that such Class A shares are held
in the MFA program will be included in determining the holding period of Class B
shares reacquired upon termination of participation in the MFA program (see
"Shareholder Services--Exchange Privilege").
The Class B CDSC is waived on redemptions of shares following the death or
disability (as defined in the Code) of a shareholder. Additional information
concerning the waiver of the Class B CDSC is set forth in the Statement of
Additional Information.
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
28
<PAGE> 31
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. For the period October 21, 1994 (commencement of
operations) to August 31, 1995, the Distributor received CDSCs of $3,844 with
respect to redemptions of Class C shares, all of which were paid to Merrill
Lynch.
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.
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
29
<PAGE> 32
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.
For the year ended August 31, 1995, the Fund paid the Distributor
$3,249,016 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Distribution Plan of $649.8 million), all of which were
paid to Merrill Lynch for providing account maintenance and distribution-related
activities and services in connection with Class B shares. During the period
October 21, 1994 (commencement of operations) to August 31, 1995, the Fund paid
the Distributor $8,263 pursuant to the Distribution Plan relating to Class C
shares (based on average net assets subject to such Distribution Plan of
approximately $1.6 million), all of which were paid to Merrill Lynch for
providing account maintenance and distribution-related activities and services
in connection with Class C shares. During the period October 21, 1994
(commencement of operations) to August 31, 1995, the Fund paid the Distributor
$2,131 pursuant to the Distribution Plan relating to Class D shares (based on
average net assets subject to such Distribution Plan of approximately $2.5
million), all of which were paid to Merrill Lynch for providing account
maintenance services in connection with Class D shares. At November 30, 1995,
the net assets of the Fund subject to the Class B Distribution Plan aggregated
approximately $577.4 million. At this asset level, the annual fee payable
pursuant to the Class B Distribution Plan would aggregate $2.9 million. At
November 30, 1995, the net assets of the Fund subject to the Class C
Distribution Plan aggregated $4.6 million. At this asset level, the annual fee
payable pursuant to the Class C Distribution Plan would aggregate $27,877. At
November 30, 1995, the net assets of the Fund subject to the Class D
Distribution Plan aggregated approximately $48.5 million. At this asset level,
the annual fee payable pursuant to the Class D Distribution Plan would aggregate
$48,473.
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
30
<PAGE> 33
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 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. At December 31, 1994, 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,
1994 exceeded fully allocated accrual revenues for such period by approximately
$7,326,000 (1.18% of Class B net assets at that date). As of August 31, 1995,
direct cash revenues for the period since the commencement of operations
exceeded direct cash expenses by approximately $19,252,901 (3.12% of Class B net
assets at that date). As of August 31, 1995, direct cash expenses for the period
since October 21, 1994 (commencement of operations) exceeded direct cash
revenues by $9,556 (.31% of Class C 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
31
<PAGE> 34
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.
------------------------------
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, Merrill Lynch Financial Data Services, Inc.,
P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered
other than by mail should be delivered to Merrill Lynch Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice
of redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. Redemption requests should not be sent to the Fund.
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
32
<PAGE> 35
repurchase is received by the dealer prior to the regular close of business on
the New York Stock Exchange (generally, 4:00 P.M., New York time) on the day
received and is received by the Trust from such dealer not later than 30 minutes
after the close of business on the New York Stock Exchange on the same day.
Dealers have the responsibility of submitting such repurchase requests to the
Trust not later than 30 minutes after the close of business on the New York
Stock Exchange in order to obtain that day's closing price.
These repurchase arrangements are for the convenience of shareholders and
do not involve a charge by the Trust (other than any applicable CDSC).
Securities firms that do not have selected dealer agreements with the
Distributor, however, may impose a charge on the shareholder for transmitting
the notice of repurchase to the Trust. Merrill Lynch may charge its customers a
processing fee (presently $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
33
<PAGE> 36
opened automatically at the Transfer Agent. Shareholders considering
transferring their Class A or Class D shares from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class A or Class D shares are to be transferred will not take delivery
of shares of the Fund, a shareholder either must redeem the Class A or Class D
shares (paying any applicable CDSC) so that the cash 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.
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 are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period of the newly acquired shares of the
other Fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of
34
<PAGE> 37
any CDSC imposed on such shares, if any, and, with respect to Class B shares,
toward satisfaction of the Conversion Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange 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 by non-retirement plan investors under the MFA
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the MFA program of Class A or Class D shares
of a MLAM-advised mutual fund for Class A or Class D shares of the Fund will be
made solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other MLAM-advised mutual fund
and the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
Automatic Reinvestment of Dividends and 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. 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.
Alternatively, 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 CMA(R)/CBA(R)
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. The
Fund's Automatic Investment Program is not available to shareholders whose
shares are held in a brokerage account with Merrill Lynch. Alternatively,
investors who maintain CMA(R) or CBA(R) accounts may arrange to have periodic
investments made in the Fund in their CMA(R) or CBA(R) accounts or in certain
related accounts in amounts of $100 or more through the CMA(R)/CBA(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
35
<PAGE> 38
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 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. The Trust has applied
for an exemptive order, subject to certain conditions, permitting the Trust to,
among other things, (i) purchase investment grade tax-exempt securities from
Merrill Lynch when Merrill Lynch is a member of an underwriting syndicate for
such securities and (ii) purchase tax-exempt securities from and sell tax-exempt
securities to Merrill Lynch in secondary market transactions. Affiliated persons
of the Trust may serve as its broker in over-the-counter transactions conducted
by the Fund on an agency basis only.
Portfolio Turnover. 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. As a result of the investment
policies described herein, under certain market conditions the Fund's portfolio
turnover may be higher than that of other investment companies; however, it is
extremely difficult to predict portfolio turnover rates with any degree of
accuracy. Higher portfolio turnover may contribute to higher transactional costs
and negative tax consequences, such as an increase in capital gain dividends or
in ordinary income dividends of accrued market discount, as well as greater
difficulty meeting the requirement for qualifications as a regulated investment
company that less than 30% of its gross income be derived from the sale or other
disposition of securities held for less than three months. See "Distributions
and Taxes" on page 37. (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.)
36
<PAGE> 39
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The net investment income of the Fund is declared as dividends daily prior
to the determination of the net asset value, which is calculated 15 minutes
after the close of business on the New York Stock Exchange (generally, 4:00
P.M., New York time) 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.
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 income tax under Code Section 103(a)
and are properly designated as "exempt-interest dividends" by the Trust, they
will be excludable from a shareholder's gross income for Federal income tax
purposes. Exempt-interest dividends are included, however, in determining the
portion, if any, of a person's social security 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 also
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
37
<PAGE> 40
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. Distributions, if any, from an excess of net long-term capital gains
over net short-term capital losses derived from the sale of securities or from
certain transactions in futures or options ("capital gain dividends") are
taxable as long-term capital gains for Federal income tax purposes, regardless
of the length of time the shareholder has owned Fund shares and, for California
income tax purposes, are treated as capital gains which are taxed at ordinary
income tax rates. Distributions by the Fund, whether from exempt-interest
income, ordinary income or capital gains will not be eligible for the dividends
received deduction allowed to corporations under the Code.
All or a portion of 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 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
38
<PAGE> 41
earnings, a corporate shareholder may be required to pay alternative minimum tax
on exempt-interest dividends paid by the Fund.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring 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.
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, judicial 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.
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<PAGE> 42
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 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,
1995 was 5.17% for Class A shares, 4.89% for Class B shares, 4.78% for Class C
shares and 5.08% for Class D shares and tax-equivalent yield for the same period
(based on a Federal income tax rate of 28%) was 7.18% for Class A shares, 6.79%
for Class B shares, 6.64% for Class C shares and 7.06% for Class D shares.
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
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<PAGE> 43
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 indicative 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, 15 minutes after the close of business on the New
York Stock Exchange (generally, 4:00 P.M., New York time), on each day during
which the New York Stock Exchange is open for trading. The net asset value 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.
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 (although not necessarily meet) immediately after
the payment of dividends or distributions which will differ by approximately the
amount of the expense accrual differentials between the classes.
ORGANIZATION OF THE TRUST
The Trust is an unincorporated business trust organized on March 20, 1985
under the laws of Massachusetts. The Trust 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
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<PAGE> 44
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 (the "Order") from the Commission
permitting the issuance and sale of multiple classes of shares. The Trustees of
the Trust may classify and reclassify the shares of any Series into additional
classes at a future date. 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.
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:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this,
please call your Merrill Lynch financial consultant or Merrill Lynch Financial
Data Services, Inc. at 800-637-3863.
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<PAGE> 45
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.
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(This page intentionally left blank)
44
<PAGE> 47
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 Merrill Lynch Financial
Data Services, Inc., as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
<TABLE>
<S> <C>
1. .......................................................... 4. ..........................................................
2. .......................................................... 5. ..........................................................
3. .......................................................... 6. ..........................................................
</TABLE>
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address.........................................................................
............................................................. Date.............
(Zip Code)
<TABLE>
<S> <C>
Occupation ................................................... Name and Address of Employer..................................
............................................................. .............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTION
<TABLE>
<S> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT / / Reinvest SELECT / / Reinvest
ONE: / / Cash ONE: / / Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: / / Check
or / / Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch 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 Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor.........................................................
Signature of Depositor .......................Date.............................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
45
<PAGE> 48
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
"Distributions and Taxes--Taxes") either because I have not been notified that I
am subject thereto as a result of a failure to report all interest or dividends,
or the Internal Revenue Service ("IRS") has notified me that I am no longer
subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
- ----------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
......................,19 . . . .
Dear Sir/Madam: Date of initial purchase
</TABLE>
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 the Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch California Municipal Bond Fund held as security.
<TABLE>
<S> <C>
By............................................................... ...............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................ Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
- --- Branch Office, Address, Stamp. ---
- - -
- - -
- --- ---
This form when completed should be mailed to:
Merrill Lynch California Municipal Bond Fund
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to
notify the Distributor of any purchases made under a Letter of Intention or
Systematic Withdrawal Plan. We guarantee the Shareholder's signature.
...............................................................
Dealer Name and Address
By .............................................................................
Authorized Signature of Dealer
- --------- ------------
- --------- ------------ ..............................
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer A/C No.
46
<PAGE> 49
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
<TABLE>
<S> <C>
------------------------------------
Name of Owner.......................................................................
------------------------------------
Social Security No.
or Taxpayer Identification Number
Name of Co-Owner (if any)...........................................................
Address.............................................................................
.................................................................................... Account Number...........................
(if existing account)
</TABLE>
- --------------------------------------------------------------------------------
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 be made
either (check one) / / Monthly on the 24th day of each month, or N 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 MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
SPECIFY TYPE OF ACCOUNT (CHECK ONE): / / checking / / savings
Name 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.
47
<PAGE> 50
MERRILL LYNCH CALIFORNIA MUNICIPAL BOND FUND--AUTHORIZATION FORM (PART
2)--(CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
of Merrill Lynch 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.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Healthcare Fund, Inc. as indicated below:
Amount of each check or ACH debit $..........................................
Account Number...............................................................
Please date and invest ACH debits on the 20th of each month beginning
.................................. or as soon thereafter as possible.
(month)
I agree that you are drawing these ACH debits voluntarily at my request and that
you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of Fund shares including liquidating shares of the Fund and
crediting my bank account. I further agree that if a debit is not honored upon
presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS DRAWN BY
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City .................... State ........ Zip Code...............................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc., I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
................. .......................................................
Date Signature of Depositor
................. .......................................................
Bank Account Signature of Depositor
Number (If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
48
<PAGE> 51
[This page intentionally left blank]
<PAGE> 52
[This page intentionally left blank]
<PAGE> 53
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 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
The Bank of New York
90 Washington Street, 12th Floor
New York, New York 10268
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE> 54
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.............. 11
Potential Benefits........................... 13
Special and Risk Considerations Relating to
Municipal Bonds............................ 13
Description of Municipal Bonds............... 14
Call Rights.................................. 16
When-Issued Securities and Delayed Delivery
Transactions............................... 17
Financial Futures Transaction and Options.... 17
Repurchase Agreements........................ 19
Investment Restrictions...................... 19
Management of the Trust........................ 21
Trustees..................................... 21
Management and Advisory Arrangements......... 21
Code of Ethics............................... 22
Transfer Agency Services..................... 22
Purchase of Shares............................. 23
Initial Sales Charge Alternatives--
Class A and Class D Shares................. 25
Deferred Sales Charge Alternatives--
Class B and Class C Shares................. 27
Distribution Plans........................... 29
Limitations on the Payment of Deferred Sales
Charges.................................... 31
Redemption of Shares........................... 32
Redemption................................... 32
Repurchase................................... 32
Reinstatement Privilege--
Class A and Class D Shares................. 33
Shareholder Services........................... 33
Portfolio Transactions......................... 35
Distributions and Taxes........................ 37
Distributions................................ 37
Taxes........................................ 37
Performance Data............................... 39
Additional Information......................... 41
Determination of Net Asset Value............. 41
Organization of the Trust.................... 41
Shareholder Reports.......................... 42
Shareholder Inquiries........................ 43
Authorization Form............................. 45
</TABLE>
Code #10327-1295
[MERRILL LYNCH LOGO]
Merrill Lynch
California Municipal
Bond Fund
Merrill Lynch California
Municipal Series Trust
PROSPECTUS
December 29, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 55
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 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. 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.
------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated
December 29, 1995 (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 December 29, 1995.
<PAGE> 56
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 Ratings Group ("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
applicable law. 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 Invest-
2
<PAGE> 57
ments 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.
Also, the Fund may invest in so-called "inverse floating obligations" or
residual interest bonds" on which the interest rates typically decline as market
rates increase and increase as market rates decline. To the extent the Fund
invests in these types of Municipal Bonds, the Fund's return on such Municipal
Bonds will be subject to risk with respect to the value of the particular index,
which may include reduced or eliminated interest payments and losses of invested
principal. 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. 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 15% (10% to the extent required by certain
state laws) of the Fund's total assets. The Manager, however, believes that
indexed and inverse floating obligations represent flexible portfolio management
instruments for the Fund which allow the Fund to seek potential investment
rewards, to hedge other portfolio positions or to vary the degree of investment
leverage relatively efficiently under different market conditions.
3
<PAGE> 58
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 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 15% (10% to the extent required by certain state laws) 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
4
<PAGE> 59
trading market for high yield securities does exist, it generally is not as
liquid as the secondary market for higher rated securities. Reduced secondary
market liquidity may have an adverse impact on market price and 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 rates for the years ended August 31, 1994 and 1995
were 75.66% and 53.40%, 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. A more complete discussion concerning
futures and options transactions is set forth under "Investment Objective and
Policies" in the Prospectus. 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
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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 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 August 15, 1986, private activity bonds, are
in most cases revenue bonds and generally do not constitute the pledge of the
credit or taxing power of the issuer of such bonds. Generally, the 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 15% (10% to the extent required by certain state laws)
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
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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
maturity of the obligation, and the rating 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 securities in which the Fund invests to meet their
obligations for the payment of interest and principal when due. There are
variations in the risks involved in holding Municipal Bonds, both within a
particular classification and between classifications, depending on numerous
factors. Furthermore, the rights of owners of Municipal Bonds and the
obligations of the issuer of such Municipal Bonds may be subject to applicable
bankruptcy, insolvency and similar laws and court decisions affecting the rights
of creditors generally and to general equitable principles, which may limit the
enforcement of certain remedies.
DESCRIPTION OF TEMPORARY INVESTMENTS
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
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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 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 repurchase agreements, the prices at which the trades are conducted
do not reflect accrued interest on the underlying obligations. Such agreements
usually cover short periods, such as under one week. Repurchase agreements may
be construed to be collateralized loans by the purchaser to the seller secured
by the securities transferred to the purchaser. In a repurchase agreement, 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
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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 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 15%
(10% to the extent required by certain state laws) 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
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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.
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
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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 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 a decrease in interest rates or otherwise, that
may occur before such purchases can be effected. Subject to the degree of
correlation between the Municipal Bonds and the financial futures contracts,
subsequent increases in the cost of Municipal Bonds should be reflected in the
value of the 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 a put option
on a financial futures contract is analogous to the purchase of a protective put
option 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 Investment Company Act of 1940, as amended (the "1940 Act") in
connection with its strategy of investing in financial futures contracts.
Section 17(f) relates to the custody of securities and other assets of an
investment company and may be
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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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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 were approved for trading
in 1986. Trading in such financial futures contracts may tend to 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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INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (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. 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 at the
time of each investment, in the securities of issuers in any particular
industry (excluding the U.S. Government and its agencies and
instrumentalities). For purposes of this restriction, states,
municipalities and their political subdivisions are not considered part of
any industry.
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.
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
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Information, as they may be amended from time to time, and without
registering as commodity pool operator under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box".
c. Invest in securities 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.
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. In addition, the Fund will
not purchase securities while borrowings are outstanding.
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<PAGE> 70
In addition, to comply with Federal income tax requirements for
qualification as a "regulated investment company", the Fund's investments will
be limited in a manner such that, at the close of each quarter of each fiscal
year, (a) no more than 25% of the Fund's total assets are invested in the
securities of a single issuer, and (b) with regard to at least 50% of the Fund's
total assets, no more than 5% of its total assets are invested in the securities
of a single issuer. For purposes of this restriction, the Fund will regard each
state and each political subdivision, agency or instrumentality of such state
and each multi-state agency of which such state is a member and each public
authority which issues securities on behalf of a private entity as a separate
issuer, except that if the security is backed only by the assets and revenues of
a non-governmental entity then the entity with the ultimate responsibility for
the payment of interest and principal may be regarded as the sole issuer. These
tax-related limitations may be changed by the Trustees of the Trust to the
extent necessary to comply with changes to the Federal income tax requirements.
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
pursuant to a permissive order or otherwise in compliance with the provisions of
the 1940 Act and the rules and regulations thereunder. Included among such
restricted transactions are 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
Information about the Trustees, executive officers and the portfolio
manager of the Trust, including their ages and their principal occupations, for
at least the last five years, is set forth below. Unless otherwise noted, the
address of each Trustee and executive officer is P.O. Box 9011, Princeton, New
Jersey 08543-9011.
ARTHUR ZEIKEL (63) --President and Trustee (1)(2)--President of the Manager
(which term, as used herein, includes the Manager's corporate predecessors)
since 1977; President of Merrill Lynch Asset Management, L.P. ("MLAM," which
term, as used herein, includes MLAM's corporate predecessors) since 1977;
President and Director of Princeton Services, Inc. ("Princeton Services") since
1993; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since
1990; Director of Merrill Lynch Funds Distributor, Inc. (the "Distributor")
since 1991.
JAMES H. BODURTHA (51) --Trustee (2)--124 Long Pond Road, Plymouth,
Massachusetts 02360. Chairman and Chief Executive Officer, China Enterprise
Management Corporation since 1993; Chairman, Berkshire Corporation since 1980;
Partner, Squire, Sanders & Dempsey from 1980 to 1993.
HERBERT I. LONDON (56) --Trustee (2)--113-115 University Place, New York,
New York 10003. John M. Olin Professor of Humanities, New York University since
1993 and Professor thereof since 1973; Dean, Gallatin Division of New York
University from 1978 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Director, Damon Corporation since 1991; Overseer,
Center for Naval Analyses from 1983 to 1993.
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<PAGE> 71
ROBERT R. MARTIN (68) --Trustee (2)--513 Grand Hill, St. Paul, Minnesota
55102. Director, WTC Industries, Inc. since 1994 and Chairman thereof in 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 (66) --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 (43) --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 (55) --Executive Vice President (1)(2)--Executive Vice
President of the Manager and MLAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of the Distributor since
1986 and Director thereof since 1991.
VINCENT R. GIORDANO (51) --Vice President (1)(2)--Portfolio Manager of the
Manager and MLAM since 1977 and Senior Vice President of the Manager and MLAM
since 1984; Vice President of MLAM from 1980 to 1984; Senior Vice President of
Princeton Services since 1993.
KENNETH A. JACOB (44) --Vice President (1)(2)--Vice President of the
Manager and MLAM since 1984.
WALTER O'CONNOR (34) --Portfolio Manager (1)(2) --Vice President of MLAM
since 1993; Assistant Vice President of MLAM from 1991 to 1993; Assistant Vice
President of Prudential Securities from 1984 to 1991.
DONALD C. BURKE (35) --Vice President (1)(2)--Vice President and Director
of Taxation of MLAM since 1990; Employee of Deloitte & Touche LLP from 1982 to
1990.
GERALD M. RICHARD (46) --Treasurer (1)(2)--Senior Vice President and
Treasurer of the Manager and MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Treasurer of the Distributor since
1984 and Vice President thereof since 1981.
JERRY WEISS (37) --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.
At November 30, 1995, 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.
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<PAGE> 72
COMPENSATION OF TRUSTEES
The Trust pays each Trustee not affiliated with the Manager a fee of $5,000
per year plus $500 per meeting attended. 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. The Trust
reimburses each unaffiliated Trustee for his out-of-pocket expenses relating to
attendance at Board and committee meetings. The fees and expenses of the
Trustees are allocated to the respective series of the Trust on the basis of
asset size. For the fiscal year ended August 31, 1995, fees and expenses paid to
non-affiliated Trustees by the Fund aggregated $40,349.
The following table sets forth for the fiscal year ended August 31, 1995,
compensation paid by the Fund to the non-affiliated Trustees and, for the
calendar year ended December 31, 1995, the aggregate compensation paid by all
investment companies (including the Fund) advised by FAM and its affiliate, MLAM
("FAM/MLAM Advised Funds") to the non-affiliated Trustees:
<TABLE>
<CAPTION>
AGGREGATE
PENSION OR COMPENSATION
RETIREMENT FROM FUND AND
BENEFITS FAM/MLAM
ACCRUED AS ADVISED FUNDS
COMPENSATION PART OF FUND PAID TO
NAME OF TRUSTEE FROM FUND EXPENSE TRUSTEE(1)
--------------------------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
James H. Bodurtha............................ $ 887 None $ 156,250
Herbert I. London............................ $8,062 None $ 157,500
Robert R. Martin............................. $8,062 None $ 157,500
Joseph L. May................................ $8,062 None $ 157,500
Andre F. Perold.............................. $8,062 None $ 157,500
</TABLE>
- ---------------
(1) In addition to the Fund, the Trustees serve on the boards of other FAM/MLAM
Advised Funds as follows: Mr. Bodurtha (46 funds); Mr. London (46 funds);
Mr. Martin (46 funds); Mr. May (46 funds); and Mr. Perold (46 funds). For
purposes of this table, each series of a series investment company,
including the Trust, is treated as a separate fund.
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 and such sales and
purchases arise for consideration at or about the same time, transactions in
such securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that transactions on
behalf of more than one client of the Manager or 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.
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<PAGE> 73
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, 1993, 1994 and 1995, the
total advisory fees paid by the Fund to the Manager aggregated $4,391,540,
$4,567,938 and $3,828,093, 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, 1993, 1994 and
1995 pursuant to these operating expense limitations.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Trust connected with investment and economic
research, trading and investment management of the Trust, as well as the fees of
all Trustees of the Trust who are affiliated persons of ML & Co. or any of its
affiliates. 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 of registering
the shares under Federal and state securities laws, pricing costs (including the
daily calculation of net asset value), expenses of printing shareholder reports,
prospectuses and statements of additional information (except to the extent paid
by the Distributor as described below), fees for legal and auditing services,
Commission fees, interest, certain taxes, and other expenses attributable to a
particular Series. Expenses 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. Depending upon
the nature of a lawsuit, litigation costs may be assessed to the specific Series
to which the lawsuit relates or allocated on the basis of the asset size of the
respective Series. The Trustees have determined that this is an appropriate
method of allocation of expenses. Accounting services are provided to the Trust
by the Manager and the Trust reimburses the Manager for its costs in connection
with such services. For the year ended August 31, 1995, the Trust paid the
Manager $64,518 for such services. As required by the Fund's distribution
agreements, the Distributor will pay the promotional expenses of the Fund
incurred in connection with the offering of shares of
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<PAGE> 74
the Fund. Certain expenses in connection with the account maintenance and
distribution of Class B and Class C 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.
and Princeton Services. ML & Co. and Princeton Services are "controlling
persons" of the Manager as defined under the 1940 Act because of their ownership
of its voting securities or their power to exercise a controlling influence over
its management or policies.
Duration and Termination. Unless earlier terminated as described below,
the Management 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 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
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<PAGE> 75
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 year ended
August 31, 1994 were $132,664, of which the Distributor received $13,053 and
Merrill Lynch received $119,611. The gross sales charges for the sale of Class A
shares for the year ended August 31, 1995 were $30,995, of which the Distributor
received $2,220 and Merrill Lynch received $28,775. The gross sales charges for
the sale of Class D shares for the period October 21, 1994 (commencement of
operations) to August 31, 1995, were $22,241, of which the Distributor received
$1,704 and Merrill Lynch received $20,537.
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 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
21
<PAGE> 76
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.
Employee Access Accounts(SM). Class A or Class D shares are offered at net
asset value to Employee Access Accounts available through employers that provide
employer sponsored retirement or savings plans that are eligible to purchase
such shares at net asset value. The initial minimum for such accounts is $500,
except that the initial minimum for shares purchased for such accounts pursuant
to the Automatic Investment Program is $50.
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 plus a reduced sales charge of 0.50% of the
offering price, which is 0.50% of the net amount invested.
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 are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis; and second, the investor also must establish
22
<PAGE> 77
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 the shares of
such other fund were subject to a sales charge either at the time of purchase or
on a deferred basis; and second, such purchase of Class D shares must be made
within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of shares of such
other mutual fund and that such shares have been outstanding for a period of no
less than six months; and second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must be
maintained in the interim in cash or a money market fund.
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, the
date the Merrill Lynch Select Pricing(SM) System commenced operations, and wish
to reinvest the net proceeds of a sale of their closed-end fund shares of
common stock in Eligible Class A Shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994 and wish to reinvest the net proceeds from
a sale of their closed-end fund shares are offered Class A shares (if eligible
to 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. 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
23
<PAGE> 78
the Fund on such day. Similarly, Class D shares of the Fund are offered at net
asset value to shareholders of either Merrill Lynch Municipal Strategy Fund,
Inc. ("Municipal Strategy Fund") or Merrill Lynch High Income Municipal Bond
Fund, Inc. ("High Income Municipal Bond Fund") who wish to purchase shares of
the Fund with the net proceeds from a sale of certain of their shares of common
stock pursuant to a tender offer by Municipal Strategy Fund or by High Income
Municipal Bond Fund. This investment option is available only with respect to
the proceeds of Municipal Strategy Fund shares as to which no CDSC (as defined
in the Municipal Strategy Fund's prospectus) is applicable or to the proceeds of
High Income Municipal Bond Fund shares as to which no Early Withdrawal Charge
(as defined in the High Income Municipal Bond Fund's prospectus) is applicable.
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
24
<PAGE> 79
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.
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,
1995 with respect to the Class B and Class C shares of the Fund, indicating the
maximum allowable payments that can be made under the
25
<PAGE> 80
NASD maximum sales charge rule and, with respect to the Class B shares, the
Distributor's voluntary maximum for the period September 30, 1985 (commencement
of operations) to August 31, 1995.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF AUGUST 31, 1995
-----------------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------------- --------- ---------- -------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B
Under NASD Rule as Adopted............ $1,396,330 $ 87,271 $ 63,709 $150,980 $28,860 $122,120 $ 1,540
Under Distributor's Voluntary
Waiver.............................. $1,396,330 $ 87,271 $ 6,982 $94,253 $28,860 $ 65,393 $ 1,540
<CAPTION>
(NOT IN THOUSANDS)
CLASS C
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as Adopted............ $3,277,018 $204,814 $ 8,163 $212,977 $ 8,664 $204,313 $10,957
</TABLE>
- ------------------
(1) Purchase price of all eligible Class B shares sold since September 30, 1985
(commencement of operations) other than shares acquired through dividend
reinvestment and the exchange privilege. Purchase price of all eligible
Class C shares sold since October 21, 1994 (commencement of operations)
other than shares acquired through dividend reinvestment and the exchange
privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0% as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals.
(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 (with respect to Class B shares) or
the NASD maximum (with respect to Class B and Class C shares).
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 AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives-- Class B and Class C Shares", while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge is waived on redemptions of Class B shares 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,
1993, 1994 and 1995, the Distributor received CDSCs of $591,941, $704,845 and
$866,830, respectively, with respect to redemptions of Class B shares, all of
which were paid to
26
<PAGE> 81
Merrill Lynch. For the period October 21, 1994 (commencement of operations) to
August 31, 1995, the Distributor received CDSCs of $3,844 with respect to
redemptions of Class C shares, all of which were paid to Merrill Lynch.
The CDSC is also waived for any Class B shares that were acquired and held
at the time of redemption by Employee Access Accounts available through
employers that provide Eligible 401(k) Plans. The initial minimum for such
accounts of $500, except that the initial minimum for shares purchased for such
accounts pursuant to the Automatic Investment Program is $50.
PORTFOLIO TRANSACTIONS
Reference is made to "Investment Objective and Policies--Other Investment
Policies and Practices" 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 years ended
August 31, 1993 and 1994, the Fund engaged in no transactions pursuant to such
order. During the year ended August 31, 1995, the Fund engaged in 60
transactions pursuant to such order aggregating approximately $138.3 million.
The Trust has applied for an exemptive order, subject to certain conditions,
permitting the Trust to, among other things, (i) purchase investment grade
tax-exempt securities from Merrill Lynch when Merrill Lynch is a member of an
underwriting syndicate for such securities and (ii) purchase tax-exempt
securities from and sell tax-exempt securities to Merrill Lynch in secondary
market transactions. 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 Act in order to seek to recapture
underwriting and dealer spreads from affiliated entities. The Trustees have
considered all factors deemed relevant and have made a determination not to seek
such recapture at this time. The Trustees will reconsider this matter from time
to time.
As a non-fundamental restriction, the Trust will prohibit the purchase or
retention by the Fund of the securities of any issuer if the officers and
Trustees of the Trust, the officers and general partner of the Manager, the
directors of such general partner or the officers and directors of any
subsidiary thereof each owning beneficially more than one-half of one percent of
the securities of an issuer together own beneficially more than five percent of
the securities of that issuer. In addition, 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. As indicated above, the Trust has applied for a
conditional exemption from these restrictions.
27
<PAGE> 82
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. As a result of the investment policies described in
the Prospectus, under certain market conditions the Fund's portfolio turnover
may be higher than that of other investment companies; however, it is extremely
difficult to predict portfolio turnover rates with any degree of accuracy.
Higher portfolio turnover may contribute to higher transactional costs and
negative tax consequences, such as an increase in capital gain dividends or in
ordinary income dividends of accrued market discount, as well as greater
difficulty meeting the requirement for qualifications as a regulated investment
company that less than 30% of its gross income be derived from the sale or other
disposition of securities held for less than three months. See "Distribution and
Taxes" on page 45. High portfolio turnover involves correspondingly higher
transaction costs in the form of dealer spreads and brokerage commissions, which
are borne directly by the Fund. Such turnover also has certain tax consequences
for the Fund. See "Distributions and Taxes". (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 rates
for the years ended August 31, 1994 and 1995 were 75.66% and 53.40%,
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.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
by the Manager once daily, Monday through Friday, as of 15 minutes after the
close of business on the New York Stock Exchange
28
<PAGE> 83
(generally, 4:00 P.M. New York time), 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 per share net asset value of
the Class B, Class C and Class D shares generally will be lower than the per
share net asset value of the Class A shares, reflecting the higher 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. It is expected, however, that the per share net asset value
of the four classes eventually will tend to converge (although not necessarily
meet) immediately after the payment of dividends, which will differ by
approximately the amount of the expense accrual differential 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 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 previous statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale
29
<PAGE> 84
transaction other than automatic investment purchases and the reinvestment of
ordinary income dividends, and long-term capital gains distributions. A
shareholder may make additions to his or her Investment Account at any time by
mailing a check directly to the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of 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.
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. If
the new brokerage firm is willing to accommodate the shareholder in this manner,
the shareholder must request that he or she be issued certificates for his or
her shares, and then must turn the certificates over to the new firm for re-
registration as described in the preceding sentence.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to 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. The Fund's Automatic Investment Plan
is not available to shareholders whose shares are held in brokerage accounts
with Merrill Lynch. Alternatively, investors who maintain CMA(R) or CBA(R)
accounts may arrange to have periodic investments made in the Fund, in the
CMA(R) or CBA(R) accounts or in certain related accounts in amounts of $100 or
more through the CMA(R)/CBA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
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. Cash payments also can be direct
deposited to the shareholder's bank account.
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 shares
30
<PAGE> 85
of the Fund or vice versa and, commencing ten days after the receipt by the
Transfer Agent of such notice, those instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account in the form of payments by check or through automatic
payment by direct deposit to such shareholder's bank account on either a monthly
or quarterly basis as provided below. Quarterly withdrawals are available for
shareholders who have acquired Class A or Class D shares of the Fund having a
value, based on cost or the current offering price, of $5,000 or more, and
monthly withdrawals are available for shareholders with Class A or Class D
shares with such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify either a dollar amount or a percentage of the value of his or her Class
A or Class D shares. Redemptions will be made at net asset value as determined
15 minutes after the close of business on the New York Stock Exchange
(generally, 4:00 P.M., New York time) on the 24th day of each month or the 24th
day of the last month of each quarter, whichever is applicable. If the 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.
Alternatively, 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 CMA(R)/CBA(R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$25. The proceeds of systematic redemptions will be posted to the shareholder's
account five business days after the date the shares are redeemed. Monthly
systematic redemptions will be made at net asset value on the first Monday of
each month, bimonthly systematic redemptions will be made at net asset value on
the first Monday of every other month, and quarterly, semiannual or annual
redemptions are made at net asset value on the first Monday of months selected
at the shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
CMA(R)/CBA(R) Systematic Redemption Program is not available if Fund shares are
being purchased within the account pursuant to the CMA(R)/CBA(R) Automatic
Investment Program. For more information on the CMA(R)/CBA(R) Systematic
Redemption Program, eligible shareholders should contact their Merrill Lynch
financial consultant.
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<PAGE> 86
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 are 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 are exchangeable for shares of certain
MLAM-advised money market funds specifically designated below as available for
exchange by holders of Class A, Class B, Class C or Class D shares. Shares with
a net asset value of at least $100 are required to qualify for the exchange
privilege, and any shares utilized in an exchange must have been held by the
shareholder for 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
32
<PAGE> 87
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% CDSC that generally would apply to a redemption
would not apply to the exchange. Three years later the investor may decide to
redeem the Class B shares of 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:
<TABLE>
<S> <C>
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).
</TABLE>
33
<PAGE> 88
<TABLE>
<S> <C>
MERRILL LYNCH ARIZONA 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 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, consistent with prudent
risk, from investment in United States and foreign
equity, debt and money market securities the
combination of which will be varied both with respect
to types of securities and markets in response to
changing market and economic trends.
MERRILL LYNCH ASSET INCOME FUND,
INC. ............................ A high level of current income through investment
primarily in United States fixed income securities.
MERRILL LYNCH BALANCED FUND FOR
INVESTMENT AND
RETIREMENT, INC.................. As high a level of total investment return as is
consistent with a reasonable and relatively low 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,
INC. ............................ Capital appreciation and, secondarily, income, by
investing in securities, primarily equities, that are
undervalued and therefore represent basic investment
value.
</TABLE>
34
<PAGE> 89
<TABLE>
<S> <C>
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 CALIFORNIA 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 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 COLORADO 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 Colorado income taxes as is consistent with
prudent investment management.
MERRILL LYNCH CONNECTICUT 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 Connecticut income taxes as is consistent with
prudent investment management.
MERRILL LYNCH CORPORATE BOND FUND,
INC. ............................ Current income from three separate diversified
portfolios of fixed income securities.
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS FUND, INC. .............. Long-term capital appreciation through investment in
securities, principally equities, of issuers in
countries having smaller capital markets.
</TABLE>
35
<PAGE> 90
<TABLE>
<S> <C>
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,
INC. ............................ Long-term growth through investment in 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.
</TABLE>
36
<PAGE> 91
<TABLE>
<S> <C>
MERRILL LYNCH FUNDAMENTAL VALUE
PORTFOLIO (available only for
exchanges by certain individual
retirement accounts for which
Merrill Lynch acts as
custodian)....................... A portfolio of Merrill Lynch Asset Builder Program,
Inc., a series fund, whose objective is to provide
capital appreciation and income by investing in
securities, with at least 65% of the portfolio's
assets being invested in equities.
MERRILL LYNCH GLOBAL ALLOCATION
FUND, INC. ...................... High total return consistent with prudent risk, through
a fully managed investment policy utilizing United
States and foreign equity, debt and money market
securities, the combination of which will be varied
from time to time both with respect to the types of
securities and markets in response to changing market
and economic trends.
MERRILL LYNCH GLOBAL BOND FUND FOR
INVESTMENT AND RETIREMENT........ High total investment return 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.
</TABLE>
37
<PAGE> 92
<TABLE>
<S> <C>
MERRILL LYNCH GLOBAL OPPORTUNITY
PORTFOLIO (available only for
exchanges by certain individual
retirement accounts for which
Merrill Lynch acts as
custodian)....................... A portfolio of Merrill Lynch Asset Builder Program,
Inc., a series fund, whose objective is to provide a
high total investment return through an investment
policy utilizing United States and foreign equity,
debt and money market securities, the combination of
which will vary depending upon changing market and
economic trends.
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.
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.
</TABLE>
38
<PAGE> 93
<TABLE>
<S> <C>
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 MASSACHUSETTS 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 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.
MERRILL LYNCH MICHIGAN 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 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.
</TABLE>
39
<PAGE> 94
<TABLE>
<S> <C>
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 JERSEY 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 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.
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.
</TABLE>
40
<PAGE> 95
<TABLE>
<S> <C>
MERRILL LYNCH NEW YORK 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, 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.
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.
</TABLE>
41
<PAGE> 96
<TABLE>
<S> <C>
MERRILL LYNCH PENNSYLVANIA 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 and Pennsylvania income taxes as
is consistent with prudent investment management
through investment in a portfolio primarily of
intermediate-term investment grade Pennsylvania
Municipal Bonds.
MERRILL LYNCH PENNSYLVANIA
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 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 QUALITY BOND
PORTFOLIO (available only for
exchanges by certain individual
retirement accounts for which
Merrill Lynch acts as
custodian)....................... A portfolio of Merrill Lynch Asset Builder Program,
Inc., a series fund, whose objective is to provide a
high level of current income through investment in a
diversified portfolio of debt obligations, such as
corporate bonds and notes, convertible securities,
preferred stocks and governmental obligations.
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.
</TABLE>
42
<PAGE> 97
<TABLE>
<S> <C>
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,
INC. ............................ Capital appreciation through worldwide 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 U.S. GOVERNMENT
SECURITIES PORTFOLIO (available
only for exchanges by certain
individual retirement accounts
for which Merrill Lynch acts as
custodian)....................... A portfolio of Merrill Lynch Asset Builder Program,
Inc., a series fund, whose objective is to provide a
high current return through investments in U.S.
Government and government agency securities, including
GNMA mortgage-backed certificates and other
mortgage-backed government securities.
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,
INC. ............................ High current income by investing in a global portfolio
of fixed income securities denominated in various
currencies, including multinational currencies.
</TABLE>
43
<PAGE> 98
<TABLE>
<CAPTION>
Class A Share Money Market Funds:
<S> <C>
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 Fund 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.
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
FUND............................. Preservation of capital, liquidity and current income
through investment exclusively in a diversified
portfolio of short-term marketable securities which
are direct obligations of the U.S. Treasury.
<CAPTION>
Class B, Class C and Class D Share Money Market Funds:
<S> <C>
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.
</TABLE>
44
<PAGE> 99
<TABLE>
<S> <C>
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.
</TABLE>
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 (see below), the Fund (but not its
shareholders) will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The Trust
intends to cause the Fund to distribute substantially all of such income.
45
<PAGE> 100
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 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 Securities and Exchange 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 a shareholder would be treated
as a "substantial user" or "related person" under Code Section 147(a) with
respect to property financed with the proceeds of an issue of "industrial
development bonds" or "private activity bonds", if any, held by 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.
46
<PAGE> 101
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 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 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. Distributions, if
any, from an excess of net long-term capital gains over net short-term capital
losses derived from the sale of securities or from certain transactions in
futures or options ("capital gain dividends") are taxable as long-term capital
gains for Federal income tax purposes, regardless of the length of time the
shareholder has owned Fund shares and, for California income tax purposes, will
be treated as capital gains which are taxed at ordinary income tax rates.
Distributions by the Fund, whether from exempt-interest income, ordinary income
or capital gains will not be eligible for the dividends received deduction
allowed to corporations under the Code.
All or a portion of 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.
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
47
<PAGE> 102
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.
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.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own advisers concerning the applicability of the United States withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on 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 will be imposed
for taxable years beginning after December 31, 1986 and before January 1, 1996
unless extended. 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
48
<PAGE> 103
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.
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. The
mark-to-market rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of changes in
price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in 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, judicial
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.
From time to time, the Fund may include the Fund's Morningstar risk-adjusted
performance ratings in advertisements or supplemental sales literature. Total
return, yield and tax-equivalent yield figures
49
<PAGE> 104
are based on the Fund's historical performance and are not intended to indicate
future performance. Average annual total return, yield and tax equivalent yield
are determined separately for Class A, Class B, Class C and Class D shares in
accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
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.
Set forth below is total return, yield and tax-equivalent yield information
for Class A, Class B, Class C and Class D shares of the Fund for the periods
indicated.
<TABLE>
<CAPTION>
CLASS A SHARES* CLASS B SHARES
------------------------------- -------------------------------
REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
$1,000 OF $1,000 OF
INVESTMENT THE PERIOD INVESTMENT THE PERIOD
------------ ------------ ------------ ------------
AVERAGE ANNUAL TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ended August 31, 1995..... 2.50% $1,025.00 2.28% $1,022.80
Five Years Ended August 31, 1995... 7.01% $1,403.10 7.34% $1,424.80
Inception (September 30, 1985) to
August 31, 1995................... 8.15% $2,175.60
Inception (October 25, 1988) to
August 31, 1995................... 7.04% $1,593.70
Inception (October 21, 1994) to
August 31, 1995...................
<CAPTION>
CLASS C SHARES** CLASS D SHARES**
------------------------------- -------------------------------
REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
$1,000 OF $1,000 OF
INVESTMENT THE PERIOD INVESTMENT THE PERIOD
------------ ------------ ------------ ------------
AVERAGE ANNUAL TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ended August 31, 1995.....
Five Years Ended August 31, 1995...
Inception (September 30, 1985) to
August 31, 1995...................
Inception (October 25, 1988) to
August 31, 1995...................
Inception (October 21, 1994) to
August 31, 1995................... 9.31% $1,079.60 5.88% $ 1,050.40
</TABLE>
50
<PAGE> 105
<TABLE>
<CAPTION>
CLASS A SHARES* CLASS B SHARES
------------------------------- -------------------------------
REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
$1,000 OF $1,000 OF
INVESTMENT THE PERIOD INVESTMENT THE PERIOD
------------ ------------ ------------ ------------
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charges)
<S> <C> <C> <C> <C>
Year Ended August 31,
1995.............................. 6.77% $1,067.70 6.28% $1,062.80
1994.............................. (.92)% $ 990.80 (1.50)% $ 985.00
1993.............................. 13.19% $1,131.90 12.62% $1,126.20
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
Inception (October 25, 1988) to
August 31, 1989................... 7.96% $1,079.60
Inception (October 21, 1994) to
August 31, 1995...................
<CAPTION>
AGGREGATE TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
Inception (September 30, 1985) to
August 31, 1995.................. 117.56% $2,175.60
Inception (October 25, 1988) to
August 31, 1995................... 59.37% $1,593.70
Inception (October 21, 1994) to
August 31, 1995...................
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended on August 31, 1995... 5.17% 4.89%
<CAPTION>
TAX-EQUIVALENT YIELD***
<S> <C> <C> <C> <C>
30 days ended on August 31, 1995... 7.18% 6.79%
<CAPTION>
CLASS C SHARES** CLASS D SHARES**
------------------------------- -------------------------------
REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
$1,000 OF $1,000 OF
INVESTMENT THE PERIOD INVESTMENT THE PERIOD
------------ ------------ ------------ ------------
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charges)
<S> <C> <C> <C> <C>
Year Ended August 31,
1995..............................
1994..............................
1993..............................
1992..............................
1991..............................
1990..............................
1989..............................
1988..............................
1987..............................
Inception (September 30, 1985) to
August 31, 1986...................
Inception (October 25, 1988) to
August 31, 1989...................
Inception (October 21, 1994) to
August 31, 1995................... 8.96% $1,089.60 9.42% $1,094.20
<CAPTION>
AGGREGATE TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
Inception (September 30, 1985) to
August 31, 1995..................
Inception (October 25, 1988) to
August 31, 1995...................
Inception (October 21, 1994) to
August 31, 1995................... 7.96% $1,079.60 5.04% $1,050.40
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended on August 31, 1995... 4.78% 5.08%
<CAPTION>
TAX-EQUIVALENT YIELD***
<S> <C> <C> <C> <C>
30 days ended on August 31, 1995... 6.64% 7.06%
</TABLE>
- ---------------
* Information as to Class A shares is presented only for the period October
25, 1988 to August 31, 1995. Prior to October 25, 1988, no Class A shares
were publicly issued.
** Information as to Class C and Class D shares is presented only for the
period October 21, 1994 (commencement of operations) to August 31, 1995.
Prior to October 21, 1994, no Class C or Class D shares had been 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 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.
51
<PAGE> 106
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 are 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 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
52
<PAGE> 107
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, Class
B, Class C and Class D shares of the Fund, based on the value of the Fund's net
assets and number of shares outstanding as of August 31, 1995, is set forth
below.
<TABLE>
<CAPTION>
AUGUST 31, 1995
----------------------------------------------------------
CLASS A CLASS B CLASS C CLASS D
----------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Net Assets............................. $44,228,256 $616,198,905 $3,130,524 $3,846,498
========== =========== ========= =========
Number of Shares Outstanding........... 3,880,999 54,055,554 274,709 337,469
========== =========== ========= =========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)......................... $ 11.40 $ 11.40 $ 11.40 $ 11.40
Sales Charge (for Class A and Class D
shares: 4.00% of offering price
(4.17% of net asset value per
share))*............................. .48 ** ** .48
----------- ------------ ---------- ----------
Offering Price......................... $ 11.88 $ 11.40 $ 11.40 $ 11.88
========== =========== ========= =========
</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 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.
53
<PAGE> 108
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's Transfer Agent. The
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts. See
"Management of the 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 December 1, 1995.
54
<PAGE> 109
APPENDIX I
ECONOMIC AND OTHER CONDITIONS IN CALIFORNIA
The following information is a brief summary of factors affecting the
economy of the State and does not purport to be a complete description of such
factors. Other factors will affect issuers. The summary is based primarily upon
one or more publicly available offering statements relating to debt offerings of
state issuers, however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.
ECONOMIC CONDITIONS
The economy of the State of California (sometimes referred to as the
"State") is the largest among the 50 states and one of the largest in the world.
Total employment is about 14 million, with major employment in the agriculture,
manufacturing, high technology, services, trade, entertainment and construction
sectors. Total gross domestic product of about $835 billion in 1994 was larger
than all but six nations in the world.
California's July 1, 1994 population of over 32 million represented over 12
percent of the total United States population. The official 1990 Census
population was 29,760,021 as of April 1, 1990, which represented an increase of
over 6 million persons, or 26 percent, during the decade of the 1980's. As of
the April 1, 1990 census, the median age of California's population was 31.5
years, younger than the 1990 U.S. median of 32.9 years.
California's population is concentrated in metropolitan areas. As of the
April 1, 1990 Census, 96 percent resided in the 23 Metropolitan Statistical
Areas in the State. Overall, California's population per square mile was 191 in
1990. As of July 1, 1994, 69 percent of the population of the State was located
in the two consolidated Metropolitan Statistical Areas in California. The
5-county Los Angeles area accounted for 48 percent, with 15.6 million residents.
The 10-county San Francisco Bay Area represented 21 percent, with a population
of 6.7 million.
Recent studies indicate changes in the State's population dynamics. Since
1990, population growth has shifted to depend on births and foreign immigration.
Net movements within the U.S. were negative during the State's economic
recession in 1991-94, but domestic immigration to the State has increased as the
State's economy has improved. The population is expected to become more
ethnically diverse into the next century, with the Latino and Asian populations
growing faster than other groups.
California. Starting in mid-1990, the State entered a sustained economic
recession, somewhat later than the rest of the nation. It was the most severe
recession in the State since the 1930's, with job losses estimated at over
800,000, particularly in the manufacturing (predominately aerospace), services
and construction sectors. The greatest effects were felt in Southern California.
A significant portion of these losses are linked to post-Cold War cuts in the
federal defense budget and military base closures. The trough of the recession
is estimated to have occurred in late 1993, again later than for the nation as a
whole. Although a steady recovery has been underway since 1994, pre-recession
employment levels are not expected to be reached until later in the decade.
Northridge Earthquake. On January 17, 1994, a major earthquake measuring
an estimated 6.8 on the Richter Scale struck the Los Angeles metropolitan area,
centered in the Northridge area of the City of Los Angeles. Significant property
damage, estimated at $15-20 billion, occurred to private and public facilities
in a
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four-county area including northern Los Angeles County, Ventura County and parts
of Orange and San Bernardino Counties. These counties were declared as State and
federal disaster areas by January 18. Much of this damage will be compensated by
insurance or government aid; although the remaining losses total several billion
dollars, this amount is small compared to the overall wealth of the region. The
effects of the earthquake are not expected to have a material impact on the
State's overall economic performance.
The State. In the years following enactment of the federal Tax Reform Act
of 1986, and conforming changes to the State's tax laws, taxpayer behavior
became much more difficult to predict, and the State experienced a series of
fiscal years in which revenue came in significantly higher or lower than
original estimates. The 1989-90 Fiscal Year ended with revenues below estimates,
so that the State's budget reserve (the Special Fund for Economic Uncertainties
or "SFEU") was fully depleted by June 30, 1990. This date essentially coincided
with the start of the current recession, which severely affected State General
Fund revenues, and increased expenditures above initial budget appropriations
due to greater health and welfare costs. The State's budget problems in recent
years have also been caused by a structural imbalance which has been identified
by the current and previous Administrations. The largest General Fund
Programs --K-14 education, health, welfare and corrections --were increasing
faster than the revenue base, driven by the State's rapid population growth.
These pressures will continue as population trends maintain strong demand for
health and welfare services, as the school age population continues to grow, and
as the State's corrections program responds to a "Three Strikes" law enacted in
1994, which requires mandatory life prison terms for certain third-time felony
offenders.
As a result of these factors and others, from the late 1980's until
1992-93, the State had a period of budget imbalance. During this period,
expenditures exceeded revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the SFEU approaching $2.8 billion
at its peak at June 30, 1993. Starting in the 1990-91 Fiscal Year and for each
fiscal year thereafter, each budget required multibillion dollar actions to
bring projected revenues and expenditures into balance and to close large
"budget gaps" which were identified. Despite budget actions by the Legislature,
the effects of the recession led to large, unanticipated deficits in the budget
reserve, the SFEU, as compared to projected positive balances. By the 1993-94
Fiscal Year, the accumulated deficit was so large that it was impractical to
budget to retire it in one year, so a two-year program was implemented, using
the issuance of revenue anticipation warrants to carry a portion of the deficit
over the end of the fiscal year. When the economy failed to recover sufficiently
in 1993-94, a second two-year plan was implemented in 1994-95.
Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts "borrowed" from
future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. The State's cash condition became so serious in late spring of 1992
that the State Controller was required to issue revenue anticipation warrants
maturing in the following fiscal year in order to pay the State's continuing
obligations. The State was forced to rely increasingly on external debt markets
to meet its cash needs, as a succession of notes and warrants were issued in the
period from June 1992 to July 1994, often needed to pay previously maturing
notes or warrants. These borrowings were used also in part to spread out the
repayment of the accumulated budget deficit over the end of a fiscal year.
The 1994-95 Fiscal Year represented 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 had
already been made in the last three years. The Governor's Budget Proposal, as
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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 set
forth revenue and expenditure forecasts and revenue and expenditure proposals
which result in operating surpluses for the budget for both 1994-95 and 1995-96,
and lead to the elimination of the accumulated budget deficit, estimated at
about $1.8 billion at June 30, 1994, by June 30, 1996.
Reports by the Department of Finance in May, 1995 indicate that, with
economic recovery well underway in the State, General Fund revenues for the
entire 1994-95 Fiscal Year were above projections, and expenditures were below
projections because of slower than anticipated health/welfare caseload growth
and school enrollments. The aggregate effect improved the budget picture by
about $500 million, leaving an estimated budget deficit of about $630 million at
June 30, 1995.
Analysis of the federal Fiscal Year 1995 budget by the Department of
Finance indicates that about $98 million was appropriated for California to
offset costs of incarceration of illegal immigrants, less than the $356 million
which was assumed in the State's 1994-95 Budget Act. Because of timing
considerations in applying for these federal funds, the Department of Finance
estimates that about $33 million of these funds will have been received during
the State's 1994-95 Fiscal Year, with the balance received in the current fiscal
year. It does not appear that the federal budget contains any of the additional
$400 million in funding for refugee assistance and health costs which were also
assumed in the 1994-95 Budget Act.
Pursuant to the Budget Adjustment Law (the "Law"), the State Controller was
required to make a report by November 15, 1994 on whether the projected cash
resources for the General Fund as of June 30, 1995 would decrease more than $430
million from the amount projected by the State in its Official Statement in
July, 1994 for the sale of $4,000,000,000 of Revenue Anticipation Warrants. On
November 15, 1994, the State Controller issued the report on the State's cash
position required by the Law. The report indicated that the cash position of the
General Fund on June 30, 1995 would be $581 million better than was estimated in
the July, 1994 cash flow projections and therefore, no budget adjustment
procedures will be invoked for the 1994-95 Fiscal Year.
The second step in the process was for the Director of Finance to include
updated cash-flow statements for the 1994-95 and 1995-96 Fiscal Years in the May
revision to the 1995-96 Fiscal Year budget proposal and for the State Controller
to either concur with these updated statements or provide a report to the
Governor and the Legislature identifying specific corrections, objections or
concerns and the State Controller's estimate of the cash condition of the
General Fund for the 1994-95 and 1995-96 Fiscal Years. On June 1, 1995, the
State Controller issued a report assessing the May 1995 Revision of the
Governor's Budget (the "May Revision"). The May Revision had projected that by
June 30, 1996, the General Fund would have about $1.8 billion in borrowable
resources. The State Controller noted that this estimate was based on a number
of assumptions, which might not be fulfilled, including a relatively high
estimate of economic growth, reliance on a level of federal funds that might not
be forthcoming and federal government actions regarding welfare and health
waivers that might not be approved, and possible costs from ongoing litigation.
The State Controller projected that, in a "worst-case" scenario where all the
May Revision estimates were found to be too optimistic, the $1.8 billion cushion
of cash resources could disappear and a $500 million deficit would result,
forcing the "trigger" to be pulled on October 15.
The third step in the process occurred on October 15, 1995, when the State
Controller, in conjunction with the Legislative Analyst's Office, reviewed the
estimated cash condition of the General Fund for the
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1995-96 Fiscal Year. The State Controller estimates that the General Fund would
not have negative internal cash resources on June 30, 1996 (i.e., external
borrowing would be needed to pay all obligations due) (the "October Report"). If
a cash shortfall had been identified by the State Controller, the State
Legislature would have been required to enact legislation providing for
sufficient General Fund expenditure reductions, revenue increases, or both.
1995-96 Budget Act. On January 10, 1995, the Governor presented his
1995-96 Fiscal Year Budget Proposal (the "Proposed Budget"). Two of the
principal features of the Proposed Budget were a phased, 15% cut in personal
income and corporate taxes, and a further expansion of the "realignment" process
to transfer more responsibility and funding sources for certain health and
welfare programs to local governments. Neither of these proposals was approved
by the Legislature. As a result of the improving economy, with resulting
improved revenue and caseload estimates, the State entered the 1995-96 Budget
negotiations with the smallest nominal "budget gap" to be closed in many years.
The 1995-96 Budget Act was signed by the Governor on August 3, 1995. The
Budget Act projects General Fund revenues and transfers of $44.1 billion, a 3.5
percent increase from the prior year. Expenditures are budgeted at $43.4
billion, a 4 percent increase. The Department of Finance projects that, after
repaying the last of the carryover budget deficit, there will be a positive
balance of $28 million in the budget reserve, the SFEU at June 30, 1996. The
Budget Act also projects Special Fund revenues of $12.7 billion and appropriates
Special Fund expenditures of $13.4 billion.
Subsequent Developments. Reports from the Department of Finance indicate
that State General Fund revenues through the first four months of the 1995-96
fiscal year were about $676 million, or 5.4%, above Budget Act projections. For
the four months, personal income tax (primarily estimated tax payments) were
$261 million (4.6%) above projection; sales and use taxes were $151 million
(3.5%) above projection, and bank and corporation taxes (also primarily
estimated tax payments) were $182 million (12.7%) above projection.
The State Controller's October Report, while finding no need to impose
automatic budget cuts, noted a number of areas where there was likely to be a
divergence from the original budget estimates. On the positive side, the State
Controller noted that improving economic conditions were leading to improved
cash receipts. On the negative side, the October Report estimated that federal
actions to allow health and welfare cuts and to reimburse the State for illegal
immigrant costs were not likely to provide as much money as had been planned,
and that Proposition 98 expenditures for K-14 schools had been underestimated.
In addition, the State Controller reported that an annual review of internal
borrowable resources resulted in a $705 million increase of estimated available
internal borrowable resources. In total, therefore, the State Controller
estimated that the State's cash position on June 30, 1996 would be about $500
million worse than the estimate of $1.9 billion of available internal cash
resources included in the original budget, but still large enough to avoid the
Budget Adjustment Law cuts.
Orange County Bankruptcy. On December 6, 1994, Orange County, California
(the "County"), together with its pooled investment funds (the "Funds") filed
for protection under Chapter 9 of the federal Bankruptcy Code, after reports
that the Funds had suffered significant market losses in their investments,
causing a liquidity crisis for the Funds and the County. More than 180 other
public entities, most of which, but not all, are located in the County, were
also depositors in the Funds. The County has reported the Funds' loss at about
$1.54 billion, or about 23% of their initial deposits of approximately $7.5
billion. Many of the entities
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which deposited moneys in the Funds, including the County, faced interim and/or
extended cash flow difficulties because of the bankruptcy filing and may be
required to reduce programs or capital projects.
On May 2, 1995, the United States Bankruptcy Court approved a settlement
agreement covering claims of the other participating entities against the County
and the Funds. Most participants have received in cash 80% (90% for school
districts) of their Funds' investment; the balance is to be paid in the future.
The County succeeded in deferring, by consent of the holders thereof, until June
30, 1996, the repayment of $800 million of short-term obligations due in July
and August, 1995; these notes are, however, considered to be in default by
Moody's and Standard & Poor's. On June 27, 1995, County voters turned down a
proposal for a temporary 0.5% increase in the local sales tax to replace
revenues lost after the Funds' investment losses. It is anticipated that a
recovery plan (the "Plan") including, among others, the County and participants
in the Funds will be arrived at in the near future. The Plan has been approved
by the State Legislature and the Governor.
The State has no existing obligation with respect to any outstanding
obligations or securities of the County or any of the other participating
entities. However, in the event the County is unable to maintain County
administered State programs because of insufficient resources, it may be
necessary for the State to intervene, although no prediction can be made what,
if any, action may occur.
LOCAL GOVERNMENTS
The primary units of local government in California are the counties,
ranging in population from 1,300 (Alpine) to over 9,000,000 (Los Angeles).
Counties are responsible for the provision of many basic services, including
indigent healthcare, welfare, courts, jails and public safety in unincorporated
areas. There are also about 480 incorporated cities, and thousands of other
special districts formed for education, utility and other services. The fiscal
condition of local governments has been constrained since the enactment of
"Proposition 13" in 1978, which reduced and limited the future growth of
property taxes, and limited the ability of local governments to impose other
taxes. Counties, in particular, have had fewer options to raise revenues than
many other local government entities, and have been required to maintain many
services.
In the aftermath of Proposition 13, the State provided aid from the General
Fund to make up some of the loss of property tax moneys, including taking over
the principal responsibility for funding local K-12 schools and community
colleges. Under the pressure of the recent recession, the Legislature has
eliminated the remnants of this post-Proposition 13 aid to entities other than
K-14 education districts, although it has also provided additional funding
sources (such as sales taxes) and reduced mandates for local services. Many
counties continue to be under severe fiscal stress. While such stress has in
recent years most often been experienced by smaller, rural counties, larger
urban counties, such as Los Angeles, have also been affected.
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,
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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 occurs in an amount equal to the
revenues received by such entity attributable to the tax levied in violation of
the initiative, and (viii) permitted those provisions to be amended exclusively
by the voters of the State of California.
On September 28, 1995 the California Supreme Court upheld the
constitutionality of the provision requiring a two-thirds vote in order for a
local government to impose a "special tax." Although the Supreme Court has yet
to rule on the provision requiring a majority vote for a "general tax," it
appears the Supreme Court is favorably disposed to uphold that portion of
Proposition 62 as well. In that event, a number of taxes currently being
collected (especially by counties and general law cities) would be invalidated.
Prior collection of such taxes may also be subject to claims for refund unless
the Supreme Court chooses to apply its ruling prospectively. The California
Supreme Court has yet to consider the validity of Proposition 62 to charter
cities.
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 spend 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
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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. The State Legislative Analyst
estimates a revenue reduction of $300 million per year ($200 million in
1992-93).
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
Proposition 187. On November 8, 1994 the voters approved Proposition 187,
an initiative statute ("Proposition 187"). Proposition 187 specifically
prohibits public funding of social services, health care services and public
school education for the benefit of any person not verified as either a United
States citizen or a person legally admitted to the United States. Among the
provisions in Proposition 187 the measure requires, commencing January 1, 1995,
that every school district in the state verify the legal status of every child
enrolling in the district for the first time. By January 1, 1996, each school
district must also verify the legal status of children already enrolled in the
district and of all parents or guardians of all students. If the district
"reasonably suspects" that a student, parent or guardian is not legally in the
United States, that district must report the student to the United States
Immigration and Naturalization Service and certain other parties. The
Legislative Analyst estimates that verification costs could be in the tens of
millions of dollars on a statewide level (including verification costs incurred
by other local governments) with first-year costs potentially in excess of $100
million.
The reporting requirements may violate the Family Educational Rights and
Privacy Act ("FERPA"), which generally prohibits schools that receive federal
funds from disclosing information in student records without parental consent.
Compliance with FERPA is a condition of receiving federal education funds, which
total $2.3 billion annually to California school districts. The Secretary of the
United States Department of Education has indicated that the reporting
requirement in Proposition 187 could jeopardize the ability of school districts
to receive these funds.
Opponents of Proposition 187 have filed at least eight lawsuits challenging
the constitutionality and validity of the measure. A United States District
Court judge overseeing four of the lawsuits has granted an injunction enjoining
the implementation of most of the provisions of Proposition 187, pending a trial
on the merits.
Pending Litigation. The State is a party to numerous legal proceedings,
many of which normally occur in governmental operations. Some of the
more-significant lawsuits pending against the State are described herein.
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The State is a defendant in 12 lawsuits involving the exclusion of small
business stock gains from preference tax and in some cases, also from taxation.
The lead cases are Mervin Morris v. Franchise Tax Board and James Lennane v.
Franchise Tax Board. The majority of the remaining cases had been deferred
pending the outcome of the Morris and Lennane cases. The Supreme Court has ruled
against the State in Lennane but has not yet ruled in Morris. The State will
lose at least $80 million as a result of the Lennane decision.
The State has lost several tax cases relating to the State's method of
determining the tax on gross health insurance premiums. The loss to the State
will be approximately $200 million.
In Parr v. State of California, a complaint was filed in federal court
claiming that payment of wages in registered warrants violated the Fair Labor
Standards Act ("FLSA"). The federal court held that the issuance of registered
warrants does violate the FLSA but subsequently withdrew its order. Further
proceedings are uncertain at this time. If the State loses, the maximum amount
of damages could be approximately $500 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.
In another case, the State is a defendant in Long Beach Unified School
District v. State of California. In this case, the school district seeks
reimbursement for voluntary desegregation costs incurred in the implementation
of California Department of Education guidelines. The years of reimbursement are
from fiscal year 1977-78 and each fiscal year thereafter to the present. The
district prevailed in a superior court, and the case has been decided by a State
appellate court against the State. A petition for review was denied and the
superior court judgment has become final, but the court retains jurisdiction to
oversee payment. The State anticipates that the unfavorable outcome will affect
pending claims by other school districts, and the total loss could be in excess
of $300 million.
A federal Court of Appeals in the case of Deanna Beno et al. v. Donna
Shalala, et al., reversing a trial court ruling in favor of the State, recently
determined that the Secretary of the United States Department of Health and
Human Services violated the federal Administrative Procedure Act when she
approved California's Assistance Payment Demonstration Project, which, in part,
granted California a waiver from complying with requirements for state
participation in the federal program for medical assistance (Medicaid). The
waiver had allowed California to reduce payments under the Aid to Families with
Dependent Children program (AFDC) below 1988 payment levels without violating
Medicaid requirements relating to maintenance of AFDC payment levels. California
had relied, in part, on the waiver to reduce state AFDC payments in 1992, 1993
and 1994. The Court of Appeals remanded the case to the trial court with
instructions to remand the demonstration project to the Secretary for additional
consideration of objections raised by the plaintiffs. The effect of the court's
decision on California is uncertain at this time.
One of the features of the 1994-95 Budget Act is a 2.3 percent reduction in
AFDC payments. In Welch v. Anderson, on August 19, 1994, the San Francisco
Superior Court issued a preliminary injunction against the California Director
of Social Services to prevent the 2.3 percent AFDC cuts from becoming effective
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September 1, 1994. While September cuts were already in process and could not be
halted, the court ordered the cuts to be restored. The preliminary injunction
has been appealed and the case on the merits remains pending.
The State is involved in two lawsuits related to contamination at the
Stringfellow toxic waste site. In one suit, the State is one of approximately
130 defendants in Penny Newman v. J. B. Stringfellow, et. al. in which 3,800
plaintiffs are claiming damages of $850 million arising from contamination at
the Stringfellow toxic waste site. The State is a defendant because it chose the
site and approved the deposit of toxic wastes. Seventeen of the 3,800 plaintiffs
have litigated their claims; in half of these cases plaintiffs' verdicts in the
total amount of $159,000 were received and in the remaining cases verdicts were
entered for the State. The other cases have been settled for $13.5 million. In
the separate suit described in United States, People of the State of California
v. J. B. Stringfellow, Jr., et al., the State has been found liable by the
District Court on the counterclaim. The amount of liability is still being
litigated, although allocation of liability has been determined by the trial
court, including an allocation of liability to the State.
The State is a defendant in a coordinated action involving 3,000 plaintiffs
seeking recovery for damages caused by the Yuba River flood of February 1986.
The trial court has found liability in inverse condemnation and awarded damages
of $500,000 to 12 sample plaintiffs. Potential lability to the remaining 300
plaintiffs, from claims filed, ranges form $800 million to $1.5 billion. An
appeal has been filed.
In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. As part of the
negotiations leading to the 1995-96 Budget Act, an oral agreement was reached to
settle this case. It is expected that a formal settlement reflecting these
conditions will be entered into in the near future.
The oral agreement provides that both the State and K-14 schools share in
the repayment of prior years' emergency loans to schools. Of the total $1.76
billion in loans, the State will repay $935 million, while schools will repay
$825 million. The State share of the repayment will be reflected as expenditures
above the current Proposition 98 base calculation. The schools' share of the
repayment will count as appropriations that count toward satisfying the
Proposition 98 guarantee, or from "below" the current base. Repayment are spread
over the eight-year period of 1994-95 through 2001-02 to mitigate any adverse
fiscal impact. Once a court settlement is reached, and the Director of Finance
certifies that such a settlement has occurred, $360 million in appropriations to
schools will be disbursed in August 1996.
The State is involved in a case concerning the default by Triad Healthcare
on a $167 million loan guaranteed by the Cal-Mortgage Loan Insurance Division of
the Office of Statewide Health Planning and Development (Cal-Mortgage). Monies
for the loan were raised through the sale of Certificates of Participation and
Cal-Mortgage insured the debt service payments. Since July 1993, Triad has
failed to make its monthly debt service payments; therefore, the reserve account
of the bonds has been used to make the payments. Once the reserve account is
exhausted, additional debt service payments would be made from the Health
Facility Construction Loan Insurance Fund as they become due. However, if there
is any shortfall in this fund, the State's General Fund would be used to make up
the difference.
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In Jernigan & Burleson v. State, filed in federal district court, the
prison inmate plaintiffs claim they are entitled to minimum wages while working
for the Prison Industry Authority. The inmates claims the State has violated the
Fair Labor Standards Act (the "FLSA"). Plaintiffs are seeking back pay for the
period from August 1990 onward, and liquidated damages, for a total of
approximately $350 million. In June 1995, the district court ruled that the
inmates are not employees under the FLSA. The decision has been appealed to the
Ninth Circuit Court of Appeals.
Additional lawsuits, challenge the transfer of moneys from special fund
accounts within the State Treasury to the State's General Fund pursuant to the
Budget Acts of 1991, 1992, 1993 and 1994. Plaintiffs in the two cases titled
Abramovitz, et al. v. Wilson, et al., filed in State and federal court, seek to
have the transfers reversed and the moneys, allegedly totaling approximately
$400 million, returned to the special funds. Plaintiffs in the case of Kurt
Hathaway, et. al. v. Wilson, filed in State court, seek to reverse transfers of
money from special fund accounts to the State's General Fund authorized in the
1994 and 1995 Budget Acts, allegedly totaling approximately $370 million. The
State disputes both liability and the amount claimed. In the case of
Professional Engineers in California Government ("PECG") v. Wilson, several
State employees' unions have challenged transfers made from special funds to the
general fund pursuant to the Budget Acts of 1993, 1994 and 1995 and seek
reimbursement of over $400 million to these special funds.
In the case of Board of Administration, California Public Employees'
Retirement System, et al. v. Pete Wilson, Governor, et al., plaintiffs
challenged the constitutionality of legislation which deferred payment of the
State's employer contribution to the Public Employees' Retirement System
beginning in Fiscal Year 1992-93. On January 11, 1995, the Sacramento County
Superior Court entered a judgment finding that the legislation
unconstitutionally impaired the vested contract rights of PERS members. The
judgment provides for issuance of a writ of mandate directing State defendants
to disregard the provisions of the legislation, to implement the statute
governing employer contributions that existed before the changes in the
legislation found to be constitutional, and to transfer to PERS the 1993-94 and
1994-95 contributions that are unpaid to date. The State defendants have
appealed.
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APPENDIX II
RATINGS OF MUNICIPAL BONDS
DESCRIPTION OF MUNICIPAL BOND RATINGS OF MOODY'S INVESTORS SERVICE, INC.
("MOODY'S")
<TABLE>
<S> <C>
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge".
Interest payments are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds. They
are rated lower than the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be of greater amplitude
or there may be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payment and principal security
appear adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot
be considered as well assured. Often the protection of interest and principal payments
may be very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can
be regarded as having extremely poor prospects of ever attaining any real investment
standing.
</TABLE>
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1 and B1.
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<PAGE> 120
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 RATINGS GROUP
("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.
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<PAGE> 121
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
<TABLE>
<S> <C>
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 Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on balance, as
B predominately speculative with respect to capacity to pay interest and repay
CCC principal in accordance with the terms of the obligations. "BB" indicates the
CC lowest degree of speculation and "C" the highest degree of speculation. While
C 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.
</TABLE>
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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<PAGE> 122
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:
<TABLE>
<S> <C>
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.
</TABLE>
A Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer 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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<PAGE> 123
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 Standard & Poor's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date information to permit a judgment to be formed; if a bond
is called for redemption; or for other reasons.
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.
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Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
<TABLE>
<S> <C>
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.
</TABLE>
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:
<TABLE>
<S> <C>
Improving Up Arrow
Stable Left Arrow Right Arrow
Declining Down Arrow
Uncertain Up-Down Arrow
</TABLE>
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.
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Bonds that have the same rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect the
differences in degrees of credit risk.
<TABLE>
<S> <C>
BB Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD and D Bonds are in default on interest and/or principal payments. Such bonds are
extremely speculative and should be valued on the basis of their ultimate
recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D"
represents the lowest potential for recovery.
</TABLE>
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.
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Fitch short-term ratings are as follows:
<TABLE>
<S> <C>
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.
</TABLE>
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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, 1995, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and the financial highlights are the responsibility
of the 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, 1995 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
California Municipal Bond Fund of Merrill Lynch California Municipal Series
Trust as of August 31, 1995, the results of its operations, the changes in its
net assets, and the financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
September 29, 1995
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<PAGE> 129
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California--98.5%
<S> <S> <C> <S> <C>
AAA Aaa $ 3,000 Anaheim, California, Public Financing Authority, Tax Allocation Revenue
Bonds, RITES, 8.745% due 12/28/2018 (c)(j) $ 3,244
Antioch, California, Improvement Bonds (1915 Assessment District No. 27--
Lone Tree):
NR* NR* 630 Series D, 6.20% due 9/02/2002 641
NR* NR* 670 Series D, 6.40% due 9/02/2003 686
NR* NR* 4,975 Series D, 7.30% due 9/02/2013 5,129
NR* NR* 4,000 Series E, 7.125% due 9/02/2016 4,086
AAA Aaa 3,140 Brea, California, Public Financing Authority, Tax Allocation Revenue Bonds
(Redevelopment Project), Series A, 6.75% due 8/01/2022 (c) 3,309
AAA Aaa 2,025 Brentwood, California, Unified School District Revenue Bonds, 6.85%
due 8/01/2016 (d) 2,173
A1+ VMIG1++ 700 California Health Facilities Financing Authority Revenue Bonds (Catholic
Health Care), VRDN, Series C, 3.40% due 7/01/2020 (b)(c) 700
California Health Facilities Financing Authority Revenue Bonds, Series A:
AA Aa3 16,770 (Kaiser Permanente), 7% due 10/01/2018 17,851
AAA Aaa 4,350 (Kaiser Permanente), 7% due 10/01/2018 (c) 4,738
BB Ba 5,150 Refunding (Good Samaritan Health System), 7.50% due 5/01/2015 5,183
AAA Aaa 4,085 Refunding (San Diego Hospital Association), 6.20% due 8/01/2020 (c) 4,126
AAA Aaa 4,000 (Scripps Memorial Hospital), 6.25% due 10/01/2013 (c) 4,060
NR* A 5,780 (Scripps Research Institute), 6.625% due 7/01/2014 5,962
California HFA, Home Mortgage Revenue Bonds:
AA- Aa 5,080 AMT, Series A, 7.70% due 8/01/2030 5,381
AA- Aa 535 AMT, Series B, 8% due 8/01/2029 570
AA- Aa 10,200 AMT, Series F-1, 7% due 8/01/2026 10,639
AA- Aa 855 AMT, Series G, 8.15% due 8/01/2019 914
AA- Aa 2,205 Series A, 8.125% due 8/01/2019 2,373
AA- Aa 3,085 Series D, 7.25% due 8/01/2017 3,287
California HFA, Revenue Bonds, AMT:
AA- Aa 4,250 RIB, 8.777% due 8/01/2023 (j) 4,303
AAA Aaa 980 Series A, 7.20% due 2/01/2026 (c) 1,032
California Pollution Control Financing Authority, Solid Waste Disposal
Revenue Bonds (Shell Oil Co.--Martinez Project), VRDN, AMT (b):
A1+ VMIG1++ 700 Series A, 3.60% due 10/01/2024 700
A1+ VMIG1++ 300 Series B, 3.60% due 12/01/2024 300
</TABLE>
PORTFOLIO ABBREVIATIONS
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.
ACES SM Adjustable Convertible Extendable Securities
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
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
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<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (continued)
<S> <S> <C> <S> <C>
AA Aa $10,000 California State Department of Water Resources, Central Valley Project
Revenue Bonds (Water Systems), Series M, 5% due 12/01/2019 $ 8,707
A A1 2,000 California State, GO, UT, 10% due 2/01/2010 2,875
A A1 3,500 California State, GO, Various Purpose Bonds, UT, 5.90% due 4/01/2023 3,384
A+ A1 16,300 California State, GO, Veterans' Revenue Bonds, AMT, UT, Series AW, 7.70%
due 4/01/2009 17,698
California State Public Works Board, Lease Revenue Bonds:
A- A 10,675 (Department of Corrections--Monterey County), Series A, 7% due
11/01/2019 11,421
A- A 3,555 High Technology Facilities (San Jose Facilities), Series A, 7.75%
due 8/01/2006 4,100
A- A 7,000 (Various Community College Projects), 7% due 3/01/2019 7,469
AAA Aaa 10,625 (Various University of California Projects), Series A, 6.40% due
12/01/2016 (d) 10,998
A- A1 1,475 (Various University of California Projects), Series B, 6.625% due
12/01/2019 1,533
California Statewide Community Development Authority Revenue Bonds, COP:
AAA Aaa 5,360 (Good Samaritan Health System), 6.50% due 5/01/2024 (k) 5,547
AA Aa 4,750 (Saint Joseph Health System Group), 6.625% due 7/01/2021 4,972
A1 VMIG1++ 1,700 (Sutter Health Obligation Group), VRDN, 3.30% due 7/01/2015 (b)(d) 1,700
AAA Aaa 5,000 Central Coast, California, Water Authority Revenue Bonds
(State Water Project Regional Facilities), 6.60% due 10/01/2022 (d) 5,250
BBB NR* 1,000 Contra Costa County, California, Public Financing Authority,
Tax Allocation Revenue Refunding Bonds, Series A, 7.10% due 8/01/2022 1,033
Corona, California, COP, Corona Community:
AAA Aaa 1,915 8% due 3/01/2009 (a) 2,418
AAA Aaa 2,065 8% due 3/01/2010 (a) 2,606
AAA Aaa 2,230 8% due 3/01/2011 (a) 2,828
AAA Aaa 2,410 8% due 3/01/2012 (a) 3,067
AAA Aaa 2,605 8% due 3/01/2013 (a) 3,324
AAA Aaa 2,810 8% due 3/01/2014 (a) 3,592
AAA Aaa 3,035 8% due 3/01/2015 (i) 3,918
NR* Aaa 4,635 Cypress, California, S/F Residential Mortgage Revenue Refunding Bonds,
Series A, 7.10% due 1/01/2011(i) 4,944
A1+ VMIG1++ 600 Eastern Municipal Water District, California, Water and Sewer Revenue
Refunding Bonds, VRDN, COP, Series B, 3.35% due 7/01/2020 (b)(e) 600
AAA Aaa 5,000 El Cajon, California, Redevelopment Agency, Tax Allocation
(El Cajon Redevelopment Project), 6.60% due 10/01/2022 (d) 5,252
BBB+ NR* 3,600 Fontana, California, Redevelopment Agency, Tax Allocation Refunding
Bonds (Jurupa Hills Redevelopment Project), Series A, 7.20% due 10/01/2024 3,773
AAA Aaa 2,230 Irvine, California, Unified School District, Special Tax Community
Facilities Bonds (District No. 86-1), Series A, 8.10% due 11/15/2013 (c) 2,536
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 4,202
</TABLE>
76
<PAGE> 131
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (continued)
<S> <S> <C> <S> <C>
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 $ 5,100
NR* NR* 4,545 Long Beach, California, Special Tax Community Facilities, District No.3--
Pine Avenue, 6.375% due 9/01/2023 4,235
AAA Aaa 5,225 Los Angeles, California, Community Redevelopment Agency,
Housing Revenue Refunding Bonds, Series A, 6.45% due 7/01/2017 (d) 5,393
AAA Aaa 5,150 Los Angeles, California, Community Redevelopment Agency,
Tax Allocation Refunding Bonds (Bunker Hill), Series H, 6.50% due 12/01/2016 (f) 5,344
AAA Aaa 17,050 Los Angeles, California, Convention and Exhibition Center Authority,
COP, 9% due 12/01/2005 (a) 22,693
AA- Aa 10,000 Los Angeles, California, Department of Water and Power, Electric Plant
Revenue Bonds, Registered RITR, 8.522% due 2/01/2020 (j) 10,375
AAA Aaa 5,000 Los Angeles, California, Department of Water and Power, Waterworks Revenue
Bonds, 6.30% due 7/01/2024 (c) 5,122
Los Angeles, California, Harbor Department Revenue Bonds:
AAA NR* 14,000 7.60% due 10/01/2018 (i) 15,772
AA Aa 1,965 Series B, AMT, 6.60% due 8/01/2014 2,045
Los Angeles, California, Wastewater System Revenue Bonds (c):
AAA Aaa 2,000 Refunding, Series A, 5.70% due 6/01/2020 1,918
AAA Aaa 7,890 Series D, 6.625% due 12/01/2012 8,346
AAA Aaa 13,500 Los Angeles County, California, COP (Correctional Facilities Project), 6.50%
due 9/01/2013 (c) 13,975
NR* NR* 8,000 Los Angeles County, California, COP (Marina Del Rey), Series A, 6.50% due
7/01/2008 7,999
AAA Aaa 10,000 Los Angeles County, California, Metropolitan Transportation Authority,
Sales Tax Revenue Bonds (Proposition C--Second Senior), Series A, 5.50% due
7/01/2017 (d) 9,360
AA- Aaa 18,105 Los Angeles County, California, Transportation Commission, Sales Tax Revenue
Bonds, Series A, 6.90% due 7/01/2001 (a) 20,641
AAA Aaa 4,750 Marysville, California, Hospital Revenue Bonds (Fremont--Rideout Health Group),
Series A, 6.30% due 1/01/2022 (d) 4,837
Metropolitan Water District, Southern California, Waterworks Revenue Bonds:
AA Aa 3,000 6.625% due 7/01/2012 3,187
AA+ Aa 4,880 Refunding, 6.75% due 6/01/2022 5,036
AAA Aaa 2,000 Modesto, California, Health Facilities Revenue Bonds (Memorial Hospital
Association), Series A, 6.875% due 6/01/2021 (c) 2,125
AAA Aaa 5,635 Ontario, California, Redevelopment Financing Authority Revenue Bonds
(Cimarron Project No.1), 6.375% due 8/01/2020 (c) 5,776
AAA Aaa 20,300 Orange County, California, Local Transportation Authority,
Sales Tax Revenue Bonds, Second Series, 6.10% due 2/14/2011 (e) 20,665
A NR* 5,000 Palmdale, California, Civic Authority, Revenue Refunding Bonds
(Merged Redevelopment Project), Series A, 6.60% due 9/01/2034 5,262
A+ A1 8,000 Pasadena, California, COP, Refunding Bonds (Old Pasadena Parking Facility
Project), 6.25% due 1/01/2018 8,253
AAA Aaa 11,620 Pittsburg, California, Redevelopment Agency, Residential Mortgage Revenue Bonds,
9.60% due 6/01/2016 (i) 17,223
</TABLE>
77
<PAGE> 132
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (continued)
<S> <S> <C> <S> <C>
NR* NR* $ 4,890 Pleasanton, California, Joint Powers Financing Authority, Revenue Reassessment
Bonds, Sub-Series B, 6.75% due 9/02/2017 $ 4,925
AAA Aaa 1,000 Port Oakland, California, Port Revenue Bonds, AMT, Series E, 6.50% due
11/01/2016 (c) 1,030
Poway, California, Redevelopment Agency, Tax Allocation Revenue Refunding Bonds
(Paraguay Redevelopment Project) (e):
AAA Aaa 7,000 5.50% due 12/15/2023 6,499
AAA Aaa 3,800 5.75% due 12/15/2026 3,651
AAA Aaa 3,450 Rancho, California, Water District Financing Authority Revenue Bonds,
RITES, 9.199% due 9/11/2001 (a)(d)(j) 4,261
AAA Aaa 1,500 Redding, California, Electric System Revenue Bonds, COP, RIB, 8.65% due
7/01/2022(c)(j) 1,644
Redwood City, California, Public Financing Authority, Local Agency Revenue Bonds:
AAA Aaa 1,500 Refunding, Series A, 6.50% due 7/15/2011 (d) 1,592
A- NR* 2,500 Series B, 7.25% due 7/15/2011 2,696
A1+ VMIG1++ 2,600 Riverside County, California, COP (Riverside County Public Facilities),
ACES, Series A, 3.45% due 12/01/2015 (b) 2,600
Riverside County, California, Redevelopment Agency Bonds (Tax Allocation
Redevelopment Project), Series A:
BBB NR* 2,430 7.50% due 10/01/2026 2,590
AAA Aaa 3,000 Refunding, 5.625% due 8/01/2023 (c) 2,852
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) 3,094
AAA Aaa 5,335 Sacramento, California, City Financing Authority Revenue Bonds, 6.70% due
11/01/2001 (a) 6,060
Sacramento, California, Municipal Utilities District, Electric
Revenue Bonds:
AAA Aaa 5,000 INFLOS, 8.565% due 8/15/2018 (e)(j) 5,131
AAA Aaa 5,000 Series B, 6.375% due 8/15/2022 (c) 5,132
AA Aa 2,500 San Bernardino, California, Health Care System Revenue Bonds (Sisters of Charity),
Series A, 7% due 7/01/2021 2,689
SP1+ NR* 5,000 San Diego, California, Area Local Government Bonds, COP, TRAN, 4.75% due 10/18/1996 5,030
AAA Aaa 7,250 San Diego, California, IDR, Refunding (San Diego Gas & Electric),
Series C, 5.90% due 9/01/2018 (d) 7,107
San Francisco, California, City and County Airport Commission,
International Airport Revenue Bonds, Second Series (d):
AAA Aaa 3,240 AMT, Issue 6, 6.50% due 5/01/2018 3,371
AAA Aaa 8,000 AMT, Issue 6, 6.60% due 5/01/2020 8,412
AAA Aaa 8,500 Refunding, Issue 1, 6.30% due 5/01/2011 8,821
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 1,390
AAA Aaa 6,195 San Francisco, California, City and County Sewer Revenue Refunding Bonds,
5.375% due 10/01/2016 (e) 5,784
AAA Aaa 4,150 Santa Clara County, California, Electric Revenue Bonds, Series A, 6.50% due
7/01/2021 (c) 4,293
AAA Aaa 10,000 Santa Clara County, California, Financing Authority, Lease Revenue Bonds
(VMC Facility Replacement Project), Series A, 6.75% due 11/15/2020 (d) 10,705
</TABLE>
78
<PAGE> 133
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (concluded)
<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 $ 1,059
AAA Aaa 2,000 Santa Fe Springs, California, Redevelopment Agency, Tax Allocation
(Consolidated Redevelopment Project), Series A, 6.40% due 9/01/2022 (c) 2,065
Southern California Home Financing Authority, S/F Mortgage Revenue Bonds, AMT (h):
AAA NR* 4,175 Series A, 7.625% due 10/01/2023 4,445
AAA NR* 2,450 Series A, 7.35% due 9/01/2024 (g) 2,597
AAA NR* 1,040 Series B, 7.75% due 3/01/2024 (g) 1,101
AAA Aaa 5,000 Southern California Public Power Authority, Power Project Revenue Bonds (San
Juan Unit 3), Series A, 5% due 1/01/2020 (c) 4,352
AA+ VMIG1++ 4,100 Southern California Public Power Authority, Transmission Project, Revenue
Refunding Bonds (Southern Transmission Project), VRDN, 3.15% due 7/01/2019 (b)(d) 4,100
BBB+ NR* 21,930 Stanislaus, California, Waste-to-Energy Financing Agency, Solid Waste Facility
Revenue Refunding Bonds (Ogden Martin System, Inc. Project), 7.625% due 1/01/2010 23,401
AAA Aaa 4,000 Stockton, California, Revenue Bonds (Wastewater Treatment Plant Expansion),
COP, Series A, 6.80% due 9/01/2024 (e) 4,258
AAA Aaa 4,000 Tri-City, California, Hospital District Revenue Bonds (Tri-City Hospital), 7.50%
due 2/01/2017 (c) 4,526
University of California Revenue Bonds (Multiple Purpose Projects):
A- NR* 14,700 Refunding, Series A, 6.875% due 9/01/2002 (a) 16,858
AAA Aaa 8,000 Series D, 6.25% due 9/01/2012 (c) 8,238
AAA Aaa 6,000 Series D, 6.375% due 9/01/2019 (c) 6,159
AAA Aaa 11,845 Series D, 6.375% due 9/01/2024 (c) 12,126
West Covina, California, COP (Queen of the Valley Hospital):
A A 2,810 6.50% due 8/15/2019 2,803
A A 6,000 6.95% due 8/15/2023 6,310
AAA Aaa 6,000 West Sacramento, California, Redevelopment Agency, Tax Allocation Revenue Bonds
(West Sacramento Redevelopment Project), 6.25% due 9/01/2010 (c) 6,206
Puerto Rico--2.4%
A Baa1 5,000 Puerto Rico Commonwealth, GO, UT, 6.45% due 7/01/2017 5,169
A Baa1 10,465 Puerto Rico Commonwealth, Highway and Transportation Authority,
Highway Revenue Bonds, Series T, 6.625% due 7/01/2018 10,915
Total Investments (Cost--$638,499 )--100.9% 673,288
Liabilities in Excess of Other Assets--(0.9%) (5,884)
--------
Net Assets--100.0% $667,404
========
<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, 1995.
(c)MBIA Insured.
(d)AMBAC Insured.
(e)FGIC Insured.
(f)FSA Insured.
(g)FNMA Collateralized.
(h)GNMA Collateralized.
(i)Escrowed to Maturity.
(j)The interest rate is subject to change periodically and inversely
based upon prevailing market rates. The interest rate shown is the
rate in effect at August 31, 1995.
(k)CAPMAC Insured.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche
LLP.
See Notes to Financial Statements.
</TABLE>
79
<PAGE> 134
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$638,499,362)(Note 1a) $673,287,854
Cash 99,976
Receivables:
Securities sold $ 20,724,278
Interest 12,184,525
Beneficial interest sold 229,241 33,138,044
------------
Prepaid registration fees and other assets (Note 1e) 128,247
------------
Total assets 706,654,121
------------
Liabilities: Payables:
Securities purchased 36,423,400
Beneficial interest redeemed 1,146,312
Dividends to shareholders (Note 1f) 949,895
Investment adviser (Note 2) 307,096
Distributor (Note 2) 262,489 39,089,192
------------
Accrued expenses and other liabilities 160,746
------------
Total liabilities 39,249,938
------------
Net Assets: Net assets $667,404,183
============
Net Assets Class A Shares of beneficial interest, $.10 par value,
Consist of: unlimited number of shares authorized $ 388,100
Class B Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 5,405,555
Class C Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 27,471
Class D Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 33,747
Paid-in capital in excess of par 650,305,824
Accumulated realized capital losses on investments--net (Note 5) (16,973,155)
Accumulated distributions in excess of realized capital gains--net (6,571,851)
Unrealized appreciation on investments--net 34,788,492
------------
Net assets $667,404,183
============
Net Asset Value: Class A--Based on net assets of $44,228,256 and 3,880,999
shares of beneficial interest outstanding $ 11.40
============
Class B--Based on net assets of $616,198,905 and 54,055,554
shares of beneficial interest outstanding $ 11.40
============
Class C--Based on net assets of $3,130,524 and 274,709 shares of
beneficial interest outstanding $ 11.40
============
Class D--Based on net assets of $3,846,498 and 337,469 shares of
beneficial interest outstanding $ 11.40
============
See Notes to Financial Statements.
</TABLE>
80
<PAGE> 135
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the Year Ended
August 31, 1995
<S> <S> <C>
Investment Income Interest and amortization of premium and discount earned $ 45,693,141
(Note 1d):
Expenses: Investment advisory fees (Note 2) 3,828,093
Account maintenance and distribution fees--Class B (Note 2) 3,249,016
Transfer agent fees--Class B (Note 2) 292,378
Printing and shareholder reports 125,242
Professional fees 83,636
Registration fees (Note 1e) 78,769
Custodian fees 66,614
Accounting services (Note 2) 64,518
Trustees' fees and expenses 40,349
Transfer agent fees--Class A (Note 2) 19,780
Pricing fees 17,934
Account maintenance and distribution fees--Class C (Note 2) 8,263
Account maintenance fees--Class D (Note 2) 2,131
Transfer agent fees--Class D (Note 2) 847
Transfer agent fees--Class C (Note 2) 727
Other 14,609
------------
Total expenses 7,892,906
------------
Investment income--net 37,800,235
------------
Realized & Realized loss on investments--net (16,973,155)
Unrealized Gain Change in unrealized appreciation on investments--net 17,518,587
(Loss) on ------------
Investments Net Increase in Net Assets Resulting from Operations $ 38,345,667
- --Net (Notes 1b, ============
1d & 3):
See Notes to Financial Statements.
</TABLE>
81
<PAGE> 136
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 37,800,235 $ 43,908,000
Realized gain (loss) on investments--net (16,973,155) 4,109,882
Change in unrealized appreciation on investments--net 17,518,587 (61,534,369)
------------ ------------
Net increase (decrease) in net assets resulting from operations 38,345,667 (13,516,487)
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (3,035,857) (3,624,918)
Shareholders Class B (34,575,842) (40,283,082)
(Note 1f): Class C (69,364) --
Class D (119,172) --
Realized gain on investments--net:
Class A -- (1,039,120)
Class B -- (12,643,710)
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 (37,800,235) (64,162,681)
------------ ------------
Beneficial Net decrease in net assets derived from beneficial interest
Interest transactions (120,046,349) (21,161,878)
Transactions ------------ ------------
(Note 4):
Net Assets: Total decrease in net assets (119,500,917) (98,841,046)
Beginning of year 786,905,100 885,746,146
------------ ------------
End of year $667,404,183 $786,905,100
============ ============
See Notes to Financial Statements.
</TABLE>
82
<PAGE> 137
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
Class A
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1995 1994 1993 1992 1991
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 11.32 $ 12.38 $ 11.80 $ 11.44 $ 11.03
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .64 .68 .70 .72 .74
Realized and unrealized gain (loss) on
investments--net .08 (.78) .78 .41 .41
-------- -------- -------- -------- --------
Total from investment operations .72 (.10) 1.48 1.13 1.15
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.64) (.68) (.70) (.72) (.74)
Realized gain on investments--net -- (.19) (.20) (.05) --
In excess of realized gain on
investments--net -- (.09) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.64) (.96) (.90) (.77) (.74)
-------- -------- -------- -------- --------
Net asset value, end of year $ 11.40 $ 11.32 $ 12.38 $ 11.80 $ 11.44
======== ======== ======== ======== ========
Total Based on net asset value per share 6.77% (.92%) 13.19% 10.23% 10.73%
Investment ======== ======== ======== ======== ========
Return:*
Ratios to Expenses .65% .62% .63% .63% .64%
Average ======== ======== ======== ======== ========
Net Assets: Investment income--net 5.83% 5.65% 5.87% 6.26% 6.57%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 44,228 $ 60,017 $ 64,526 $ 46,556 $ 37,499
Data: ======== ======== ======== ======== ========
Portfolio turnover 53.40% 75.66% 61.24% 52.31% 116.09%
======== ======== ======== ======== ========
<FN>
*Total investment returns exclude the effect of sales loads.
See Notes to Financial Statements.
</TABLE>
83
<PAGE> 138
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class B
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1995 1994 1993 1992 1991
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 11.32 $ 12.38 $ 11.80 $ 11.44 $ 11.03
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .59 .61 .64 .67 .68
Realized and unrealized gain (loss) on
investments--net .08 (.78) .78 .41 .41
-------- -------- -------- -------- --------
Total from investment operations .67 (.17) 1.42 1.08 1.09
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.59) (.61) (.64) (.67) (.68)
Realized gain on investments--net -- (.19) (.20) (.05) --
In excess of realized gain on
investments--net -- (.09) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (.59) (.89) (.84) (.72) (.68)
-------- -------- -------- -------- --------
Net asset value, end of year $ 11.40 $ 11.32 $ 12.38 $ 11.80 $ 11.44
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 6.28% (1.50%) 12.62% 9.68% 10.18%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses, excluding account maintenance
Net Assets: and distribution fees .66% .63% .63% .63% .65%
======== ======== ======== ======== ========
Expenses 1.16% 1.13% 1.13% 1.13% 1.15%
======== ======== ======== ======== ========
Investment income--net 5.32% 5.15% 5.38% 5.76% 6.07%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $616,199 $726,888 $821,220 $729,569 $690,885
Data: ======== ======== ======== ======== ========
Portfolio turnover 53.40% 75.66% 61.24% 52.31% 116.09%
======== ======== ======== ======== ========
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period Oct. 21, 1994++
to Aug. 31, 1995
Increase (Decrease) in Net Asset Value: Class C Class D
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 10.94 $ 10.94
Operating ------------ ------------
Performance: Investment income--net .49 .54
Realized and unrealized gain on investments--net .46 .46
------------ ------------
Total from investment operations .95 1.00
------------ ------------
Less dividends from investment income--net (.49) (.54)
------------ ------------
Net asset value, end of period $ 11.40 $ 11.40
============ ============
Total Investment Based on net asset value per share 8.96%+++ 9.42%+++
Return:** ============ ============
Ratios to Expenses, excluding account maintenance and distribution fees .67%* .66%*
Average ============ ============
Net Assets: Expenses 1.27%* .76%*
============ ============
Investment income--net 5.04%* 5.59%*
============ ============
Supplemental Net assets, end of period (in thousands) $ 3,131 $ 3,846
Data: ============ ============
Portfolio turnover 53.40% 53.40%
============ ============
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
84
<PAGE> 139
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
four classes of shares under the Merrill Lynch Select Pricing SM
System. Shares of Class A and Class D are sold with a front-end
sales charge. Shares of Class B and Class C may be subject to a
contingent deferred sales charge. All classes of shares have
identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B, Class C and Class D
Shares bear certain expenses related to the account maintenance of
such shares, and Class B and Class C Shares also bear certain
expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to its
account maintenance and distribution expenditures. The following is
a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--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) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The 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 securities or the
intended purchase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Prepaid registration fees--Prepaid registration fees are charged
to 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.
85
<PAGE> 140
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
FAM is responsible for the management of the Fund's 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.
Pursuant to the distribution plans ("the Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.25%
Class C 0.25% 0.35%
Class D 0.10% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended August 31, 1995, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $2,220 $28,775
Class D $1,704 $20,537
For the year ended August 31, 1995, MLPF&S received contingent
deferred sales charges of $866,830 and $3,844 relating to
transactions in Class B and Class C Shares, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1995 were $360,260,804 and
$455,808,554, respectively.
Net realized and unrealized gains (losses) as of August 31, 1995
were as follows:
Realized Unrealized
Losses Gains
Long-term investments $(12,697,427) $ 34,788,492
Short-term investments (1,146,290) --
Financial futures
contracts (3,129,438) --
------------ -------------
Total $(16,973,155) $ 34,788,492
============ =============
86
<PAGE> 141
NOTES TO FINANCIAL STATEMENTS (concluded)
As of August 31, 1995, net unrealized appreciation for Federal
income tax purposes aggregated $34,788,492 of which $35,965,265
related to appreciated securities and $1,176,773 related to depre-
ciated securities. The aggregate cost of investments at August 31,
1995 for Federal income tax purposes was $638,499,362.
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest
transactions was $(120,046,349) and $(21,161,878) for the years
ended August 31, 1995 and August 31, 1994, respectively.
Transactions in shares of beneficial interest for each class were as
follows:
Class A Shares for the Year Dollar
Ended August 31, 1995 Shares Amount
Shares sold 356,036 $ 3,948,528
Shares issued to share-
holders in reinvestment of
dividends 110,995 1,224,562
----------- -------------
Total issued 467,031 5,173,090
Shares redeemed (1,889,907) (20,801,528)
----------- -------------
Net decrease (1,422,876) $ (15,628,438)
=========== =============
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 & 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 B Shares for the Year Dollar
Ended August 31, 1995 Shares Amount
Shares sold 4,055,625 $ 44,759,130
Shares issued to share-
holders in reinvestment
of dividends 1,364,078 15,067,056
----------- -------------
Total issued 5,419,703 59,826,186
Shares redeemed (15,559,912) (170,703,755)
Automatic conversion
of shares (22,131) (248,360)
----------- -------------
Net decrease (10,162,340) $(111,125,929)
=========== =============
Class B Shares for the Year Dollar
Ended August 31, 1994 Shares Amount
Shares sold 7,118,622 $ 84,446,664
Shares issued to shareholders
in reinvestment of dividends
& 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 C Shares for the Period
October 21, 1994++ to Dollar
August 31, 1995 Shares Amount
Shares sold 343,686 $ 3,830,307
Shares issued to share-
holders in reinvestment
of dividends 3,078 34,747
----------- -------------
Total issued 346,764 3,865,054
Shares redeemed (72,055) (813,364)
----------- -------------
Net increase 274,709 $ 3,051,690
=========== =============
++Commencement of Operations.
Class D Shares for the Period
October 21, 1994++ to Dollar
August 31, 1995 Shares Amount
Shares sold 383,812 $ 4,170,592
Automatic conversion
of shares 22,131 248,360
Shares issued to share-
holders in reinvestment of
dividends 7,710 86,300
----------- -------------
Total issued 413,653 4,505,252
Shares redeemed (76,184) (848,924)
----------- -------------
Net increase 337,469 $ 3,656,328
=========== =============
++Commencement of Operations.
5. Capital Loss Carryforward:
At August 31, 1995, the Fund had a net capital loss carryforward of
approximately $9,806,000, all of which expires in 2003. This amount
will be available to offset like amounts of any future taxable
gains.
87
<PAGE> 142
- -----
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................. 16
Trustees and Officers................. 16
Compensation of Trustees.............. 18
Management and Advisory
Arrangements........................ 18
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 and
Class C Shares...................... 26
Portfolio Transactions.................. 27
Determination of Net Asset Value........ 28
Shareholder Services.................... 29
Investment Account.................... 29
Automatic Investment Plans............ 30
Automatic Reinvestment of Dividends
and Capital Gains Distributions..... 30
Systematic Withdrawal Plans--Class A
and Class D Shares.................. 31
Exchange Privilege.................... 32
Distributions and Taxes................. 45
Environmental Tax..................... 48
Tax Treatment of Futures and Options
Transactions........................ 49
Performance Data........................ 49
General Information..................... 52
Description of Series and Shares...... 52
Computation of Offering Price Per
Share............................... 53
Independent Auditors.................. 53
Custodian............................. 53
Transfer Agent........................ 54
Legal Counsel......................... 54
Reports to Shareholders............... 54
Additional Information................ 54
Appendix I
Economic and Other Conditions in
California.......................... 55
Appendix II
Ratings of Municipal Bonds............ 65
Independent Auditors' Report............ 74
Financial Statements.................... 75
</TABLE>
Code #10328-1295
[MERRILL LYNCH LOGO]
Merrill Lynch
California Municipal
Bond Fund
Merrill Lynch California
Municipal Series Trust
STATEMENT OF
ADDITIONAL
INFORMATION
December 29, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 143
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
<TABLE>
<CAPTION>
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
<S> <C>
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>
<PAGE> 144
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 nine-year period
ended August 31, 1995 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, 1995.
Statement of Assets and Liabilities as of August 31, 1995.
Statement of Operations for the year ended August 31, 1995.
Statements of Changes in Net Assets for each of the years in the two-year
period ended August 31, 1995.
Financial Highlights for each of the years in the five-year period ended
August 31, 1995.
(b) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------
<S> <C>
1(a) -- Declaration of Trust of the Registrant, dated March 20, 1985.(a)
(b) -- Amendment to Declaration of Trust, dated July 25, 1985.(a)
(c) -- Amendment to Declaration of Trust, dated October 3, 1988.(a)
(d) -- Instrument establishing Merrill Lynch California Municipal Bond Fund (the
"Fund") as a series of Registrant.(a)
(e) -- Instrument establishing Class A and Class B shares of beneficial interest of
the Fund.(a)
(f) -- Amendment to Instrument establishing the Fund as a series of Registrant.(a)
(g) -- Amendment to Declaration of Trust, dated October 17, 1994 and instrument
establishing Class C and Class D shares of beneficial interest.
2 -- By-Laws of Registrant.(a)
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.(b)
5(a) -- Management Agreement between Registrant and Fund Asset Management, L.P.(a)
(b) -- Supplement to Management Agreement between Registrant and Fund Asset
Management, L.P.(d)
6(a) -- Form of Revised Class A Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected Dealers
Agreement).(d)
(b) -- Class B Shares Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc.(a)
(c) -- Form of Class C Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc. (including Form of Selected Dealers
Agreement).(d)
(d) -- Form of Class D Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc. (including Form of Selected Dealers
Agreement).(d)
(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.(c)
7 -- None.
8 -- Custody Agreement between Registrant and The Bank of New York.(a)
9 -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between Registrant and Merrill Lynch Financial Data Services,
Inc.(a)
10 -- Opinion of Brown & Wood, Counsel for the Registrant.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
12 -- None.
13 -- Certificate of Fund Asset Management, L.P.(a)
14 -- None.
</TABLE>
C-1
<PAGE> 145
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------
<C> <C> <S>
</TABLE>
<TABLE>
<C> <C> <S>
15(a) -- Amended and Restated Class B Shares Distribution Plan and Class B Shares
Distribution Plan Sub-Agreement.(c)
(b) -- Form of Class C Shares Distribution Plan and Class C Shares Distribution
Plan Sub-Agreement of the Registrant.(d)
(c) -- Form of Class D Shares Distribution Plan and Class D Shares Distribution
Plan Sub-Agreement of the Registrant.(d)
16(a) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class A Shares.(a)
(b) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class B Shares.(a)
(c) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class C Shares.
(d) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class D Shares.
17(a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
(d) -- Financial Data Schedule for Class D Shares.
</TABLE>
- ---------------
(a) Refiled pursuant to the Electronic Data Gathering, Analysis and Retrieval
("EDGAR") phase-in requirements.
(b) Reference is made to Article II, Section 2.3 and Articles V, VI, VIII, IX, X
and XI of the Registrant's Declaration of Trust, as amended, filed as
Exhibits 1(a), 1(b), 1(c) and 1(g) with Post-Effective Amendment No. 11 to
the Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933, as amended (the "Registration Statement"); 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 filed as Exhibits 1(d), 1(e) and 1(f),
respectively, with Post-Effective Amendment No. 11 to the Registration
Statement; and to Articles I, V and VI of the Registrant's By-Laws, filed as
Exhibit 2 with Post-Effective Amendment No. 11 to the Registration
Statement.
(c) Filed on December 23, 1993 as an Exhibit to Post-Effective Amendment No. 9
to the Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933.
(d) Filed on October 21, 1994 as an Exhibit to Post-Effective Amendment No. 10
to the Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS NOVEMBER 30, 1995*
----------------------------------------------------------- -------------------
<S> <C>
Class A shares of beneficial interest, par value $0.10 per
share 1,044
Class B shares of beneficial interest, par value $0.10 per
share 12,744
Class C shares of beneficial interest, par value $0.10 per
share 181
Class D shares of beneficial interest, par value $0.10 per
share 1,814
</TABLE>
- ---------------
* The number of holders includes holders of record plus beneficial owners, whose
shares are held of record by Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
C-2
<PAGE> 146
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> 147
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" or "FAM") acts as the investment
adviser for the following open-end investment companies: CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation
Program, Inc., Financial Institutions Series Trust, Merrill Lynch Basic Value
fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch
Funds for Institutions Series, Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust, Merrill Lynch Multi-State Municipal Series Trust,
Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc.,
Merrill Lynch Special Value Fund Inc., Merrill Lynch World Income Fund, Inc.,
and The Municipal Fund Accumulation Program, Inc. and the following closed-end
investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund,
Inc., Corporate High Yield Fund II, Inc., Emerging Tigers Fund, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., MuniAssets
Fund 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 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 MuniNew York Holdings, Inc. and Worldwide
DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the Manager,
acts as the investment adviser for the following open-end companies: Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Asset Builders Program, 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 Bond Fund for Investment and Retirement,
Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Convertible
Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch Global Resources
Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility
Fund, Inc. Merrill Lynch Growth Fund for Investment and Retirement, Merrill
Lynch Healthcare Fund, Inc., Merrill Lynch Institutional Intermediate Fund,
Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series
Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust,
Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill
Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money
Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income
Fund, Inc., and Merrill Lynch Variable Series Funds, Inc. and the following
closed-end investment companies: Convertible Holdings, Inc., Merrill Lynch High
Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund,
Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series and Merrill Lynch Institutional Intermediate Fund is One
Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of
the Manager, MLAM, Princeton Services, Inc. ("Princeton Services") and Princeton
Administrators, L.P. is
C-4
<PAGE> 148
also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill
Lynch Funds Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey
08543-9081. The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial
Center, North Tower, 250 Vesey Street, New York, New York 10281. The address of
the Fund's transfer agent, Merrill Lynch Financial Data Services, Inc. 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,
1993 for his or its 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. Giordano, Harvey,
Hewitt, Kirstein and Monagle and Ms. Griffin are directors, trustees or officers
of one or more of such companies.
OFFICERS AND PARTNERS OF FAM ARE SET FORTH AS FOLLOWS:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION(S) WITH MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- -------------------------- ------------------------ ----------------------------------------
<S> <C> <C>
ML & Co. ................. Limited Partner Financial Services Holding Company;
Limited Partner of MLAM
Princeton Services, General Partner General Partner of MLAM
Inc. ...................
Arthur Zeikel............. President President and Director of MLAM;
President and Director of Princeton
Services; Director of MLFD; Executive
Vice President of ML & Co.
Terry K. Glenn............ Executive Vice President Executive Vice President of MLAM;
Executive Vice President and Director
of Princeton Services; President and
Director of MLFD; President of
Princeton Administrators, L.P.;
Director of Financial Data Services,
Inc.
Vincent R. Giordano....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Elizabeth Griffin......... Senior Vice President Senior Vice President of MLAM
Norman R. Harvey.......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
N. John Hewitt............ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Philip L. Kirstein........ Senior Vice President, Senior Vice President, General Counsel
General Counsel and and Secretary of MLAM; Senior Vice
Secretary President, General Counsel, Director
and Secretary of Princeton Services;
Director of MLFD
Ronald M. Kloss........... Senior Vice President Senior Vice President and Controller of
and Controller MLAM; Senior Vice President and
Controller of Princeton Services
Joseph T. Monagle, Jr..... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Richard L. Reller......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
</TABLE>
C-5
<PAGE> 149
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION(S) WITH MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- -------------------------- ------------------------ ----------------------------------------
<S> <C> <C>
Gerald M. Richard......... Senior Vice President Senior Vice President of MLAM; Vice
and Treasurer President and Treasurer 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 open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
Convertible Holdings, Inc., The Corporate Fund Accumulation Program, Inc.,
MuniAssets Fund, Inc., and The Municipal Fund Accumulation Program, Inc. and
MLFD also acts as the principal underwriter for the following closed-end
investment companies: Merrill Lynch High Income Municipal Bond Fund, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas, Graczyk and Wasel is One Financial Center, 15th
floor, Boston, Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(1) (2) (3)
POSITION(S) 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 P. Boman................ Vice President None
Michael J. Brady.............. Vice President None
William M. Breen.............. Vice President None
Sharon Creveling.............. Vice President and Assistant Treasurer None
Mark A. DeSario............... Vice President None
James T. Fatseas.............. Vice President None
Stanley Graczyk............... Vice President None
Michelle T. Lau............... Vice President None
Debra W. Landsman-Yaros....... Vice President None
Gerald M. Richard............. Vice President and Treasurer Treasurer
Salvatore Venezia............. Vice President None
William Wasel................. Vice President None
Robert Harris................. Secretary None
</TABLE>
(c) Not applicable.
C-6
<PAGE> 150
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, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and Merrill Lynch Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the
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> 151
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the Township of Plainsboro, and
State of New Jersey, on the 28th day of December, 1995.
MERRILL LYNCH CALIFORNIA MUNICIPAL
SERIES TRUST
(REGISTRANT)
BY /S/ TERRY K. GLENN
------------------------------------
(Terry K. Glenn, Executive Vice
President)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------ ------------------
<S> <C> <C>
ARTHUR ZEIKEL* President and Trustee
- --------------------------------------------- (Principal Executive
(Arthur Zeikel) Officer)
GERALD M. RICHARD* Treasurer (Principal
- --------------------------------------------- Financial and
(Gerald M. Richard) Accounting Officer)
JAMES H. BODURTHA* Trustee
- ---------------------------------------------
(James H. Bodurtha)
HERBERT I. LONDON* Trustee
- ---------------------------------------------
(Herbert I. London)
ROBERT R. MARTIN* Trustee
- ---------------------------------------------
(Robert R. Martin)
JOSEPH L. MAY* Trustee
- ---------------------------------------------
(Joseph L. May)
ANDRE F. PEROLD* Trustee
- ---------------------------------------------
(Andre F. Perold)
*By /s/ TERRY K. GLENN December 28, 1995
- ---------------------------------------------
(Terry K. Glenn,
Attorney-in-fact)
</TABLE>
C-8
<PAGE> 152
POWER OF ATTORNEY
The undersigned Trustee of Merrill Lynch California Municipal Series Trust
(the "Trust") hereby authorizes Arthur Zeikel, Terry K. Glenn and Gerald M.
Richard, or any of them, as attorney-in-fact, to sign on his behalf, in the
capacity stated below, any amendments to the Registration Statement (including
post-effective amendments) on Form N-1A of Merrill Lynch California Municipal
Bond Fund, a series of the Trust, and to file the same, with all exhibits
thereto, with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------ ------------------
<S> <C> <C>
/s/ JAMES H. BODURTHA Trustee December 27, 1995
- ---------------------------------------------
(James H. Bodurtha)
</TABLE>
C-9
<PAGE> 153
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------ ------------------------------------------------------------------- ------
<S> <C> <C>
1(a) -- Declaration of Trust of the Registrant, dated March 20, 1985.(a)...
(b) -- Amendment to Declaration of Trust, dated July 25, 1985.(a).........
(c) -- Amendment to Declaration of Trust, dated October 3, 1988.(a).......
(d) -- Instrument establishing Merrill Lynch California Municipal Bond
Fund (the "Fund") as a series of Registrant.(a)....................
(e) -- Instrument establishing Class A and Class B shares of beneficial
interest of the Fund.(a)...........................................
(f) -- Amendment to Instrument establishing the Fund as series of
Registrant.(a)
(g) -- Amendment to Declaration of Trust, dated October 17, 1994 and
instrument establishing Class C and Class D shares of beneficial
interest. .........................................................
2 -- By-Laws of the Registrant.(a)......................................
5(a) -- Management Agreement between Registrant and Fund Asset Management,
L.P.(a)............................................................
6(b) -- Class B Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.(a)...........................
8 -- Custody Agreement between Registrant and The Bank of New
York.(a)...........................................................
9 -- Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Merrill Lynch
Financial Data Services, Inc.(a)...................................
10 -- Opinion of Brown & Wood, counsel for the Registrant. ..............
11 -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant. .......................................................
13 -- Certificate of Fund Asset Management, Inc.(a)......................
16(a) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
A shares.(a).......................................................
(b) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
B shares.(a).......................................................
(c) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
C shares. .........................................................
(d) -- Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class
D shares. .........................................................
17(a) -- Financial Data Schedule for Class A shares. .......................
(b) -- Financial Data Schedule for Class B shares. .......................
(c) -- Financial Data Schedule for Class C shares. .......................
(d) -- Financial Data Schedule for Class D shares. .......................
</TABLE>
- ---------------
(a) Refiled pursuant to the Electronic Data Gathering, Analysis and Retrieval
("EDGAR") phase-in requirements.
<PAGE> 1
EX-99.1 (a)
DECLARATION OF TRUST
OF
MERRILL LYNCH CALIFORNIA
MUNICIPAL SERIES TRUST
THE DECLARATION OF TRUST of Merrill Lynch California Municipal Series
Trust is made the 20th day of March, 1985 by the parties signatory hereto, as
trustees (such persons, so long as they shall continue in office in accordance
with the terms of this Declaration of Trust, and all other persons who at the
time in question have been duly elected or appointed as trustees in accordance
with the provisions of this Declaration of Trust and are then in office, being
hereinafter called the "Trustees").
W I T N E S S E T H
WHEREAS, the Trustees desire to form a trust fund under the laws of
Massachusetts for the investment and reinvestment of funds contributed thereto;
and
WHEREAS, it is proposed that the beneficial interest in the trust
assets be divided into transferable shares of beneficial interest which may, at
the discretion of the Trustees, be divided into separate series as hereinafter
provided;
NOW, THEREFORE, the Trustees hereby declare that they will hold in
trust, all money and property contributed to the trust fund to manage and
dispose of the same for the benefit of the holders from time to time of the
shares of beneficial interest issued hereunder and subject to the provisions
hereof, to wit:
<PAGE> 2
ARTICLE I
The Trust
1.1. Name. The name of the trust created hereby (the "Trust",
which term shall be deemed to include any Series of the Trust when the
context requires) shall be "Merrill Lynch California Municipal Series
Trust", and so far as may be practicable the Trustees shall conduct the
activities of the Trust, execute all documents and sue or be sued under
that name, which name (and the word "Trust" wherever hereinafter used)
shall refer to the Trustees as Trustees, and not individually, and shall
not refer to the officers, agents, employees or Shareholders of the
Trust or any Series thereof. Each Series of the Trust which shall be
established and designated by the Trustees pursuant to Section 6.2 shall
conduct its activities under such name as the Trustees shall determine
and set forth in the instrument establishing such Series. Should the
Trustees determine that the use of the name of the Trust or any Series
is not advisable, they may select such other name for the Trust or such
Series as they deem proper and the Trust or Series may conduct its
activities under such other name. Any name change shall be effective
upon the execution by a majority of the then Trustees of an instrument
setting forth the new name. Any such instrument shall have the status
of an amendment to this Declaration.
1.2. Definitions. As used in this Declaration, the following terms
shall have the following meanings:
The terms "Affiliated Person"," Assignment", " Commision",
"Interested Person", "Majority Shareholder Vote" (the 67% or 50% of the
third sentence of Section 2(a)(42) 1940 Act, whichever may be
applicable) and "Principal Underwritern" shall have the meanings given
them in the 1940 Act.
"Declaration" shall mean this Declaration of Trust as amended from
time to time. References in this Declaration to "Declaration",
"hereof", "herein" and "hereunder" shall be deemed to refer to the
Declaratlon rather than the article or section in which such words appear.
"Fundamental Policies" shall mean the investment restrictions set
forth in the Prospectus of any Series and designated as fundamental
policies therein.
"Person" shall mean and include individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities,
whether or not legal entities, and governments and agencies and political
subdivisions thereof.
"Prospectus" shall mean the currently effective Prospectus of any
Series of the Trust under the Securities Act of 1933, as amended.
"Series" shall mean the separate series that may be established and
designated pursuant to Section 6.2.
2.
<PAGE> 3
"Shareholders" shall mean as of any particular time all holders of
record of outstanding Shares at such time.
"Shares" shall mean the equal proportionate transferable units of
interest into which beneficial interest in any Series of the Trust shall
be divided from time to time and includes fractions of Shares as well as
whole Shares. All references to Shares shall be deemed to be shares Of any
or all Series as the context may require.
"Trustees" shall mean the signatories to this Declaration of Trust, so
long as they shall continue in office in accrdance with the terms
hereof, and all Other persons who at the time in question have been duly
elected or appointed and have qualified as trustees in accordance with the
provisions hereof and are then in office, are herein referred to as the
"Trustees", and reference in this Declaration of Trust to a Trustee or
Trustees shall refer to such person or persons in their capacity as Trustees
hereunder.
"Trust Property" shall mean as of any particular time any and all prop-
erty, real or personal, tangible or intangible, which at such time is owned
or held by or for the account of the Trust, any Series thereof or the
Trustees.
The "1940 Act" refers to the Investment Company Act of 1940 and the
regulations promulgated thereunder, as amended from time to time.
3.
<PAGE> 4
ARTICILE II
Trustees
2. 1. Number and Qualification. The number of Trustees shall be fixed
from time to time by written instrument signed by a majority of the
Trustees then in office, provided, however, that the number of Trustees shall
in no event be less than three or more than fifteen (except prior to the first
public offering of Shares). Any vacancy created by an increase in Trustees
may, to the extent permitted by the 1940 Act, be filled by the appointment of
an individual having the qualifications described in this Article made by a
written instrument signed by a majority of the Trustees then in office. Any
such appointment shall not become effective, however, until the individual
name in the written instrument of appointment shall have accepted in writing
such appointment and agreed in writing to be bound by the terms of this
Declaration of Trust. No reduction in the number of Trustees shall have the
effect of removing any Trustee from off ice prior to the expiration of his
term. Whenever a vacancy in the number of Trustees shall occur, until such
vacancy is filled as provided in Section 2.3 hereof, the Trustees in office,
regardless of their number, shall have all the powers granted to the Trustees
and shall discharge all the duties imposed upon the Trustees by this
Declaration of Trust. A Trustee shall be an individual at least 21 years of
age who is not under legal disability. Trustees need not own Shares.
2.2. Term of Office. The Trustees shall hold office during the lifetime
of this Trust, and until its temination as hereinafter provided; except (a)
that any Trustee may resign his trust by written instrument signed by him and
delivered to the other Trustees, which shall take effect upon such delivery or
upon such later date as is specified therein; (b) that any Trustee way be re-
moved at any time by written instrument, signed by at least two-thirds of the
number of Trustees prior to such removal, specifying the date when such
removal shall become effective; (c) that any Trustee who requests in writing
to be retired or, who had become incapacitated by illness or injury may be
retired by written instrument signed by a majority of the other Trustees,
specifying the date of his retirement; and (d) a Trustee may be removed at any
special meeting of the Shareholders by a vote of two-thirds of the outstanding
Shares. Upon the resignation or removal of a Trustee, or his otherwise
ceasing to be a Trustee, he shall execute and deliver such documents as the
remaining Trustees shall require for the purpose of conveying to the Trust
or the remaining Trustees any Trust Property held in the name of the resigning
or removed Trustee. Upon the incapacity or death of any Trustee, his legal
representative shall execute and deliver on his behalf such documents as the
remaining Trustees shall require as provided in the preceding sentence.
2.3. Vacancies. Tbe term of office of a Trustee shall terminated and a
vacancy shall occur in the event of the death, resignation, bankruptcy, ad-
judicated incompetence or other incapacity to perform the duties of the
office, or removal, of a Trustee. No such vacancy shall operate to annul this
Declaration of Trust or to revoke any existing agency created pursuant to
the terms of
4.
<PAGE> 5
this Declaration of Trust. In the case of a vacancy, the Shareholders, acting
any meeting of Shareholders held in accordance with Section 10.2 hereof,
or, the extent permitted by the 1940 Act, a majority of the Trustees
continuing in office acting by written instrument or instruments, may fill
such vacancy, and any Trustee so elected by the Trustees shall hold office
as provided in this Declaration.
2.4. Meetings. Meetings of the Trustees shall be held from tine to time
upon the call of the Chairman, if any, the President, the Secretary or any two
Trustees. Regular meetings of the Trustees may be held without call or notice
at a time and place fixed by the By-Laws or by resolution of the Trustees.
Notice of any other meeting shall be mailed or otherwise given not less than 48
hours before the meeting but may be waived in writing by any Trustee either
before or after such meeting. The attendance of a Trustee at a meeting shall
constitute a waiver of notice of such meeting except where a Trustee attends a
meeting for the express purpose of objecting to the transaction of any business
on the ground that the meeting has not been lawfully called or convened. The
Trustees may act with or without a meeting. A quorum for all meetings of the
Trustees shall be a majority of the Trustees. Unless provided otherwise in
this Declaration of Trust, any action of the Trustees may be taken at a meeting
by vote of a majority of the Trustees present (a quorum being present) or
without a meeting by written consents of a majority of the Trustees.
Any committee of the Trustees, including an executive executive
committee, if any, may act with or without a meeting. A quorum for all
meetings of any such committee shall be a majority of the members thereof.
Unless provided otherwise in this Declaration, any action of any such committee
may be taken at a meeting by vote of a majority of the members present (a
quorum being present) or without a meeting by written consent of a majority of
the members.
With respect to actions of the Trustees and any ccmmittee of the
Trustees, Trustees who are Interested Persons of the Trust within the
meaning of Section 1.2 hereof or otherwise interested in any action to be
taken may be counted for quorm purposes under this Section and shall be
entitled to vote to the extent permitted by the 1940 Act.
To the extent permitted by the 1940 Act, all or any one or more Trustees
may participate in a meeting of the Trustees or any committee thereof by means
of a conference telephone or similar comunications equipment by means of which
all persons participating in the meeting can hear each other and participation
in a meeting pursuant to such communications systems shall constitute presence
in person at such meeting.
2.5. Officers. The Trustees shall annually elect a President, a
Secretary and a Treasurer and may elect a Chairman. The Trustees may elect
or appoint or authorize the Chairman, if any, or President to appoint such
other officers or agents with such powers as the Trustees may deem to be
advisable. The Chairman and President shall and the Secretary and Treasurer
may, but need not, be a Trustee.
5.
<PAGE> 6
2.6. By-Laws. The Trustees way adopt and from time to time amend or
repeal the By-Laws for the conduct of the business of the Trust.
6.
<PAGE> 7
ARTICLE III
Powers of Trustees
3.1. General. The Trustees shall have exclusive and absolute control
over the Trust Property and over the business of the Trust or any Series
thereof to the same extent as if the Trustees were the sole owners of the
Trust Property and business in their own right, but with such powers of
delegation as may be permitted by this Declaration. The Trustees may perform
such acts as in their sole discretion are proper for conducting the business
of the Trust or any Series thereof. The enumeration of any specific power
herein shall not be construed as limiting the aforesaid power. Such
powers of the Trustees may be exercised without order of or resort to an court.
3.2. Investments. The Trustees shall have power, subject to the Funda-
mental Policies, to:
(a) conduct, operate and carry on the business of an investment
company;
(b) subscribe for, invest in, reinvest in, purchase or otherwise
acquire, hold, pledge, sell, assign, transfer, exchange, distribute or
otherwise deal in or dispose of negotiable or non-negotiable instruments,
obligations, evidences of indebtedness, certificates of deposit or
indebtedness, commercial paper, repurchase agreements, reverse repurchase
agreements and other securities, including, without limitation, those
issued, guaranteed or sponsored by any state,, territory or possession of
the United States and the District of Columbia and their political sub-
divisions, agencies and instrumentalities, or by the United States
Government or its agencies or instrumentalities, or international
instrumentalities, or by any bank, savings institution, corporation or
other business entity organized under the laws of the United States and,,
to the extent provided in the Prospectus and not prohibited by the
Fundamental Policies, organized under foreign laws; and to exercise any
and all rights, powers and privileges of ownership or interest in respect
of any and all such investments of every kind and description, including,
without limitation, the right to consent and otherwise act with respect
thereto, with power to designate one or more persons, firms, associations
or corporations to exercise any of said rights, powers and privileges in
respect of any of said instruments; and the Trustees shall be deemed to
have the foregoing powers with respect to any additional securities in
which any Series of the Trust may invest should the investment policies
set forth in the Prospectus or the Fundamental Policies be amended.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust or any Series, nor shall the
Trustees be limited by any law limiting the investments which may me made by
fiduciaries.
7.
<PAGE> 8
3.3. Legal Title. Legal title to all the Trust property shall be
vested in the Trustees as joint tenants except that the Trustees shall
have power to cause legal title to any Trust Property to be held by or
in the name of one or more of the Trustees, or in the name of the Trust
or any Series thereof or in the name of any other Person as nominee,, On
such terms as the Trustees may detemine, provided that the interest of
the Trust or any Series thereof therein is appropriately protected.
The right, title and interest of the Trustees in the Trust
Property shall vest automatically in each person who ray hereafter
become a Trustee upon his due election and qualification. Upon the
resignation, removal or death of a Trustee he shall automatically cease
to have any right, title or interest in any of the Trust Property, and
the right, title and interest of such Trustee in the Trust Property
shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing
documents have been executed and delivered.
3.4. Issuance and Repurchase of Securities. The Trustees shall
have the power to issue, sell, repurchase, redeem, retire, cancel,
acquire, hold, resell, reissue, dispose of, transfer, and otherwise deal
in, Shares, including shares in fractional denominations, and, subject
to the more detailed provisions set forth in Articles VIII and IX, to
apply to any such repurchase, redemption, retirement, cancellation or
acquisition of Shares any funds or property of the applicable Series of
the Trust whether capital or surplus or otherwise, to the full extent
now or hereafter permitted by the laws of the Commonwealth of
Massachusetts governing business corporations.
3.5. Borrow Money. Subject to the Fundamental Policies, the
Trustees shall have power to borrow money or otherwise obtain credit and
to secure the same by mortgaging, pledging or otherwise subjecting as
security the assets of the Trust or any Series thereof, including the
lending of portfolio securities, and to endorse, guarantee, or undertake
the performance of any obligation, contract or engagement of any other
person, firm, association or corporation.
3.6. Delegation; Committees. The Trustees shall have power,
consistent with their continuing exclusive authority over the management
of the Trust and the Trust Property, to delegate from time to time to
such of their number or to officers, employees or agents of the Trust
the doing of such things and the execution of such instruments either
in the name of the Trust or the names of the Trustees or otherwise as
the Trustees may deem expedient, to the same extent as such delegation
is permitted to directors of a Massachusetts business corporation and
is permitted by the 1940 Act.
3.7. Collection and Payment. The Trustees shall have power to
collect all property due to the Trust or any Series thereof; to pay all
claims, including taxes, against the Trust Property; to prosecute,
defend, compromise or abandon any claims relating to the Trust Property;
to foreclose any security interest securing any obligations, by virtue
of which any property is owed to the Trust or any Series thereof; and to
enter into releases, agreements and other instruments.
8.
<PAGE> 9
3.8. Expenses. The Trustees shall have power to incur and pay
any expenses which in the opinion of the Trustees are necessary or
incidental to carry out any of the purposes of this Declaration of
Trust, and to pay reasonable compensation from the funds of the Trust to
themselves as Trustees. The Trustees shall fix the compensation of all
officers, employees and Trustees. The Trustees may pay themselves such
compensation for special services, including legal, underwriting,
syndicating and brokergae services, as they in good faith may deem
reasonable and reimbursement for expenses expenses reasonably in-curred
by themselves on behalf of the Trust.
3.9. Miscellaneous Powers. The Trustees shall have the power to: (a)
(a) employ or contract with such Persons as the Trustees may deem
desirable for the transaction of the business of the Trust or any Series
thereof; (b) enter into joint ventures, partnerships and any other
combinations or associations; (c) purchase, and pay for out of Trust
Property, insurance policies insuring the Shareholders, Trustees,
officers, employess, agents, investment advisors, distributors, selected
dealers or independent contractors of the Trust or any Series,thereof
against all claims arising by reason of holding any such position or by
reason of any action taken or omitted by any such Person in such capacity,
whether or not constituting negligence, or whether or not the Trust would
have the power to indemnify such Person against such liability; (d)
establish pension, profit-sharing, share purchase, and other retirement,
incentive and benefit plans for any Trustees, officers, employees and
agents of the Trust; (e) make donations, irrespective of benefit to the
Trust, for charitable, religious, educational, scientific, civic or
similar purposes; (f) to the extent permitted by law, indemnify any
Person with whom the Trust or any Series thereof has dealings, including
any advisor, admistrator, manager, distributor and selected dealers with
respect to any Series, to such extent as the Trustees shall determine; (g)
guarantee indebtedness or contractual obligations of others; (h) detemine
and change the fiscal year of the Trust and the method in which its
accounts shall be kept; and (i) adopt a seal for the Trust but the absence
of such seal shall not impair the validity of any instrument executed on
behalf of the Trust.
3.10. Further Powers. The Trustees shall have power to conduct
the business of the Trust or any Series thereof and carry on its
operation in any and all of its branches and maintain offices both within
and without the Commonwealth of Massachusetts, in any and all states of
the United States of America, in the District of Columbia, and in any and
all Commonwealths, territories, dependencies, colonies, possessions,
agencies or instrumentalities of the United States of America and of
foreign governments, and to do all such other things and execute all such
intruments as they deem necessary, proper or desirable in order to
promote the interests of the Trust or any Series thereof although such
things are not herein specifically mentioned. Any determination as to
what is in the Interests of the Trust or any Series thereof made by the
Trustees in good faith shall be conclusive. In construing the provision
of this Declaration, the presumption shall be in favor of a grant of power
to the Trustees. The Trustees will not be required to obtain any court
order to deal with the Trust Property.
9.
<PAGE> 10
ARTICL.E IV
Advisory, Management and Distribution Arrangements
4.1. Advisory and Management Agreement. Subject to a Majority
Shareholder vote of the applicable Series, as required by the 1940
Act, the Trustees may in their discretion from time to time enter into
advisory or management contracts whereby the other party to such contract
shall undertake to furnish the Trustees such advisory and management
services, with respect to a Series as the Trustees shall from tine to tine
consider desirable and all upon such terms and conditions as the Trustees
may in their discretion determine. Notwithstanding any provisions of
this Declaration of Trust, the Trustees may authorize any advisor or
manager (subject to such general or specific instructions as the
Trustees may from time to time adopt) to effect purchases, sales, loans or
exchanges of portfolio securities of any Series of the Trust on behalf of
the Trustees or may authorize any officer, employee or Trustee to effect
such purchases, sales, loans or exchanges pursuant to recommndations of
any such advisor, administrator or manager (and all without further action
by the Trustees). Any such purchases, sales, 1oans and exchanges shall be
deemed to have been authorized by all of the Trustees.
4.2. Distribution Arrangements. The Trustees may in their
discretion from time to time enter into a contract, providing for the
sale of the Shares of the Trust or any Series of the Trust to net the
Trust not less than the par value per share, whereby the Trust may either
agree to sell the Shares to the other party to the contract or appoint
such other party its sales agent for such Shares. In either case, the
contract shall be an such terms and conditions as the Trustees may in
their discretion determine is not inconsistent with the provisions of this
Article IV or the BY-Laws; and such contract my also provide for the
repurchase or sale of Shares by such other party as principal or as agent
of the Trust and may provide that such other party may enter into selected
dealer agreements with registered securities dealers to further the
purpose of the distribution or repurchase of the Shares.
4.3. Parties to Contract. Any contract of the character described
in Section 4.1 and 4.2 of this Article IV or in Article VII hereof May be
entered into with any corporation, firm,, trust or association, although
one or more of the Trustees or officers of the Trust may be an officer,
director, Trustee, Shareholder, or member of such other party to the
contract, and no such contract shall be invalidated or rendered voidable
by reason of the existence of any such relationship, nor shall any person
holding such relationship be liable merely by reasen of such relationship
for any loss or expense to the Trust under or by reason of said
Contract or accountable for any profit realized directly or indirectly
therefrom, provided that the contract when entered into was reasonalbe and
fair and not inconsistent with the provisions of this Article IV or the
By-laws. The same person (including a firm, corporation, trust, or
association) may be the other party to contracts entered into pursuant to
Sections 4.1 and 4.2.above or Article VII, and any indvidual may be
financially interested or
10
<PAGE> 11
therwise affiliated with persons who are parties to any or all of the
contracts mentioned in this Section 4.3.
4.4. Provisions and Amentments. Any contract entered into pursuant to
Section 4.1 and 4.2 of this Article IV shall be consistent with and subject
to the requirements of Section 15 of the 1940 Act with respect to its
continuance in effect, its termination, and the method of authorization and
approval of such contract or renewal thereof, and no amendment to any
contract entered into pursuant to Section 4.1 shall be effective unless
assented to by a majority shareholder Vote of the applicable Series.
<PAGE> 12
ARTICLE V
Limitations of Liability of Shareholders,,
Trustees and Others
5.1. No Personal Liability of Shareholders, Trustees, etc. No
Sharesholder shall be subject to any personal liability whatsoevser
to any Person in connection with Trust Property or the acts,
obligations or affairs of the Trust or any Series therof. No Trustee,
officer, employee or agent of the Trust shall be subject to any
personal liability whatsoever to any Person, other than the Trust or
its Shareholders, in connection with Trust Property or the affairs of
the Trust or any Series thereof, savse only that arising from his bad
faith, willful misfeasance, gross negligence or reckless disregard of
his duty to such Person; and all such Person shall look solely to the
Trust Property for satisfaction of claim of any nature arising in
connection with the affairs of the Trust or any Series thereof. If
any Shareholder, Trustee, Officer, employee, or agent, as such, of
the Trust, is made a party to any suit or proceding to enforce any
much liability, he shall not on account thereof, be held to any per-
sonal liability. The Trust shall indemnify and hold each Shareeholder
harmless from and against all claim and liabilities, to which such
Shareholder may become subject by reason of his being or having been
a Shareholder, and shall reimburse such Shasreholder for all legal and
other expenses reasonably incurred by him in connection with any such
claim or liability. The rights accruing to a Shareholder under this
Section 5.1 shall not exclude any other right to which such
Shareholder may be lawfully entitled, nor shall anything herein
contained restrict the right of the Trust to indemnify or reimburse a
Shareholder in any appropriate situation even though not specifically
provided herein.
5.2. Non-Liability of Trustees, etc. No Trustee, officer,
employee or agent of the Trust shall be liable to the Trust, any
Series, its Shareholders, or to any Shareholder, Trustee, Officer,
employee, or agent thereof for any action or failure to act (including
without limitation the failure to compel in any way any fomer or
acting Trustee to redress any breach of trust) except for his own bad
faith, willful misfeasance, gross negligence or reckless disregard of
his duties.
5.3. Mandatory Indemnification. The Trust shall indenmify each
of its Trustees, officers, employees, and agents(including person 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 amount
paid in satisfaction of judgments, in compromise, as fines ad
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 involved
or with which he my be threatened, while in office or thereafter, by
reason of his being or having such a trustee, officer, employee or
agent, except with respect to any matter as to which he shall have
here 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
12.
<PAGE> 13
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 wiliful misfeasance, gross negligence or reckless
disregard of duty, or the matter of good faith and reasonable belief as
to the best interests of the Trust, had been adjudicated, it would have
been adjudicated in favor of such person. The rights accruing to any
Person under these provisions shall not exclude any other right to which
he may be lawfully entitled; provided that no Person may satisfy any
right of indemnify or reimbursement granted herein or in Section 5.1 or
to which he may be otherwise entitled except out of the property of the
Trust, and no Shareholder shall be personally liable to any Person with
respect to any claim for indemnity or reimbursement or otherwise. The
Trustees may make advance payments in connection with indemnification
under this Section 5.3, provided that the indemnified person shall have
given a written undertaking to reimburse the Trust in the event it is
subsequently determined that he is not entitled to such indemnification.
5.4. No Bond Required of Trustees. No Trustee shall, as such, be
obligated to give any bond or security or other security for the
performance of any of his duties hereunder.
5.5. No Duty of Investigation; Notice in Trust Instruments, etc. No
purchaser, lender, transfer agent or other person dealing with the
Trustees or any officer, employee or agent of the Trust shall be bound to
make any inquiry concerning the validity of any transaction purporting to
be made by the Trustees or by said officer, employee or agent or be
liable for the application of money or property paid, loaned, or
delivered to or an the order of the Trustees or of said officer, employee
or agent. Every obligation, contract undertaking, instrument,
certificate, Share, other security of the Trust or any Series, and every
other act or thing whatsoever executed in connection with the Trust or
any Series shall be conclusively taken to have been executed or done by
the executors thereof only in their capacity as Trustees under this
Declaration of Trust or in their capacity as officers, employees or
agents of the Trust. Every written obligation, contract, undertaking,
instrument, certificate, Share, other security of the Trust or any Series
made or issued by the Trustees or by any officers, employees or agents of
the Trust, in their capacity as such, shall contain an appropriate
recital to the effect that the Shareholders. Trustees, officers,
employees and agents of the Trust shall not personally be bound by or
liable thereunder, nor shall resort be had to their private property for
the satisfaction of any obligation or claim thereunder, and appropriate
references shall be made therein to the Declaration of Trust, and may
contain any further recital which they may deem appropriate, but the
omission of such recital shall not operate to impose personal liability
on any of the Trustees, Shareholders, officers, employees or agents of
the Trust. The Trustees may maintain insurance for the protection of the
Trust Property, its Shareholders, Trustees, officers, employees and
agents in such amount as the Trustees shall deem adequate to cover
possible tort liability, and such other insurance as the Trustees in
their sole judgment shall deem advisable.
13.
<PAGE> 14
5.6. Reliance on Experts, etc. Each Trustee and officer or
employee of the Trust shall, in the performance of his duties, be fully
and completely justified and protected with regard to any act or any
failure to act resulting from reliancee in good faith upon the books of
account or other records of the Trust, upon an opinion of counsel, or
upon reports made to the Trust by any of its officers or employees or by
any advisor, administrator, managers, distributor, selected dealer,
accountants, appraiser or other expert or consultant selected with
reasonable care by the Trustees, officers or employees of the Trust,
gardless of whether such counsel or expert may also be a Trustee.
14.
<PAGE> 15
ARTICLE VI
Shares of Beneficial Interest
6.1. Beneficial Interest. The interest of the beneficiaries
hereunder shall be divided into transferable shares of beneficial interest
with par value $ 10 per share. The number of such shares of beneficial
interest authorized hereunder is unlimited. All Shams issued hereunder
including, without limitation, Shares issued in connection with a
dividend in Shares or a split Of Shares, shall be fully paid and
nonassessable.
6.2. Series Designation. The Trustees, in their discretion from time
to time, may authorize the division of shares into two or more Series, each
Series relating to a separate portfolio of investments. The different
Series shall be established and designated, and the variations in the
relative rights and preferences as between the different Series shall be
fixed and determined, by the Trustees; provided, that all Shares shall be
identical except that there may be variations between different Series as
to purchase price, determination of net asset value, the price, terms and
manner of redemption, special and relative rights as to dividends and on
liquidation, conversion rights, and conditions under which the several
Series shall have separate voting rights. All references to Shares in
this Declaration shall be deemed to be shares of any or all Series as the
context may require.
If the Trustees shall divide the Shares into two or more Series, the
following provisions shall be applicable:
(a) Tbe number of Shares of each Series that may be issued shall be
unlimited. The Trustees may classify or reclassify any unissued Shares
or any Shares previously issued and reacquired of any Series info one or
more Series that may be established and designated from time to time. The
Trustees may hold as treasury Shares (of the same or some other Series),
reissue for such consideration and on such terms as they may determine, or
cancel any Shares of any Series reacquired by the Trust at their discretion
from tine to time.
(b) The power of the Trustees to invest and reinvest the Trust
Property of each Series that may be established shall be governed by
Section 3.2 of this Declaration.
(c) All consideration received by the Trust for the issue or sale of
Shares of a particular Series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits,
and proceeds thereof, including any proceeds derived from the sale,
exchange or liquidation of such assets, and any funds or payments derived
from any reinvestment of such proceeds in whatever form the same may be,
shall irrevocably belong to that Series for all purposes, subject only to
the rights of creditors, and shall be so recorded upon the books of account
of the Trust. In the event that there are any assets, income, earnings,
profits, and proceeds thereof, funds, or payments which are not readily
identifiable as belonging to any particular Series, the
15.
<PAGE> 16
Trustees shall allocate them among any one or more of the Series
established and designated ftom time to time in such manner and on such
basis as they, in their sole discretion, deem fair and equitable. Each
such allocation by the Trustees shall be conclusive and binding upon
the shareholders of all Series for all purposes.
(d) The assets belonging to each particular Series shall be
charged with the liabilities of the Trust in respect of that Series and
all expences, costs, charges and reserves attributable to that Series,
and any general liabilities, expense, costs, charges or reserves of the
Trust which are not readily identifiable as belonging to any
particular Series shall be allocated and charged by the Trustees to and
among any one or more of the Series established and designated from
time to time in such manner and on such basis as the Trustees in their
sole discretion deem fair and equitable. Each allocation of
liabilities, expenses, costs, charges and reserves by the Trustees
shall be conclusive and binding upon the holders of all Series for all
purposes. The Trustees shall have full discretion, to the extent not
inconsistent with the 1940 Act, to determine which items shall be
treated as income and which items as capital; and each such
determination and allocation shall be conclusive and binding upon the
Shareholders.
(e) The power of the Trustees to pay dividends and make
distributions with respect to any one or more Series shall be governed
by Section 9.2 of this Trust. Dividends and distributions on Shares of
a particular Series may be paid with such frequency as the Trustees may
determine, which may be daily or otherwise, pursuant to a standing
resolution or resolutions adopted only once or with such frequency as
the Trustees may determine, to the holders of Shares of that Series,
from such of the income and capital gains, accrued or realized, from
the assets belonging to that Series, as the Trustees may determine,
after providing for actual and accrued liabilities belonging to that
Series. All dividends and distributions on Shares of a particular
Series shall be distributed pro rata to the holders of that Series in
proportion to the number of Shares of that Series held by such holders
at the date and time of record established for the payment of such
dividends or distributions.
The establishment and designation of any Series of Shares shall be
effective upon the execution by a majority of the then Trustees of an
instrument setting forth the establishment and designation of such
Series. Such instrument shall also set forth any rights and
preferences of such Series which are in addition to the rights and
preferences of Shares set forth in this Declaration. At any time that
there are no Shares outstanding of any particular Series previously
established and designated, the Trustees may by an instrument exe-
cuted by a majority of their number abolish that Series and the
establishment and designation thereof. Each instrument referred to in
this paragraph shall have the status of amendment to this Declaration.
6.3 Rights of Shareholders. The ownership of the Trust
Property of every description and the right to conduct any business
hereinbefore described are vested exclusively in the Trustees, and the
Shareholders shall have no interest therein other than the beneficial
interest conferred by their Shares with
16.
<PAGE> 17
respect to a particular Series, and they shall have no right to call for
any partition or division of any property, profits, rights or interests of
the Trust nor can they be called upon to share or assume any losses of the
Trust or suffer an assessment of any kind by virtue of their Ownership of
Shares. The Shares shall be personal property giving only the rights in
this Declaration specifically set forth. The Shares shall not entitle the
holder to preference, preemptive, appraisal conversion or exchange rights
(except for rights of appraisal specified in section 11.4).
6.4. Trust Only. It is the intention Of the Trustees to create only
the relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees
to create a general partnership, limited partnership, joint stock
association, corporation, bailment or any form of legal relationship other
than a trust. Nothing in this Declaration Of Trust shall be construed to
make the Shareholders, either by themselves or with the Trustees, partners
or members of a joint stock association.
6.5. Issuance of Shares. The Trustees, in their discretion, may from
time to time without vote of the Shareholders issue Shares with respect to
any Series that may have been established pursuant to Section 6.2, in
addition to the then issued and outstanding Shares and Shares held in the
treasury, to such party or parties and for such amount not less than par
value and type of consideraticn, including cash or property, at such
time or times (including, without limitation, each business day in
accordance with the maintenance of a constant net asset value per share as
set forth in Section 9.3 hereof), and on such terms as the Trustees may
deem best, and may in such manner acquire other assets (including the
acquisition of assets subject to, and in connection with the assumption
of, liabilities) and businesses. In connection with any issuance of
Shares, the Trustees may issue fractional Shares. The Trustees may from
time to time divide or combine the Shares of any Series into a greater or
lesser number without thereby changing the proportionate beneficial
interests in such Series of the Trust. Reductions in the number of
outstanding Shares may be made pursuant to the constant net asset value
per share formula set forth in Section 9.3. Contributions to the Trust may
be accepted for, and Shares shall be redeemed as, whole Shares and/or
1/1,000ths of a Share or multiples thereof.
6.6. Register of Shares. A register shall be kept at the Trust or
any transfer agent duly appointed by the Trustees under the direction of
the Trustees which shall contain the names and addresses of the
Shareholders and the number of Shares (with respect to each Series that
may have been established) held by them respectively and a record of all
transfers thereof separate registers shall be established and maintained
for each Series of the Trust. Each such register shall be conclusive as
to who are the holders of the Shares of the applicable Series and who
shall be entitled to receive dividends or distributions or otherwise to
exercise or enjoy the rights of Shareholders. No Shareholder shall be
entitled to receive payment of any dividend or distribution, nor to have
notice given to him as herein provided, until he has given his address to
a transfer agent or such other officer or agent of the Trustees as shall
keep the register for entry thereon. It is not contemplated that
certificates will
17.
<PAGE> 18
be issued for the Shares; however, the Trustees, in their discretion, may
authorize the issuance of share certificates and promulgate appropriate
rules and regulations as to their use.
6.7. Transfer Agent and Registrar. The Trustee shall have power to
employ a transfer agent or transfer agent, and a registrar or
registrars with respect to the Shares of the various Series. Tbe
transfer agent or transfer agents may keep the applicable register and
record therein the original issues and transfers, if any, of the said
Shares of the applicable Series. Any such transfer agent and registrars
shall perfom the duties usually performed by transfer agents and
registrars of certificates of stock in a corporation, except as modified
by the Trustees.
6.8. Transfer of Shares. Shares shall be transferable an the
records of the Trust only the record holder thereof or by his agent
thereto duly authorized in writing, upon delivery to the Trustees or a
transfer agent of the Trust of a duly executed instrument of transfer,
together with such evidence of the genuineness of each such execution and
authorization and of other matters as may reasonably be required. Upon
such delivery the transfer shall be recorded on the applicable register
of the Trust. Until such record is made, the Shareholder of record
shall be deemed to be the holder of such Shares for all purposes hereof
and neither the Trustees nor any transfer agent or registrar nor any
officer, employee or agent of the Trust shall be affected by any notice
of the proposed transfer.
Any person becoming entitled to any Shares in consequence of the
death, bankruptcy, or incompetence of any Shareholder, or otherwise by
operation of law, shall be recorded on the applicable register of Shares
as the holder of such Shares upon production of the proper evidence
thereof to the Trustees or a transfer agent of the Trust, but until such
record is made, the Shareholder of record shall be deemed to be the
holder of such Shares for all purposes hereof and neither the Trustees
nor any transfer agent or registrar nor any officer or agent of the Trust
shall be affected by any notice of such death, bankruptcy or
incompetence, or other operation of law.
6.9. Notices. Any and all notices to which any Shareholder
hereunder may be entitled and any all communications shall be demend duly
served or given if mailed, postage prepaid, addressed to any Shareholder
of record at his last known address as recorded on the applicable
register of the Trust.
18.
<PAGE> 19
ARTICLE VII
Custodians
7. 1. Appointment and Duties. The Trustees shall at all times employ
a cutodan or cistodians, meeting the qualications for custodians for
portfolio securities of investment companies contained in the 1940 Act, as
custodian with respect to each Series of the Trust. It is contemplated that
separate custodians may be employed for the different Series of the Trust.
Any custodian, acting with respect to one or more Series, shall have
authority as agent of the Trust or the Series with respect to which it is
acting, but subject to such restrictions, limitation and other
requirements, if any, as my be contained in the By-Laws of the Trust and the
1940 Act:
(1) to hold the securities owned by the Trust or the Series and
deliver the Sam upon written order;
(2) to receive and receipt for any moneys due to the Trust or
the Series and deposit the same in its own banking department (if a
bank) or elsewhere as the Trustees may direct;
(3) to disburse such funds upon orders or vouchers;
(4) if authorized by the Trustees, to keep the books and
accounts of the Trust or the Series and furnish clerical and
accounting services; and
(5) if authorized to do so by the Trustees, to compute the net
income of the Trust or the Series,
all upon such basis of compensation as may be agreed upon between the
Trustees and the custodian. If so directed by a majority Shareholder Vote
of the Series with respect to which the custodian is acting, the custodian
shall deliver and pay over all property of the Trust held by it as specified
in such vote.
The Trustees may also authorize each custodian to employ one or more
sub-custodians from time to tim to perform such of the acts and services of
the custodian and upon such terms and conditions, as may be agreed upon
between the custodian and such sub-custodian and approved by the Trustees,
provided that in every case such sub-custodian shall meet the qualifications
for custodians contained in the 1940 Act.
7.2. Central Certificate System. Subject to such rules, regulations
and order as the Commission may adopt, the Trustees may direct the custodian
to deposit all or any part of the securities owned by the Trust or the
Series in a system for the central handling of securities established by a
national securities exchange or a national securities association registered
with the Commission under the Securities Exchange Act of 1934, or such other
person as may be permitted by the Commission, or otherwise in accordance
with the 1940
19.
<PAGE> 20
Act, pursuant to which system all securities of any particular class or
series of any issuer deposited within the system are treated as fungible
and may be transferred or pledged by bookkeeping entry without physical
delivery of such securities, provided that all such deposits shall be
subject to withdrawal only upon the order of the Trust.
20.
<PAGE> 21
ARTICLE VIII
Redemption
8.1. Redemptions. All outstanding Shares of any Series of the Trust
may be redeemed at the option of the holders thereof, upon and subject to
the terms and conditions provided in this Article VIII. The Trust shall,
upon application of any Shareholder or pursuant to authorization from any
Shareholder of a particular Series, redeem or repurchase from such
Shareholder outstanding Shares of such Series for an amount per share
determined by the application of a formula adopted for such purpose by the
Trustees with respect to such Series (which formula shall be consistent
with the 1940 Act); provided that (a) such amount per share shall not
exceed the cash equivalent of the proportionate interest of each share in
the assets of the Series of the Trust at the time of the purchase or
redemption and (b) if so authorized by the Trustees, the Trust may, at any
time and from time to time, charge fees for effecting such redemption, at
such rates as the Trustees may establish, as and to the extent permitted
under the 1940 Act, and may, at any time and from time to time, pursuant
to such Act, suspend such right of redemption. The procedures for
effecting redemption shall be as set forth in the Prospectus with respect
to the applicable Series from time to time.
8.2. Redemption of Shares; Disclosure of Holding. If the Trustees
shall, at any time and in good faith, be of the option that direct or
indirect ownership of Shares or other securities of the Trust has or may
become concentrated in any person to an extent which would disqualify
the Trust as a regulated investment company under the Internal Revenue
Code, then the Trustees shall have the power by lot or other means deemed
equitable by them (i) to call for redemption a number, or principal
amount, of Shares or other securities of the Trust sufficient, in the
opinion of the Trustees, to maintain or bring the direct or indirect
ownership of Shares or other securities of the Trust into confomity with
the requirements for such qualification and (ii) to refuse to transfer or
issue Shares or other securities of the Trust to any Person whose
acquisition of the Shares or other securities of the Trust in question
would in the opinion of the Trustees result in such disqualification. The
redemption shall be effected at a redemption price detemined in accordance
with Section 8.1.
The holders of Shares or other securities of the Trust shall upon
demand disclose to the Trustees in writing such information with respect
to direct and indirect ownership of Shares or other securities of the
Trust as the Trustees deem necessary to comply with the provisions of the
Internal Revenue Code, or to comply with the requirements of any other
taxing authority.
8.3. Redemptions of Accounts of Less than $1,000. Due to the
relatively high cost of maintaining investment accounts of less than
$l,000, the Trustees shall have the power to redeem shares at a redemption
price determined in accordance with Section 8.1 if at any time the total
investment in such account does not have a value of at least $1,000;
provided, however, that the Trustees
21.
<PAGE> 22
nay not exercise such power with respect to Shares of any Series if the
Prospectus of such Series does not describe such power. In the event the
Trustees determine to exercise their power to redeem Shares provided in
this Section 8.3, shareholders shall be notified that the value of their
account is less than $1,000 and allowed 60 days to make an additional
investment before redemption is processed.
8.4. Redemptions Pursuant to Constant Net Asset Value Fbrmula. The
Trust may also reduce the number of outstanding Shares of any Series
pursuant to the provisions of Section 9.3.
22.
<PAGE> 23
ARTICLE IX
Determination of Net Asset Value,
Net Income and Distributions
9.1. Net Asset Value. The net asset value of each outstanding Share
of each Series of the Trust shall be determined at such time or times an
such days as the Trustees may determine, in accordance with the 1940 Act,,
with respect to each Series. The method of detemination of net asset value
shall be determined by the Trustees and shall be as set forth in the
Prospectus with respect to the applicable Series. The power and duty to
make the daily calculations for any Series may be delegated by the Trustees
to the adviser, administor, manager custodian, transfer agent or such other
person as the Trustees may detemine. The Trustees may suspend the daily
detemination of net asset value to the extent pemitted by the 1940 Act.
9.2. Distributions to Shareholders. The Trustees shall from time to
time distribute ratably among the Shareholders of any Series such
proportion of the net profits, surplus (including paid-in surplus),
capitals, or assets with respect to such Series held by the Trustees as
they may deem proper. Such distribution may be made in cash or property
(including without limitation any type of obligations of the Trust or any
assets thereof), and the Trustees may distribute ratably among the
Shareholders of any Series additional Shares of each Series in such manner,
at such times, and an such terms as the Trustees may deem proper. Such
distributions may be among the Shareholders of record at the time of
declaring a distribution or among the Shareholders of record at such later
date as the Trustees shall determine. The Trustees may always retain from
the net profits such amount as they may deem necessary to pay the debts or
expenses of the Trust or to meet obligations of the Trusts, or as they may
deem desirable to use in the conduct of its affairs or to retain for future
requirements or extensions of the business. The Trustees may adopt and
offer to Shareholders of any Series such dividend reinvestment plans, cash
dividend payout plans or related plans as the Trustees shall deem
appropriate for much Series.
Inasmuch as the utation of net income and gains for Federal income tax
purposes may vary from the computation thereof an the books, the above
provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient
to enable the Trust to avoid or reduce liability for taxes.
9.3. Constant Net Asset Value; Reduction of Outstanding Shares. The
Trustees shall have the power to detemine the net income of any Series of
the Trust on each day the net asset value of such Series is determined as
provided in Section 9.1 and at each such determination declare such net
income for such Series as dividends with the result that the net asset
value per share of the Series of the Trust shall remain at a constant
dollar value. The determination of net income and the resultant
declaration of dividends shall be as set forth in the Prospectus. In such
event fluctuations in value may be reflected in the
23.
<PAGE> 24
number of outstanding Shares in each Shareholder's account. It is
expected that each Series of the Trust will have a positive net income at
the time of each detemination. If for any reason such net income is a
negative amount, the Trust may offset such amount against dividends
accrued in the account of the Shareholder of the applicable Series. If
and to the extent such negative amount exceeds such accrued dividends,
the Trust shall have authority to reduce the number of the outstanding
Shares of the Series. Such reduction will be effected by having each
Shareholder proportionately contributing to the Series capital the
necessary Shares that represent the amount of the excess upon such
determination. Each Shareholder will be deemed to have agreed to such
contribution in these circumstances by his investment in the Series of
the Trust. This procedure will permit the net asset value per share of
the Series of the Trust to be maintained at a constant dollar value per
share.
The Trustees, by resolution, may discontinue or amend the practice
of maintaining the net asset value per share at a constant dollar amount
with respect to any Series at any tine and such modification shall be
evidenced by appropriate changes in the Prospectus.
9.4. Power to Modify Foregoing Procedures. Notwithstanding any of
the foregoing provisions of this Article IX, the Trustees may prescribe,
in their absolute discretion, such other bases and times for detemining
the per share net asset value of the Trust's Shares or net income, or the
declaration and payment of dividends and distributions as they may deem
necessary or desirable to enable the Trust to comply with any provision
of the 1940 Act, or any securities association registered under the
Securities Exchange Act of 1934, or any order of exemption issued by said
Commission, all as in effect now or here-ZIP after amended or
modified.
24.
<PAGE> 25
ARTICLE X
Shareholders
10.1. Voting Powers. The Shareholders shall have power to vote (i)
for the removal of Trustees as provided in Section 2.2; (ii) with respect
to any advisory or management contract of a Series as provided in
Section 4.1; (iii) with respect to the amendment of this Declaration as
provided in Section 11.3; and (iv) with respect to such additional
matters relating to the Trust as may be required or authorized by the
1940 Act or other applicable law or by this Declaration or by the
By-Laws of the Trust.
10.2. Meetings Of Shareholders. Special meetings of the
Shareholders may be called at any time by a majority or the Trustees and
shall be called by any Trustee upon written request of Shareholders of
any Series holding in the aggregate not. less than 10% of the
outstanding Shares of such Series having voting rights, such request
specifying the purpose or purposes for which such meeting is to be
called. Any such meeting shall be held within or without the Common-
wealth of Massachusetts on such day and at such time as the Trustees
shall designate. The holders of one-third of outstanding Shares of
each Series present in person or by proxy shall constitute a quorum for
the transaction of any business, except as may otherwise be required by
the 1940 Act or other applicable law or by this Declaration or the
By-Laws of the Trust. If a quorum is present at a meeting of a
particular Series, the affirmative vote of a majority of the Shares of
such Series represented at the meeting constitutes the action of the
Shareholders, unless the 1940 Act, other applicable law, this Declaration
or the By-Laws of the Trust requires a greater number of affirmative
votes.
10.3. Notice of Meetings. Notice of all meetings of the
Shareholders, stating the time, place and purposes of the meeting, shall
be given by the Trustees by mail to each Shareholder at his registered
address, mailed at least 10 days and not more than 60 days before the
meeting only the business stated in the notice of the meeting shall be
considered at such meeting. Any adjourned meeting may be held as
adjourned without further notice.
10.4. Record Date for Meetings. For the purpose of determining
the Shareholders who are entitled to notice of and to vote at any
meeting, or to participate in any distribution, or for the purpose of any
other action, the Trustees may from time to time close the transfer books
for such period, not exceeding 30 days, as the Trustees may determine; or
without closing the transfer books the Trustees may fix a date not more
than 60 days prior to the date of any meeting of Shareholders or daily
dividends or other action as a record date for the determination of the
Persons to be treated as Shareholders of record for such purposes, except
for dividend payments which shall be governed by Section 9.2 hereof.
10.5. Proxies, etc. At any meeting of Shareholders, any holder of
Shares entitled to vote thereat may vote by proxy, provided that no proxy
shall be voted at any meeting unless it shall have been placed on file
with the Secretary, or with such other officer or agent of the Trust as
the Secretary may
25.
<PAGE> 26
direct, for verification prior to the time at which such vote shall be
taken. Pursuant to a resolution of a majority of the Trustees, proxies
may be solicited in the name of one or more Trustees or am or more of
the officers of the Trust. only Shareholders of reoord shall be
entitled to vote. Each full Share shall be entitled to one vote and
fractional Shares shall be entitled to a vote of such fraction. When
any Share is held jointly by several persons, any one of them may vote
at any meeting in person or by proxy in respect of such Share, but if
more than one of them shall be present at such meeting in person or by
proxy, and such joint owners or their proxies so present disagree as to
any vote to be cast, such vote shall not be received in respect of such
Share. A proxy purporting to be executed by or an behalf of a
Shareholder shall be deemed valid unless challenged at or prior to its
exercise, and the burden of proving invalidity shall rest an the
challenger. If the holder of any such Share is a minor or a person of
unsound mind, and subject to guardianship or to the legal control of any
other person as regards the charge or management of such Share, he may
vote by his guardian or such other person appointed or having such
control, and such vote may be given in person or by proxy.
10.6 Reports. The Trustees shall cause to be prepared with
respect to each Series at least annually a report of operations
containing a balance sheet and statement of income and undistributed
income of the applicable Series of the Trust prepared in conformity with
generally accecpted accounting principles and an opinion of an
independent public accountant on such financial statements. It is
contemplated that separate reports may be prepared for the various
Series. Copies of such reports shall be mailed to all Shareholders of.
record of the applicable Series within the time required by the 1940
Act, and in any event within a reasonable period preceding the annual
meeting of Shareholders. The Trustees shall, in addition, furnish to
the Shareholders at least annually, interim reports containing an
unaudited balance sheet of the Series as of the end of such period and
an unaudited statement of income and surplus for the period from the
beginning of the current fiscal year to the end of such period.
10.7. Inspection of Records. The records of the Trust shall be
open to inspection by Shareholders to the same extent as is pemitted
shareholders of a Massachusetts business corporation.
10.8. Shareholder Action by Written Consent. Any action which may
be taken by Shareholders may be taken without a meeting if a majority of
Shareholders of each Series entitled to vote an the matter (or such
larger proportion thereof as shall be required by any express provision
of this Declaration) consent to the action in writing and the written
consents are filed with the records of the meetings of Shareholders.
Such consent shall be treated for all purposes as a vote taken at a
meeting of Shareholders.
26.
<PAGE> 27
ARTICLE XI
Duration; Termination of Trust;
Amendment; Mergers, Etc.
11.1. Duration. Subject to possible termination in accordance with
the provisions of Section 11.2 hereof, the Trust created hereby shall
continue until the expiration of 20 years after the death of the last
survivor of the initial Trustees named herein and the following name
persons:
<TABLE>
<CAPTION>
Name Address Date of Birth
<S> <C> <C>
Avery Moores Bruno 25 Rutgers Place September 14, 1983
Scarsdale, N.Y. 10583
Avery Daniel Katz 435 E. 70th Street July 20, 1984
New York, N.Y. 10021
Lindsay Rider MacKinnon Mountain Farm Road January 27, 1981
Tuxedo Park, N.Y. 10987
Eric Alfred Pietrzak 95 Corona Avenue January 29, 1981
Pelham, N.Y. 10803
Angus Washburn Smith 12 Masterton Road October 15, 1982
Bronxville, N.Y. 10708
Elisabeth Lyon Smith 12 Masterton road October 15, 1982
Bronxville, N.Y. 10708
</TABLE>
11.2. Termination.
(a) The Trust may be terminated by the affirmative vote of
the holders of not less than two-thirds of the Shares of each Series of
the Trust at any meeting of Shareholders or by an instrument in writing,
without a meeting, signed by a majority of the Trustees and consented to
by the holders of not less than two-thirds of such Shares. Any Series may
be so terminated by vote or written consent of not less than two-thirds of
the Shares of such Series. Upon the termination of the Trust or any
Series,
(i) The Trust or such Series shall carry on no business
except for the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the
Trust on such Series and all of the powers of the Trustees under
this Declaration shall continue until the affairs of the Trust or
such Series shall have been wound up, including the power to
fulfill or discharge the
27.
<PAGE> 28
contracts of the Trust or such Series, collect its assets, sell,
convey, assign, exchange, transfer or otherwise dispose of all or
any part of the remaining Trust Property to one or more persons at
public or private sale for consideration which may consist in whole
or in part of cash,, securities or other property of any kind,
discharge or pay its liabilities, and do all other acts appropriate
to liquidate its business; provided that any sale, conveyance,
assignment, exchange, transfer or other disposition of all or
substantially all the Trust Property shall require approval of the
principal terms of the transaction and the nature and amxint of the
consideration by vote or consent of the holders of a majority of
the Shares entitled to vote.
(iii) After paying or adequately providing for the payment of
all liabilities, and upon receipt of such releases, indemnities and
refunding agreements, as they deem necessary for their protection,
the Trustees may distribute the remaining Trust Property of any
Series, in cash or in kind or partly each, among the Shareholders of
such Series according to their respective rights.
(b) After termination of the Trust or any Series and
distribution to the Shareholders as herein provided, a majority of the
Trustees shall execute and lodge among the records of the Trust an
instrument in writing setting forth the fact of such termination. Upon
termination of the Trust, the Trustees shall there upon be discharged from
all further liabilities and duties hereunder and the rights and interests
of all Shareholders shall thereupon cease. Upon termination of any
Series, the Trustees shall thereunder be discharged from all further
liabilities and duties with respect to such Series, and the rights and
interests of all Shareholders of such Series shall thereupon cease.
11.3. Amendment Procedure.
(a) This Declaration may be amended by the affirmative vote of
the holders of not less than a majority of the Shares at any meeting of
Shareholders or by an instrument in writing, without a meeting, signed by
a majority of the Trustees and consented to by the holders of not less
than a majority of such Shares. Tbe Shareholders of each Series shall
have the right to vote separately on amendments to this Declaration to the
extent provided by Section 10.1. The Trustees may also amend this
Declaration without the vote or consent of Shareholders if they deem it
necessary to conform this Declaration to the requirements of applicable
federal laws or regulations or the requirements of the regulated
investment company provisions of the Internal Revenue Code, but the Trus-
tees shall not be liable for failing so to do.
(b) No amendment may be made, under Section 11.3 (a) above,
which would change any Lights with respect to any Shares of the Trust by
reducing the amount payable thereon upon liquidation of the Trust or by
diminishing or eliminating any voting rights pertaining thereto, except
with the vote or consent of the holders of two-thirds of the Shares of
each Series. Nothing contained in this Declaration shall permit the
amendment of this Declaration to impair the
28.
<PAGE> 29
exemption from personal liability of the Shareholders, Trustees, officers,
employees and agents of the Trust or to permit assesments, upon
Shareholders.
(c) A certification in recordable fom signed by a majority of
the Trustees setting forth an amendment and reciting that it was duly
adopted by the Shareholders or by the Trustees as aforesaid or a copy of
the Declaration, as amended, in recordable form, and executed by a
majority of the Trustees, shall be conclusive evidence of such amendment
when lodged among the records of the Trust.
Notwithstanding any other provision hereof, until such time as a
Registration Statement under the Securities Act of 1933, as amended,
covering the first public offering of Shares of the Trust shall have
become effective, this Declaration of Trust may be terminated or amended
in any respect by the affirmative vote of a majority of the Trustees or
by an instrument signed by a majority of the Trustees.
11.4. Merger, Consolidation and Sale of Assets. The Trust may merge
or consolidate with any other corporation, association, trust or other
organization or may sell, lease or exchange all or substantially all of
the Trust Property, including its good will, upon such terms and
conditions and for such consideration when and as authorized at any
meeting of Shareholders called for the purpose by the affirmative vote of
the holders of not less than two thirds of the Shares of each Series, or
by an instrument or intruments in writing without a meeting, consented to
by the holders of not less than two-thirds of such Shares of each Series,
and any such merger, consolidation, sale, lease or exchange shall be
deemed for all purposes to have been accomplished under and pursuant to
the statutes of the Commonwealth of Massachusetts. Any Series may so
merge, consolidate or effect a sale or exchange of assets by the vote or
written consent of not less than two-thirds of the Shares of such Series.
In respect of any such merger, consolidation, sale or exchange of assets,
any Shareholder shall be entitled to rights of appraisal of his Shares to
the same extent as a shareholder of a Massachusetts business corporation
in respect of a merger, consolidation, sale or exchange of assets of a
Massachusetts business corporation, and such rights shall be his exclusive
remedy in respect of his dissent from any such action.
11.5. Incorporation. With the approval of the holders of a majority
of the Shares, the Trustees may cause to be organized or assist in
organizing a corporation or corporations under the laws of any
jurisdiction or any other trust, partnership, association or other
organization to take over all of the Trust Property or to carry on any
business in which the Trust shall directly or indirectly have any
interest, and to sell, convey and transfer the Trust property to any such
corporation, trust, association or organization in exchange for the Shares
or securities thereof or otherwise, and to lend money to, subscribe for
the Shares or securities of, and enter into any contracts with any such
corporation, trust, partnership, association or organization, or any
corpoation, partnership, trust, association or organization in which the
Trust holds or is about to acquire shares or any other interest. The
Trustees may also cause a merger or consolidation between the Trust or any
successor thereto
29.
<PAGE> 30
and any such corporation, trust, partnership, association or other
organization if and to the extent permitted by law, as provided under
the law then in effect. Nothing contained herein shall be construed as
requiring approval of Shareholders for the Trustees to organize or
assist in organizing one or more corporations, trusts, partnerships,
associations or other organizations and selling, conveying or
transferring a portion of the Trust Property to such organizations or
entities.
30.
<PAGE> 31
ARTICLE XII
Miscellaneous
12.1. Filing. This Declaration and any amendment hereto shall be
filed in the office of the Secretary of the Commonwealth of Massachusetts
and in much other places as may be required under the laws of
Massachusetts and may also be filed or recorded in such other places as
the Trustees deem appropriate. Each amendment so filed shall be
accompanied by a certificate signed and acknowleged by a Trustee stating
that such action was duly taken in a manner provided herein, and unless
such action or such certificate sets forth some later time for the
effectiveness of such amendment, such amendment shall be effective upon
its filing. A restated Declaration, containing the original Declaration
and all amendments theretofore made, may be executed from time to tine by
a majority of the Trustees and shall, upon filing with the Secretary of
the Commonwealth of Massachusetts, be conclusive evidence of all
amendments contained therein and may thereafter be referred to in lieu of
the original Declaration and the various amendments thereto.
12.2. Resident Agent. The Trust shall maintain a resident agent in
the Commonwealth of Massachusetts, which agent shall initially be CT
Corporation System, 10 Post Office Square, Boston, Massachusetts 02109.
The Trustees may designate a successor resident agent, provided, however,
that such appointment shall not become effective until written notice
thereof is delivered to the office of the Secretary of the Commonwealth.
12.3. Governing Law. This Declaration is executed by the Trustees
and delivered in the Commonwealth of Massachusetts and with reference to
the laws thereof, and the rights of all parties and the validity and
construction of every provision hereof shall be subject to and construed
according to the laws of said State and reference shall be specifically
made to the business corporation law of the Commonwealth of
Massachusetts as to the construction of matters not specifically covered
herein or as to which an ambiguity exists.
12.4. Counterparts. This Declaration may be simultaneously executed
in several counterparts, each of which shall be deemed to be an original,
and such counterparts, together, shall constitute one and the same
instrument, which shall be sufficiently evidenced by any such original
counterpart.
12.5. Reliance by Third Parties . Any certificate executed by an
individual who, according to the records of the Trust, or of any
recording office in which this Declaration may be recorded, appears to be
a Trustee hereunder, certifying to: (a) the number or identity of Trustees
or Shareholders, (b) the name of the Trust on any Series thereof, (c) the
establishment of any Series, (d) the due authorization of the execution of
any instrument or writing, (e) the form of any vote passed at a meeting of
Trustees or Shareholders, (f) the fact that the number of Trustees or
Shareholders present at any meeting or executing any written instrument
satisfies the requirements of this Declaration, (9) the form of any
By-Laws adopted by or the identity of any officers elected by the
31.
<PAGE> 32
Trustees, or (h) the existence of any fact or facts which in any manner
relate to the affairs of the Trust or any Series, shall be conclusive
evidence as to the matters so certified in favor of any person dealing
with the Trustees their successors.
12.6. Provisions in Conflict With Law or Regulation.
(a) The provisions of this Declaration are severable, and
if the Trustees shall detemine, with the advice of counse1, that any of
much provisions is in conflict with 1940 Act, the regulated
investment company provisions of the Internal Revenue Code or with
other applicable laws and regulations, the conflicting provision shall
be deemed never to have constituted a part of this Declaration;
provided, however, that such determination shall not affect any of the
remaining provisions of this Declaration or render invalid or improper
any action taken or omitted prior to such detemination.
(b) If any provision of this Declaration shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such
jurisdiction and shall not in any matter affect such provision in any
other jurisdiction or any other provision of this Declaration in any
jurisdiction.
IN WITNESS WHEREOF, the undersigned have caused these prsesents
to be executed as of the day and year first above written.
/s/ PHILIP L. KIRSTEIN
------------------------------
9 Liberty Street
Ossining, New York 10562
/s/ GERALD M. RICHARD
------------------------------
6 Fawn Drive
Belle Mead, New Jersey 08502
/s/ ROBERT HARRIS
------------------------------
21 Vista Road
Plainview, New York 11803
/s/ WILLIAM E. ALDRICH
------------------------------
1ll Windsor Road
Needham, Massachusetts 02192
32.
<PAGE> 1
Ex-99.1 (b)
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUSTE
The undersigned, Philip L. Kirstein, Gerald M. Richard,
Robert Harris and William E. Aldrich, constituting all of
the Trustees of Merrill Lynch California Municipal Series
Trust (the "Trust"), a Massachusetts business trust having
no shareholders as of the date hereof, hereby certify that
the Trustees of the Trust have duly adopted the following
amendment to the Declaration of Trust of the Trust dated
the 20th day of March, 1985.
VOTED: That Article VI, Section 6.2 of the Declaration
of Trust dated March 20, 1985 be and it hereby
is amended to read as follows:
6.2. Series Designation. The Trustees,
in their discretion from time to time, may authorize
the division of Shares into two or more Series,
each Series relating to a separate portfolio of
investments. The different Series shall be
established and designated, and the variations in
the relative rights and preferences as between
the different Series shall be fixed and determined,
by the Trustees; provided, that all Shares shall
be identical except that there may be variations
between different Series as to purchase price,
determination of net asset value, the price, terms
and manner of redemption, special and relative
rights as to dividends and on liquidation, conversion
rights, and conditions under which the several
Series shall have separate voting rights. All
references to Shares in this Declaration shall
be deemed to be shares of any or all Series as
the context may require.
If the Trustees shall divide the Shares
into two or more Series, the following provisions
shall be applicable:
<PAGE> 2
(a) The number of Shares of each Series that
may be issued shall be unlimited. The Trustees
may classify or reclassify any unissued Shares or
any Shares previously issued and reacquired of
any Series into one or more Series that may be
established and designated from time to time.
The Trustees may hold as treasury Shares (of the
same or some other Series), reissue for such
consideration and on such terms as they may determine,
or cancel any Shares of any Series reacquired by
the Trust at their discretion from time to time.
(b) The power of the Trustees to invest
and reinvest the Trust Property of each Series
that may be established shall be governed by
Section 3.2 of this Declaration.
(c) All consideration received by the Trust
for the issue or sale of Shares of a particular
Series, together with all assets in which such
consideration is invested or reinvested, all income,
earnings, profits, and proceeds thereof, including
any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or
payments derived from any reinvestment of such
proceeds in whatever form the same may be, shall
irrevocably belong to that Series for all purposes,
subject only to the rights of creditors of that
Series, and shall be so recorded upon the books
of account of the Trust. In the event that there
are any assets, income, earnings, profits, and
proceeds thereof, funds, or payments which are
not readily identifiable as belonging to any
particular Series, the Trustees shall allocate
them among any one or more of the Series established
and designated from time to time in such manner
and on such basis as they, in their sole discretion,
deem fair and equitable. Each such allocation
by the Trustees shall be conclusive and binding upon
the shareholders of all Series for all purposes.
(d) The assets belonging to each particular
Series shall be charged with the liabilities of
the Trust in respect of that Series only and all
-2-
<PAGE> 3
expenses, costs, charges and reserves attributable
to that Series only and shall not be charged with
the liabilities, expenses, costs, charges and
reserves attributable to other Series, and any
general liabilities, expenses, costs, charges or
reserves of the Trust which are not readily identifiable
as belonging to any particular Series shall be
allocated and charged by the Trustees to and among
any one or more of the Series established and
designated from time to time in such manner and on
such basis as the Trustees in their sole discretion
deem fair and equitable. Each allocation of
liabilities, expenses, costs, charges and reserves
by the Trustees shall be conclusive and binding
upon the holders of all Series for all purposes.
The Trustees shall have full discretion, to the
extent not inconsistent with the 1940 Act, to
determine which items shall be treated as income
and which items as capital; and each such determination
and allocation shall be conclusive and binding
upon the Shareholders.
(e) The power of the Trustees to pay dividends
and make distributions with respect to any one or
more Series shall be governed by Section 9.2 of
this Trust. Dividends and distributions on Shares
of a particular Series may be paid with such
frequency as the Trustees may determine, to the
holders of Shares of that Series, from such of the
income and capital gains, accrued or realized,
from the assets belonging to that Series, as the
Trustees may determine, after providing for actual
and accrued liabilities belonging to that Series.
All dividends and distributions on Shares of a
particular Series shall be distributed pro rata to
the holders of that Series in proportion to the
number of Shares of that Series held by such
holders at the date and time of record established
for the payment of such dividends or distributions.
The establishment and designation of any Series
of Shares shall be effective upon the execution
by a majority of the then Trustees of an instrument
setting forth the establishment and designation
of such Series. Such instrument shall also set
-3-
<PAGE> 4
forth any rights and preferences of such Series
which are in addition to the rights and preferences
of Shares set forth in this Declaration. At any
time that there are no Shares outstanding of any
particular Series previously established and
designated, the Trustees may by an instrument
executed by a majority of their number abolish
that Series and the establishment and designation
thereof. Each instrument referred to in this
paragraph shall have the status of an amendment
to this Declaration.
IN WITNESS WHEREOF, the said Philip L. Kirstein,
Gerald M. Richard, Robert Harris and William E. Aldrich
have signed this Certificate in duplicate original counter-
parts and have caused a duplicate original to be lodged
among the records of the Trust as required by Article XI,
Section 11.3(c) of the Declaration of Trust, as of the
day of July, 1985.
/s/ PHILIP L. KIRSTEIN /s/ GERALD M. RICHARD
-------------------------------- ----------------------------------
9 Liberty Steet 6 Fawn Drive
Ossining, New York 10562 Belle Mead, New Jersey 08502
/s/ ROBERT HARRIS /s/ WILLIAM E. ALDRICH
-------------------------------- ----------------------------------
22 Zeloof Drive 111 Windsor Road
West Windsor, New Jersey 08648 Needham, Massachusetts 02192
-4-
<PAGE> 1
Ex-99.1(c)
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
The undersigned, constituting a majority of the Trustees of Merrill Lynch
California Municipal Series Trust (the "Trust"), a Massachusetts business
trust, hereby certify that the Trustees of the Trust have duly adopted the
following amendment, as approved by a majority of the shareholders of the
Trust, to the Declaration of Trust, as amended, of the Trust, dated the 20th
day of March, 1985 (the " Declaration").
VOTED: Section 1.2 of Article 1 of the Declaration be, and it hereby is,
amended in its entirety to read as follows:
1.2 Definitions. As used in this Declaration, the following
terms shall have the following meanings:
The terms "Affiliated Person", "Assignment", "Commission",
"Interested Person", "Majority Shareholder Vote" (the 67% or more than 50%
requirement of the third sentence of Section 2(a)(42) of the 1940 Act,
whichever may be applicable) and "Principal Underwriter" shall have the
meanings given them in the 1940 Act.
"Declaration" shall mean this Declaration as amended from time to
time. Reference in this Declaration to "Declaration", "hereof", "herein" and
"hereunder" shall be deemed to refer to the Declaration rather than the article
or section in which such words appear.
"Fundamental Policies" shall mean the investment restrictions set
forth in the Prospectus of any Series and designated as fundamental policies
therein.
"Person" shall mean and include individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities, whether
or not legal entities, and governments and agencies and political subdivisions
thereof.
"Prospectus" shall mean the currently effective Prospectus of any
Series of the Trust under the Securities Act of 1933, as amended, including the
Statement of Additional Information incorporated by reference therein.
"Series" shall mean the separate series that may be established and
designated pursuant to Section 6.2.
<PAGE> 2
"Shareholders" shall mean as of any particular time all holders of
record or outstanding shares at such time.
"Shares" shall mean the equal proportionate transferable units of
interest into which the beneficial interest in any Series the Trust shall be
divided from time to time and includes fractions of Shares as well as whole
Shares. As provided in Article VI hereof, a Series of the Trust may issue
separate classes of Shares; all references to Shares shall be deemed to be
Shares of any or all Series or a single class of a Series or all classes of a
Series as the context may require.
"Trustees" shall mean the signatories to this Declaration, so long
as they shall continue in office in accordance with the terms hereof, and all
other persons who at the time in question have been duly elected or appointed
and have qualified as trustees in accordance with the provisions hereof and are
then in office, are herein referred to as the "Trustees", and reference in this
Declaration to a Trustee or Trustees shall refer to such person or persons in
their capacity as Trustees hereunder.
"Trust Property" shall mean as of any particular time any and all
property, real or personal, tangible or intangible, which at such time is owned
or held by or for the account of the Trust, any Series thereof or the Trustees.
The "1940 Act" refers to the Investment Company Act of 1940, as
amended from time to time, and shall include the rules and regulations and any
relevant order of exemption promulgated thereunder by the Securities and
Exchange Commission.
VOTED: That Section 6.2 of Article VI of the Declaration be, and it hereby is,
amended in its entirety to read as follows:
6.2. Series Designation. The Trustee, in their discretion from
time to time, may authorize the division of Shares into two or more Series,
each Series relating to a separate portfolio of investments. The different
Series shall be established and designated, and the variations in the relative
rights and preferences as between the different Series shall be fixed and
determined, by the Trustees; provided that all Shares shall be identical
except that there may be variations between different Series as to purchase
price, determination or net asset value, the price, terms and manner of
redemption, special and relative rights as to dividends and on liquidation,
conversion rights, and conditions under which the several Series shall have
2
<PAGE> 3
separate voting rights. All references to Shares in this Declaration shall be
deemed to be shares of any or all Series as the context may require.
The Trustees, in their discretion without a vote of the
Shareholders, may divide the shares of beneficial interest of any Series into
classes. In such event, each class of a Series shall represent interests in
the Trust Property of a Series and have identical voting, dividend,
liquidation and other rights and the same terms and conditions except that
expenses related directly or indirectly to the distribution of the Shares of a
class of a Series may be borne solely by such class (as shall be determined by
the Trustees) and, as provided in Section 10.1, a class of a Series may have
exclusive voting rights with respect to matters relating to the expenses being
borne solely by such class. The bearing of such expenses solely by a class of
Shares of a Series shall be appropriately reflected (in the manner determined
by the Trustees) in the net asset value, dividend and liquidation rights of the
Shares of such class of a Series. The division of the Shares of a Series into
classes and the terms and conditions pursuant to which the shares of the
classes of a Series will be issued must be made in compliance with the 1940
Act. No division of Shares of a Series into classes shall result in the
creation of a class of Shares having a preference as to dividends or
distributions or a preference in the event of any liquidation, termination or
winding up of the Trust.
If the Trustee shall divide the Shares into two or more Series, the
following provisions shall be applicable:
(a) the number of Shares of each Series and of each class
of a Series that may be issued shall be unlimited. The Trustees may classify
or reclassify any unissued Shares or any Shares previously issued and required
of any Series into one or more Series that may be established and designated
from time to time. The Trustees may hold as treasury Shares (of the same or
some other Series), reissue for such consideration and on such terms as they
may determine, or cancel any Shares of any Series required by the Trust at
their discretion from time to time.
(b) The power of the Trustees to invest and reinvest the
Trust Property of each Series that may be established shall be governed by
Section 3.2 of this Declaration.
(c) All consideration received by the Trust for the issue
or sale of Shares of a particular Series, together with all assets in which
such consideration is
<PAGE> 4
invested or reinvested, all income, earnings, profits,
and proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation or such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that Series for all purposes, subject only to the rights
of creditors, and shall be so recorded upon the books of account of the Trust.
In the event that there are any assets, income, earnings, profits, and proceeds
thereof, funds, or payments which are not readily identifiable as belonging to
any particular Series, the Trustee shall allocate them among any one or more of
the Series established and designated from time to time in such manner and on
such basis as they, in their sole discretion, deem fair and equitable. Each
such allocation by the Trustees shall be conclusive and binding upon the
shareholders of all Series for all purposes.
(d) The assets belonging to each particular Series shall be
charged with the liabilities of the Trust in respect of that Series only and
all expenses, costs, charges and reserves attributable to that Series and shall
not be charged with the liabilities, expenses, costs, charges and reserves
attributable to other Series, and any general liabilities, expenses, costs,
charges or reserves of the Trust which are not readily identifiable as
belonging to any particular Series shall be allocated and charged by the
Trustees to and among any one or more of the Series established and designated
from time to time in such manner and on such basis as the Trustees in their
sole discretion deem fair and equitable. Each allocation of liabilities,
expenses, costs, charges and reserves by the Trustees shall be conclusive and
binding upon the holders of all Series for all purposes. The Trustees shall
have full discretion, to the extent not inconsistent with the 1940 Act, to
determine which items shall be treated as income and which items as capital;
and each such determination and allocation shall be conclusive and binding upon
the Shareholders.
(e) The power of the Trustees to pay dividends and make
distributions with respect to any one or more Series shall be governed by
Section 9.2 of this Declaration. Dividends and distributions on Shares of a
particular Series may be paid with such frequency as the Trustees may
determine, to the holders of Shares of that Series, from such of the income and
capital gains, accrued or realized, from the assets belonging to that Series,
as the Trustees may determine, after providing
<PAGE> 5
for actual and accrued liabilities belonging to the Series. All
dividends and distributions on Shares of a particular Series shall be
distributed pro rata to the holders of that Series in proportion to the number
of Shares of that Series held by such holders at the date and time of record
established for the payment of such dividends or distributions, except that
such dividends and distributions shall appropriately reflect expenses related
directly or indirectly to the distribution of Shares of a class of such Series.
The establishment and designation of any Series of Shares
shall be effective upon the execution by a majority of the then Trustees of an
instrument setting forth the establishment and designation of such Series.
Such instrument shall also set forth any rights and preferences of such Series
which are in addition to the rights and preferences of Shares set forth in this
Declaration. At any time that there are no Shares outstanding of any
particular Series previously established and designated, the Trustees may by an
instrument executed by a majority of their number abolish that Series and the
establishment and designation thereof. Each instrument referred to in this
paragraph shall have the status of an amendment to this Declaration.
VOTED: That Sections 9.1, 9.2 and 9.4 of Article IX of the Declaration be, and
they hereby are, amended in their entirety to read as follows:
9.1. Net Asset Value. The net asset value of each outstanding
Share of each Series of the Trust shall be determined at such time or time on
such days as the Trustees may determine, in accordance with the 1940 Act, with
respect to each Series. The method of determination of net asset value of
Shares of each class of a Series shall be determined by the Trustees an shall
be as set forth in the Prospectus with respect to the applicable Series with
any expenses being borne solely by a class Shares being reflected in the net
asset value of such Shares. The power and duty to make the daily calculations
for any Series may be delegated by the Trustees to the adviser, administrator,
manager, custodian, transfer agent or such other person as the Trustees may
determine. The Trustee may suspend the daily determination of net asset value
to the extent permitted by the 1940 Act.
9.2. Distributions to Shareholders. The Trustees shall from time
to time distribute ratably among the Shareholders of any Series such proportion
of the net profits, surplus (including paid-in-surplus), capital, or
<PAGE> 6
assets with respect to such Series held by the Trustees as they deem
proper with any expenses being borne solely by a class of Shares of any Series
being reflected in the net profits or other assets being distributed to such
class. Such distribution may be made in cash or property (including without
limitation any type of obligations of the Trust or any assets thereof), and the
Trustees may distribute ratably among the shareholders of any Series additional
Shares of such Series issuable hereunder in such manner, at such times, and on
such terms as the Trustees may deem proper. Such distributions may be among the
Shareholders of record at the time of declaring a distribution or among the
Shareholders of record at such later date as the Trustees shall determine. The
Trustees may always retain from the net profits such amount as they may deem
necessary to pay the debts or expenses of the Trust or to meet obligations of
the Trust, or as they deem desirable to use in the conduct of its affairs or to
retain for future requirements or extensions of the business. The Trustees may
adopt and offer to Shareholders of any Series such dividend reinvestment plans,
cash dividend payout plans or related plans as the Trustees shall deem
appropriate for such Series.
Inasmuch as the computation of net income and gains for Federal
income tax purposes may vary from the computation thereof on the books, the
above provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust to avoid or reduce liability for taxes.
9.4. Power to Modify Foregoing Procedures. Notwithstanding any of
the foregoing provisions of this Article IX, the Trustees may prescribe, in
their absolute discretion, such other bases and times for determining the per
share net asset value of the Trust's Shares or net income, or the declaration
and payment of dividends and distributions as they deem necessary or desirable
or to enable the Trust to comply with any provision of the 1940 Act, including
any rule or regulation adopted pursuant to Section 22 of the 1940 Act by the
Commission or any securities association registered under the Securities
Exchange Act of 1934, all as in effect now or hereafter amended or modified.
VOTED: That Sections 10.1 and 10.2 of Article X of the Declaration be, and
they hereby are, amended in their entirety to read as follows:
<PAGE> 7
10.1. Voting Powers. The Shareholders shall have power to vote (i)
for the removal of Trustees as provided in Section 2.2; (ii) with respect to
any advisory or management contract of a Series as provided in Section 4.1;
(iii) with respect to the amendment of this Declaration as provided in Section
11.3; (iv) with respect to such additional matters relating to the Trust as may
be required or authorized by the 1940 Act, the laws of the Commonwealth of
Massachusetts or other applicable law or by this Declaration or the By-Laws of
the Trust; and (v) with respect to such additional matters relating to the
Trust as may be properly submitted for Shareholder approval. If the Shares of
a Series shall be divided into classes as provided in Article VI hereof, the
Shares of each class shall have identical voting rights except that the
Trustees, in their discretion, may provide a class of a Series with exclusive
voting rights with respect to matters related to expenses being borne solely by
such class.
10.2. Meetings of Shareholders. Special meetings of the
Shareholders may be called at any time by a majority of the Trustees and shall
be called by any Trustee upon written request of Shareholders of any Series
holding in the aggregate not less than 10% of the outstanding Shares of such
Series having voting rights, such request specifying the purpose or purposes
for which such meeting is to be called. Any such meeting shall be held within
or without the Commonwealth of Massachusetts on such day and at such time as
the Trustees shall designate. The holders of one-third of the outstanding
Shares of each Series present in person or by proxy shall constitute a quorum
for the transaction of any business, except as may otherwise be required by the
1940 Act, the laws of the Commonwealth of Massachusetts or other applicable law
or by this Declaration or the By-Laws of the Trust. If a quorum is present at
a meeting of a particular Series, the affirmative vote of a majority of the
Shares of each Series represented at the meeting constitutes the action of the
Shareholders, unless the 1940 Act, the laws of the Commonwealth of
Massachusetts or other applicable law, the Declaration or by the By-Laws of the
Trust requires a greater number of affirmative votes. If the Shares of any
Series shall be divided into classes with a class having exclusive voting
rights with respect to certain matters, the aforesaid quorum and voting
requirements with respect to action to be taken by the Shareholders of the
class of such Series on such matters shall be applicable only to the Shares of
such class.
VOTED: That Section 11.2 of Article XI of the Declaration be, and it hereby
is, amended in its entirety to read as follows:
<PAGE> 8
11.2. Termination.
(a) The Trust may be terminated by the affirmative vote of the
holders of not less than two-thirds of the Shares of each Series of the Trust
at any meeting of Shareholders or by an instrument in writing, without a
meeting, signed by a majority of the Trustees and consented to by the holders
of not less than two-thirds of such Shares. Any Series may be so terminated by
vote or written consent of not less than two-thirds of the Shares of such
Series. Upon the termination of the Trust or any Series,
(i) The Trust or such Series shall carry on no business
except for the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of
the Trust or such Series and all of the powers of the Trustees under this
Declaration shall continue until the affairs of the Trust or such Series shall
have been wound up, including the power to fulfill or discharge the contracts
of the Trust or such Series, collects its assets, sell, convey, assign,
exchange, transfer or otherwise dispose of all or any part of the remaining
Trust Property to one or more persons at public or private sale for
consideration which may consist in whole or in part of cash, securities or
other property of any kind, discharge or pay its liabilities, and do all other
acts appropriate to liquidate its business; provided that any sale, conveyance,
assignment, exchange, transfer or other disposition of all or substantially all
the Trust Property shall require approval of the principal terms of the
transaction and the nature and amount of the consideration by vote or consent
of the holders of a majority of the Shares entitled to vote.
(iii) After paying or adequately providing for the payment
of all liabilities, and upon receipt of such releases, indemnities and
refunding agreements, as they deem necessary for their protection, the Trustees
may distribute the remaining Trust Property of any Series, in cash or in kind
or partly each, among the Shareholders of such Series and each class of such
Series, according to their respective rights taking into account the proper
allocation of expenses being borne solely by any Series or any class of Shares
of a Series.
(b) After termination of the Trust or a Series and distribution
to the Shareholders as herein provided, a majority of the Trustees shall
execute and lodge among the
<PAGE> 9
records of the Trust an instrument in writing setting forth the fact of
such termination. Upon termination of the Trust, the Trustees shall thereupon
be discharged from all further liabilities and duties hereunder, and the rights
and interests of all Shareholders shall thereupon cease. Upon termination of
any Series, the Trustees shall thereupon be discharged from all further
liabilities and duties with respect to such Series, and the rights and
interests of all Shareholders of such Series shall thereupon cease.
IN WITNESS WHEREOF, the undersigned, constituting a majority of the
Trustees, have signed this certificate in duplicate original counterparts and
have caused a duplicate original to be lodged among the records of the Trust as
required by Article XI, Section 11.3(c) of the Declaration of Trust as of the
3rd day of October, 1988.
/s/ Kenneth G. Axelson /s/ Andre F. Perold
- -------------------------------- --------------------------------
Kenneth G. Axelson Andre F. Perold
307 Gross Neck Road 56 Barnstable Road
Waldoboro, Maine 04572 West Newton, Massachusetts 02165
/s/ Herbert I. London /s/ Arthur Zeikel
- -------------------------------- --------------------------------
Herbert I. London Arthur Zeikel
2 Washington Square Village 279 Watchung Fork
New York, New York 10012 Westfield, New Jersey 07090
/s/ Joseph L. May
- --------------------------------
Joseph L. May
2305 Hampton Avenue
Nashville, Tennessee 37215
??
{page \* arabic}
{page \* arabic}
<PAGE> 1
Ex-99.1 (d)
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
Establishment and Designation
of
Merrill Lynch California Tax-Exempt Fund
The undersigned, being a majority of the Trustees of
Merrill Lynch California Municipal Series Trust, a Massachusetts
business trust (the "Trust"), acting pursuant to Section 6.2
of the Declaration of Trust, as amended, dated March 20,
1985 (the "Declaration") of the Trust, do hereby divide
the shares of beneficial interest of the Trust, par value
$.10 per share ("Shares"), to create a separate Series,
within the meaning of said Section 6.2, as follows:
1. The Series is designated the "Merrill Lynch
California Tax-Exempt Fund" (referred to herein
as the 'Fund").
2. Shares of the Fund shall be entitled to all of
the rights and preferences accorded to Shares under
the Declaration.
3. The purchase price of Shares of the Fund, the
method of determination of net asset value of the
Fund, the price, terms and manner of redemption
of Shares of the Fund, and the relative dividend
rights of holders of Shares of the Fund shall
be established by the Trustees of the Trust in
accordance with the provisions of the Declaration
and shall be set forth in the currently effective
prospectus relating to shares of the Fund, as
amended from time to time, under the Securities
Act of 1933, as amended.
IN WITNESS WHEREOF, the undersigned have signed this
instrument in duplicate original counterparts and have
caused a duplicate original to be lodged among the records of
the Trust this 25th day of July, 1985.
/s/ PHILIP KIRSTEIN /s/ GERALD M. RICHARD
--------------------------- ------------------------------
9 Liberty Street 6 Fawn Drive
Ossining, New York 10562 Belle Mead, New Jersey 08502
<PAGE> 2
/s/ ROBERT HARRIS /s/ WILLIAM E. ALDRICH
--------------------------- ------------------------------
22 Zeloof Drive 111 Windsor Road
West Windsor, New Jersey 08648 Needham, Massachusetts 02192
The Declaration of Trust establishing Merrill Lynch
California Municipal Series 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, share-
holder, officer, employee or agent of Merrill Lynch California
Municipal Series 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
Estate only shall be liable.
-2-
<PAGE> 1
Ex-99.1(e)
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
Establishment and Designation
of
Class A Shares and Class B Shares of
Beneficial Interest of the
Series Designated Merrill Lynch
California Municipal Fund of the Trust
The undersigned, being a majority of the Trustees of Merrill
Lynch California Municipal Series Trust, a Massachusetts business
trust (the "Trust"), acting pursuant to Section 6.2 of the
Declaration of Trust, as amended, dated March 20, 1985 (the
"Declaration") of the Trust, do hereby divide the shares of
beneficial interest of the Series designated "Merrill Lynch
California municipal Fund" (the "Fund") of the Trust, par value
$.lo per share ("Shares"), to create two classes of Shares, within
the meaning of said Section 6.2, as follows:
1. The two classes of Shares are designated "Class A Shares"
and "Class B Shares
2. Class A Shares and Class B Shares shall be entitled to
all of the rights and preferences accorded to Shares
under the Declaration.
3. The purchase price of Class A Shares and Class B Shares,
the method of determination of net asset value of Class A
Shares and Class B Shares, the price, terms and manner of
redemption of Class A Shares and Class B Shares, and the
relative dividend rights of holders of Class A Shares and
Class B Shares shall be established by the Trustees of
the Trust in accordance with the provisions of the
Declaration and shall be set forth in the currently
effective prospectus and statement of additional
information of the Trust relating to the Fund, as amended
from time to time, under the Securities Act of 1933, as
amended.
4. All Shares issued prior to the filing of this instrument
with the Commonwealth of Massachusetts shall be deemed
Class B Shares.
<PAGE> 2
IN WITNESS WHEREOF, the undersigned, have signed this
instrument in duplicate original counterparts and have caused a
duplicate original to be lodged among the records of the Trust
this 3rd day of October, 1988.
/s/ KENNETH S. AXELSON /s/ ANDRE F. PEROLD
--------------------------- ---------------------------------
357 Gross Neck Road 56 Barnstable Road
Waldoboro, Maine 04572 West Newton, Massachusetts 02165
/s/ HERBERT I. LONDON /s/ ARTHUR ZEIKEL
--------------------------- ---------------------------------
2 Washington Square Village 279 Watchung Fork
New York, New York 10043 Westfield , New Jersey 07090
[SIG]
---------------------------
Joseph L. May
2305 Hampton Avenue
Nashville, Tennessee 37219
The Declaration of Trust establishing Merrill Lynch
California Municipal Series 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 Merrill Lynch California Municipal series Trust shall be
held to any personal liability, nor shall resort be had to their
private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of said Trust but the
Trust Property only shall be liable.
2.
<PAGE> 1
Ex-99.1(f)
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
The undersigned, constituting a majority of the Trustees of Merrill
Lynch California Municipal Series Trust, a Massachusetts business trust (the
"Trust"), do hereby certify that the Trustees of the Trust have duly adopted
the following amendment to the certificate establishing and designating Merrill
Lynch California Tax-Exempt Fund as a series of the Trust (the "Series") dated
July 25, 1985.
Voted: That the certificate establishing and designating Merrill
Lynch California Tax-Exempt Fund as a Series of the Trust be and it hereby is
amended to change the name of the Series from Merrill Lynch California
Tax-Exempt Fund to Merrill Lynch California Municipal Bond Fund as follows:
The Series is designating the "Merrill Lynch
California Municipal Bond Fund".
WHEREOF, the undersigned have signed this
certificate in duplicate original counterparts and have caused a duplicate
original to be lodged among the records of the Trust as of the 22nd day of
December, 1987.
<PAGE> 2
/s/ Arthur Zeikel _
------------------------------
Arthur Zeikel
279 Watchung Fork
Westfield, New Jersey 07090
/s/ Kenneth S. Axelson _
------------------------------
Kenneth S. Axelson
307 Gross Neck Road
Waldoboro, Maine 04572
/s/ Andre F. Perold _
------------------------------
Andre F. Perold
50 Burnstable Road
West Newton, Massachusetts 02165
/s/ Robert F. Vandell _
------------------------------
Robert F. Vandell
106 Cavalier
Charlottesville, Virginia 22906
/s/ Herbert I. London _
------------------------------
Herbert I. London
2 Washington Square Village
New York, New York 11012
/s/ Joseph L. May _
------------------------------
Joseph L. May
2305 Hampton Avenue
Nashville, Tennessee 37215
<PAGE> 3
The Declaration of Trust establishing Merrill Lynch California
Municipal Series 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 Merrill Lynch California
Municipal Series 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 Estate only shall be liable. ??
BWNY2/228091.1/40500/04992/3697 {date \@ "MMMM d, yyyy"|June 20, 1995}
{page \* arabic}
BWNY2/228091.1/40500/04992/3697 {date \@ "MMMM d, yyyy"|June 20, 1995}
{page \* arabic}
<PAGE> 1
Amendment to
Dec. to Trust
Ex-99.1(g)
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
Certification Of Amendment
To Declaration Of Trust
and
Establishment and Designation of Classes
The undersigned, constituting a majority of the Trustees of
Merrill Lynch California Municipal Series Trust (the "Trust"), a
Massachusetts business trust, hereby certify that the Trustees of
the Trust have duly adopted the following amendments, as approved
by a majority of the shareholders of the Trust, to the Trust's
Declaration of Trust.
VOTED: That the second paragraph of Section 6.2 of Article VI
of the Declaration of Trust be, and it hereby is,
amended by adding the following:
The Trustees may provide that shares of a class will be exchanged
for shares of another class without any act or deed on the part
of the holder of shares of the class being exchanged, whether or
not shares of such class are issued and outstanding, all on terms
and conditions as the Trustees may specify. The Trustees may
redesignate a class or series of shares of beneficial interest or
a portion of a class or series of shares of beneficial interest
whether or not shares of such class or series are issued and
outstanding, provided that such redesignation does not
substantially adversely affect the preference, conversion or
other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption of
such issued and outstanding shares of beneficial interest.
VOTED: That Section 6.3 of Article VI of the Declaration of
Trust be, and it hereby is, amended in its entirety to
read as follows:
6.3. Rights of Shareholders. The ownership of the Trust
Property of every description and the right to conduct any
business hereinbefore described are vested exclusively in the
Trustees, and the Shareholders shall have no interest therein
other than the beneficial interest conferred by their Shares with
respect to a particular Series, and they shall have no right to
call for any partition or division of any property, profits,
rights or interests of the Trust nor can they be called upon to
share or assume any losses of the Trust or suffer an assessment
of any kind by virtue of their ownership of Shares. The Shares
<PAGE> 2
shall be personal property giving only the rights in this
Declaration specifically set forth. The Shares shall not entitle
the holder to preference, preemptive, appraisal, conversion or
exchange rights (except for rights of appraisal specified in
Section 11.4 and except as may be specified by the Trustees in
connection with the division of shares into classes or the
redesignation of classes or portions of classes in accordance
with Section 6.2).
VOTED: That Section 10.1 of Article X of the Declaration of
Trust be, and it hereby is, amended in its entirety to
read as follows:
10.1. Voting Powers. The Shareholders shall have power to
vote (i) for the removal of Trustees as provided in Section 2.2;
(ii) with respect to any advisory or management contract of a
Series as provided in Section 4.1; (iii) with respect to the
amendment of this Declaration as provided in Section 11.3; (iv)
with respect to such additional matters relating to the Trust as
may be required or authorized by the 1940 Act, the laws of the
Commonwealth of Massachusetts or other applicable law or by this
Declaration or the By-Laws of the Trust; and (v) with respect to
such additional matters relating to the Trust as may be properly
submitted for Shareholder approval. If the Shares of a Series
shall be divided into classes as provided in Article VI hereof,
the Shares of each class shall have identical voting rights
except that the Trustees, in their discretion, may provide a
class of a Series with exclusive voting rights with respect to
matters related to expenses being borne solely by such class
whether or not shares of such class are issued and outstanding.
2
<PAGE> 3
The undersigned, being a majority of the Trustees of the
Trust, acting pursuant to Section 6.2 of the Declaration of
Trust, do hereby divide the shares of beneficial interest of each
series of the Trust to create four classes of shares, within the
meaning of said Section 6.2, as follows:
1. The four classes of shares are designated "Class A
Shares," "Class B Shares," "Class C Shares," and "Class
D Shares."
2. Class A Shares, Class B Shares, Class C Shares and
Class D Shares shall be entitled to all of the rights
and preferences accorded to Shares under the
Declaration of Trust.
3. The purchase price, the method of determination of net
asset value, the price, terms and manner of redemption,
and the relative dividend rights of holders of Class A
Shares, Class B Shares, Class C Shares and Class D
Shares shall be established by the Trustees of the
Trust in accordance with the provisions of the
Declaration of Trust and shall be set forth in the
currently effective prospectus and statement of
additional information of the Trust relating to each
series of the Trust, as amended from time to time,
contained in the Trust's registration statement under
the Securities Act of 1933, as amended.
4. Class A Shares, Class B Shares, Class C Shares and
Class D Shares shall vote together as a single class
except that shares of a class may vote separately on
matters affecting only that class and shares of a class
not affected by a matter will not vote on that matter.
5. A class of shares of any series of the Trust may be
terminated by the Trustees by written notice to the
Shareholders of the class.
3
<PAGE> 4
IN WITNESS WHEREOF, the undersigned, constituting a majority
of the Trustees of the Trust, have signed this certificate in
duplicate original counterparts and have caused a duplicate
original to be lodged among the records of the Trust as required
by Article XI, Section 11.3(c) of the Declaration of Trust, as of
the 17th day of October, 1994.
/s/ KENNETH S. AXELSON /s/ HERBERT I. LONDON
------------------------- -----------------------------
75 Jameson Point Road 2 Washington Square Village
Rockland, ME 04841 Apartment 12B
New YOrk, Ny 10012
/s/ ROBERT R. MARTIN /s/ JOSEPH L. MAY
------------------------- -----------------------------
513 Grand Hill 2136 Golf Club Lane
St. Paul, MN 55102 Nashville, TN 37215
/s/ ANDRE F. PEROLD /s/ ARTHUR ZEIKEL
------------------------- -----------------------------
56 Barnstable Road 300 Woodland Avenue
West Newton, MA 02165 Weseld, NJ 07090
The Declaration of Trust establishing Merrill Lynch
California Municipal Series 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 the
Trust, "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 Merrill Lynch
California Municipal Series 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.
4
<PAGE> 1
EX-99.2
- --------------------------------------------------------------------------------
BY-LAWS
OF
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
- --------------------------------------------------------------------------------
<PAGE> 2
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
BY-LAWS
These By-Laws are made and adopted pursuant to Section 2.6
of the Declaration of Trust establishing MERRILL LYNCH CALIFORNIA
MUNICIPAL SERIES TRUST, dated March 20, 1985, as from time to
time amended (hereinafter called the "Declaration"). All words
and terms capitalized in these By-Laws shall have the meaning or
meanings set forth for such words or terms in the Declaration.
ARTICLE I
Shareholder Meetings
Section 1.1. Chairman. The Chairman, if any, shall act as
chairman at all meetings of the Shareholders; in his absence, the
President shall act as chairman; and in the absence of the
Chairman and President, the Trustee or Trustees present at each
meeting may elect a temporary chairman for the meeting, who may
be one of themselves.
Section 1.2. Proxies; Voting. Shareholders may vote either
in person or by duly executed proxy and each full share
represented at the meeting shall have one vote, all as provided
in Article X of the Declaration. No proxy shall be valid after
eleven (11) months from the date of its execution, unless a
longer period is expressly stated in such proxy.
1
<PAGE> 3
eleven (11) months from the date of its execution, unless a
longer period is expressly stated in such proxy.
Section 1.3. Closing of Transfer Books and Fixing Record
Dates. For the purpose of--determining the Shareholders who are
entitled to notice of or to vote or act at any meeting, including
any adjournment thereof, or who are entitled to participate in
any dividends, or for any other proper purpose, the Trustees may
from time to time close the transfer books or fix a record date
in the manner provided in Section 10.4 of the Declaration. If
the Trustees do not prior to any meeting of Shareholders so fix a
record date or close the transfer books, then the date of mailing
notice of the meeting or the date-upon which the dividend
resolution is adopted, as the case may be, shall be the record
date.
Section 1.4. Inspectors of Election. In advance of any
meeting of Shareholders, the Trustees may appoint Inspectors of
Election to act at the meeting or any adjournment thereof. If
Inspectors of Election are not so appointed, the Chairman, if
any, of any meeting of Shareholders may, and on the request of
any Shareholder or his proxy shall, appoint Inspectors of
Election of the meeting. The number of Inspectors shall be
either one or three. If appointed at the meeting on the request
of one or more Shareholders or proxies, a majority of Shares
present shall determine whether one or three Inspectors are to be
appointed, but failure to allow such determination by the
2.
<PAGE> 4
Shareholders shall not affect the validity of the appointment of
Inspectors of Election. In case any person appointed as
Inspector fails to appear or fails or refuses to act, the vacancy
may-be -filled by appointment made by the Trustees in advance of
the convening of the meeting or at the meeting by the person
acting as chairman. The Inspectors of Election shall determine
the number of Shares outstanding, the Shares represented at the
meeting, the existence of a quorum, the authenticity, validity
and effect of proxies, shall receive votes, ballots or consents,
shall hear and determine all challenges and questions in any way
arising in connection with the right to vote, shall count and
tabulate all votes or consents, determine the results, and do
such other acts as may be proper to conduct the election or vote
with fairness to all Shareholders. If there are three Inspectors
of Election, the decision, act or certificate of a majority is
effective in all respects as the decision, act or certificate of
all. On request of the Chairman, if any, of the meeting, or of-
any Shareholder or his proxy, the Inspectors of Election shall
make a report in writing of any challenge or question or matter
determined by them and shall execute a certificate of any facts
found by them.
Section 1.5. Records at Shareholder Meetings. At each
meeting of the Shareholders there shall be open for inspection
the minutes of the last previous Shareholder Meeting of the Trust
and a list of the Shareholders of the Trust, certified to be true
3.
<PAGE> 5
and correct by the Secretary or other proper agent of the Trust,
as of the record date of the meeting or the date of closing of
transfer books, as the case may be. Such list of Shareholders
shall contain the name of each Shareholder in alphabetical order
and the address and number of Shares owned by such Shareholder.
Shareholders shall have such other rights and procedures of
inspection of the books and records of the Trust as are granted
to shareholders of a Massachusetts business corporation.
ARTICLE II
Trustees
Section 2.1. Annual and Regular Meetings. The Trustees
shall hold an annual meeting for the election of officers and the
transaction of other business which may come before such meeting,
on such date as shall be fixed by the Trustees from time to time.
Regular meetings of the Trustees may be held without call or
notice at such place or places and times as the Trustees may by
resolution provide from time to time.
Section 2.2. Special Meetings. Special Meetings of the
Trustees shall be held upon the call of the Chairman, if any, the
President, the Secretary or any two Trustees, at such time, on
such day, and at such place, as shall be designated in the notice
of the meeting.
Section 2.3. Notice. Notice of a meeting shall be given by
mail or by telegram (which term shall include a cablegram) or
<PAGE> 6
delivered personally. If notice is given by mail, it shall be
mailed not later than 48 hours preceding the meeting and if given
by telegram or personally, such telegram shall be sent or
delivery made not later than 48 hours preceding the meeting.
Notice by telephone shall constitute personal delivery for these
purposes. Notice of a meeting of Trustees may be waived before
or after any meeting by signed written waiver. Neither the
business to be transacted at, nor the purpose of, any meeting of
the Board of Trustees need be stated in the notice or waiver of
notice of such meeting, and no notice need be given of action
proposed to be taken by unanimous written consent. The
attendance of a Trustee at a meeting shall constitute a waiver of
notice of such meeting except where a Trustee attends a meeting
for the express purpose of objecting to the transaction of any
business on the ground that the meeting has not been lawfully
called or convened.
Section 2.4. Chairman; Records. The Chairman, if any,
shall act as chairman at all meetings of the Trustees; in his
absence the President shall act as chairman; and, in the absence
of the Chairman and the President, the Trustees present shall
elect one of their number to act as temporary chairman. The
results of all actions taken at a meeting of the Trustees, or by
unanimous written consent of the Trustees, shall be recorded by
the Secretary.
<PAGE> 7
ARTICLE III
Officers
Section 3.1. Officers of the Trust. The officers of the
Trust shall consist of a Chairman, if any, a President, a
Secretary, a Treasurer and such other officers or assistant
officers, including Vice-Presidents, as may be elected by the
Trustees. Any two or more of the offices may be held by the same
person, except that the same person may not be both President and
Secretary. The Trustees may designate a Vice-President as an
Executive Vice-President and may designate the order in which the
other Vice-Presidents may act. The Chairman and the President
shall be Trustees, but no other officer of the Trust need be a
Trustee.
Section 3.2. Election and Tenure. At the initial
organization meeting and thereafter at each annual meeting of the
Trustees, the Trustees shall elect the Chairman, if any,
President, Secretary, Treasurer and such other officers as the
Trustees shall deem necessary or appropriate in order to carry
out the business of the Trust. Such officers shall hold office
until the next annual meeting of the Trustees and until their
successors have been duly elected and qualified. The Trustees
may fill any vacancy in office or add any additional officers at
any time.
Section 3.3. Removal of Officers. Any officer may be
removed at any time, with or without cause, by action of a
6.
<PAGE> 8
majority of the Trustees. This provision shall not prevent the
making of a contract of employment for a definite term with any
officer and shall have no effect upon any cause of action which
any officer may have as a result of removal in breach of a
contract of employment. Any officer may resign at any time by
notice in writing signed by such officer and delivered or mailed
to the Chairman, if any, President: or Secretary, and such
resignation shall take effect immediately upon receipt by the
Chairman, if any, President, or Secretary, or at a later date
according to the terms of such notice in writing.
Section 3.4. Bonds and Surety. Any officer may be required
by the Trustees to be bonded for the faithful performance of his
duties in such amount and with such sureties as the Trustees may
determine.
Section 3.5. Chairman, President, and Vice-Presidents. The
Chairman, if any, shall, if present, preside at all meetings of
the Shareholders and of the Trustees and shall exercise and
perform such other powers and duties as may be from time to time
assigned to him by the Trustees. Subject to such supervisory
powers, if any, as may be given by the Trustees to the Chairman,
if any, the President shall be the chief executive officer of the
Trust and, subject to the control of the Trustees, shall have
general supervision, direction and control of the business of the
Trust and of its employees and shall exercise such general powers
of management as are usually vested in the office of President of
7.
<PAGE> 9
a corporation. In the absence of the Chairman, if any, the
President shall preside at all meetings of the Shareholders and
of the Trustees. The President shall be, ex officio, a member of
all standing committees, except as otherwise provided in the
resolutions or instruments creating any such committees. Subject
to direction of the Trustees, the Chairman, if any, and the
President shall each have power in the name and on behalf of the
Trust to execute any and all loan documents, contracts, agreements,
deeds, mortgages, and other instruments in writing, and to
employ and discharge employees and agents of the Trust. Unless
otherwise directed by the Trustees, the Chairman, if any, and the
President shall each have full authority and power, on behalf of
all of the Trustees, to attend and to act and to vote, on behalf
of the Trust at any meetings of business organizations in which
the Trust holds an interest, or to confer such powers upon any
other persons, by executing any proxies duly authorizing such
persons. The Chairman, if any, and the President shall have such
further authorities and duties as the Trustees shall from time to
time determine. In the absence or disability of the President,
the Vice-Presidents in order of their rank as fixed by the
Trustees or, if more than one and not ranked, the Vice-President
designated by the Trustees, shall perform all of the duties of
the President, and when so acting shall have all the powers of
and be subject to all of the restrictions upon the President.
Subject to the direction of the Trustees, and of the President,
8.
<PAGE> 10
each Vice-President shall have the power in the name and on
behalf of the Trust to execute any and all loan documents,
contracts, agreements, deeds, mortgages and other instruments in
writing, and, in addition, shall have such other duties and
powers as shall be designated from time to time by the Trustees
or by the President.
Section 3.6. Secretary. The Secretary shall keep the
minutes of all meetings of, and record all votes of, Shareholders,
Trustees and the Executive Committee, if any. He shall
be custodian of the seal of the Trust, if any, and he (and any
other person so authorized by the Trustees) shall affix the seal
or, if permitted, a facsimile thereof, to any instrument executed
by the Trust which would be sealed by a Massachusetts corporation
executing the same or a similar instrument and shall attest the
seal and the signature or signatures of the officer or officers
executing such instrument on behalf of the Trust. The Secretary
shall also perform any other duties commonly incident to such
office in a Massachusetts business corporation, and shall have
such other authorities and duties as the Trustees shall from time
to time determine.
Section 3.7. Treasurer. Except as otherwise directed by
the Trustees, the Treasurer shall have the general supervision of
the monies, funds, securities, notes receivable and other
valuable papers and documents of the Trust, and shall have and
exercise under the supervision of the Trustees and of the
9.
<PAGE> 11
President all powers and duties normally incident to his office.
He may endorse for deposit or collection all notes, checks and
other instruments payable to the Trust or to its order. He shall
deposit all funds of the Trust in such depositories as the
Trustees shall designate. He shall be responsible for such
disbursement of the funds of the Trust as may be ordered by the
Trustees or the President. He shall keep accurate account of the
books of the Trust's transactions which shall be the property of
the Trust, and which together with all other property of the
Trust in his possession, shall be subject at all times to the
inspection and control of the Trustees. Unless the Trustees
shall otherwise determine, the Treasurer shall be the principal
accounting officer of the Trust and shall also be the principal
financial officer of the Trust. He shall have such other duties
and authorities as the Trustees shall from time to time
determine. Notwithstanding anything to the contrary herein
contained, the Trustees may authorize any adviser, administrator,
manager or transfer agent to maintain bank accounts and deposit
and disburse funds of any Series of the Trust on behalf of such
Series.
Section 3.8. Other Officers and Duties. The Trustees may
elect such other officers and assistant officers as they shall
from time to time determine to be necessary or desirable in order
to conduct the business of the Trust. Assistant officers shall
act generally in the absence of the officer whom they assist and
10.
<PAGE> 12
shall assist that officer in the duties of his office. Each
officer, employee and agent of the Trust shall have such other
duties and authority as may be conferred upon him by the Trustees
or delegated to him by the President.
ARTICLE IV
Miscellaneous
Section 4.1. Depositories. In accordance with Section 7.1
of the Declaration, the funds of the Trust shall be deposited in
such depositories as the Trustees shall designate and shall be
drawn out on checks, drafts or other orders signed by such
officer, officers, agent or agents (including any adviser,
administrator or manager), as the Trustees may from time to time
authorize.
Section 4.2. Signatures. All contracts and other
instruments shall be executed on behalf of the Trust by such
officer, officers, agent or agents, as provided in these By-Laws
or as the Trustees may from time to time by resolution provide.
Section 4.3. Seal. The seal of the Trust, if any, or any
Series of the Trust, if any, may be affixed to any document, and
the seal and its attestation may be lithographed, engraved or
otherwise printed on any document with the same force and effect
as if it had been imprinted and attested manually in the same
manner and with the same effect as if done by a Massachusetts
business corporation.
<PAGE> 13
ARTICLE V
Stock Transfers
Section 5.1. Certificates. Certificates representing
Shares of any Series of the Trust shall not be issued.
Section 5.2. Transfer Agents, Registrars and the Like. As
provided in Section 6.7 of the Declaration, the Trustees shall
have authority to employ and compensate such transfer agents and
registrars with respect to the Shares of the various Series of
the Trust as the Trustees shall deem necessary or desirable. In
addition, the Trustees shall have power to employ and compensate
such dividend disbursing agents, warrant agents and agents for
the reinvestment of dividends as they shall deem necessary or
desirable. Any of such agents shall have such power and
authority as is delegated to any of them by the Trustees.
Section 5.3. Transfer of Shares. The Shares of the Trust
shall be transferable on the books of the Trust only upon
delivery to the Trustees or a transfer agent of the Trust of
proper documentation as provided in Section 6.8 of the
Declaration. The Trust, or its transfer agents, shall be
authorized to refuse any transfer unless and until presentation
of such evidence as may be reasonably required to show that the
requested transfer is proper.
Section 5.4. Registered Shareholders. The Trust may deem
and treat the holder of record of any Share as the absolute owner
12.
<PAGE> 14
thereof for all purposes and shall not be required to take any
notice of any right or claim of right of any other person.
ARTICLE VI
Amendment of By-Laws
Section 6.1. Amendment and Repeal of By-Laws. In accordance
with Section 2.6 of the Declaration, the Trustees shall have
the power to alter, amend or repeal the By-Laws or adopt new By-
Laws at any time. Action by the Trustees with respect to the By-
Laws shall be taken by an affirmative vote of a majority of the
Trustees. The Trustees shall in no event adopt By-Laws which are
in conflict with the Declaration, and any apparent inconsistency
shall be construed in favor of the related provisions in the
Declaration.
The Declaration of Trust establishing Merrill Lynch California
Municipal Series 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 Merrill Lynch California Municipal Series Trust shall be
held to any personal liability, nor shall resort be had to their
13.
<PAGE> 15
private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of said Merrill Lynch
California Municipal Series Trust but the Trust Property only
shall be liable.
14.
<PAGE> 1
EX-99.5
MANAGEMENT AGREEMENT
AGREEMENT made this 5th day of August, 1985, by and between
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST, a Massachusetts business trust
(hereinafter referred to as the "Trust'), and FUND ASSET MANAGEMENT, INC., a
Delaware corporation (hereinafter referred to as the "Manager").
W I T N E S S E T H:
WHEREAS, the Trust is engaged in business as a diversified open-end
investment company registered under the Investment Company Act of 1940, as
amended (hereinafter referred to as the "Investment Company Act"); and
WHEREAS, the Trustees of the Trust (the "Trustees") are authorized to
establish separate series relating to separate portfolios of securities, each
of which will offer a separate class of shares; and
WHEREAS, the Trustees have established and designated the MERRILL LYNCH
CALIFORNIA TAX-EXEMPT FUND (the "Fund") as the initial series of the Trust; and
WHEREAS, the Manager is engaged principally in rendering management and
investment advisory services and is registered as an investment adviser under
the Investment Advisers Act of 1940; and
<PAGE> 2
WHEREAS, the Trust desires to retain the Manager to render
management and investment advisory services to the Trust and Fund in the
manner and on the terms hereinafter set forth; and
WHEREAS, the Manager is willing to provide management and investment
advisory services to the Trust and the Fund on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Trust and the Manager hereby agree as follows:
ARTICLE I
Duties of the Manager
The Trust hereby employs the Manager to act as an investment
manager and investment adviser of the Fund and to furnish, or
arrange for affiliates to furnish, the management and investment
advisory services described below, subject to policies of, review
by and overall control of the Trustees, for the period and on the
terms and conditions set forth in this Agreement. The Manager
hereby accepts such employment and agrees during such period, at
its own expense, to render, or arrange for the rendering of, such
services and to assume the obligations herein set forth for the
compensation provided for herein. The Manager and its affiliates
shall for all purposes herein be deemed to be an independent contractor
and shall, unless otherwise expressly provided or authorized,
have no authority to act for or represent the Trust or the
2.
<PAGE> 3
Fund in any way or otherwise be deemed an agent of the Trust or
the Fund.
(a) Management Services. The Manager shall perform (or
arrange for the performance by affiliates of) the management and
administrative services necessary for the operation of the Trust
and the Fund including administering shareholder accounts and
handling shareholder relations. The Manager shall provide the
Trust and the Fund with office space, equipment and facilities and
such other services as the Manager, subject to review by the
Trustees, shall from time to time determine to be necessary or
useful to perform its obligations under this Agreement. The
Manager shall also, on behalf of the Trust, and the Fund, conduct
relations with custodians, depositories, transfer agents, dividend
disbursing agents, other shareholder service agents, accountants,
attorneys, underwriters, brokers and dealers, corporate fiduciaries,
insurers, banks and such other persons in any such other
capacity deemed to be necessary or desirable. The Manager shall
generally monitor the Trust's and the Fund's compliance with
investment policies and restrictions as set forth in the currently
effective prospectus and statement of additional information
relating to the shares of the Fund under the Securities Act of
1933, as amended (the "Prospectus" and the "Statement of
Additional Information," respectively). The Manager shall make
reports to the Trustees of its performance of obligations
hereunder and furnish advice and recommendations with respect to
3.
<PAGE> 4
such other aspects of the business and affairs of the Trust and
the Fund as it shall determine to be desirable.
(b) Investment Advisory Services. The Manager shall provide
the Trust with such investment research, advice and supervision as.
the latter may from time to time consider necessary for the proper
supervision of the assets of the Fund, shall furnish continuously
an investment program for the Fund and shall determine from time
to time which securities shall be purchased, sold or exchanged and
what portion of the assets of the Fund shall be held in the
various money market securities or cash, subject always to the
restrictions of the Declaration of Trust and By-Laws of the Trust,
as amended from time to time, the provisions of the Investment
Company Act and the statements relating to the Trust's investment
objectives, investment policies and investment restrictions as the
same are set forth in the Prospectus and Statement of Additional
Information. The Manager shall also make decisions for the Trust
as to the manner in which voting rights, rights to consent to
corporate action and any other rights pertaining to the Trust's
portfolio securities shall be exercised. Should the Trustees at
any time, however, make any definite determination as to investment
policy and notify the Manager thereof in writing, the Manager
shall be bound by such determination for the period, if any,
specified in such notice or until similarly notified that such
determination has been revoked. The Manager shall take, on behalf
of the Fund, all actions which it deems necessary to implement the
4.
<PAGE> 5
investment policies determined as provided above, and in particular
to place all orders for the purchase or sale of portfolio
securities for the Fund's account with brokers or dealers selected
by it, and to that end, the Manager is authorized as the agent of
the Trust to give instructions to the Custodian of the Fund as to
deliveries of securities and payments of cash for the account of
the Fund. In connection with the selection of such brokers or
dealers and the placing of such orders with respect to assets of
the Fund, the Manager is directed at all times to seek to obtain
execution and price within the policy guidelines determined by the
Trustees as set forth in the Prospectus and Statement of Additional
Information. Subject to this requirement and the provisions
of the Investment Company Act, the Securities Exchange Act
of 1934, as amended, and other applicable provisions of law, the
Manager may select brokers or dealers with which it or the Trust
is affiliated.
ARTICLE II
Allocation of Charges and Expenses
(a) The Manager. The Manager assumes and shall pay for
maintaining the staff and personnel necessary to perform its
obligations under this Agreement, and shall at its own expense,
provide the office space, equipment and facilities which it is
obligated to provide under Article I hereof, and shall pay all
5.
<PAGE> 6
compensation of officers of the Trust and all Trustees who are
affiliated persons of the Manager.
(b) The Trust. The Trust assumes and shall pay or cause to
be paid all other expenses of the Trust and the Fund (except for
the expenses incurred by the Distributor), including, without
limitation: redemption expenses, expenses of portfolio transactions,
expenses of registering 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, Securities
and Exchange Commission fees, interest, taxes, fees and actual
out-of-pocket expenses of Trustees who are not affiliated persons
of the Manager, fees for legal and auditing services, litigation
expenses, costs of printing proxies and other expenses related to
shareholder meetings, and other expenses properly payable by the
Trust and the Fund. It is also understood that the Trust will
reimburse the Manager for its costs in providing accounting
services to the Trust and the Fund. The Distributor will pay
certain of the expenses of the Fund incurred in connection with
the continuous offering of Fund shares.
ARTICLE III
Compensation of the Manager
(a) Investment Management Fee. For the services rendered,
the facilities furnished and expenses assumed by the Manager, the
6.
<PAGE> 7
Trust shall pay to the Manager at the end of each calendar month a
fee based upon the average daily value of the net assets of the
Fund, as determined and computed in accordance with the description
of the determination of net asset value contained in the
Prospectus and Statement of Additional Information, at the annual
rate of 0.55 of 1.0% (.55%) of the average daily net assets of the
Fund, commencing on the day following effectiveness hereof. If
this Agreement becomes effective subsequent to the first day of a
month or shall terminate before the last day of a month, compensation
for that part of the month this Agreement is in effect
shall be prorated in a manner consistent with the calculation
of the fee as set forth above. Subject to the provisions of
subsection (b) hereof, payment of the Manager's compensation for
the preceding month shall be made as promptly as possible after
completion of the computations contemplated by subsection (b)
hereof. During any period when the determination of net asset
value is suspended by the Trustees, the net asset value of a share
as of the last business day prior to such suspension shall for
this purpose be deemed to be the net asset value at the close of,
each succeeding business day until it is again determined.
(b) Expense Limitations. In the event the operating
expenses of the Fund, including amounts payable to the Manager
pursuant to subsection (a) hereof, for any fiscal year ending on a
date on which this Agreement is in effect exceed the expense
limitations applicable to the Fund imposed by applicable state
7.
<PAGE> 8
securities laws or regulations thereunder, as such limitations may
be raised or lowered from time to time, the Manager shall reduce
its management fee by the extent of such excess and, if required
pursuant to any such laws or regulations, will reimburse the Fund
in the amount of such excess, provided, however, to the extent
permitted by law, there shall be excluded from such expenses the
amount of any interest. taxes, brokerage commissions, and extraordinary
expenses (including but not limited to legal claims and
liabilities and litigation costs and any indemnification related
thereto) paid or payable by the Fund. Whenever the expenses of
the Fund exceed a pro rata portion of the applicable annual
expense limitations, the estimated amount of reimbursement under
such limitations shall be applicable as an offset against the
monthly payment of the fee due to the Manager. Should two or more
such expense limitations be applicable as at the end of the last
business day of the month, that expense limitation which results
in the largest reduction in the Manager's fee shall be applicable.
ARTICLE IV
Limitation of Liability of the Manager
The Manager shall not be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or
for any act or omission in the management of the Trust and the
Fund, except for willful misfeasance, bad faith or gross negligence
in the performance of its duties, or by reason of reckless
<PAGE> 9
disregard of its obligations and duties hereunder. As used in
this Article IV, the term "Manager" shall include any affiliates
of the Manager performing services for the Trust or the Fund
contemplated hereby and directors, officers and employees of the
Manager and such affiliates.
ARTICLE V
Activities of the Manager
The services of the Manager to the Trust and the Fund are not
to be deemed to be exclusive, and the Manager and any person
controlled by or under common control with the Manager (for
purposes of Article V referred to as "affiliates") is free to
render services to others. It is understood that Trustees,
officers, employees and shareholders of the Trust and the Fund are
or may become interested in the Manager and its affiliates, as
directors, officers, employees and shareholders or otherwise and
that directors, officers, employees and shareholders of the
Manager and its affiliates are or may become similarly interested
in the Trust and the Fund, and that the Manager may become interested
in the Trust and the Fund as shareholder or otherwise.
ARTICLE VI
Duration and Termination of this Contract
This Agreement shall become effective at of the date first
above written and shall remain in force until May 31, 1987 and
9.
<PAGE> 10
thereafter, but only so long as such continuance is specifically
approved at least annually by (i) the Trustees, or by the vote of
a majority of the outstanding voting securities of the Fund, and
(ii) 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 voting securities of the Fund, or by the
Manager, on sixty days written notice to the other party. This
Agreement shall automatically terminate in the event of its
assignment.
ARTICLE VII
Amendments of this Agreement
This Agreement may be amended by the parties only if such
amendment is specifically approved by (i) the vote of a majority
of outstanding voting securities of the Fund, and (ii) 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.
10.
<PAGE> 11
ARTICLE VIII
Definitions of Certain Terms
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 and the Rules and
Regulations thereunder, subject, however, to such exemptions as
may be granted by the Securities and Exchange Commission under the
Investment Company Act.
ARTICLE IX
Governing Law
This Agreement shall be construed in accordance with laws of
the State of New York and the applicable provisions of the Investment
Company Act. To the extent that the applicable laws 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.
ARTICLE X
Personal Liability
The Declaration of Trust establishing Merrill Lynch California
Municipal Series Trust, dated March 20, 1985, a copy of
which, together with all amendments thereto (the "Declaration"),
11.
<PAGE> 12
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 Merrill Lynch California Municipal Series Trust, shall be held
to any personal liability, nor shall resort be had to their
private property for the satisfaction of any obligation or claim
or otherwise in connection with the affairs of said Merrill Lynch
California Municipal Series Trust, but the Trust Property only
shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
By /S/ ARTHUR ZEIKEL
----------------------------------
FUND ASSET MANAGEMENT, INC.
By PHILIP L. KIRSTEIN
----------------------------------
12.
<PAGE> 1
EX-99.6(A)
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 5th day of August, 1985 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 to date (the "Investment Company
Act"), as a diversified 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 ("Series") relating to
separate portfolios of securities, each of which will offer a
separate class of shares of beneficial interest, par value $0.10
per share (collectively referred to as "shares") to selected
groups of purchasers; and
WHEREAS, the Distributor is a securities firm engaged in the
business of selling shares of investment companies either
directly to purchasers or through other securities dealers; and
WHEREAS, the Trust and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering
of the shares of the various Series, as the same are organized
from time to time, each offering to commence after the effectiveness
of the registration statement covering the shares of a
<PAGE> 2
particular Series filed pursuant to the Securities Act of 1933,
as amended (the "Securities Act").
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 shares of beneficial interest of
each Series which may be established by the Trust (sometimes
herein referred to as "shares") to the public and hereby agrees
during the term of this Agreement to sell shares of the Trust 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 shares of each Series 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 shares in the areas so designated
shall terminate, but this Agreement shall remain otherwise in
full effect until terminated in accordance with the other
provisions hereof.
(b) The exclusive rights granted to the Distributor to
purchase shares from the Trust shall not apply to shares of any
2.
<PAGE> 3
Series of the Trust 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 shares of any such company by the Trust.
(c) Such exclusive rights shall also not apply to shares
issued by the Trust pursuant to reinvestment of dividends or
capital gains distributions.
(d) Such exclusive rights shall also not apply to shares
issued by the Trust pursuant to the reinstatement privilege
afforded redeeming shareholders.
Section 3. Purchase of Shares from the Trust.
(a) Prior to the continuous offering of the shares of a
particular Series, commencing on a date agreed upon by the Trust
and the Distributor, it is contemplated that the Distributor will
solicit subscriptions for shares during a subscription period
which shall last for such period as may be agreed upon by the
parties hereto. The subscriptions will be payable within six
business days after the termination of the subscription period,
at which time the Trust will commence operations.
(b) After the Trust commences operations, the Trust will
commence an offering of its shares and thereafter the Distributor
shall have the right to buy from the Trust the shares needed, but
not more than the shares needed (except for clerical errors in
transmission) to fill unconditional orders for shares of the
3.
<PAGE> 4
Trust placed with the Distributor by investors or securities
dealers. The price which the Distributor shall pay for the
shares of any Fund so purchased from the Trust shall be the net
asset value, determined as set forth in Section 3(d) hereof.
(c) The shares are to be resold by the Distributor to
investors at net asset value, as set forth in Section 3(d)
hereof, or to securities dealers having agreements with the
Distributor upon the terms and conditions set forth in Section 7
hereof.
(d) The net asset value of shares of each Series shall be
determined by the Trust or any agent of the Trust in accordance
with --he method set forth in the prospectus and statement of
additional information of each Series of the Trust and guidelines
established by the Trustees.
(e) The Trust shall have the right to suspend the sale of
its 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 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 shares.
(f) The Trust, or any agent of the Trust designated in
writing by the Trust, shall be promptly advised of all purchase
4.
<PAGE> 5
orders for 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 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 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 Shares by the Trust.
(a) Any of the outstanding shares may be tendered for
redemption at any time, and the Trust agrees to repurchase or
redeem the shares so tendered in accordance with its obligations
as set forth in Article VIII of its Declaration of Trust, as
amended from time to time, and in accordance with the applicable
provisions set forth in the prospectus and statement of
additional information of each Series of the Trust. The price to
be paid to redeem or repurchase the shares shall be equal to the
net asset value calculated in accordance with the provisions of
Section 3(d) hereof, less the redemption fee or other charge, if
any, set forth in the prospectus and statement of additional
5.
<PAGE> 6
information of each Series of the Trust. 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 each
Series as follows: (i) any applicable contingent deferred sales
charge shall be paid to the Distributor and (ii) the balance.
shall be paid to or for the account of the shareholders, in each
case in accordance with the applicable provisions of the prospectus
and statement of additional information of each Series.
(b) Redemption of shares or payment may be suspended at
times when the New York Stock Exchange is closed, when trading
on said Exchange is closed, when trading on said Exchange is restricted,
when an emergency exists as a result of which disposal
by the 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 its Series, 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
6.
<PAGE> 7
distribution of shares of the Trust, and this shall include one
certified copy, upon request by the Distributor, of all financial
statements of each Series 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 for each Series as the Distributor
shall reasonably request.
(b) The Trust shall take, from time to time, but subject to
the necessary approval of the shareholders, all necessary action.
to fix the number of authorized shares of each Series 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 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 shares of
each Series 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.
7.
<PAGE> 8
(d) The Trust will furnish, in reasonable quantities upon
request by the Distributor, copies of annual and interim reports
of each Series.
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort
to effect sales of shares of the Trust, 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 shares of the Trust, 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 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 for each
Series and any sales literature specifically approved by the
Trust for use with respect to a particular Series.
(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
8.
<PAGE> 9
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 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 shares; provided that the
Trust shall approve the forms of agreements with dealers. Shares
sold to selected dealers shall be for resale by such dealers only
at net asset value determined as set forth in Section 3(d)
hereof. The form of agreement with selected dealers to be used
during the subscription period described in Section 3(a) with
respect to shares of the first Series of the Trust, designated
Merrill Lynch California Tax-Exempt Fund is attached hereto as
Exhibit A. and the initial form of agreement with selected dealers
to be used in the continuous offering of such shares is attached
hereto as Exhibit B.
(b) Within the United States, the Distributor shall offer
and sell shares only to such selected dealers as are members in
good standing of the NASD.
Section B. Payment of Expenses.
(a) The Trust shall bear all costs and expenses of the
Trust, including fees and disbursements of its counsel and
9.
<PAGE> 10
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 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).
(h) The Distributor shall be responsible for any payments
made to selected dealers as reimbursement for their expenses
associated with payments of sales commissions to account executives.
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 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 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 a Distribution Plan pursuant to Rule 12b-1 under the
10.
<PAGE> 11
Investment Company Act remains in effect with respect to a particular
Series of the Trust, any expenses incurred by the Distributor
hereunder with respect to such Series may be paid from
amounts recovered by it from such Series under such Plan.
(c) The Trust shall bear the cost and expenses of qualification
of the 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, arising by reason of any
person acquiring any shares, which may be based upon the
Securities Act, or on any other statute or at common law, on the
ground that the registration statement or related prospectus and
statement of additional information, as from time to time amended
and supplemented, or an annual or interim report to shareholders
<PAGE> 12
of any Series of the Trust, 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
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
12.
<PAGE> 13
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 of any
addtional counsel retained by them, but, in case the Trust does
no-- 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
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,
13.
<PAGE> 14
damage or expense described in the foregoing indemnity contained
in subsection (a) of this Section, but only with respsect 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. Duration and Termination of this Agreement.
This Agreement shall become effective as of the date first above
written and shall remain in force until May 31, 1987 and thereafter,
but only so long as such continuance is specifically
approved at least annually by (i) the Trustees of the Trust, or
by the vote of a majority of the outstanding voting securities of
each Series, 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.
14.
<PAGE> 15
This Agreement may be terminated at any time, without the
payment of any penalty, by the Trustees of the Trust or by vote
of a majority of the outstanding voting securities of the Trust,
or by the Distributor, on sixty days' written notice to the other
party. This Agreement shall automatically terminate in the event
of its assignment.
The terms "vote of a majority of the outstanding voting
securities", assignment, "affiliated person" and "interested
person", when used in this Agreement, shall have the respective
meanings specified in the Investment Company Act.
Section 11. Amendments of this Agreement. This Agreement
may be amended by the parties only if such amendment is specifically
approved (i) by the Trustees of the Trust, or by the vote of
a majority of outstanding voting securities of each Series, 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.
Section 12. Governing Law. The provisions of this Agreement
shall be construed and interpreted in accordance with the
laws of the State of New York as at the time in effect and the
applicable provisions of the Investment Company Act. To the
extent that the applicable law of the State of New York, or any
of the provisions herein, conflict with the applicable provisions
of the Investment Company Act, the latter shall control.
15.
<PAGE> 16
Section 13. Personal Liability. The Declaration of Trust
establishing Merrill Lynch California Municipal Series 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 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 /s/ Arthur Zeikel
--------------------------------
MERRILL LYNCH FUNDS DISTRIBUTORS, INC.
By /s/
--------------------------------
16.
<PAGE> 17
EXHIBIT-A
MERRILL LYNCH CALIFORNIA TAX-EXEMPT FUND
Merrill Lynch California Municipal Series Trust
SHARES OF BENEFICIAL INTEREST
SELECTED DEALERS AGREEMENT
FOR SUBSCRIPTION PERIOD
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor")
has an agreement with Merrill Lynch California Municipal Series
Trust, a Massachusets business trust (the "Trust"), pursuant to
which it acts as the distributor for the sale of shares of
beneficial interest, par value $0.10 per share ("the "Shares") of
Merrill Lynch California Tax-Exempt Fund (the "Fund") a Series of
the Trust, and as such has the right to distribute shares of the
Trust for resale. The Trust is a diversified open-end investment
company registered under the. Investment Company Act of 1940, as
amended, and the shares being offered to the public are
registered under the Securities Act of 1933, as amended. Such
shares and certain of the terms on which they are being offered
are more fully described in the enclosed Prospectus and Statement
of Additional Information. You have received a copy of the
Distribution Agreement between ourselves and the Trust and
reference is made herein to certain provisions of such
Distribution Agreement. This Agreement relates solely to the
subscription period described in Section 3(a) of such Distribution
Agreement. Subject to the foregoing, as principal, we offer
to sell to you, as a member of the Selected Dealers Group, shares
of the Fund upon the following terms and conditions:
1. The subscription period referred to in Section 3(a) of
the Distribution Agreement will continue through May 31, 1987.
The subscription period may be extended upon agreement between
the Trust and the Distributor. Subject to the provisions of such
Section and the conditions contained herein, we will sell to you
on the fifth business day following the termination of the
subscription period, or such other date as we may advise (the
"Closing Date"), such number of shares as to which you have
placed orders with us not later than 5:00 P.M. on the second full
business day preceding the Closing Date.
2. In all sales of these shares to the public you shall act
as dealer for your own account, and in no transaction shall you
<PAGE> 18
have any authority to act as agent for the Trust, for us or for
any other member of the Selected Dealers Group.
3. You shall not place orders for any of the shares unless
you have already received purchase orders for such shares at the
applicable public offering prices and subject to the terms hereof
and of the Distribution Agreement. All orders are subject to
acceptance 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 Prospectus, as amended from
time to time. You agree that you will not offer or sell any of
the 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 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 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. Payment for shares purchased by you is to be made by
certified or official bank check at the office of Merrill Lynch
Funds Distributor, Inc., 633 Third Avenue, New York, N.Y. 10017,
at the settlement price as provided above, on such date as we may
advise, in New York Clearing House funds payable to the order of
Merrill Lynch Funds Distributor, Inc. against delivery by us of
non-negotiable share deposit receipts ("Receipts") issued by
, as shareholder servicing agent,
acknowledging the deposit with it of the shares so purchased by
you. You agree that as promptly as practicable after the
delivery of such shares you will issue appropriate written
transfer instructions to the Trust or to the shareholder
servicing agent as to the purchasers to whom you sold the shares.
5. No person is authorized to make any representations
concerning shares of the issuer 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 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 and
Statement of Additional Information, periodic reports and proxy
solicitation material are our sole responsibility and not the
2.
<PAGE> 19
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.
6. 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 Trust. 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
Trust will be supplied to you in reasonable quantities upon
request.
7. We reserve the right in our discretion, without notice,
to suspend sales or withdraw the offering of shares entirely.
Each Party hereto has the right to cancel this agreement upon
notice to the other party.
8. 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.
9. 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.
10. Upon application to us, we will inform you as to the
states in which we believe the 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 shares in
any jurisdiction. We will file with the Department of State in
New York a Further State Notice with respect to the shares, if
necessary.
11. All communications to us should be sent to the address
below. Any notice to you shall be duly given if mailed or
telegraphed to you at the address specified by you below.
3.
<PAGE> 20
12. You agree that you will not sell any shares of the Trust
to any account over which you exercise discretionary authority.
13. This Agreement shall terminate at the close of business
on the Closing Date, unless earlier terminated, provided,
however, this Agreement shall continue after termination for the
purpose of settlement of accounts hereunder.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
------------------------------------
(Authorized Signature)
Please return one signed copy
of this agreement to:
VERRILL LYNCH FUNDS DISTRIBUTOR, INC.
633 Third Avenue
New York, N. Y. 10017
Accepted:
Firm Name:
---------------------------------
By:
----------------------------------------
Address:
-----------------------------------
-------------------------------------------
Date:
--------------------------------------
4.
<PAGE> 21
EXHIBIT B
MERRILL LYNCH CALIFORNIA TAX-EXEMPT FUND
Merrill Lynch California Municipal Series Trust
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 Massachusets business trust (the "Trust"), pursuant to
which it acts as the distributor for the sale of shares of
beneficial interest, par value $0.10 per share (the "Shares") of
the Merrill Lynch California Tax-Exempt Fund (the "Fund") a
series of the Trust, and as such has the right to distribute
shares Trust for resale. The Trust is a diversified open-end
investment company registered under the Investment Company Act of
1940, as amended, and the shares being offered to the public are
registered under the Securities Act of 1933, as amended. You
have received a copy of the Distribution Agreement between
ourselves 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. As principal, we offer to sell to you, as a member of
the Selected Dealers Group, shares of the Fund upon the following
terms and conditions:
1. In all sales of these 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.
2. Orders received from you will be accepted through us
only at the public offering price applicable to each order, as
set forth in the current Prospectus and Statement of Additional
Information of the Fund. The procedure relating to the handling
of orders shall be subject to Section 4 hereof and instructions
which we or the Trust shall forward from time to time to you.
All orders are subject to acceptance or rejection by the Dis-
tributor or the Trust in the sole discretion of either. The
minimum initial and subsequent purchase requirements are as set
<PAGE> 22
forth in the current Prospectus and Statement of Additional
Information of the Fund.
3. You shall not place orders for any of the shares unless
you have already received purchase orders for such 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 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 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 supple-
mented) and will not furnish to any person any information
relating to the shares, 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 shares of the Fund to be
resold by us to you subject to the applicable terms and condi-
tions governing the placement of orders by us set forth in Sec-
tion 3 of the Distribution Agreement, and (ii) to tender 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 withhold-
ing: 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 shares of the Trust 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 shares
through us you shall rely solely on the representations obtained
in the Prospectus and Statement of Additional Information and
supplemental information above mentioned. Any printed infor-
mation which we furnish you other than the Fund's Prospectus,
Statement of Additional Information, periodic reports and proxy
solicitation material are 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.
2.
<PAGE> 23
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 Trust. 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
Trust 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 shares entirely.
Each party hereto has the right to cancel this agreement upon
notice to the other party.
9. We shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the
continuous offering. We shall be under no liability to you
except for lack of good faith and for obligations expressly
assumed by us herein. Nothing contained in this paragraph is
intended to operate as, and the provisions of this paragraph
shall not in any way whatsoever constitute, a waiver by you of
compliance with any provision of the Securities Act of 1933, as
amended, or of the rules and regulations of the Securities and
Exchange Commission issued thereunder.
10. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any
sales in the United States, we both hereby agree to abide by the
Rules of Fair Practice of such Association.
11. Upon application to us, we will inform you as to the
states in which we believe the 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 shares in
any jurisdiction. We will file with the Department of State in
New York a Further State Notice with respect to the shares, if
necessary.
12. All communications to us should be sent to the address
below. Any notice to you shall be duly given if mailed or
telegraphed to you at the address specified by you below.
3.
<PAGE> 24
13. Your first order placed pursuant to this Agreement for
the purchase of 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.
633 Third Avenue
New York, N. Y. 10017
Accepted:
Firm Name:
-----------------------
By:
------------------------------
Address:
-------------------------
Date:
----------------------------
4 .
<PAGE> 1
EX-99.8
CUSTODY AGREEMENT
Agreement made as of this 5th day of August, 1985,
between Merrill Lynch California Municipal Series Trust, a
Massachusetts business trust organized and existing under
the laws of the Commonwealth of Massachusetts, having its
principal office and place of business at
(hereinafter called the "Fund"), and THE BANK OF NEW YORK, a
New York corporation authorized to do a banking business,
having its principal office and place of business at 48 Wall
Street, New York, New York 10015 (hereinafter called the
"Custodian").
W I T N E S S E T H
that for and in consideration of the mutual promises hereinafter
set forth the Fund and the Custodian agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words
and phrases, unless the context otherwise requires, shall
have the following meanings:
1. "Authorized Person" shall be deemed to include any
person, whether or not such person is an Officer or employee
of the Fund, duly authorized by the Board of Trustees of the
Fund to give Oral Instructions and Written Instructions on
behalf of the Fund and listed in the Certificate annexed
hereto as Appendix A or such other Certificate as may be
received by the Custodian from time to time.
2. "Book-Entry System" shall mean the Federal
Reserve/Treasury book-entry system for United States and
federal agency securities, its successor or successors and
its nominee or nominees.
<PAGE> 2
3 "Certificate" shall mean any notice, instruction,
or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian which is actually
received by the Custodian and signed on behalf of the
Fund by any two officers.
4. "Call Option" shall mean an exchange traded option
with respect to Securities other than Stock Index Options,
Futures Contracts, and Futures Contract Options entitling
the holder, upon timely exercise and payment of the exercise
price, as specified therein, to purchase from the writer
thereof the specified underlying Securities.
5. "Covered Call Option" shall mean an exchange traded
option entitling the holder, upon timely exercise and payment
of the exercise price, as specified therein, to purchase
from the writer thereof the specified underlying
Securities (excluding Futures Contracts) which are owned by
the writer thereof and subject to appropriate restrictions.
6. "Clearing Member" shall mean a registered broker-
dealer which is a clearing member under the rules of O.C.C.
and a member of a national securities exchange qualified to
act as a custodian for an investment company, or any broker-
dealer reasonably believed by the Custodian to be such a
clearing member.
7. "Collateral Account" shall mean a segregated
account so denominated which is specifically allocated to a
Series and pledged to the Custodian as security for, and in
consideration of, the Custodian's issuance of (a) any Put
option guarantee letter or similar document described in
paragraph 8 of Article V herein, or (b) any receipt described
in Article V or VIII herein.
8. "Depository" shall mean The Depository Trust Com-
pany ("DTC"), a clearing agency registered with the Securi-
ties and Exchange Commission, its successor or successors
and its nominee or nominees. The term "Depository" shall
further mean and include any other person authorized to act
as a depository under the Investment Company Act of 1940,
its successor or successors and its nominee or nominees,
specifically identified in a certified copy of a resolution
of the Fund's Board of Trustees specifically approving
deposits therein by the Custodian.
9. 'Financial Futures Contract" shall mean the firm
commitment to buy or sell fixed income securities including,
without limitation, U.S. Treasury Bills, U.S. Treasury
Notes, U.S. Treasury Bonds, domestic bank certificates of
deposit, and Eurodollar certificates of deposit, during a
specified month at an agreed upon price.
2
<PAGE> 3
10. "Futures Contract" shall mean a Financial Futures
Contract and/or Stock Index Futures Contracts.
11. "Futures Contract option" shall mean an option
with respect to a Futures Contract.
12. "Margin Account" shall mean a segregated account
in the name of a broker, dealer, futures commission mer-
chant, or a Clearing Member, or in the name of the Fund for
the benefit of a broker, dealer, futures commission mer-
chant, or Clearing Member, or otherwise, in accordance with
an agreement between the Fund, the Custodian and a broker,
dealer, futures commission merchant or a Clearing Member
(a "Margin Account Agreement"), separate and distinct from
the custody account, in which certain Securities and/or
money of the Fund shall be deposited and withdrawn from time
to time in connection with such transactions as the Fund may
from time to time determine. Securities held in the Book-
Entry System or the Depository shall be deemed to have been
deposited in, or withdrawn from, a Margin Account upon the
Custodian's effecting an appropriate entry in its books and
records.
13. "Money Market Security" shall be deemed to
include, without limitation, certain Reverse Repurchase
Agreements, debt obligations issued or guaranteed as to
interest and principal by the government of the United
States or agencies or instrumentalities thereof, any tax,
bond or revenue anticipation note issued by any state or
municipal government or public authority, commercial paper,
certificates of deposit and bankers' acceptances, repurchase
agreements with respect to the same and bank time deposits,
where the purchase and sale of such securities normally
requires settlement in federal funds on the same day as such
purchase or sale.
14. "O.C.C." shall mean the options Clearing Corpora-
tion, a clearing agency registered under Section 17A of the
Securities Exchange Act of 1934, its successor or succes-
sors, and its nominee or nominees.
15. "Officers" shall be deemed to include the
President, any Vice President, the Secretary, the Clerk, the
Treasurer, the Controller, any Assistant Secretary, any
Assistant Clerk, any Assistant Treasurer, and any other per-
son or persons, whether or not any such other person is an
officer of the Fund, duly authorized by the Board of Trus-
tees of the Fund to execute any Certificate, instruction,
notice or other instrument on behalf of the Fund and listed
in the Certificate annexed hereto as Appendix B or such
3
<PAGE> 4
other Certificate as may be received by the Custodian from
time to time.
16. "Option" shall mean a Call Option, Covered Call
Option, Stock Index Option and/or a Put Option.
17. "Oral Instructions" shall mean verbal instruc-
tions actually received by the Custodian from an Authorized
Person or from a person reasonably believed by the Custodian
to be an Authorized Person.
18. "Put Option" shall mean an exchange traded option
with respect to Securities other than Stock Index Options,
Futures Contracts, and Futures Contract Options entitling
the holder, upon timely exercise and tender of the specified
underlying Securities, to sell such Securities to the writer
thereof for the exercise price.
19. "Reverse Repurchase Agreement" shall mean an
agreement pursuant to which the Fund sells Securities and
agrees to repurchase such Securities at a described or
specified date and price.
20. "Security" shall be deemed to include, without
limitation, Money Market Securities, Call Options, Put
Options, Stock Index Options, Stock Index Futures Contracts,
Stock Index Futures Contract Options, Financial Futures Con-
tracts, Financial Futures Contract Options, Reverse Repur-
chase Agreements, common stocks and other securities having
characteristics similar to common stocks, preferred stocks,
debt obligations issued by state or municipal governments
and by public authorities, (including, without limitation,
general obligation bonds, revenue bonds and industrial bonds
and industrial development bonds), bonds, debentures, notes,
mortgages or other obligations, and any certificates,
receipts, warrants or other instruments representing rights
to receive, purchase, sell or subscribe for the same, or
evidencing or representing any other rights or interest
therein, or any property or assets.
21. "Senior Security Account" shall mean an account
maintained and specifically allocated to a Series under the
terms of this Agreement as a segregated account, by recorda-
tion or otherwise, within the custody account in which cer-
tain Securities and/or other assets of the Fund specifically
allocated to such Series shall be deposited and withdrawn
from time to time in accordance with Certificates received
by the Custodian in connection with such transactions as the
Fund may from time to time determine.
<PAGE> 5
22. "Series" shall mean the various portfolios, if
any, of the Fund as described from time to time in the
current and effective prospectus for the Fund.
23. "Stock Index Futures Contract" shall mean a bi-
lateral agreement pursuant to which the parties agree to
take or make delivery of an amount of cash equal to a speci-
fied dollar amount times the difference between the value of
a particular stock index at the close of the last business
day of the contract and the price at which the futures con-
tract is originally struck.
24. "Stock Index Option" shall mean an exchange
traded option entitling the holder, upon timely exercise, to
receive an amount of cash determined by reference to the
difference between the exercise price and the value of the
index on the date of exercise.
25. "Shares" shall mean the shares of beneficial
interest of the Fund, each of which is in the case of a Fund
having Series allocated to a particular Series.
26. "Written Instructions" shall mean written com-
munications actually received by the Custodian from an
Authorized Person or from a person reasonably believed by
the Custodian to be an Authorized Person by telex or any
other such system whereby the receiver of such communica-
tions is able to verify by codes or otherwise with a reason-
able degree of certainty the identity of the sender of such
communication.
ARTICLE II
APPOINTMENT OF CUSTODIAN
1. The Fund hereby constitutes and appoints the
Custodian as custodian of the Securities and moneys at any
time owned by the Fund during the period of this Agreement.
2. The Custodian hereby accepts appointment as such
custodian and agrees to perform the duties thereof as here-
inafter set forth.
5
<PAGE> 6
ARTICLE III
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of
this Article and in Article VIII, the Fund will deliver or
cause to be delivered to the Custodian all Securities and
all moneys owned by it, at any time during the period of
this Agreement, and shall specify with respect to such
Securities and money the Series to which the same are speci-
fically allocated. The Custodian shall segregate, keep and
maintain the assets of the Series separate and apart. The
Custodian will not be responsible for any Securities and
moneys not actually received by it. The Custodian will be
entitled to reverse any credits made on the Fund's behalf
where such credits have been previously made and moneys are
not finally collected. The Fund shall deliver to the Custo-
dian a certified resolution of the Board of Trustees of the
Fund, substantially in the form of Exhibit A hereto, approv-
ing, authorizing and instructing the Custodian on a continu-
ous and on-going basis to deposit in the Book-Entry System
all Securities eligible for deposit therein, regardless of
the Series to which the same are specifically allocated and
to utilize the Book-Entry System to the extent possible in
connection with its performance hereunder, including, with-
out limitation, in connection with settlements of purchases
and sales of Securities, loans of Securities, and deliveries
and returns of Securities collateral. Prior to a deposit of
Securities specifically allocated to a Series in the Deposi-
tory, the Fund shall deliver to the Custodian a certified
resolution of the Board of Trustees of the Fund, substan-
tially in the form of Exhibit B hereto, approving, authoriz-
ing and instructing the Custodian on a continuous and on-
going basis until instructed to the contrary by a Certifi-
cate actually received by the Custodian to deposit in the
Depository all Securities specifically allocated to such
Series eligible for deposit therein, and to utilize the
Depository to the extent possible with respect to such
Securities in connection with its performance hereunder,
including, without limitation, in connection with settle-
ments of purchases and sales of Securities, loans of Securi-
ties, and deliveries and returns of Securities collateral.
Securities and moneys deposited in either the Book-Entry
System or the Depository will be represented in accounts
which include only assets held by the Custodian for custo-
mers, including, but not limited to, accounts in which the
Custodian acts in a fiduciary or representative capacity.
Prior to the Custodian's accepting, utilizing and acting
with respect to Clearing Member confirmations for Options
and transactions in Options for a Series as provided in this
6
<PAGE> 7
Agreement, the Custodian shall have received a certified
resolution of the Fund's Board of Trustees, substantially in
the form of Exhibit C hereto, approving, authorizing and
instructing the Custodian on a continuous and on-going
basis, until instructed to the contrary by a Certificate
actually received by the Custodian, to accept, utilize and
act in accordance with such confirmations as provided in
this Agreement with respect to such Series.
2. The Custodian shall establish and maintain separate
accounts, in the name of each Series, and shall credit to
the separate account for each Series all moneys received by
it for the account of the Fund with respect to such Series.
Money credited to a separate account for a Series shall be
disbursed by the Custodian only:
(a) As hereinafter provided;
(b) Pursuant to Certificates setting forth the
name and address of the person to whom the payment is to be
made, the Series account from which payment is to be made,
and the purpose for which payment is to be made; or
(c) In payment of the fees and in reimbursement
of the expenses and liabilities of the Custodian attribu-
table to such Series.
3. Promptly after the close of business on each day
the Custodian shall furnish the Fund with confirmations and
a summary, on a per Series basis, of all transfers to or
from the account of the Fund for a Series, either hereunder
or with any co-custodian or sub-custodian appointed in
accordance with this Agreement during said day. Where
Securities are transferred to the account of the Fund for a
Series, the Custodian shall also by book-entry or otherwise
identify as belonging to such Series a quantity of Securi-
ties in a fungible bulk of Securities registered in the name
of the Custodian (or its nominee) or shown on the Custo-
dian's account on the books of the Book-Entry System or the
Depository. At least monthly and from time to time, the
Custodian shall furnish the Fund with a detailed statement,
on a per Series basis, of the Securities and moneys held by
the Custodian for the Fund.
4. Except as otherwise provided in paragraph 7 of
this Article and in Article VIII, all Securities held by the
Custodian hereunder, which are issued or issuable only In
bearer form, except such Securities as are held in the
Book-Entry System, shall be held by the Custodian in that
form; all other Securities held hereunder may be registered
in the name of the Fund, in the name of any duly appointed
<PAGE> 8
registered nominee of the Custodian as the Custodian may
from time to time determine, or in the name of the Book-
Entry System or the Depository or their successor or succes-
sors, or their nominee or nominees. The Fund agrees to
furnish to the Custodian appropriate instruments to enable
the Custodian to hold or deliver in proper form for trans-
fer, or to register in the name of its registered nominee or
in the name of the Book-Entry System or the Depository any
Securities which it may hold hereunder and which may from
time to time be registered in the name of the Fund. The
Custodian shall hold all such Securities specifically allo-
cated to a Series which are not held in the Book-Entry
System or in the Depository in a separate account in the
name of such Series physically segregated at all times from
those of any other person or persons.
5. Except as otherwise provided in this Agreement
and unless otherwise instructed to the contrary by a Certi-
ficate, the Custodian by itself, or through the use of the
Book-Entry System or the Depository with respect to Securi-
ties held hereunder and therein deposited, shall with
respect to all Securities held for the Fund hereunder in
accordance with preceding paragraph 4:
(a) Collect all income due or payable;
(b) Present for payment and collect the amount
payable upon such Securities which are called, but only if
either (i) the Custodian receives a written notice of such
call, or (ii) notice of such call appears in one or more of
the publications listed in Appendix C annexed hereto, which
may be amended at any time by the Custodian without the
prior notification or consent of the Fund;
(c) Present for payment and collect the amount
payable upon all Securities which mature;
(d) Surrender Securities in temporary form for
definitive Securities;
(e) Execute, as custodian, any necessary declara-
tions or certificates of ownership under the Federal Income
Tax Laws or the laws or regulations of any other taxing
authority now or hereafter in effect; and
(f) Hold directly, or through the Book-Entry
System or the Depository with respect to Securities therein
deposited, for the account of a Series, all rights and simi-
lar securities issued with respect to any Securities held by
the Custodian for such Series hereunder.
8
<PAGE> 9
6 Upon receipt of a Certificate and not otherwise,
the Custodian, directly or through the use of the Book-Entry
System or the Depository, shall:
(a) Execute and deliver to such persons as may be
designated in such Certificate proxies, consents, authoriza-
tions, and any other instruments whereby the authority of
the Fund as owner of any Securities held by the Custodian
hereunder for the Series specified in such Certificate may
be exercised;
(b) Deliver any Securities held by the Custodian
hereunder for the Series specified in such Certificate in
exchange for other Securities or cash issued or paid in con-
nection with the liquidation, reorganization, refinancing,,
merger, consolidation or recapitalization of any corpora-
tion, or the exercise of any conversion privilege and
receive and hold hereunder specifically allocated to such
Series any cash or other Securities received in exchange;
(c) Deliver any Securities held by the Custodian
hereunder for the Series specified in such Certificate to
any protective committee, reorganization committee or other
person in connection with the reorganization, refinancing,
merger, consolidation, recapitalization or sale of assets of
any corporation, and receive and hold hereunder specifically
allocated to such Series such certificates of deposit,
interim receipts or other instruments or documents as may be
issued to it to evidence such delivery;
(d) Make such transfers or exchanges of the
assets of the Series specified in such Certificate, and take
such other steps as shall be stated in such Certificate to
be for the purpose of effectuating any duly authorized plan
of liquidation, reorganization, merger, consolidation or
recapitalization of the Fund; and
(e) Present for payment and collect the amount
payable upon Securities not described in preceding paragraph
5(b) of this Article which may be called as specified in the
Certificate.
7. Notwithstanding any provision elsewhere contained
herein, the Custodian shall not be required to obtain pos-
session of any instrument or certificate representing any
Futures Contract, any Option, or any Futures Contract Option
until after it shall have determined, or shall have received
a Certificate from the Fund stating, that any such instru-
ments or certificates are available. The Fund shall deliver
to the Custodian such a Certificate no later than the busi-
ness day preceding the availability of any such instrument
9
<PAGE> 10
or certificate. Prior to such availability, the Custodian
shall comply with Section 17f of the Investment Company Act
of 1940, as amended, in connection with the purchase, sale,
settlement, closing out or writing of Futures Contracts,
Options, or Futures Contract Options by making payments or
deliveries specified in Certificates received by the Custo-
dian in connection with any such purchase, sale, writing,
settlement or closing out upon its receipt from a broker,
dealer, or futures commission merchant of a statement or
confirmation reasonably believed by the Custodian to be in
the form customarily used by brokers, dealers, or future
commission merchants with respect to such Futures Contracts,
Options, or Futures Contract Options, as the case may be,
confirming that such Security is held by such broker, dealer
or futures commission merchant, in book-entry form or other-
wise, in the name of the Custodian (or any nominee of the
Custodian) as custodian for the Fund, provided, however,
that payments to or deliveries from the Margin Account shall
be made in accordance with the terms and conditions of the
Margin Account Agreement. Whenever any such instruments or
certificates are available, the Custodian shall, notwith-
standing any provision in this Agreement to the contrary,
make payment for any Futures Contract, Option, or Futures
Contract Option for which such instruments or such certifi-
cates are available only against the delivery to the
Custodian of such instrument or such certificate and
deliver any Future Contract, Option or Futures Contract
Option for which such instruments or such instruments or
such certificates are available only against receipt by the
Custodian of payment therefor. Any such instrument or cer-
tificate delivered to the Custodian shall be held by the
Custodian hereunder in accordance with, and subject to, the
provisions of this Agreement.
ARTICLE IV
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the
Fund, other than a purchase of an Option, a Futures Con-
tract, or a Futures Contract Option, the Fund shall deliver
to the Custodian (i) with respect to each purchase of
Securities which are not Money Market Securities, a Certifi-
cate, and (ii) with respect to each purchase of Money Market
Securities, a Certificate, Oral Instructions or Written
Instructions, specifying with respect to each such purchase:
10
<PAGE> 11
(a) the Series to which such Securities are to be speci-
fically allocated; (b) the name of the issuer and the title
of the Securities; (c) the number Of shares or the principal
amount purchased and accrued interest, if any; (d) the date
of purchase and settlement; (e) the purchase price per unit;
(f) the total amount payable upon such purchase; (g) the
name of the person from whom or the broker through whom the
purchase was made, and the name of the clearing broker,, if
any; and (h) the name of the broker to whom payment is to be
made. The Custodian shall, upon receipt of Securities pur-
chased by or for the Fund, pay to the broker specified in
the Certificate out of the moneys held for the account of
such Series the total amount payable upon such purchase,
provided that the same conforms to the total amount payable
as set forth in such Certificate, Oral Instructions or
Written Instructions.
2. Promptly after each sale of Securities by the
Fund, other than a sale of any Option, Futures Contract,
Futures Contract Option, or any Reverse Repurchase Agree-
ment, the Fund shall deliver to the Custodian (i) with
respect to each sale of Securities which are not Money
Market Securities, a Certificate, and (ii) with respect to
each sale of Money Market Securities, a Certificate, Oral
Instructions or Written Instructions, specifying with re-
spect to each such sale: (a) the Series to which such Se-
curities were specifically allocated; (b) the name of the
issuer and the title of the Security; (c) the number of
shares or principal amount sold, and accrued interest, if
any; (d) the date Of sale; (e) the sale price per unit; (f)
the total amount payable to the Fund upon such sale; (g) the
name of the broker through whom or the person to whom the
sale was made, and the name of the clearing broker, if any;
and (h) the name of the broker to whom the Securities are to
be delivered. The Custodian shall deliver the Securities
specifically allocated to such Series to the broker speci-
fied in the Certificate upon the total amount payable to the
Fund upon such sale, provided that the same conforms to the
total amount payable as set forth in such Certificate, Oral
Instructions or Written Instructions.
ARTICLE V
OPTIONS
1. Promptly after the purchase of any Option by the
Fund, the Fund shall deliver to the Custodian a Certificate
specifying with respect to each Option purchased: (a) the
<PAGE> 12
Series to which such Option is specifically allocated; (b)
the type of Option (put or call); (c) the name of the issuer
and the title and number of shares subject to such Option
or, in the case of a Stock Index Option, the stock index to
which such Option relates and the number of Stock Index
Options purchased; (d) the expiration date; (e) the exercise
price; (f) the dates of purchase and settlement; (g) the
total amount payable by the Fund in connection with such
purchase; (h) the name of the Clearing Member through whom
such Option was purchased; and (i) the name of the broker to
whom payment is to be made. The Custodian shall pay, upon
receipt of a Clearing Member's statement confirming the
purchase of such Option held by such Clearing Member for the
account of the Custodian (or any duly appointed and regis-
tered nominee of the Custodian) as custodian for the Fund,
out of moneys held for the account of the Series to which
such Option is to be specifically allocated, the total
amount payable upon such purchase to the Clearing Member
through whom the purchase was made, provided that the same
conforms to the total amount payable as set forth in such
Certificate.
2. Promptly after the sale of any Option purchased by
the Fund pursuant to paragraph I hereof, the Fund shall
deliver to the Custodian a Certificate specifying with
respect to each such sale: (a) the Series to which such
Option was specifically allocated; (b) the type of Option
(put or call) ; (c) the name of the issuer and the title and
number of shares subject to such Option or, in the case of a
Stock Index Option, the stock index to which such Option
relates and the number of Stock Index Options sold; (d) the
date of sale; (e) the sale price; (f) the date of settle-
ment; (g) the total amount payable to the Fund upon such
sale; and (h) the name of the Clearing Member through whom
the sale was made. The Custodian shall consent to the
delivery of the Option sold by the Clearing Member which
previously supplied the confirmation described in preceding
paragraph 1 of this Article with respect to such Option
against payment to the Custodian of the total amount payable
to the Fund, provided that the same conforms to the total
amount payable as set forth in such Certificate.
3. Promptly after the exercise by the Fund of any
Call Option purchased by the Fund pursuant to paragraph I
hereof,, the Fund shall deliver to the Custodian a Certi-
ficate specifying with respect to such Call Option: (a) the
Series to which such Call Option was specifically allocated;
(b) the name of the issuer and the title and number of
shares subject to the Call Option; (c) the expiration date;
(d) the date of exercise and settlement; (e) the exercise
price per share; (f) the total amount to be paid by the
12
<PAGE> 13
Fund upon such exercise; and (g) the name of the Clearing
Member through whom such Call Option was exercised. The
Custodian shall, upon receipt of the Securities underlying
the Call Option which was exercised, pay out of the moneys
held for the account of the Series to which such Call Option
was specifically allocated the total amount payable to the
Clearing Member through whom the Call Option was exercised,
provided that the same conforms to the total amount payable
as set forth in such Certificate.
4. Promptly after the exercise by the Fund of any Put
Option purchased by the Fund pursuant to paragraph I hereof,
the Fund shall deliver to the Custodian a Certificate
specifying with respect to such Put Option: (a) the Series
to which such Put Option was specifically allocated; (b) the
name of the issuer and the title and number of shares
subject to the Put Option; (c) the expiration date; (d) the
date of exercise and settlement; (e) the exercise price per
share; (f) the total amount to be paid to the Fund upon such
exercise; and (g) the name of the Clearing Member through
whom such Put Option was exercised. The Custodian shall,
upon receipt of the amount payable upon the exercise of the
Put Option, deliver or direct the Depository to deliver the
Securties specifically allocated to such Series, provided
the same conforms to the amount payable to the Fund as set
forth in such Certificate.
5. Promptly after the exercise by the Fund of any
Stock Index Option purchased by the Fund pursuant to para-
graph I hereof, the Fund shall deliver to the Custodian a
Certificate specifying with respect to such Stock Index
Option: (a) the Series to which such Stock Index Option was
specifically allocated; (b) the type of Stock Index Option
(put or call); (c) the number of Options being exercised;
(d) the stock index to which such Option relates; (e) the
expiration date; (f) the exercise price; (g) the total
amount to be received by the Fund in connection with such
exercise; and (h) the Clearing Member from whom such payment
is to be received.
6. Whenever the Fund writes a Covered Call Option,
the Fund shall promptly deliver to the Custodian, a Certi-
ficate specifying with respect to such Covered Call Option:
(a) the Series for which such Covered Call Option was
written; (b) the name of the issuer and the title and number
of shares for which the Covered Call Option was written and
which underlie the same; (e) the expiration date; (d) the
exercise price; (e) the premium to be received by the
Fund; (f) the date such Covered Call Option was written; and
(g) the name of the Clearing Member through whom the premium
is to be received. The Custodian shall deliver or cause to
13
<PAGE> 14
be delivered, in exchange for receipt of the premium speci-
fied in the Certificate with respect to such Covered Call
Option, such receipts as are required in accordance with the
customs prevailing among Clearing Members dealing in Covered
Call Options and shall impose, or direct the Depository to
impose, upon the underlying Securities specified in the Cer-
tificate specifically allocated to such Series such restric-
tions as may be required by such receipts. Notwithstanding
the foregoing, the Custodian has the right, upon prior
written notification to the Fund, at any time to refuse to
issue any receipts for Securities in the possession of the
Custodian and not deposited with the Depository underlying a
Covered Call Option.
7. Whenever a Covered Call Option written by the Fund
and described in the preceding paragraph of this Article is
exercised, the Fund shall promptly deliver to the Custodian
a Certificate instructing the Custodian to deliver, or to
direct the Depository to deliver, the Securities subject to
such Covered Call Option and specifying: (a) the Series for
which such Covered Call Option was written; (b) the name of
the issuer and the title and number of shares subject to the
Covered Call Option; (c) the Clearing Member to whom the
underlying Securities are to be delivered; and (d) the total
amount payable to the Fund upon such delivery. Upon the
return and/or cancellation of any receipts delivered pursu-
ant to paragraph 6 of this Article, the Custodian shall
deliver, or direct the Depository to deliver, the underlying
Securities as specified in the Certificate for the amount to
be received as set forth in such Certificate.
8. Whenever the Fund writes a Put Option, the Fund
shall promptly deliver to the Custodian a Certificate speci-
fying with respect to such Put Option: (a) the Series for
which such Put Option was written; (b) the name of the
issuer and the title and number of shares for which the Put
Option is written and which underlie the same; (c) the
expiration date; (d) the exercise price; (e) the premium to
be received by the Fund; (f) the date such Put Option is
written; (g) the name of the Clearing Member through whom
the premium is to be received and to whom a Put Option
guarantee letter is to be delivered; (h) the amount of cash,
and/or the amount and kind of Securities, if any, speci-
fically allocated to such Series to be deposited in the
Senior Security Account for such Series; and (i) the amount
of cash and/or the amount and kind of Securities
specifically allocated to such Series to be deposited into
the Collateral Account for such Series. The Custodian
shall, after making the deposits into the Collateral Account
specified in the Certificate, issue a Put Option guarantee
letter substantially in the form utilized by the Custodian
14 -
<PAGE> 15
on the date hereof, and deliver the same to the Clearing
Member specified in the Certificate against receipt of the
premium specified in said Certificate. Notwithstanding the
foregoing, the Custodian shall be under no obligation to
issue any Put Option guarantee letter or similar document if
it is unable to make any of the representations contained
therein.
9. Whenever a Put Option written by the Fund and
described in the preceding paragraph is exercised, the Fund
shall promptly deliver to the Custodian a Certificate
specifying: (a) the Series to which such Put Option was
written; (b) the name of the issuer and title and number of
shares subject to the Put Option; (c) the Clearing Member
from whom the underlying Securities are to be received; (d)
the total amount payable by the Fund upon such delivery; (e)
the amount of cash and/or the amount and kind of Securities
specifically allocated to such Series to be withdrawn from
the Collateral Account for such Series and (f) the amount of
cash and/or the amount and kind of Securities, specifically
allocated to such Series, if any, to be withdrawn from the
Senior Security Account. Upon the return and/or cancella-
tion of any Put Option guarantee letter or similar document
issued by the Custodian in connection with such Put Option,
the Custodian shall pay out of the moneys held for the
account of the Series to which such Put Option was specific-
ally allocated the total amount payable to the Clearing
Member specified in the Certificate as set forth in such
Certificate, and shall make the withdrawals specified in
such Certificate.
10. Whenever the Fund writes a Stock Index Option, the
Fund shall promptly deliver to the Custodian a Certificate
specifying with respect to such Stock Index Option: (a) the
Series for which such Stock Index Option was written; (b)
whether such Stock Index Option is a put or a call; (c) the
number of options written; (d) the stock index to which such
Option relates; (e) the expiration date; (f) the exercise
price; (g) the Clearing Member through whom such Option was
written; (h) the premium to be received by the Fund; (i) the
amount of cash and/or the amount and kind of Securities, if
any, specifically allocated to such Series to be deposited
in the Senior Security Account for such Series; (j) the
amount of cash and/or the amount and kind of Securities, if
any, specifically allocated to such Series to be deposited
in the Collateral Account for such Series; and (k) the
amount of cash and/or the amount and kind of Securities, if
any, specifically allocated to such Series to be deposited
in a Margin Account, and the name in which such account is
to be or has been established. The Custodian shall, upon
receipt of the premium specified in the Certificate, make
15
<PAGE> 16
the deposits, if any, into the Senior Security Account
specified in the Certificate, and either (1) deliver such
receipts, if any, which the Custodian has specifically
agreed to issue, which are in accordance with the customs
prevailing among Clearing Members in Stock Index Options and
make the deposits into the Collateral Account specified in
the Certificate, or (2) make the deposits into the Margin
Account specified in the Certificate.
11. Whenever a Stock Index Option written by the Fund
and described in the preceding paragraph of this Article is
exercised, the Fund shall promptly deliver to the Custodian
a Certificate specifying with respect to such Stock Index
option: (a) the Series for which such Stock Index option was
written; (b) such information as may be necessary to identi-
fy the Stock Index option being exercised; (c) the Clearing
Member through whom such Stock Index Option is being exer-
cised; (d) the total amount payable upon such exercise, and
whether such amount is to be paid by or to the Fund; (e) the
amount of cash and/or amount and kind of Securites, if any,
to be withdrawn from the Margin Account; and (f) the amount
of cash and/or amount and kind of Securities, if any, to be
withdrawn from the Senior Security Account for such Series;
and the amount of cash and/or the amount and kind of Securi-
ties, if any, to be withdrawn from the Collateral Account
for such Series. Upon the return and/or cancellation of the
receipt, if any, delivered pursuant to the preceding para-
graph of this Article, the Custodian shall pay out of the
moneys held for the account of the Series to which such
Stock Index option was specifically allocated to the Clear-
ing Member specified in the Certificate the total amount
payable, if any, as specified therein.
12. Whenever the Fund purchases any option identical
to a previously written option described in paragraphs, 6, 8
or 10 of this Article in a transaction expressly designated
as a 'Closing Purchase Transaction" in order to liquidate
its position as a writer of an option, the Fund shall
promptly deliver to the Custodian a Certificate specifying
with respect to the option being purchased: (a) that the
transaction is a Closing Purchase Transaction; (b) the
Series for which the Option was written; (c) the name of the
issuer and the title and number of shares subject to the
option, or, in the case of a Stock Index Option, the stock
index to which such Option relates and the number of options
held; (d) the exercise price; (e) the premium to be paid by
the Fund; (f) the expiration date; (g) the type of Option
(put or call) (h) the date of such purchase; (i) the name of
the Clearing Member to whom the premium is to be paid; and
(j) the amount of cash and/or the amount and kind of Securi-
ties, if any, to be withdrawn from the Collateral Account, a
16
<PAGE> 17
specified Margin Account, or the Senior Security Account for
such Series. Upon the Custodian's payment of the premium
and the return and/or cancellation of any receipt issued
pursuant to paragraphs 6, 8 or 10 of this Article with
respect to the Option being liquidated through the Closing
Purchase Transaction'. the Custodian shall remove, or direct
the Depository to remove, the previously imposed restric-
tions on the Securities underlying the Call Option.
13. Upon the expiration, exercise or consummation of a
Closing Purchase Transaction with respect to, any Option
purchased or written by the Fund and described in this
Article, the Custodian shall delete such Option from the
statements delivered to the Fund pursuant to paragraph 3
Article III herein, and upon the return and/or cancellation
of any receipts issued by the Custodian, shall make such
withdrawals from the Collateral Account, and the Margin
Account and/or the Senior Security Account as may be
specified in a Certificate received in connection with such
expiration, exercise, or consummation.
ARTICLE VI
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures Con-
tract, the Fund shall deliver to the Custodian a Certificate
specifying with respect to such Futures Contract, (or with
respect to any number of identical Futures Contract(s)): (a)
the Series for which the Futures Contract is being entered;
(b) the category of Futures Contract (the name of the under-
lying stock index or financial instrument); (c) the number
of indentical Futures Contracts entered into; (d) the
delivery or settlement date of the Futures Contract(s); (e)
the date the Futures Contract(s) was (were) entered into and
the maturity date; (f) whether the Fund is buying (going
long) or selling (going short) on such Futures Contract(s);
(g) the amount of cash and/or the amount and kind of Securi-
ties, if any, to be deposited in the Senior Security Account
for such Series; (h) the name of the broker, dealer, or
futures commission merchant through whom the Futures Con-
tract was entered into; and (i) the amount of fee or commis-
sion, if any, to be paid and the name of the broker, dealer,
or futures commission merchant to whom such amount is to be
paid. The Custodian shall make the deposits, if any, to the
Margin Account in accordance with the terms and conditions
of the Margin Account Agreement. The Custodian shall make
payment out of the moneys specifically allocated to such
17
<PAGE> 18
Series of the fee or commission, if any, specified in the
Certificate and deposit in the Senior Security Account for
such Series the amount of cash and/or the amount and kind of
Securities specified in said Certificate.
2. (a) Any variation margin payment or similar pay-
ment required to be made by the Fund to a broker, dealer, or
futures commission merchant with respect to an outstanding
Futures Contract, shall be made by the Custodian in accor-
dance with the terms and conditions of the Margin Account
Agreement.
(b) Any variation margin payment or similar pay-
ment from a broker, dealer, or futures commission merchant
to the Fund with respect to an outstanding Futures Contract,
shall be received and dealt with by the Custodian in accord-
ance with the terms and conditions of the Margin Account
Agreement.
3. Whenever a Futures Contract held by the Custodian
hereunder is retained by the Fund until delivery or settle-
ment is made on such Futures Contract, the Fund shall
deliver to the Custodian a Certificate specifying: (a) the
Futures Contract and the Series to which the same relates;
(b) with respect to a Stock Index Futures Contract, the
total cash settlement amount to be paid or received, and
with respect to a Financial Futures Contract, the Securities
and/or amount of cash to be delivered or received; (c) the
broker, dealer, or futures commission merchant to or from
whom payment or delivery is to be made or received; and (d)
the amount of cash and/or Securities to be withdrawn from
the Senior Security Account for such Series. The Custodian
shall make the payment or delivery specified in the Certifi-
cate, and delete such Futures Contract from the statements
delivered to the Fund pursuant to paragraph 3 of Article III
herein.
4. Whenever the Fund shall enter into a Futures Con-
tract to offset a Futures Contract held by the Custodian
hereunder, the Fund shall deliver to the Custodian a Certi-
ficate specifying: (a) the items of information required in
a Certificate described in paragraph I of this Article, and
(b) the Futures Contract being offset. The Custodian shall
make payment out of the money specifically allocated to such
Seris of the fee or commission, if any, specified in the
Certificate and delete the Futures Contract being offset
from the statements delivered to the Fund pursuant to para-
graph 3 of Article III herein, and make such withdrawals
from the Senior Security Account for such Series as may be
specified in such Certificate. The withdrawals, if any, to
be made from the Margin Account shall be made by the
Custodian in accordance with the terms and conditions of the
Margin Account Agreement.
18
<PAGE> 19
ARTICLE VII
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract
Option by the Fund, the Fund shall Promptly deliver to the
Custodian a Certificate specifying with respect to such
Futures Contract Option: (a) the Series to which such Option
is specifically allocated; (b) the type of Futures Contract
Option (put or call); (c) the type of Futures Contract and
such other information as may be necessary to identify the
Futures Contract underlying the Futures Contract Option pur-
chased; (d) the expiration date; (e) the exercise price; (f)
the dates of purchase and settlement; (g) the amount of
premium to be paid by the Fund upon such purchase; (h) the
name of the broker or futures commission merchant through
whom such option was purchased; and (i) the name of the
broker, or futures commission merchant, to whom payment is
to be made. The Custodian shall pay out of the moneys
specifically allocated to such Series the total amount to be
paid upon such purchase to the broker or futures commissions
merchant through whom the purchase was made, provided that
the same conforms to the amount set forth in such Certifi-
cate.
2. Promptly after the sale of any Futures Contract
Option purchased by the Fund pursuant to paragraph 1 hereof,
the Fund shall promptly deliver to the Custodian a Certifi-
cate specifying with respect to each such sale: (a) Series
to which such Futures Contract Option was specifically allo-
cated; (b) the type of Future Contract Option (put or call);
(c) the type of Futures Contract and such other information
as may be necessary to identify the Futures Contract under-
lying the Futures Contract Option; (d) the date of sale; (e)
the sale price; (f) the date of settlement; (g) the total
amount payable to the Fund upon such sale; and (h) the name
of the broker of futures commission merchant through whom
the sale was made. The Custodian shall consent to the can-
cellation of the Futures Contract Option being closed
against payment to the Custodian of the total amount payable
to the Fund, provided the same conforms to the total amount
payable as set forth in such Certificate.
3. Whenever a Futures Contract Option purchased by the
Fund pursuant to paragraph 1 is exercised by the Fund, the
Fund shall promptly deliver to the Custodian a Certificate
specifying: (a) the Series to which such Futures Contract
19
<PAGE> 20
Option was specifically allocated; (b) the particular
Futures Contract Option (put or call) being exercised; (c)
the type of Futures Contract underlying the Futures Contract
Option; (d) the date of exercise; (e) the name of the broker
or futures commission merchant through whom the Futures
Contract Option is exercised; (f) the net total amount, if
any,, payable by the Fund; (g) the amount, if any, to be
received by the Fund; and (h) the amount of cash and/or the
amount and kind of Securities to be deposited in the Senior
Security Account for such Series. The Custodian shall make,
out of the moneys and Securities specifically allocated to
such Series, the payments, if any, and the deposits, if any,
into the Senior Security Account as specified in the
Certificate. The deposits, if any, to be made to the Margin
Account shall be made by the Custodian in accordance with
the terms and conditions of the Margin Account Agreement.
4. Whenever the Fund writes a Futures Contract
Option, the Fund shall promptly deliver to the Custodian a
Certificate specifying with respect to such Futures Contract
Option: (a) the Series for which such Futures Contract
Option was written; (b) the type of Futures Contract Option
(put or call); (c) the type of Futures Contract and such
other information as may be necessary to identify the
Futures Contract underlying the Futures Contract Option; (d)
the expiration date; (e) the exercise price; (f) the premium
to be received by the Fund; (g) the name of the broker or
futures commission merchant through whom the premium is to
be received; and (h) the amount of cash and/or the amount
and kind of Securities, if any, to be deposited in the
Senior Security Account for such Series. The Custodian
shall, upon receipt of the premium specified in the Certifi-
cate, make out of the moneys and Securities specifically
allocated to such Series the deposits into the Senior Secur-
ity Account, if any, as specified in the Certificate. The
deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and con-
ditions of the Margin Account Agreement.
5. Whenever a Futures Contract Option written by the
Fund which is a call is exercised, the Fund shall promptly
deliver to the Custodian a Certificate specifying: (a) the
Series to which such Futures Contract Option was specific-
ally allocated; (b) the particular Futures Contract Option
exercised; (c) the type of Futures Contract underlying the
Futures Contract Option; (d) the name of the broker or
futures commission merchant through whom such Futures Con-
tract Option was exercised; (e) the net total amount, if
any, payable to the Fund upon such exercise; (f) the net
total amount, if any, payable by the Fund upon such exer-
20 -
<PAGE> 21
cise; and (g) the amount of cash and/or the amount and kind
of Securities to be deposited in the Senior Security Account
for such Series. The Custodian shall, upon its receipt of
the net total amount payable to the Fund, if any, specified
in such Certificate make the payments, if any, and the
deposits, if any, into the Senior Security Account as speci-
fied in the Certificate. The deposits, if any, to be made to
the Margin Account shall be made by the Custodian in accor-
dance with the terms and conditions of the Margin Account
Agreement.
6. Whenever a Futures Contract Option which is written
by the Fund and which is a put is exercised, the Fund shall
promptly deliver to the Custodian a Certificate specifying:
(a) the Series to which such Option was specifically allo-
cated; (b) the particular Futures Contract Option exercised;
(c) the type of Futures Contract underlying such Futures
Contract Option; (d) the name of the broker or futures com-
mission merchant through whom such Futures Contract Option
is exercised; (e) the net total amount, if any, payable to
the Fund upon such exercise; (f) the net total amount, if
any, payable by the Fund upon such exercise; and (g) the
amount and kind of Securities and/or cash to be withdrawn
from or deposited in, the Senior Security Account for such
Series, if any. The Custodian shall, upon its receipt of
the net total amount payable to the Fund, if any, specified
in the Certificate, make out of the moneys and Securities
specifically allocated to such Series, the payments, if any,
and the deposits, if any, into the Senior Security Account
as specified in the Certificate. The deposits to and/or
withdrawals from the Margin Account, if any, shall be made
by the Custodian in accordance with the terms and conditions
of the Margin Account Agreement.
7. Whenever the Fund purchases any Futures Contract
Option identical to a previously written Futures Contract
Option described in this Article in order to liquidate its
position as a writer of such Futures Contract Option, the
Fund shall promptly deliver to the Custodian a Certificate
specifying with respect to the Futures Contract Option being
purchased: (a) the Series to which such Option is speci-
fically allocated; (b) that the transaction is a closing
transaction; (c) the type of Future Contract and such other
information as may be necessary to identify the Futures
Contract underlying the Futures Option Contract; (d) the
exercise price; (e) the premium to be paid by the Fund; (f)
the expiration date; (g) the name of the broker or futures
commission merchant to whom the premium is to be paid; and
(h) the amount of cash and/or the amount and kind of Securi-
ties, if any, to be withdrawn from the Senior Security
Account for such Series. The Custodian shall effect the
21 -
<PAGE> 22
withdrawals from the Senior Security Account specified in
the Certificate. The withdrawals, if any, to be made from
the Margin Account shall be made by the Custodian in accor-
dance with the terms and conditions of the Margin Account
Agreement.
8. Upon the expiration, exercise, or consummation of a
closing transaction with respect to, any Futures Contract
Option written or purchased by the Fund and described in
this Article, the Custodian shall (a) delete such Futures
Contract Option from the statements delivered to the Fund
pursuant to paragraph 3 of Article III herein and, (b) make
such withdrawals from and/or in the case of an exercise such
deposits into the Senior Security Account as may be speci-
fied in a Certificate. The deposits to and/or withdrawals
from the Margin Account, if any, shall be made by the
Custodian in accordance with the terms and conditions of the
Margin Account Agreement.
9. Futures Contracts acquired by the Fund through the
exercise of a Futures Contract Option described in this
Article shall be subject to Article VI hereof.
ARTICLE VIII
SHORT SALES
1. Promptly after any short sales by any Series of
the Fund, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series for which such short
sale was made; (b) the name of the issuer and the title of
the Security; (c) the number of shares or principal amount
sold, and accrued interest or dividends, if any; (d) the
dates of the sale and settlement; (e) the sale price per
unit; (f) the total amount credited to the Fund upon such
sale, if any, (g) the amount of cash and/or the amount and
kind of Securities, if any, which are to be deposited in a
Margin Account and the name in which such Margin Account has
been or is to be established; (h) the amount of cash and/or
the amount and kind of Securities, if any, to be deposited
in a Senior Security Account, and (i) the name of the broker
through whom such short sale was made. The Custodian shall
upon its receipt of a statement from such broker confirming
such sale and that the total amount credited to the Fund
upon such sale, if any, as specified in the Certificate is
held by such broker for the account of the Custodian (or any
nominee of the Custodian) as custodian of the Fund, issue a
receipt or make the deposits into the Margin Account and the
Senior Security Account specified in the Certificate.
22
<PAGE> 23
2. In connection with the closing-out of any short
sale, the Fund shall promptly deliver to the Custodian a
Certificate specifying with respect to each such closing-
out: (a) the Series for which such transaction is being
made; (b) the name of the issuer and the title of the
Security; (c) the number of shares or the principal amount,
and accrued interest or dividends, if any, required to
effect such closing-out to be delivered to the broker; (d)
the dates of closing-out and settlement; (e) the purchase
price per unit; (f) the net total amount payable to the Fund
upon such closing-out; (g) the net total amount payable to
the broker upon such closing-out; (h) the amount of cash and
the amount and kind of Securities to be withdrawn, if any,
from the Margin Account; (i) the amount of cash and/or the
amount and kind of Securities, if any, to be withdrawn from
the Senior Security Account; and (j) the name of the broker
through whom the Fund is effecting such closing-out. The
Custodian shall, upon receipt of the net total amount pay-
able to the Fund upon such closing-out, and the return and/
or cancellation of the receipts, if any, issued by the
Custodian with respect to the short sale being closed-out,
pay out of the moneys held for the account of the Fund to
the broker the net total amount payable to the broker,, and
make the withdrawals from the Margin Account and the Senior
Security Account, as the same are specified in the Certifi-
cate.
ARTICLE IX
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters a Reverse Repur-
chase Agreement with respect to Securities and money held by
the Custodian hereunder, the Fund shall deliver to the
Custodian a Certificate or in the event such Reverse Repur-
chase Agreement is a Money Market Security, a Certificate,
Oral Instructions, or Written Instructions specifying: (a)
the Series for which the Reverse Repurchase Agreement is
entered; (b) the total amount payable to the Fund in connec-
tion with such Reverse Repurchase Agreement and specifically
allocated to such Series; (c) the broker or dealer through
or with whom the Reverse Repurchase Agreement is entered;
(d) the amount and kind of Securities to be delivered by the
Fund to such broker or dealer; (e) the date of such Reverse
Repurchase Agreement; and (f) the amount of cash and/or the
amount and kind of Securities, if any, specifically allo-
cated to such Series to be deposited in a Senior Security
23
<PAGE> 24
Account for such Series in connection with such Reverse
Repurchase Agreement. The Custodian shall, upon receipt of
the total amount payable to the Fund specified in the Certi-
ficate, Oral Instructions, or Written Instructions make the
delivery to the broker or dealer, and the deposits, if any,
to the Senior Security Account, specified in such Certifi-
cate, Oral Instructions, or Written Instructions.
2. Upon the termination of a Reverse Repurchase
Agreement described in preceding paragraph 1 of this Arti-
cle, the Fund shall promptly deliver a Certificate or, in
the event such Reverse Repurchase Agreement is a Money
Market Security, a Certificate, Oral Instructions, or
Written Instructions to the Custodian specifying: (a) the
Reverse Repurchase Agreement being terminated and the Series
for which same was entered; (b) the total amount payable by
the Fund in connection with such termination; (c) the amount
and kind of Securities to be received by the Fund and
specifically allocated to such Series in connection with
such termination; (d) the date of termination; (e) the name
of the broker or dealer with or through whom the Reverse
Repurchase Agreement is to be terminated; and (f) the amount
of cash and/or the amount and kind of Securities to be with-
drawn from the Senior Securities Account for such Series.
The Custodian shall, upon receipt of the amount and kind of
Securities to be received by the Fund specified in the
Certificate, Oral Instructions, or Written Instructions,
make the payment to the broker or dealer, and the with-
drawals, if any, from the Senior Security Account, specified
in such Certificate; Oral Instructions, or Written Instruc-
tions.
ARTICLE X
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan of portfolio Securities
specifically allocated to a Series held by the Custodian
hereunder, the Fund shall deliver or cause to be delivered
to the Custodian a Certificate specifying with respect to
each such loan: (a) the Series to which the loaned Securi-
ties are specifically allocated; (b) the name of the issuer
and the title of the Securities, (c) the number of shares or
the principal amount loaned, (d) the date of loan and
delivery, (e) the total amount to be delivered to the Cus-
todian against the loan of the Securities,, including the
amount of cash collateral and the premium, if any, separate-
ly identified, and (f) the name of the broker, dealer, or
financial institution to which the loan was made. The
24 -
<PAGE> 25
Custodian shall deliver the Securities thus designated to
the broker, dealer or financial institution to which the
loan was made upon receipt of the total amount designated as
to be delivered against the loan of Securities. The
Custodian may accept payment in connection with a delivery
otherwise than through the Book-Entry System or Depository
only in the form of a certified or bank cashier's check pay-
able to the order of the Fund or the Custodian drawn on New
York Clearing House funds and may deliver Securities in
accordance with the customs prevailing among dealers in
securities.
2. Promptly after each termination of the loan of
Securities by the Fund, the Fund shall deliver or cause to
be delivered to the Custodian a Certificate specifying with
respect to each such loan termination and return of Securi-
ties: (a) the Series to which the loaned Securities are
specifically allocated; (b) the name of the issuer and the
title of the Securities to be returned, (c) the number of
shares or the principal amount to be returned, (d) the date
of termination, (e) the total amount to be delivered by the
Custodian (including the cash collateral for such Securities
minus any offsetting credits as described in said Certifi-
cate), and (f) the name of the broker, dealer, or financial
institution from which the Securities will be returned. The
Custodian shall receive all Securities returned from the
broker, dealer, or financial institution to which such
Securities were loaned and upon receipt thereof shall pay,
out of the moneys held for the account of the Fund, the
total amount payable upon such return of Securities as set
forth in the Certificate.
ARTICLE XI
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such
deposits to, or withdrawals from, a Senior Security Account
as specified in a Certificate received by the Custodian.
Such Certificate shall specify the Series for which such
deposit or withdrawal is to be made, and the amount of cash
and/or the amount and kind of Securities specifically allo-
cated to such Series to be deposited in, or withdrawn from,
such Senior security Account for such Series. In the event
that the Fund fails to specify in a Certificate the Series,
the name of the issuer, the title and the number of shares
or the principal amount of any particular Securities to be
25
<PAGE> 26
ticular Securities to be deposited by the Custodian into, or
withdrawn from, a Senior Securities Account, the Custodian
shall be under no obligation to make any such deposit or
withdrawal and shall so notify the Fund.
2. The Custodian shall make deliveries or payments
from a Margin Account to the broker, dealer, futures commis-
sion merchant or Clearing Member in whose name, or for whose
benefit, the account was established as specified in the
Margin Account Agreement.
3. Amounts received by the Custodian as payments or
distributions with respect to Securities deposited in any
Margin Account shall be dealt with in accordance with the
terms and conditions of the Margin Account Agreement.
4. The Custodian shall have a continuing lien and
security interest in and to any property at any time held by
the Custodian in any Collateral Account described herein.
In accordance with applicable law the Custodian may enforce
its lien and realize on any such property whenever the
Custodian has made payment or delivery pursuant to any Put
Option guarantee letter or similar document or any receipt
issued hereunder by the Custodian. In the event the Custo-
dian should realize on any such property net proceeds which
are less than the Custodian's obligations under any Put
option guarantee letter or similar document or any receipt,
such deficiency shall be a debt owed the Custodian by the
Fund within the scope of Article XIV herein.
5. On each business day the Custodian shall furnish
the Fund with a statement with respect to each Margin
Account in which money or Securities are held specifying as
of the close of business on the previous business day: (a)
the name of the Margin Account; (b) the amount and kind of
Securities held therein; and (c) the amount of money held
therein. The Custodian shall make available upon request to
any broker, dealer, or futures commission merchant specified
in the name of a Margin Account a copy of the statement
furnished the Fund with respect to such Margin Account.
6. Promptly after the close of business on each busi-
ness day in which cash and/or Securities are maintained in a
Collateral Account for any Series, the Custodian shall furn-
ish the Fund with a Statement with respect to such Col-
lateral Account specifying the amount of cash and/or the
amount and kind of Securities held therein. No later than
the close of business next succeeding the delivery to the
Fund of such statement, the Fund shall furnish to the
26 -
<PAGE> 27
Custodian a Certificate or Written Instructions specifying
the then market value of the Securities described in such
statement. In the event such then market value is indicated
to be less than the Custodian's obligation with respect to
any outstanding Put Option guarantee letter or similar docu-
ment, the Fund shall promptly specify in a Certificate the
additional cash and/or Securities to be deposited in such
Collateral Account to eliminate such deficiency.
ARTICLE XII
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall furnish to the Custodian a copy of
the resolution of the Board of Trustees of the Fund, certi-
fied by the Secretary, the Clerk, any Assistant Secretary or
any Assistant Clerk, either (i) setting forth with respect
to the Series specified therein the date of the declaration
of a dividend or distribution, the date of payment thereof,
the record date as of which shareholders entitled to payment
shall be determined, the amount payable per Share of such
Series to the shareholders of record as of that date and the
total amount payable to the Dividend Agent and any sub-
dividend agent or co-dividend agent of the Fund on the pay-
ment date, or (ii) authorizing with respect to the Series
specified therein the declaration of dividends and distribu-
tions on a daily basis and authorizing the Custodian to rely
on Oral Instructions, Written Instructions or a Certificate
setting forth the date of the declaration of such dividend
or distribution, the date of payment thereof, the record
date as of which shareholders entitled to payment shall be
determined the amount payable per Share of such Series to
the shareholders of record as of that date and the total
amount payable to the Dividend Agent on the payment date.
2. Upon the payment date specified in such resolu-
tion, Oral Instructions, Written Instructions or Certifi-
cate, as the case may be, the Custodian shall pay out of the
moneys held for the account of each Series the total amount
payable to the Dividend Agent, and any sub-dividend agent or
co-dividend agent of the Fund with respect to such Series.
27
<PAGE> 28
ARTICLE XIII
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall
deliver to the Custodian a Certificate duly specifying:
(a) The Series, the number of Shares sold, trade
date, and price; and
(b) The amount of money to be received by the
Custodian for the sale of such Shares and specifically allo-
cated to the seperate account in the name of such Series.
2. Upon receipt of such money from the Transfer
Agent, the Custodian shall credit such money to the separate
account in the name of the Series for which such money was
received.
3. Upon issuance of any Shares of any Series des-
cribed in the foregoing provisions of this Article, the
Custodian shall pay, out of the money held for the account
of such Series, all original issue or other taxes required
to be paid by the Fund in connection with such issuance upon
the receipt of a Certificate specifying the amount to be
paid.
4. Except as provided hereinafter, whenever the Fund
desires the Custodian to make payment out of the money held
by the Custodian hereunder in connection with a redemption
of any Shares, it shall furnish to the Custodian a
Certificate specifying:
(a) The number and Series of Shares redeemed; and
(b) The amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice
setting forth the Series and number of Shares received by
the Transfer Agent for redemption and that such Shares are
in good form for redemption, the Custodian shall make pay-
ment to the Transfer Agent out of the moneys held in the
separate account in the name of the Series the total amount
specified in the Certificate issued pursuant to the fore-
going paragraph 4 of this Article.
6. Notwithstanding the above provisions regarding the
redemption of any Shares, whenever any Shares are redeemed
pursuant to any check redemption privilege which may from
time to time be offered by the Fund, the Custodian, unless
28 -
<PAGE> 29
otherwise instructed by a Certificate, shall, upon receipt
of an advice from the Fund or its agent setting forth that
the redemption is in good form for redemption in accordance
with the check redemption procedure, honor the check pre-
sented as part of such check redemption privilege out of the
moneys held in the separate account of the Series of the
Shares being redeemed.
ARTICLE XIV
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian should in its sole discretion
advance funds on behalf of any Series which results in an
overdraft because the moneys held by the Custodian in the
separate account for such Series shall be insufficient to
pay the total amount payable upon a purchase of Securities
specifically allocated to such Series, as set forth in a
Certificate, Oral Instructions, or Written Instructions or
which results in an overdraft in the separate account of
such Series for some other reason, or if the Fund is for
any other reason indebted to the Custodian with respect to a
Series (except a borrowing for investment or for temporary
or emergency purposes using Securities as collateral pursu-
ant to a separate agreement and subject to the provisions of
paragraph 2 of this Article), such overdraft or indebtedness
shall be deemed to be a loan made by the Custodian to the
Fund for such Series payable on demand and shall bear
interest from the date incurred at a rate per annum (based
on a 360-day year for the actual number of days involved)
equal to 1/2% over Custodian's prime commercial lending rate
in effect from time to time, such rate to be adjusted on the
effective date of any change In such prime commercial
lending rate but in no event to be less than 6% per annum.
In addition, the Fund hereby agrees that the Custodian shall
have a continuing lien and security interest in and to any
property specifically allocated to such Series at any time
held by it for the benefit of such Series or in which the
Fund may have an interest which is then in the Custodian's
possession or control or in possession or control of any
third party acting in the Custodian's behalf. The Fund
authorizes the Custodian, in its sole discretion, at any
time to charge any such overdraft or indebtedness together
with interest due thereon against any balance of account
standing to such Series' credit on the Custodian's books.
2. The Fund will cause to be delivered to the
Custodian by any bank (including, if the borrowing is pur-
29
<PAGE> 30
suant to a separate agreement, the Custodian) from which it
borrows money for investment or for temporary or emergency
purposes using Securities held by the Custodian hereunder as
collateral for such borrowings, a notice or undertaking in
the form currently employed by any such bank setting forth
the amount which such bank will loan to the Fund against
delivery of a stated amount of collateral. The Fund shall
promptly deliver to the Custodian a Certificate specifying
with respect to each such borrowing: (a) the Series to which
such borrowing relates; (b) the name of the bank, (c) the
amount and terms of the borrowing, which may be set forth by
incorporating by reference an attached promissory note, duly
endorsed by the Fund, or other loan agreement, (d) the time
and date, if known, on which the loan is to be entered into,
(e) the date on which the loan becomes due and payable, (f)
the total amount payable to the Fund on the borrowing date,
(g) the market value of Securities to be delivered as col-
lateral for such loan, including the name of the issuer, the
title and the number of shares or the principal amount of
any particular Securities, and (h) a statement specifying
whether such loan is for investment purposes or for tempor-
ary or emergency purposes and that such loan is in confor-
mance with the Investment Company Act of 1940 and the Fund's
prospectus. The Custodian shall deliver on the borrowing
date specified in a Certificate the specified collateral and
the executed promissory note, if any, against delivery by
the lending bank of the total amount of the loan payable,
provided that the same conforms to the total amount. payable
as set forth in the Certificate. The Custodian may, at the
option of the lending bank, keep such collateral in its pos-
session, but such collateral shall be subject to all rights
therein given the lending bank by virtue of any promissory
note or loan agreement. The Custodian shall deliver such
Securities as additional collateral as may be specified in a
Certificate to collateralize further any transaction des-
cribed in this paragraph. The Fund shall cause all Securi-
ties released from collateral status to be returned directly
to the Custodian, and the Custodian shall receive from time
to time such return of collateral as may be tendered to it.
In the event that the Fund fails to specify in a Certificate
the Series, the name of the Issuer, the title and number of
shares or the principal amount of any particular Securities
to be delivered as collateral by the Custodian, the Custo-
dian shall not be under any obligation to deliver any
Securities.
30
<PAGE> 31
ARTICLE XV
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, neither the Custo-
dian nor its nominee shall be liable for any loss or damage,
including counsel fees, resulting from its action or omis-
sion to act or otherwise, either hereunder or under any
Margin Account Agreement, except for any such loss or damage
arising out of its own negligence or willful misconduct.
The Custodian may, with respect to questions of law arising
hereunder or under any Margin Account Agreement, apply for
and obtain the advice and opinion of counsel to the Fund or
of its own counsel, at the expense of the Fund, and shall be
fully protected with respect to anything done or omitted by
it in good faith in conformity with such advice or opinion.
The Custodian shall be liable to the Fund for any loss or
damage resulting from the use of the Book-Entry System or
any Depository arising by reason of any negligence, misfeas-
ance or willful misconduct on the part of the Custodian or
any of its employees or agents.
2. Without limiting the generality of the foregoing,
the Custodian shall be under no obligation to inquire into,
and shall not be liable for:
(a) The validity of the issue of any Securities
purchased, sold, or written by or for the Fund, the legality
of the purchase, sale or writing thereof, or the propriety
of the amount paid or received therefor;
(b) The legality of the sale or redemption of any
Shares, or the propriety of the amount to be received or
paid therefor;
(c) The legality of the declaration or payment of
any dividend by the Fund;
(d) The legality of any borrowing by the Fund
using Securities as collateral;
(e) The legality of any loan of portfolio Securi-
ties, nor shall the Custodian be under any duty or obliga-
tion to see to it that any cash collateral delivered to it
by a broker, dealer, or financial institution or held by it
at any time as a result of such loan of portfolio Securities
of the Fund is adequate collateral for the Fund against any
loss it might sustain as a result of such loan. The Custo-
dian specifically, but not by way of limitation, shall not
be under any duty or obligation periodically to check or
notify the Fund that the amount of such cash collateral held
by it for the Fund is sufficient collateral for the Fund,
31
<PAGE> 32
but such duty or obligation shall be the sole responsibility
of the Fund. In addition, the Custodian shall be under no
duty or obligation to see that any broker, dealer or finan-
cial institution to which portfolio Securities of the Fund
are lent pursuant to Article XIV of this Agreement makes
payment to it of any dividends or interest which are payable
to or for the account of the Fund during the period of such
loan or at the termination of such loan, provided, however,
that the Custodian shall promptly notify the Fund in the
event that such dividends or interest are not paid and
received when due; or
(f) The sufficiency or value of any amounts of
money and/or Securities held in any Margin Account, Senior
Security Account,, Exempt Account or Collateral Account in
connection with transactions by the Fund. In addition, the
Custodian shall be under no duty or obligation to see that
any broker, dealer, futures commission merchant or Clearing
Member makes payment to the Fund of any variation margin
payment or similar payment which the Fund may be entitled to
receive from such broker, dealer, futures commission
merchant or Clearing Member, to see that any payment
received by the Custodian from any broker,, dealer, futures
commission merchant or Clearing Member is the amount the
Fund is entitled to receive, or to notify the Fund of the
Custodian's receipt or non-receipt of any such payment.
3. The Custodian shall not be liable for, or con-
sidered to be the Custodian of, any money, whether or not
represented by any check, draft, or other instrument for the
payment of money., received by it on behalf of the Fund
until the Custodian actually receives and collects such
money directly or by the final crediting of the account
representing the Fund's interest at the Book-Entry System or
the Depository.
4. The Custodian shall not be under any duty or obli-
gation to take action to effect collection of any amount due
to the Fund from the Transfer Agent of the Fund nor to take
any action to effect payment or distribution by the Transfer
Agent of the Fund of any amount paid by the Custodian to the
Transfer Agent of the Fund in accordance with this Agree-
ment.
5. The Custodian shall not be under any duty or obli-
gation to take action to effect collection of any amount, if
the Securities upon which such amount is payable are in
default, or if payment is refused after due demand or pre-
sentation, unless and until (i) it shall be directed to take
such action by a Certificate and (ii) it shall be assured to
its satisfaction of reimbursement of its costs and expenses
in connection with any such action.
32
<PAGE> 33
6 The Custodian may appoint one or more banking
institutions as Depository or Depositories, as Sub-Custodian
or Sub-Custodians, or as Co-Custodian or Co-Custodians
including, but not limited to, banking institutions located
in foreign countries, of Securities and moneys at any time
owned by the Fund, upon such terms and conditions as may be
approved in a Certificate or contained in an agreement exe-
cuted by the Custodian, the Fund and the appointed institu-
tion.
7. The Custodian shall not be under any duty or obli-
gation (a) to ascertain whether any Securities at any time
delivered to, or held by it, for the account of the Fund and
specifically allocated to a Series are such as properly may
be held by the Fund or such Series under the provisions of
its then current prospectus, or (b) to ascertain whether any
transactions by the Fund, whether or not involving the
Custodian, are such transactions as may properly be engaged
in by the Fund.
8. The Custodian shall be entitled to receive and the
Fund agrees to pay to the Custodian all out-of-pocket expen-
ses and such compensation as may be agreed upon from time to
time between the Custodian and the Fund. The Custodian may
charge such compensation and any expenses with respect to a
Series incurred by the Custodian in the performance of its
duties pursuant to such agreement against any money specifi-
cally allocated to such Series. Unless and until the Fund
instructs the Custodian by a Certificate to apportion any
loss, damage, liability or expense among the Series in a
specified manner, the Custodian shall also be entitled to
charge against any money held by it for the account of a
Series such Series' pro rata share (based on such Series net
asset value at the time of the charge to the aggregate net
asset value of all Series at that time) of the amount of any
loss, damage, liability or expense, including counsel fees,
for which it shall be entitled to reimbursement under the
provisions of this Agreement. The expenses for which the
Custodian shall be entitled to reimbursement hereunder shall
include, but are not limited to, the expenses of sub-custo-
dians and foreign branches of the Custodian incurred in set-
tling outside of New York City transactions involving the
purchase and sale of Securities of the Fund.
9. The Custodian shall be entitled to rely upon any
Certificate, notice or other instrument in writing received
by the Custodian and reasonably believed by the Custodian to
be a Certificate. The Custodian shall be entitled to rely
upon any Oral Instructions and any Written Instructions
actually received by the Custodian hereinabove provided
33 -
<PAGE> 34
for. The Fund agrees to forward to the Custodian a Certifi-
cate or facsimile thereof confirming such Oral Instructions
or Written Instructions in such manner so that such Certifi-
cate or facsimile thereof is received by the Custodian,
whether by hand delivery, telecopier or other similar
device, or otherwise, by the close of business of the same
day that such Oral Instructions or Written Instructions are
given to the Custodian. The Fund agrees that the fact that
such confirming instructions are not received by the Custo-
dian shall in no way affect the validity of the transactions
or enforceability of the transactions hereby authorized by
the Fund. The Fund agrees that the Custodian shall incur no
liability to the Fund in acting upon Oral Instructions or
Written Instructions given to the Custodian hereunder con-
cerning such transactions provided such instructions reason-
ably appear to have been received from an Authorized Person.
10. The Custodian shall be entitled to rely upon any
instrument, instruction or notice received by the Custodian
and reasonably believed by the Custodian to be given in
accordance with the terms and conditions of any Margin
Account Agreement. Without limiting the generality of the
foregoing, the Custodian shall be under no duty to inquire
into, and shall not be liable for, the accuracy of any
statements or representations contained in any such instru-
ment or other notice including, without limitation, any
specification of any amount to be paid to a broker, dealer,
futures commission merchant or Clearing Member.
11. The books and records pertaining to the Fund which
are in the possession of the Cutodian shall be the property
of the Fund. Such books and records shall be prepared and
maintained as required by the Investment Company Act of
1940, as amended, and other applicable securities laws and
rules and regulations. The Fund, or the Fund's authorized
representatives, shall have access to such books and records
during the Custodian's normal business hours. Upon the
reasonable request of the Fund, copies of any such books and
records shall be provided by the Custodian to the Fund or
the Fund's authorized representative, and the Fund shall
reimburse the Custodian its expenses of providing such
copies.
12. The Custodian shall provide the Fund with any
report obtained by the Custodian on the system of internal
accounting control of the Book-Entry System, the Depository,
or O.C.C., and with such reports on its own systems of
internal accounting control as the Fund may reasonably
request from time to time.
34
<PAGE> 35
13. The Fund agrees to indemnify the Custodian against
and save the Custodian harmless from all liability, claims,
losses and demands whatsoever, including attorney's fees,
howsoever arising or incurred because of or in connection
with the Custodian's payment or non-payment of checks pursu-
ant to paragraph 6 of Article XIII as part of any check
redemption privilege program of the Fund, except for any
such liability, claim, loss and demand arising out of the
Custodian's own negligence or willful misconduct.
14. Subject to the foregoing provisions of this Agree-
ment, the Custodian may deliver and receive Securities, and
receipts with respect to such Securities, and arrange for
payments to be made and received by the Custodian in accor-
dance with the customs prevailing from time to time among
brokers or dealers in such Securities.
15. The Custodian shall have no duties or responsibil-
ities whatsoever except such duties and responsibilities as
are specifically set forth in this Agreement, and no
covenant or obligation shall be implied in this Agreement
against the Custodian.
ARTICLE XVI
TERMINATION
1. Either of the parties hereto may terminate this
Agreement by giving to the other party a notice in writing
specifying the date of such termination, which shall be not
less than ninety (90) days after the date of giving of such
notice. In the event such notice is given by the Fund, it
shall be accompanied by a copy of a resolution of the Board
of Trustees of the Fund, certified by the Secretary, the
Clerk, any Assistant Secretary or any Assistant Clerk,
electing to terminate this Agreement and designating a suc-
cessor custodian or custodians, each of which shall be a
bank or trust company having not less than $2,000,000 aggre-
gate capital, surplus and undivided profits. In the event
such notice is given by the Custodian, the Fund shall, on or
before the termination date, deliver to the Custodian a copy
of a resolution of the Board of Trustees of the Fund, cer-
tified by the Secretary, the Clerk, any Assistant Secretary
or any Assistant Clerk, designating a successor custodian or
custodians. In the absence of such designation by the Fund,
the Custodian may designate a successor custodian which
shall be a bank or trust company having not less than
$2,000,000 aggregate capital, surplus and undivided pro-
fits. Upon the date set forth in such notice this Agreement
35
<PAGE> 36
ment shall terminate, and the Custodian shall upon receipt
of a notice of acceptance by the successor custodian on that
date deliver directly to the successor custodian all Securi-
ties and moneys then owned by the Fund and held by it as
Custodian, after deducting all fees, expenses and other
amounts for the payment or reimbursement of which it shall
then be entitled.
2. If a successor custodian is not designated by the
Fund or the Custodian in accordance with the preceding para-
graph, the Fund shall upon the date specified in the notice
of termination of this Agreement and upon the delivery by
the Custodian of all Securities (other than Securities held
in the Book-Entry System which cannot be delivered to the
Fund) and moneys then owned by the Fund be deemed to be its
own custodian and the Custodian shall thereby be relieved of
all duties and responsibilities pursuant to this Agreement,
other than the duty with respect to Securities held in the
Book Entry System which cannot be delivered to the Fund to
hold such Securities hereunder in accordance with this
Agreement.
ARTICLE XVII
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate
signed by two of the present Officers of the Fund under -its
seal, setting forth the names and the signatures of the
present Authorized Persons. The Fund agrees to furnish to
the Custodian a new Certificate in similar form in the event
that any such present Authorized Person ceases to be an
Authorized Person or in the event that other or additional
Authorized Persons are elected or appointed. Until such new
Certificate shall be received, the Custodian shall be fully
protected in acting under the provisions of this Agreement
upon Oral Instructions or signatures of the present Author-
ized Persons as set forth in the last delivered Certificate.
2. Annexed hereto as Appendix B is a Certificate
signed by two of the present Officers of the Fund under its
seal, setting forth the names and the signatures of the pre-
sent Officers of the Fund. The Fund agrees to furnish to
the Custodian a new Certificate in similar form in the event
any such present Officer ceases to be an Officer of the
Fund, or in the event that other or additional Officers are
- 36 -
<PAGE> 37
elected or appointed. Until such new Certificate shall be
received, the Custodian shall be fully protected in acting
under the provisions of this Agreement upon the signatures
of the Officers as set forth in the last delivered Certifi-
cate.
3. Any notice or other instrument in writing, author-
ized or required by this Agreement to be given to the Custo-
dian, shall be sufficiently given if addressed to the Custo-
dian and mailed or delivered to it at its offices at 90
Washington Street, New York, New York 10015, or at such
other place as the Custodian may from time to time designate
in writing.
4. Any notice or other instrument in writing, author-
ized or required by this Agreement to be given to the Fund
shall be sufficiently given if addressed to the Fund and
mailed or delivered to it at its office at the address for
the Fund first above written, or at such other place as the
Fund may from time to time designate in writing.
5. This Agreement may not be amended or modified in
any manner except by a written agreement executed by both
parties with the same formality as this Agreement and
approved by a resolution of the Board of Trustees of the
Fund.
6. This Agreement shall extend to and shall be bind-
ing upon the parties hereto, and their respective successors
and assigns; provided, however, that this Agreement shall
not be assignable by the Fund without the written consent of
the Custodian, or by the Custodian without the written con-
sent of the Fund, authorized or approved by a resolution of
the Fund's Board of Trustees.
7. This Agreement shall be construed in accordance
with the laws of the State of New York.
8. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an origi-
nal, but such counterparts shall, together, constitute only
one instrument.
9. A copy of the Declaration of Trust of the Fund is
on file with the Secretary of The Commonwealth of Massa-
chusetts, and notice is hereby given that this instrument is
executed on behalf of the Board of Trustees of the Fund as
Trustees and not individually and that the obligations of
this instrument are not binding upon any of the Trustees or
shareholders individually but are binding only upon the
assets and property of the Fund.
- 37 -
<PAGE> 38
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective Officers,
thereunto duly authorized and their respective seals to be
hereunto affixed, as of the day and year first above
written.
Attest: By /S/ GERALD M. RICHARD
-----------------------
THE BANK OF NEW YORK
Attests: /s/ By: /s/
-----------------------
38
<PAGE> 39
APPENDIX A
I, President and I.
of
a Massachusetts business trust (the "Fund"),,
do hereby certify that:
The following individuals have been duly authorized by
the Board of Trustees of the Fund in conformity with the
Fund's Declaration of Trust and By-Laws to give Oral
Instructions and Written Instructions on behalf of the Fund,
and the signatures set forth opposite their respective names
are their true and correct signatures:
Name Signature
---------------------- -----------------------
<PAGE> 40
APPENDIX B
I, ,President and I.
of
Massachusetts business trust (the "Fund"),
do hereby certify that:
The following individuals serve in the following posi-
tions with the Fund and each has been duly elected or
appointed by the Board of Trustees of the Fund to each such
position and qualified therefor in conformity with the
Fund's Declaration of Trust and By-Laws, and the signatures
set forth opposite their respective names are their true and
correct signatures:
Name Position Signature
---------------- ---------------- -----------------
<PAGE> 41
APPENDIX C
I, , an Assistant Vice
President with THE BANK OF YORK do hereby designate the
following publications:
The Bond Buyer
Depository Trust Company Notices
Financial Daily Card Service
New York Times
Standard & Poor's Called Bond Record
Wall Street Journal
<PAGE> 42
EXHIBIT A
CERTIFICATION
The undersigned, hereby
certifies that he or she is the duly elected and acting
of a Massachusetts business
trust (the 'Fund"), and further certifies that the following
resolution was adopted by the Board of Trustees of the Fund
at a meeting duly held on , 19 , at which a quorum
was at all times present and that such resolution has not
been modified or rescinded and is in full force and effect
as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian
pursuant to a Custody Agreement between The Bank of New
York and the Fund dated as of , 19 (the
"Custody Agreement") is authorized and instructed on a
continuous and ongoing basis to deposit in the Book-
Entry System, as defined in the Custody Agreement, all
securities eligible for deposit therein, regardless of
the Series to which the same are specifically allo-
cated, and to utilize the Book-Entry System to the
extent possible in connection with its performance
thereunder, including, without limitation, in connec-
tion with settlements of purchases and sales of securi-
ties, loans of securities, and deliveries and returns
of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of, ,as of the day of
19
-------------------------
<PAGE> 43
EXHIBIT B
CERTIFICATION
The undersigned, hereby
certifies that he or she is the duly elected and acting
of a Massachusetts business
Trust (the 'Fund"), and further certifies that the following
resolution was adopted by the Board of Trustees of the Fund
at a meeting duly held on , 19 , at which a quorum
was at all times present and that such resolution has not
been modified or rescinded and is in full force and effect
as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian
pursuant to a Custody Agreement between The Bank of New
York and the Fund dated as of , 19 ,
(the "Custody Agreement') is authorized and instructed
on a continuous and ongoing basis until such time as it
receives a Certificate, as defined in the Custody
Agreement, to the contrary to deposit in the Depos-
itory, as defined in the Custody Agreement, all secu-
rities eligible for deposit therein, regardless of the
Series to which the same are specifically allocated,
and to utilize the Depository to the extent possible in
connection with its performance thereunder, including,
without limitation, in connection with settlements of
purchases and sales of securities, loans of securities,
and deliveries and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of as of the day of
19
-------------------------
<PAGE> 44
EXHIBIT C
CERTIFICATION
The undersigned, hereby
certifies that he or she is the duly elected and acting
of , a Massachusetts business
trust (the "Fund"), and further certifies that the following
resolution was adopted by the Board of Trustees of the Fund
at a meeting duly held on , 19 , at which a quorum
was at all times present and that such resolution has not
been modified or rescinded and is in full force and effect
as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian
pursuant to a Custody Agreement between The Bank of New
York and the Fund dated as of , 19 ,
(the "Custody Agreement") is authorized and instructed
on a continuous and ongoing basis until such time as it
receives a Certificate, as defined in the Custody
Agreement,, to the contrary,, to accept, utilize and act
with respect to Clearing Member confirmations for
Options and transaction in options, regardless of the
Series to which the same are specifically allocated,,
as such terms are defined in the Custody Agreement,, as
provided in the Custody Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand and the
seal of as of the day of
19
-------------------------
<PAGE> 1
Ex-99.9
TRANSFER AGENCY AGREEMENT
Agreement made as of the 5th day of August ,
1985 between MEILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST ,a
Massachusetts business trust organized and existing under
the laws of the Commonwealth of Massachusetts, having its
principal office and place of business at
(hereinafter referred to as
the "Fund"), and THE BANK OF NEW YORK, a Now York corpo-
ration authorized to do a banking business, having its prin-
cipal office and place of business at 48 Wall Street, New
York, New York 10015 (hereinafter referred to as the "Trans-
fer Agent").
W I T N E S S E T H
That for and in consideration of the mutual promises
hereinafter set forth, the parties hereto covenant and agree
as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement,, the following words
and phrases shall have the following meanings:
1. "Approved Institution" shall mean an entity so
named in a Certificate. From time to time the Fund may
amend a previously delivered Certificate by delivering to
the Transfer Agent a Certificate naming an additional entity
or deleting any entity named in a previously delivered
Certificate.
2. "Certificate" shall mean any notice, instruction,
or other instrument in writing, authorized or required by
this Agreement to be given to the Transfer Agent by the Fund
which is signed by any officer, as hereinafter defined, and
actually received by the Transfer Agent.
3. "Custodian" shall mean The Bank of New York, as
custodian under the terms and conditions of the Custody
<PAGE> 2
Agreement between The Bank of New York and the Fund# or its
successors.
4. "Fund Business Day' shall be deemed to be each day
on which the New York Stock Exchange, Inc. is open for
trading.
5. 'Officer' shall be deemed to be the Fund's Chair-
man of the Board, the Fund's President, any Vice President
of the Fund, the Fund's Secretary or Clerk, the Fund's
Treasurer, the Fund's Controller, any Assistant Controller
of the Fund, any Assistant Treasurer of the Fund, and any
other person duly authorized by the Board of Trustees of the
Fund to execute any Certificate, instruction, notice or
other instrument on behalf of the Fund and named in the
Certificate annexed hereto as Appendix A, as such Certifi-
cate may be amended from time to time, and any person
reasonably believed by the Transfer Agent to be such a
person.
6. "Series" shall mean the various portfolios of the
Fund as described from time to time in the current and
effective Prospectus.
7. "Shares" shall mean all or any part of each class
of the shares of beneficial interest of the Fund listed in
the Certificate annexed hereto as Appendix B, as may be
amended from time to time, which from time to time are
authorized and/or issued by the Fund.
8. "Prospectus" shall mean the last Fund prospectus
actually received by the Transfer Agent from the Fund with
respect to which the Fund has indicated a registration
statement under the Federal Securities Act of 1933 has
become effective, including the statement of Additional
Information incorporated by reference therein.
9. "Transfer Agent" shall mean The Bank of New York,
as transfer agent and dividend disbursing agent under the
terms and conditions of this Agreement, its successors or
assign(s).
ARTICLE II
APPOINTMENT OF TRANSFER AGENT
1. The Fund hereby constitutes and appoints the
Transfer Agent as transfer agent of all the Shares of the
Fund and as dividend disbursing agent during the period of
this Agreement.
2
<PAGE> 3
2 The Transfer Agent hereby accepts appointment as
transfer agent and dividend disbursing agent and agrees to
perform the duties thereof as hereinafter set forth.
3. in connection with such appointment, the Fund
shall deliver the following documents to the Transfer Agent:
(a) A certified copy of the Declaration of Trust
of the Fund and all amendments thereto;
(b) A certified copy of the By-Laws of the Fund;
(c) A certified copy of a resolution of the Trus-
tees of the Fund appointing the Transfer Agent and authoriz-
ing the execution of this Transfer Agency Agreement;
(d) A Certificate signed by the Secretary or
Clerk of the Fund specifying with respect to each Series:
the number of authorized Shares, the number of such author-
ized Shares issued, and the number of such authorized Shares
issued and currently outstanding, the names and specimen
signatures of the officers of the Fund, and the name and
address of the legal counsel for the Fund;
(e) Specimen Share certificates for each class of
Shares in the form approved by the Board of Trustees of the
Fund, together with a certificate signed by the Secretary or
Clerk of the Fund as to such approval;
(f) Copies of the Fund's Registration Statement,
as amended to date, and the most recently filed Post-Effec-
tive Amendment thereto, filed by the Fund with the Securi-
ties and Exchange Commission under the Securities Act of
1933, as amended, and under the Investment Company Act of
1940, as amended, together with any applications filed in
connection therewith; and
(g) opinion of counsel for the Fund with respect
to the validity of the authorized and outstanding Shares,
whether such Shares are fully paid and non-assessable and
the status of such Shares under the Securities Act of 1933,
as amended, and any other applicable federal law or regula-
tion (i.e., if subject to registration, that they have been
registered and that the Registration Statement has become
effective or, if exempt, the specific grounds therefor).
4. The Fund shall furnish the Transfer Agent with a
sufficient supply of blank Share certificates and from time
to time will renew such supply upon request of the Transfer
3
<PAGE> 4
Agent. Such blank Share certificates shall be properly
signed, by facsimile or otherwise,, by officers of the Fund
authorized by law or by the by-laws to sign share certifi-
cates, and, if required, shall bear the seal or facsimile
thereof.
ARTICLE III
AUTHORIZATION AND ISSUANCE OF SHARES
1. The Fund shall deliver to the Transfer Agent the
following documents on or before the effective date of any
increase or decrease in the total number of Shares autho-
rized to be issued:
(a) A certified copy of the amendment to the
Declaration of Trust giving effect to such increase or
decrease;
(b) In the case of an increase, an opinion of
counsel for the Fund with respect to the validity of the
Shares of the Fund and the status of such Shares under the
Securities Act Of 1933, as amended, and any other applicable
federal law or regulation (i.e., if subject to registration,
that they have been registered and that the Registration
Statement has become effective or, if exempt, the specific
grounds therefor); and
(c) In the case of an increase, if the appoint-
ment of the Transfer Agent was theretofore expressly limit-
ed, a certified copy of a resolution of the Board of
Trustees of the Fund increasing the authority of the
Transfer Agent.
2. Prior to the issuance of any additional Shares of
the Fund pursuant to stock dividends or stock splits, etc.,
and prior to any reduction in the number of shares outstand-
ing, the Fund shall deliver the following documents to the
Transfer Agent:
(a) A certified copy of the resolutions) adopted
by the Board of Trustees and/or the shareholders of the Fund
authorizing such issuance of additional Shares of the Fund
or such reduction, as the case may be, and
(b) An opinion of counsel for the Fund with
respect to the validity of the Shares of the Fund and the
status of such Shares under the Securities Act of 1933, as
amended, and any other applicable federal law or regulation
4
<PAGE> 5
(i.e., if subject to registration that they have been
registered and that the Registration Statement has become
effective, or, if exempt, the specific grounds therefor).
ARTICLE IV
RECAPITALIZATION OR CAPITAL ADJUSTMENT
1. In the case of any negative stock split, recapi-
talization or other capital adjustment requiring a change in
the form of Share certificates, the Transfer Agent will
issue Share certificates in the new form in exchange.for, or
upon transfer of, outstanding Share certificates in the old
form, upon receiving:
(a) A Certificate authorizing the issuance of
Share certificates in the new form;
(b) A certified copy of any amendment to the
Declaration of Trust with respect to the change;
(c) Specimen Share certificates for each class of
Shares in the new form approved by the Board of Trustees of
the Fund, with a Certificate signed by the Secretary or
Clerk of the Fund as to such approval; and
(d) An opinion of counsel for the Fund with res-
pect to the validity of the Shares in the new form and the
status of such Shares under the Securities Act of 1933, as
amended, and any other applicable federal law or regulation
(i.e., if subject to registration, that the Shares have been
registered and that the Registration Statement has become
effective or, if exempt, the specific grounds therefor).
2. The Fund shall furnish the Transfer Agent with a
sufficient supply of blank Share certificates in the new
form, and from time to time will replenish such supply upon
the request of the Transfer Agent. Such blank Share certi-
ficates shall be properly signed by officers of the Fund
authorized by law or by the by-laws to sign Share certifi-
cates and, if required shall bear the seal of the Fund or
facsimile thereof. The Fund agrees to indemnify and
exonerate, save and hold the Transfer Agent harmless, from
and against any and all claims or demands that may be
asserted against the Transfer Agent with respect to the
genuineness of any Share certificate supplied to the Trans-
fer Agent pursuant to this section.
5
<PAGE> 6
ARTICLE V
ISSUANCE, REDEMPTION, AND TRANSFER OF SHARES
1. (a) The Transfer Agent shall accept with respect
to each Fund Business Day, at such times as are agreed upon
from time to time by the Transfer Agent and the Fund, each
(i) purchase order received from a purchaser, or share-
holder, whether or not an Approved Institution, and (ii)
redemption request either received from a shareholder,
whether or not an Approved Institution, or contained in a
Certificate, provided, that (A) such purchase order or
redemption request, as the case may be, is reasonably
believed by the Transfer Agent to be in conformity with the
Fund's purchase and redemption procedures described in the
Prospectus, and (B) the Transfer Agent has agreed to accept
and act in accordance with such type of purchase order or
redemption request, as the case may be.
(b) The Transfer Agent shall also accept with
respect to each Fund Business Day, at such times as are
agreed upon from time to time by the Transfer Agent and the
Fund, a computer tape consistent in all respects with the
Transfer Agent's tape layout package, as amended from time
to time, which is believed by the Transfer Agent to be
furnished by or on behalf of any Approved Institution.
2. On each Fund Business Day the Transfer Agent
shall, as of the time at which the Fund computes the net
asset value of each Series, issue to, and redeem from, the
accounts specified in a purchase order, redemption request,
or computer tape which in accordance with the Prospectus is
effective on such Fund Business Day the appropriate number
of full and fractional Shares based on the net asset value
per Share of such Series specified in an advice received on
such Fund Business Day from the Fund. Notwithstanding the
foregoing, if a redemption specified in a computer tape is
for a dollar value of Shares in excess of the dollar value
of uncertificated Shares in the specified account, the
Transfer Agent shall not effect such redemption in whole or
part, and shall orally advise both the Fund and the Approved
Institution which supplied such tape of such discrepancy.
6
<PAGE> 7
3. The Transfer Agent shall, as of each Fund Business
Day specified in a Certificate or resolution described in
paragraph I of succeeding Article VI, issue Shares of a
Series, based on the net asset value per Share of such
Series specified in an advice received from the Fund on such
Fund Business Day, in connection with a reinvestment of a
dividend or distribution on Shares of such Series.
4. on each Fund Business Day the Transfer Agent shall
supply the Fund with a statement specifying with respect to
the immediately preceding Fund Business Day: the total
number of Shares of each Series (including fractional
Shares) issued and outstanding at the opening of business on
such day; the total number of Shares of each Series sold to
The Bank of New York, as agent for the purchasers, on such
day, pursuant to preceding paragraph 2 of this Article; the
total number of Shares of each Series redeemed by The Bank
of New York, as agent for the respective redeeming share-
holders, on such day; the total number of Shares of each
Series, if any, sold to The Bank of New York, as agent for
shareholders, on such day pursuant to preceding paragraph 3
of this Article, and the total number of Shares of each
Series issued and outstanding. On the same day such state-
ment is received by the Fund, the Fund shall confirm the
information contained therein by delivering to the Transfer
Agent a Certificate with respect to the same.
5. In connection with each purchase and each redemp-
tion of Shares, the Transfer Agent shall send such state-
ments as are described in the Prospectus. If the Prospectus
indicates that certificates for Shares are available, and if
specifically requested in writing by any shareholder or if
otherwise required hereunder, the Transfer Agent will coun-
tersign, issue and mail by not less than first class insured
mail, to such shareholder at the address set forth in the
records of the Transfer Agent, a Share certificate for any
full Shares requested.
6. As of each Fund Business Day the Transfer Agent
shall furnish the Custodian with an advice setting forth the
number and dollar amount of Shares to be redeemed on such
Fund Business Day in accordance with paragraph 2 of this
Article.
7. Upon receipt of moneys paid to it by the Custodian
in connection with a redemption of Shares, the Transfer
Agent shall cancel the redeemed Shares and after making
appropriate deduction for any withholding of taxes required
of it by applicable law (a) in the case of a redemption of
Shares pursuant to a redemption described in preceding para-
7
<PAGE> 8
graph l(a)of this Article, make payment in accordance with
the Fund's redemption and payment procedures described in
the Prospectus, and (b) in the case of a redemption of
Shares pursuant to a computer tape described in preceding
paragraph l(b) of the Article, make payment by directing a
federal funds wire order to the account previously design-
ated by the Approved Institution specified in said computer
tape.
8. The Transfer Agent shall not be required to issue
any Shares after it has received from an officer of the Fund
or from an appropriate federal or state authority written
notification that the sale of Shares has been suspended or
discontinued, and the Transfer Agent shall be entitled to
rely upon such written notification.
9. Upon the issuance of any Shares in accordance with
this Agreement the Transfer Agent shall not be responsible
for the payment of any original issue or other taxes
required to be paid by the Fund in connection with such
issuance of any Shares.
10. Shares which are subject to restriction on trans-
fer or redemption (including, without limitation, Shares
acquired pursuant to a restrictive investment representa-
tion, Shares held by controlling persons, Shares subject to
shareholder's agreements, etc.), other than the general
restrictions on the transferability of the shares described
in the Prospectus, must be issued in Share certificate form
and must be stamped on the face thereof with a legend
describing the extent and conditions of the restriction or
referring to the source of such restriction, and shall be so
issued and so legended by the Transfer Agent only if the
Fund so directs in a Certificate. Legended Shares may not
be transferred or redeemed except upon receipt by the
Transfer Agent of an opinion of counsel for the Fund stating
that such transfer or redemption is in accordance with
applicable law, and may be properly effected. The Transfer
Agent shall be entitled to rely upon such opinion and shall
be indemnified by the Fund for any transfer or redemption
made in reliance upon any such opinion.
11. The Transfer Agent shall accept a computer tape
consistent with the Transfer Agent's tape layout package, as
amended from time to time, which is reasonably believed by
the Transfer Agent to be furnished by or on behalf of any
Approved Institution and is represented to be instructions
with respect to the transfer of Shares from one account of
such Approved Institution to another such account, and shall
effect the transfers specified in said computer tape.
8
<PAGE> 9
12. (a) Except as otherwise provided in sub-paragraph
(b) of this paragraph and in paragraph 13 of this Article,
Shares will be transferred or redeemed upon presentation to
the Transfer Agent of Share certificates or instructions
properly endorsed for transfer or redemption, accompanied by
such documents as the Transfer Agent deems necessary to
evidence the authority of the person making such transfer or
redemption, and bearing satisfactory evidence of the payment
of stock transfer taxes. In the case of small estates,
where no administration is contemplated, the Transfer Agent
may, when furnished with an appropriate surety bond, and
without further approval of the Fund, transfer or redeem
Shares registered in the name of a decedent where the cur-
rent market value of the Shares being transferred does not
exceed such amount as may from time to time be prescribed by
various states. The Transfer Agent reserves the right to
refuse to transfer or redeem Shares until it is satisfied
that the endorsement on the stock certificate or instruc-
tions is valid and genuine, and for that purpose it will
require, unless otherwise instructed by an authorized
officer of the Fund, a guarantee of signature by a member
firm of a National Securities Exchange or by a bank or trust
company acceptable to the Transfer Agent. The Transfer
Agent also reserves the right to refuse to transfer or
redeem Shares until it is satisfied that the requested
transfer or redemption is legally authorized, and it shall
incur no liability for the refusal, in good faith, to make
transfers or redemptions which the Transfer Agent, in its
judgment, deems improper or unauthorized, or until it is
satisfied that there is no basis to any claims adverse to
such transfer or redemption. The Transfer Agent may, in
effecting transfers and redemptions of Shares, rely upon
those provisions of the Uniform Act for the Simplification
of Fiduciary Security Transfers or the Uniform Commercial
Coder as the same may be amended from time to time, applic-
able to the transfer of securities, and the Fund shall
indemnify the Transfer Agent for any act done or omitted by
it in good faith in reliance upon such laws.
(b) Notwithstanding the foregoing or any other
provision contained in this Agreement to the contrary, the
Transfer Agent shall be fully protected by the Fund in not
requiring any instruments, documents, assurances, endorse-
ments or guarantees including, without limitation, any
signature guarantees, in connection with a redemption, or
transfer, of Shares whenever the Transfer Agent reasonably
believes that requiring the same would be inconsistent with
the transfer and redemption procedures as described in the
Prospectus.
9
<PAGE> 10
13. Notwithstanding any provision contained in this
Agreement to the contrary, the Transfer Agent shall not be
required or expected to require, as a condition to any
transfer of any Shares pursuant to paragraph 11 of this
Article or any redemption of any Shares pursuant to a
computer tape described in this Article, any documents,
including, without limitation, any documents of the kind
described in sub-paragraph (a) of paragraph 12 of this
Article, to evidence the authority of the person requesting
the transfer or redemption and/or the payment of any stock
transfer taxes, and shall be fully protected in acting in
accordance with the applicable provisions of this Article.
14. (a) As used in this Agreement, the terms
"computer tape" and "computer tape believed by the Transfer
Agent to be furnished by an Approved Institution", shall
include any tapes generated by the Transfer Agent to reflect
information believed by the Transfer Agent to have been
inputted by an Approved Institution, via a remote terminal
or other similar link, into a data processing, storage, or
collection system, or similar system (the "System"), located
on the Transfer Agent's premises. For purposes of paragraph
1 of this Article, such a computer tape shall be deemed to
have been furnished at such times as are agreed upon from
time to time by the Transfer Agent and Fund only if the
information reflected thereon was inputted into the System
at such times as are agreed upon from time to time by the
Transfer Agent and the Fund.
(b) Nothing contained in this Agreement shall
constitute any agreement or representation by the Transfer
Agent to permit, or to agree to permit, any Approved Insti-
tution to input information into a System.
ARTICLE VI
DIVIDENDS AND DISTRIBUTIONS
1. The Fund shall furnish to the Transfer Agent a
copy of a resolution of its Board of Trustees, certified by
the Secretary or Clerk or any Assistant Secretary or Assis-
tant Clerk, either (i) setting forth with respect to a
Series the date of the declaration of a dividend or distri-
bution, the date of accrual or payment, as the case may be,
thereof, the record date as of which Shareholders entitled
to payment, or accrual, as the case may be, shall be
determined, the amount per Share of such dividend or distri-
bution, the payment date on which all previously accrued and
10
<PAGE> 11
unpaid dividends are to be paid,, and the total amount, if
any, payable to the Transfer Agent on such payment dater or
(ii) authorizing the declaration of dividends and distribu-
tions on a daily or other periodic basis and authorizing the
Transfer Agent to rely on a Certificate setting forth the
information described in subsection (i) of this paragraph.
2. Upon the payment date specified in such Certifi-
cate or resolution, as the case may be, the Fund shall, in
the case of a cash dividend or distribution, cause the
Custodian to pay to the Transfer Agent an amount of cash, if
any, sufficient for the Transfer Agent to make the payment,
if any, specified in such Certificate or resolution, as the
case may be, to the Shareholders of record as of such pay-
ment date. The Transfer Agent will, upon receipt of any
such cash, make payment of such cash dividends or distribu-
tions to the Shareholders of record as of the record date
by: (i) mailing a check, payable to the registered share-
holder, to the address of record or dividend mailing
address, or (ii) wiring such amounts to the accounts pre-
viously designated by an Approved Institution, as the case
may be. The Transfer Agent shall not be liable for any
improper payments made in accordance with a Certificate or
resolution described in the preceding paragraph. If the
Transfer Agent shall not receive from the Custodian suffi-
cient cash to make payments of any cash dividend or distri-
bution to all shareholders of the Fund as of the record
date, the Transfer Agent shall, upon notifying the Fund,
withhold payment to all shareholders of record as of the
record date until sufficient cash is provided to the
Transfer Agent.
3. It is understood that the Transfer Agent shall in
no way be responsible for the determination of the rate or
form of dividends or capital gain distributions due to the
shareholders.
4. It is understood that the Transfer Agent shall
file such appropriate information returns concerning the
payment of dividends and capital gain distributions with the
proper federal, state and local authorities as are required
by law to be filed by the Fund but shall in no way be res-
ponsible for the collection or withholding of taxes due on
such dividends or distributions due to shareholders, except
and only to the extent, required of it by applicable law.
<PAGE> 12
ARTICLE VII
CONCERNING THE FUND
1. The Fund shall promptly deliver to the Transfer
Agent written notice of any change in the officers authoriz-
ed to sign Share certificates, Certificates, notifications
or requests, together with a specimen signature of each new
officer. In the event any officer who shall have signed
manually or whose facsimile signature shall have been
affixed to blank Share certificates shall die, resign or be
removed prior to issuance of such Share certificates, the
Transfer Agent may issue such Share certificates of the Fund
notwithstanding such death, resignation or removal, and the
Fund shall promptly deliver to the Transfer Agent such
approval, adoption or ratification as may be required by
law.
2. Each copy of the Declaration of Trust of the Fund
and copies of all amendments thereto shall be certified by
the Secretary of State (or other appropriate official) of
the state of organization, and if such Declaration of Trust
and/or amendments are required by law also to be filed with
a county or other officer or official body, a certificate of
such filing shall be filed with a certified copy submitted
to the Transfer Agent. Each copy of the By-Laws and copies
of all amendments thereto, and copies of resolutions of the
Board of Trustees of the Fund, shall be certified by the
Secretary or Clerk of the Fund under the seal.
3. It shall be the sole responsibility of the Fund to
deliver to the Transfer Agent the Fund's currently effective
Prospectus and, for purposes of this Agreement, the Transfer
Agent shall not be deemed to have notice of any information
contained in such Prospectus until it is actually received
by the Transfer Agent.
ARTICLE VIII
CONCERNING THE TRANSFER AGENT
1. The Transfer Agent shall not be liable and shall
be fully protected in acting upon any computer tape, writing
or document reasonably believed by it to be genuine and to
have been signed or made by the proper person or persons and
shall not be held to have any notice of any change of autho-
12
<PAGE> 13
rity of any person until receipt of written notice thereof
from the Fund or such person. It shall also be protected in
processing Share certificates which it reasonably believes
to bear the proper manual or facsimile signatures of the
officers of the Fund and the proper countersignature of the
Transfer Agent.
2. The Transfer Agent may establish such additional
procedures, rules and regulations governing the transfer or
registration of certificates of stock as it may deem advis-
able and consistent with such rules and regulations general-
ly adopted by bank transfer agents.
3. The Transfer Agent shall keep such records as are
specified in Appendix C hereto in the form and manner, and
for such period, as it may deem advisable but not inconsis-
tent with the rules and regulations of appropriate govern-
ment authorities, in particular Rules 3la-2 and 31a-3 under
the federal Investment Company Act as amended from time to
time. The Transfer Agent may deliver to the Fund from time
to time at its discretion, for safekeeping or disposition by
the Fund in accordance with law, such records, papers, Share
certificates which have been cancelled in transfer, exchange
or redemption, or other documents accumulated in the exe-
cution of its duties as such Transfer Agent, as the Transfer
Agent may deem expedient, other than those which the Trans-
fer Agent is itself required to maintain pursuant to applic-
able laws and regulations, and the Fund shall assume all
responsibility for any failure thereafter to produce any
record, paper, cancelled Share certificate, or other docu-
ment so returned, if and when required. The records speci-
fied in Appendix C hereto maintained by the Transfer Agent
pursuant to this paragraph 3, which have not been previously
delivered to the Fund pursuant to the foregoing provisions
of this paragraph 3, shall be considered to be the property
of the Fund, shall be made available upon request for
inspection by the officers, employees, and auditors of the
Fund, and records shall be delivered to the Fund upon
request and in any event upon the date of termination of
this Agreement, as specified in Article IX of this Agree-
ment, in the form and manner kept by the Transfer Agent on
such date of termination or such earlier date as may be
requested by the Fund.
4. The Transfer Agent may employ agents or attorneys-
in-fact at the expense of the Fund, and shall not be liable
for any loss or expense &rising out of, or in connection
with,, the actions or omissions to act of its agents or
attorneys-in-fact so long as the Transfer Agent acts in good
faith and without negligence or willful misconduct in con-
13
<PAGE> 14
nection with the selection of such agents or attorneys-in-
fact.
5 . The Transfer Agent shall not be liable for any
loss or damage, including counsel fees, resulting from its
actions or omissions to act or otherwise, except for any
loss or damage arising out of its own failure to act in
goodfaith, negligence or willful misconduct.
6. The Fund shall indemnify and exonerate, save and
hold harmless the Transfer Agent from and against any and
all claims (whether with or without basis in fact or law),
demands, expenses (including attorney's fees) and liabil-
ities of any and every nature which the Transfer Agent may
sustain or incur or which may be asserted against the Trans-
fer Agent by any person by reason of or as a result of any
action taken or omitted to be taken by the Transfer' Agent in
good faith and without negligence or willful misconduct or
in reliance upon (i) any provision of this Agreement; (ii)
the Prospectus; (iii) any instruction or order including,
without limitation, any computer tape reasonably believed by
the Transfer Agent to have been received from an Approved
Institution; (iv) any instrument, order or Share certificate
reasonably believed by it to be genuine and to be signed,
countersigned or executed by any duly authorized officer of
the Fund; (v) any certificate or other instructions of an
officer; or (vi) any opinion of legal counsel for the Fund
or the Transfer Agent. The Fund shall indemnify and exoner-
ate, save and hold the Transfer Agent harmless from and
against any and all claims (whether with or without basis in
fact or law), demands, expenses (including attorney's fees)
and liabilities of any and every nature which the Transfer
Agent may sustain or incur or which may be asserted against
the Transfer Agent by any person by reason of or as a result
of any action taken or omitted to be taken by the Transfer
Agent in good faith in connection with its appointment or in
reliance upon any law, act, regulation or any interpretation
of the same even though such law, act or regulation may
thereafter have been altered, changed, amended or repealed.
7. Specifically, but not by way of limitation, the
Fund shall indemnify and exonerate, save and hold the Trans-
fer Agent harmless from and against any and all claims
(whether with or without basis in fact or law), demands,
expenses (including attorney's fees) and liabilities of any
and every nature which the Transfer Agent may sustain or
incur or which may be asserted against the Transfer Agent by
any person in connection with the genuineness of a Share
certificate the Transfer Agent's capacity and authorization
to issue Shares and the form and amount of authorized
Shares.
14
<PAGE> 15
8 Notwithstanding the foregoing, the Transfer Agent
shall be liable to the Fund with respect to any redemption
check which the Transfer Agent pays on which the signature
of the drawer is forged, but only to the extent of the
lesser of (a) the amount of such redemption check minus
$2,500.00 and (b) the amount of insurance proceeds received
by the Transfer Agent with respect to such redemption check,
and only if, and for so long as, each of the following
conditions is satisfied: (i) insurance with respect to
Fund redemption checks is maintained by the Transfer Agent,
and (ii) the Fund pays to the Transfer Agent monthly the
amount which the Transfer Agent determines to be the Fund's
pro rata share of the cost of such insurance coverage. The
Fund agrees that the insurance may be discontinued or
cancelled without any prior notices, and that the Transfer
Agent shall at all times have the absolute right, without
any prior notice to the Fund, to cease to maintain such
insurance, and the Transfer Agent agrees to notify the Fund
promptly upon cancelling or discontinuing any such insurance
or upon learning of any such cancellation or discontinuance.
In the event such insurance is not maintained, or in the
event the Fund does not pay monthly to the Transfer Agent
the amount which the Transfer Agent determines to be the
Fund's pro rata share of the cost of such insurance cover-
age, the Transfer Agent shall not be liable for any loss or
damage, including counsel fees, resulting from its paying or
not paying any redemption check, unless such loss or damage
arises out of the Transfer Agent's failure to use good
faith, negligence or willful misconduct.
9. At any time the Transfer Agent may apply to an
officer of the Fund for written instructions with respect to
any matter arising in connection with the Transfer Agent's
duties and obligations under this Agreement, and the
Transfer Agent shall not be liable for any action taken or
permitted by it in good faith in accordance with such writ-
ten instructions. Such application by the Transfer Agent
for written instructions from an officer of the Fund may, at
the option of the Transfer Agent, set forth in writing any
action proposed to be taken or omitted by the Transfer Agent
with respect to its duties or obligations under this Agree-
ment and the date on and/or after which such action shall be
taken, and the Transfer Agent shall not be liable for any
action taken or omitted in accordance with a proposal
included in any such application on or after the date speci-
fied therein unless, prior to taking or omitting any such
action, the Transfer Agent has received written instructions
in response to such application specifying the action to be
taken or omitted. The Transfer Agent may consult counsel to
15
<PAGE> 16
the Fund, or its own counsel, at the expense of the Fund and
shall be fully protected with respect to anything done or
omitted by it in good faith in accordance with the advice or
opinion of counsel to the Fund or its own counsel.
10. When mail is used for delivery of non-negotiable
Share certificates,, the value of which does not exceed the
limits of the Transfer Agent's Blanket Bond,, the Transfer
Agent shall send such non-negotiable Share certificates by
first class mail, and such deliveries will be covered while
in transit by the Transfer Agent's Blanket Bond. Non-
negotiable Share certificates, the value of which exceed the
limits of the Transfer Agent's Blanket Bond, will be sent by
insured registered mail. Negotiable Share certificates will
be sent by insured registered mail. The Transfer Agent
shall advise the Fund of any Share certificates returned as
undelivered after being mailed as herein provided for.
11. The Transfer Agent may issue new Share certifi-
cates in place of Share certificates represented to have
been lost, stolen, or destroyed upon receiving instructions
in writing from an officer and indemnity satisfactory to the
Transfer Agent. Such instructions from the Fund shall be in
such form as approved by the Board of Trustees of the Fund
in accordance with the provisions of law or of the By-Laws
of the Fund governing such matters. If the Transfer Agent
receives written notification from the owner of the lost,
destroyed, or stolen Share certificate within a reasonable
time after he has notice of it, the Transfer Agent shall
promptly notify the Fund and shall act pursuant to written
instructions signed by an officer. If the Fund receives
such written notification from the owner of the lost,
destroyed or stolen Share certificate within a reasonable
time af ter he has notice of it, the Fund shall promptly
notify the Transfer Agent and the Transfer Agent shall act
pursuant to written instructions signed by an officer. The
Transfer Agent shall not be liable for any act done or omit-
ted by it pursuant to the written instructions described
herein. The Transfer Agent may issue new Share certificates
in exchange for, and upon surrender of, mutilated Share cer-
tificates.
12. The Transfer Agent will issue and mail subscrip-
tion warrants for Shares of beneficial interest, Shares
representing stock dividends, exchanges or splits, or act as
conversion agent upon receiving written instructions from an
officer and such other documents as the Transfer Agent may
deem necessary.
13. The Transfer Agent will supply shareholder lists
to the Fund from time to time upon receiving a request
therefor from an officer of the Fund.
- 16 -
<PAGE> 17
14. In case of any requests or demands for the inspec-
tion of the shareholder records of the Fund, the Transfer
Agent will endeavor to notify the Fund and to secure
instructions from an officer as to such inspection. The
Transfer Agent reserves the right, however, to exhibit the
Shareholder records to any person whenever it receives an
opinion from its counsel that there is a reasonable likeli-
hood that the Transfer Agent will be held liable for the
failure to exhibit the shareholder records to such person.
15. At the request of an officer, the Transfer Agent
will address and mail such appropriate notices to share-
holders as the Fund may direct.
16. Notwithstanding any of the foregoing provisions of
this Agreement, the Transfer Agent shall be under no duty or
obligation to inquire into, and shall not be liable for:
(a) The legality of the issue or sale of any
Shares, the sufficiency of the amount to be received there-
for, or the authority of the Approved Institution or of the
Fund, as the case may be, to request such sale or issuance;
(b) The legality of a transfer of Shares, or of a
redemption of any Shares, the propriety of the amount to be
paid therefor, or the authority of the Approved Institution
or of the Fund, as the case may be, to request such transfer
or redemption;
(c) The legality of the declaration of any divi-
dend by the Fund, or the legality of the issue of any Shares
in payment of any stock dividend; or
(d) The legality of any recapitalization or read-
justment of the Shares.
17. The Transfer Agent shall be entitled to receive
and the Fund hereby agrees to pay to the Transfer Agent for
its performance hereunder, including its performance of the
duties and functions set forth in Appendix C hereto, (i) its
reasonable out-of-pocket expenses (including legal expenses
and attorney's fees) incurred in connection with this Agree-
ment and its performance hereunder and (ii) such compen-
sation as may be agreed upon in writing from time to time by
the Transfer Agent and the Fund.
18. The Transfer Agent shall have no duties or respon-
sibilities whatsoever except such duties and responsibili-
ties as are specifically set forth in this Agreement, and no
17
<PAGE> 18
covenant or obligation shall be implied in this Agreement
against the Transfer Agent.
ARTICLE IX
TERMINATION
Either of the parties hereto may terminate this Agree-
ment by giving to the other party a notice in writing speci-
fying the date of such termination, which shall be not less
than 90 days after the date of receipt of such notice. In
the event such notice is given by the Fund, it shall be
accompanied by a copy of a resolution of the Board of
Trustees of the Fund, certified by the Secretary or Clerk or
any Assistant Secretary or Assistant Clerk, electing to
terminate this Agreement and designating a successor trans-
fer agent or transfer agents. In the event such notice is
given by the Transfer Agent, the Fund shall, on or before
the termination date, deliver to the Transfer Agent a copy
of a resolution of its Board of Trustees certified by the
Secretary or Clerk or any Assistant Secretary or Assistant
Clerk designating a successor transfer agent or transfer
agents. In the absence of such designation by the Fund, the
Transfer Agent may designate a successor transfer agent. If
the Fund fails to designate a successor transfer agent and
if the Transfer Agent is unable to find a successor transfer
agent, the Fund shall, upon the date specified in the notice
of termination of this Agreement and delivery of the records
maintained hereunder, be deemed to be its own transfer agent
and the Transfer Agent shall thereby be relieved of all
duties and responsibilities pursuant to this Agreement.
ARTICLE X
MISCELLANEOUS
1. The Fund agrees that prior to effecting any
change in the Prospectus which would increase or alter the
duties and obligations of the Transfer Agent hereunder, it
shall advise the Transfer Agent of such proposed change at
least 30 days prior to the intended date of the same, and
shall proceed with such change only if it shall have receiv-
ed the written consent of the Transfer Agent thereto.
2. Any notice or other instrument in writing, author-
ized or required by this Agreement to be given to the Fund
- 18 -
<PAGE> 19
shall be sufficiently given if addressed to the Fund and
mailed or delivered to it at its office at the address first
above written, or at such other place as the Fund may from
time to time designate in writing.
3. Any notice or other instrument in writing, autho-
rized or required by this Agreement to be given to the
Transfer Agent shall be sufficiently given if addressed to
the Transfer Agent and mailed or delivered to it at its
office at 90 Washington Street, New York, New York 10015 or
at such other place as the Transfer Agent may from time to
time designate in writing.
4. This Agreement may not be amended or modified in
any manner except by a written agreement executed by both
parties with the formality of this Agreement, and, except
for an amendment to Appendix B or Appendix C hereto, autho-
rized or approved by a resolution of the Board of Trustees
of the Fund.
5. This Agreement shall extend to and shall be bind-
ing upon the parties hereto, and their respective successors
and assigns; provided, however, that this Agreement shall
not be assignable by the Fund without the written consent of
the Transfer Agent.
6. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York.
7. This Agreement may be executed in any number of
counterparts each of which shall be deemed to be an
original; but such counterparts shall, together constitute
only one instrument.
8. The provisions of this Agreement are intended to
benefit only the Transfer Agent and the Fund, and no rights
shall be granted to any other person by virtue of this
Agreement.
9. A copy of the Declaration of Trust of the Fund is
on file with the Secretary of The Commonwealth of Massa-
chusetts, and notice is hereby given that this instrument is
executed on behalf of the Board of Trustees of the Fund as
Trustees and not individually and that the obligations of
this instrument are not binding upon the Board of Trustees
or shareholders individually but are binding only upon the
assets and property of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers,
19
<PAGE> 20
thereunto duly authorized and their respective seals to be
hereunto affixed, as of the day and year first above writ-
ten.
Attest: By /s/ Gerald M. Richard
-----------------------
THE BANK OF NEW YORK
Attest:/s/ By:/s/
----------------------
20
<PAGE> 21
STATE OF NEW YORK
ss.:
COUNTY OF NEW YORK
On this day of ,198 , before me
personally appeared to me known, who,
being by me duly sworn, said that he/she is a
of THE BANK OF NEW YORK,, a corporation described in and
which executed the foregoing instrument; that he/she knows
the seal of said corporation; that the seal affixed to said
instrument is such corporate seal; that it was so affixed by
authority of the Board of Directors of said corporation, and
that he/she signed his/her name thereto by like authority.
------------------------
Notary Public
<PAGE> 22
STATE OF
ss.:
COUNTY OF
On this day of ,198 , before me
personally appeared to me known, who,
being by me duly sworn, said that he/she is a of
, the Massachusetts business trust
described in and which executed the foregoing instrument;
that he/she knows the seal of said trust; that the seal
affixed to said instrument is such seal; that it was so
affixed by authority of the Trustees of said trust, and that
he/she signed his/her name thereto by like authority.
-------------------
Notary Public
<PAGE> 23
TRANSFER AGENCY AGREEMENT
APPENDIX A
I, ,President and I,
of ,
a Massachusetts business trust, (the "Fund") , do hereby
certify that:
The following individuals have been duly authorized by
the Board of Trustees of the Fund in conformity with the
Fund's Declaration of Trust and By-Laws to execute any
Certificate, instruction, notice or other instrument,
including an amendment to Appendix B hereto, or to give oral
instructions on behalf of the Fund, and the signatures set
forth opposite their respective names and their true and
correct signatures.
Name Signature
--------------------- ----------------------
--------------------- ----------------------
<PAGE> 24
TRANSFER AGENCY AGREEMENT
APPENDIX B
I, ,President and I,
of ,
a Massachusetts business turst, (the "Fund") , do hereby
certify that:
The following is a list of the Series of the Fund
issued and/or authorized by the Fund as of the date of this
Transfer Agency Agreement:
<PAGE> 25
AGENCY AGREEMENT
Appendix D
CONTINGENT DEFERRED SALES
CHARGE; RULE 12b-1
1 Transfer Agent shall maintain such records as may
permit the imposition of the contingent deferred sales charge
described in the Prospectus, including such reports as may be
reasonably requested by the Fund with respect to such Shares as
may be subject to a contingent deferred sales charge.
2. Upon the redemption of Shares subject to such contingent
deferred sales charge, the Transfer Agent shall calculate and
deduct from the redemption proceeds thereof the amount of such
charge in the manner set forth in the Prospectus. The Transfer
Agent shall pay, on behalf of Merrill Lynch Funds Distributor,
Inc. ("MLFD"), to Merrill Lynch, Pierce, Penner and Smith
Incorporated ("MLPF&S") such deducted contingent deferred sales
charges imposed upon all shares maintained in the name of, or the
name of a nominee of, MLPF&S, or maintained in the name of an
account identified as a customer account of MLPF&S. Contingent
deferred sales charges imposed upon any other Shares shall be paid
by the Transfer Agent to MLFD.
3. The Transfer Agent shall maintain such records and
product such reports as may permit the Fund to administer the
Distribution Plan pursuant to Rule 12b-1 under the Investment
Company Act of 1940 as described in the Prospectus with respect to
Shares hold at the Transfer Agent in the name of, or in the name
of a nominee of MLPF&S or maintained in the name of an account
identified as a customer account of MLPF&S.
<PAGE> 26
Schedule of Fees
The Fund will pay to FDS an annual fee of $11.00 per Class A and Class
D Shareholder Account and $14.00 per Class B and Class C Shareholder Account in
addition to reimbursement for the out- of-pocket expenses incurred by FDS
pursuant to this Agreement.
8
<PAGE> 1
Ex-99.13
CERTIFICATE OF SOLE SHAREHOLDER
Fund Asset Management, Inc., the holder Of 10,000
shares of beneficial interest, par value $0.10 per share, of
Merrill Lynch California Municipal Series Trust, a Massachusetts
business trust (the "Trust'), does hereby confirm to the
Trust its representation that it purchased such shares for
investment purposes, with no present intention of redeeming
or reselling any portion thereof, and does further agree
that if it redeems any portion of such shares prior to the
amortization of the Trust's organizational expenses, the
proceeds thereof will be reduced by the proportionate amount
of the unamortized organizational expenses which the number
of shares being redeemed bears to the number of shares
initially purchased.
FUND ASSET MAGEMENT, INC.
By: /S/ Arthur Zeikel
----------------------
Dated: August 12, 1985
<PAGE> 1
Ex-99.15(b)
AMENDED AND RESTATED
CLASS B DISTRIBUTION PLAN
OF
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 18th day of December, 1992, and
amended and restated as of April 2, 1993, 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
("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 has entered into a Class B Shares Distribution
Agreement with MLFD, pursuant to which MLFD acts as the exclusive distributor
and representative of the Trust in the offer and sale of Class B shares of
beneficial interest, par value $0.10 per share (the "Class B shares"), of the
Merrill Lynch California Insured Municipal Bond Fund (the "Fund") series of the
Trust to the public; and
WHEREAS, the Trust has entered into a Class B Distribution Plan (the
"Prior Plan") on behalf of the Fund pursuant to Rule 12b-1 under the Investment
Company Act; and
WHEREAS, the Trust desires to adopt this Amended and Restated Class B
Distribution Plan (the "Plan") pursuant to Rule 12b 1 under the Investment
Company Act, pursuant to which the
<PAGE> 2
Trust will pay an account maintenance fee and a distribution fee to MLFD with
respect to the Fund's Class B 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
Class B shareholders;
NOW, THEREFORE, the Trust hereby adopts, and MLFD hereby agrees to the
terms of, the Plan in accordance with Rule 12b-1 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 0.25k of the Fund's average
daily net assets of the Fund relating to Class B shares to compensate MLFD and
securities firms with which MLFD enters into related agreements pursuant to
Paragraph 3 hereof ("Sub-Agreements") for account maintenance activities with
respect to Class B shareholders of the Fund.
2. The Trust shall pay MLFD a distribution fee under the Plan at
the end of each month at the annual rate of 0.25% of the Fund's average daily
net assets relating to Class B shares of the Fund 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 B shares
of the Fund. Such expenditures may consist of sales commissions to financial
consultants for selling Class B 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 SubAgreements
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 compensation will be in an
amount as set forth in the individual
<PAGE> 3
Sub-Agreements. Such Sub-Agreement shall provide that the Securities
Firms shall provide MLFD with such information as is reasonably necessary to
permit FLFD to comply with the reporting requirements set forth in Paragraph 4
hereof.
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. This
report shall include an itemization of the distribution expenditures incurred
on behalf of the Fund and its Class B shareholders, the purpose of such
distribution expenditures and a description of the benefits derived by the Fund
and its Class B shareholders therefrom.
5. The Prior Plan has been approved by a vote of at least a
majority, as defined in the Investment Company Act, of the outstanding Class B
voting securities of the Fund. The Plan has not been submitted to the Class B
shareholders because the amendments do not materially increase the rate of
payments by the Fund provided for in the Prior Plan.
6. The Plan shall not take effect until it has been approved,
together with any related agreements, by (a) the Trustees of the Trust and (b)
those Trustees of the Trust who are not "interested persons n 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 B
voting securities of the Fund.
9. The Plan may not be amended to increase materially the rate of
payments by the Fund provided for herein unless such amendment is approved by
at least a majority, as defined in the Investment Company Act, of the
outstanding Class B voting securities of the Fund, and by the Trustees of the
Fund 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.
<PAGE> 4
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 Trust 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 this Plan, or the agreements or such
report, as the case may be, the first two years in an easily accessible place.
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 of the Trust but the "Trust Property"
only shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed this Plan as of
the date first above written.
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
By ___/s/ Kenneth A. Jacob___________________
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By __/s/ Gerald M. Richard___________________
<PAGE> 5
AMENDED AND RESTATED
CLASS B SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 18th day of December, 1992, and amended and
restated as of April 2, 1993, by and between Merrill Lynch Funds Distributor,
Inc. ("MLFD"), and Merrill Lynch, Pierce, Fenner S Smith Incorporated (the
"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 B shares of beneficial interest, par value $0.10 per share (the "Class
B shares"), of the Merrill Lynch California Insured Municipal Bond Fund (the
"Fund") series of the Trust; and
WHEREAS, MLFD and the Trust have entered into an Amended and Restated
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940 (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 B shares for account maintenance
activities related to Class B shares of the Fund and a distribution fee from
the Fund at the annual rate of 0.256 of average daily net assets of the Fund
relating to Class B shares for providing sales and promotional activities and
services related to the distribution of Class B 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 B 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 with respect to the Class B shares of the Fund 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 B shares of the
Fund, and incur distribution expenditures, of the types referred to in
Paragraph 2 of the Plan.
<PAGE> 6
3. As compensation for its activities and services performed under
this Sub-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 Sub-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 ____/s/ Gerald M. Richard_________
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By ____/s/ David Conine______________ ??
{page \* arabic}
{page \* arabic}
<PAGE> 1
Exhibit 16(a)
Merrill Lynch California Municipal Bond Fund
of Merrill Lynch California municipal Series Trust
Class A
Total Return
<TABLE>
<CAPTION>
Period from
10/25/88 Annual
(inception) Total
to 08/31/89 Return*
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by
Maximum offering Price 11.48
Divided by Net Asset Value 11.02
Equals Shares Purchased 87.11 90.74
Plus Shares Acquired through
Dividend Reinvestment 5.10 5.31
Equals Shares Held
at 08/31/89 92.21 96.05
Multiplied by Net Asset
Value at 08/31/89 11.24 11.24
Equals Ending Redeemable
Value at $1,000
Investment (ERV) at 08/31/89 $1,036.40 $1,079.60
Divided by $1,000 (P) 1.0364 1.0796
Subtract 1 0.0364 0.0796
Expressed as a percentage
equals the Aggregate Total
Return for the Period (T) 3.64%
Expressed as a percentage
equals the Aggregate Total
Return for the Period 7.96%
ERV divided by P 1.0364
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
Raise to the power of 1 / .8493
Equals 1.0430
Subtract 1 0.0430
Expressed as a percentage
equals the Average
Annualized Total Return 4.30%
</TABLE>
* Does not include sales charge for the period.
-2-
<PAGE> 1
Exhibit 16(b)
California Municipal Bond Fund
Standardized Yield Computation
August 31, 1988
<TABLE>
<S> <C>
Longterm Income generally based on
yield to maturity times market
value of each security. $3,771,685
Plus short term income accrued for
the past thirty days 128,103
Equals Total Income 3,899,788
Less expenses for the past thirty
days 617,038
Equals not monthly income for yield
Calculation 3,282,750
Average shares outstanding for the
month 57,233,842
Times maximum offering price
10.77
Equals total dollars $616,408,478
Net monthly Income divided by total
dollars equals .00532561
Add 1 1.00532561
Raise to the power of 6 1,03238212
Subtract 1 .03238212
Times 2
.06476424
Expressed as a percentage equals
the a standardized yield for
the month 6.476%
</TABLE>
<PAGE> 2
Exhibit: 16(b)
CALIFORNIA MUNICIPAL BOND FUND
TOTAL RETURN
<TABLE>
<CAPTION>
Annual
Inception Total
1 Year 9-30-85 Return*
<S> <C> <C> <C>
Initial Investment $1,000.00 $1,000.00 $1,000.00
Divided by
Net Asset Value 10.97 10.00 10.97
Equals Shares Purchased 91.158 100.00 91.158
Plus Shares Acquired Through
Dividend Reinvestment 6.20 21.752 6.20
Equals Shares Held
at 8/31/88 97.358 121.752 97.358
Multiplied by Net Asset
value at 8/31/88 10.79 10.79 10.79
Equals Ending Value before
deduction for contingent
deferred sales charge $1,050,49 $1,313.70 1,050.49
Deduction for deferred
sales charge 39.36 20.00 -0-
Equals Ending Redeemable
Value of-& $1,000
Investment (ERV) $1,011.13 $1,293.70 $1,050.49
Divided by $1,000 (P) 1.0111 1.2937 1.0505
Subtract 1 .0111 .2937 .0505
Expressed as a percentage
equals the Aggregate Total
Return for the Period (T) 1.11% 29.37%
Expressed as a percentage
equals the Annual
Total Return
5.05%
ERV divided by P 1.0111 1.2937
Raise to the power of 1 1/2.921
Equals 1.0111 1.0922
Subtract 1 .0111 .0922
Expressed as a percentage
equals the Average 1.11% 9.22%
</TABLE>
*Does not include sales charge for the period.
<PAGE> 1
EXHIBIT 10
BROWN & WOOD
ONE WORLD TRADE CENTER
NEW YORK, NY 10048-0557
TELEPHONE: (212) 839-5300
FACSIMILE: (212) 839-5599
December 28, 1995
Merrill Lynch California Municipal Bond Fund of
Merrill Lynch California Municipal Series Trust
P.O. Box 9011
Princeton, New Jersey 08543-9011
Dear Sirs:
This opinion is furnished in connection with the registration by Merrill
Lynch California Municipal Series Trust, a Massachusetts business trust (the
"Trust"), of 16,944,460 shares of beneficial interest, par value $0.10 per
share (the "Shares"), of the Merrill Lynch California Municipal Bond Fund, a
series of the Trust, under the Securities Act of 1933 pursuant to a
registration statement on Form N-1A (File No. 2-96581), as amended (the
"Registration Statement").
As counsel for the Trust, we are familiar with the proceedings taken by
it in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Declaration of Trust of
the Trust, as amended, the By-Laws of the Trust and such other documents as we
have deemed relevant to the matters referred to in this opinion.
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the
<PAGE> 2
Registration Statement for consideration not less than the par value thereof,
will be legally issued, fully paid and nonassessable shares of beneficial
interest, except that shareholders of the Trust may under certain circumstances
be held personally liable for the Trust's obligations.
In rendering this opinion, we have relied as to matters of
Massachusetts law upon an opinion of Bingham, Dana & Gould rendered to the
Trust.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus and
Statement of Additional Information constituting parts thereof.
Very truly yours,
/s/ BROWN & WOOD
<PAGE> 1
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. 11 to Registration
Statement No. 2 -96581 of our report dated September 29, 1995 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
December 26, 1995
<PAGE> 1
EXHIBIT 16(c)
Merrill Lynch California Municipal Bond Fund
of Merrill Lynch California Municipal Series Trust - Class C
10/21/94 - 08/31/95
<TABLE>
<CAPTION>
Since Since
Inception Inception
Average Annual Total
Total Return Return*
-------------- ---------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Net Asset Value 10.94 10.94
----------- -----------
Equals Shares Purchased 91.408 91.408
Plus Shares Acquired through
Dividend Reinvestment 4.000 4.000
----------- -----------
Equals Shares Held at 08/31/95 95.407 95.407
Multiplied by Net Asset Value at 08/31/95 11.42 11.42
----------- -----------
Equals Ending Value before deduction for
contingent deferred sales charge 1,089.55 1,089.55
Less deferred sales charge (10.00) 0.00
----------- -----------
Equals Ending Redeemable Value
at $1000 Investment (ERV) at 08/31/95 1,079.55 1,089.55
----------- -----------
Divided by $1,000 (P) 1.0796 1.0896
Subtract 1 0.0796 0.0896
Expressed as a percentage equals
the Aggregate Total for the Period (T) 7.96%
===========
Expressed as a percentage equals the Aggregate
Total for the Period 8.96%
===========
ERV divided by P 1.0796
Raise to the power of 1.1624
Equals 1.0931
Subtract 1 0.0931
Expressed as a percentage equals the
Average Annualized Total Return 9.31%
===========
</TABLE>
* Does not include sales charge for the period.
<PAGE> 2
30 DAYS STANDARDIZED YIELD
FOR THE PERIOD ENDING 08-31-95
Merrill Lynch California Municipal Bond Fund
of Merrill Lynch California Municipal Series Trust - Class C
<TABLE>
<S> <C>
Long term income generally based on yield to
maturity times market value of each security $12,747
Plus short term income accrued for
the past thirty days 1,718
-----------
Equals Total Income 14,465
Less expenses for the past thirty days -2,981
-----------
Equals net monthly income for yield calculation 11,485
-----------
Average shares outstanding for 30 days 255,307
Times the Net Asset Value 11.40
-----------
Equals total dollars $2,910,505
===========
Net monthly income divided by total
dollars equals 0.003945996
Add 1 1.003945996
Raise to the power of 6 1.023910770
Subtract 1 0.023910770
Times 2 0.047821540
Expressed as a percentage equals the
standardized yield for 30 day period 4.78%
=========
Tax Rate 28.00%
X = 1 minus Tax Rate 72.00%
Standardized Yield divided by x equals
Tax Equivalent Yield for 30 day period 6.64%
=========
</TABLE>
<PAGE> 1
EXHIBIT 16(d)
30 DAYS STANDARDIZED YIELD
FOR THE PERIOD ENDING 08-31-95
<TABLE>
<S> <C>
Merrill Lynch California Municipal Bond Fund
of Merrill Lynch California Municipal Series Trust - Class D
Long term income generally based on yield to
maturity times market value of each security $16,414
Plus short term income accrued for the
past thirty days 2,213
-------------
Equals Total Income 18,626
Less expenses for the past thirty days -2,275
-------------
Equals net monthly income for yield calculation 16,352
-------------
Average shares outstanding for 30 days 328,690
Times the Maximum Offering Price 11.88
-------------
Equals total dollars $3,904,840
=============
Net monthly income divided by total dollars equals 0.004187560
Add 1 1.004187560
Raise to the power of 6 1.025389868
Subtract 1 0.025389868
Times 2 0.050779736
Expressed as a percentage equals the
standardized yield for 30 day period 5.08%
==========
Tax Rate 28.00%
X = 1 minus Tax Rate 72.00%
Standardized Yield divided by x equals
Tax Equivalent Yield for 30 day period 7.06%
==========
</TABLE>
<PAGE> 2
Merrill Lynch California Municipal Bond Fund
of Merrill Lynch California Municipal Series Trust - Class D
10/21/94 - 08/31/95
<TABLE>
<CAPTION>
Since Since
Inception Inception
Average Annual Total
Total Return Return*
-------------- ---------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Initial Maximum Offering Price 11.40
-----------
Divided by Net Asset Value 10.94
-----------
Equals Shares Purchased 87.752 91.408
Plus Shares Acquired through Dividend
Reinvestment 4.227 4.403
----------- -----------
Equals Shares Held at 08/31/95 91.979 95.811
Multiplied by Net Asset Value at 08/31/95 11.42 11.42
----------- -----------
Equals Ending Redeemable Value at $1000
Investment (ERV) at 08/31/95 1,050.40 1,094.16
Divided by $1,000 (P) 1.0504 1.0942
Subtract 1 0.0504 0.0942
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) 5.04%
===========
Expressed as a percentage equals the
Aggregate Total Return for the Period 9.42%
===========
ERV divided by P 1.0504
Raise to the power of 1.1624
Equals 1.0588
Subtract 1 0.0588
Expressed as a percentage equals the
Average Annualized Total Return 5.88%
===========
</TABLE>
* Does not include sales charge for the period.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000765199
<NAME> MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
<SERIES>
<NUMBER> 001
<NAME> MERRILL LYNCH CALIFORNIA MUNICIPAL BOND FUND CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-START> SEP-01-1994
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 638,499,362
<INVESTMENTS-AT-VALUE> 673,287,854
<RECEIVABLES> 33,138,044
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 228,223
<TOTAL-ASSETS> 706,654,121
<PAYABLE-FOR-SECURITIES> 36,423,400
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,826,538
<TOTAL-LIABILITIES> 39,249,938
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 656,160,697
<SHARES-COMMON-STOCK> 3,880,999
<SHARES-COMMON-PRIOR> 5,303,875
<ACCUMULATED-NII-CURRENT> (16,973,155)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 6,571,851
<ACCUM-APPREC-OR-DEPREC> 34,788,492
<NET-ASSETS> 44,228,256
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 45,693,141
<OTHER-INCOME> 0
<EXPENSES-NET> 7,892,906
<NET-INVESTMENT-INCOME> 37,800,235
<REALIZED-GAINS-CURRENT> (16,973,155)
<APPREC-INCREASE-CURRENT> 17,518,587
<NET-CHANGE-FROM-OPS> 38,345,667
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,035,857
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 356,036
<NUMBER-OF-SHARES-REDEEMED> 1,889,907
<SHARES-REINVESTED> 110,995
<NET-CHANGE-IN-ASSETS> (119,500,917)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 6,571,851
<GROSS-ADVISORY-FEES> 3,828,093
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,892,906
<AVERAGE-NET-ASSETS> 52,039,631
<PER-SHARE-NAV-BEGIN> 11.32
<PER-SHARE-NII> .64
<PER-SHARE-GAIN-APPREC> .08
<PER-SHARE-DIVIDEND> .64
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.40
<EXPENSE-RATIO> .65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
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<NAME> MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
<SERIES>
<NUMBER> 002
<NAME> MERRILL LYNCH CALIFORNIA MUNICIPAL BOND FUND CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-START> SEP-01-1994
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 638,499,362
<INVESTMENTS-AT-VALUE> 673,287,854
<RECEIVABLES> 33,138,044
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 228,223
<TOTAL-ASSETS> 706,654,121
<PAYABLE-FOR-SECURITIES> 36,423,400
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,826,538
<TOTAL-LIABILITIES> 39,249,938
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 656,160,697
<SHARES-COMMON-STOCK> 54,055,554
<SHARES-COMMON-PRIOR> 64,217,894
<ACCUMULATED-NII-CURRENT> (16,973,155)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 6,571,851
<ACCUM-APPREC-OR-DEPREC> 34,788,492
<NET-ASSETS> 616,198,905
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 45,693,141
<OTHER-INCOME> 0
<EXPENSES-NET> 7,892,906
<NET-INVESTMENT-INCOME> 37,800,235
<REALIZED-GAINS-CURRENT> (16,973,155)
<APPREC-INCREASE-CURRENT> 17,518,587
<NET-CHANGE-FROM-OPS> 38,345,667
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 34,575,842
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,055,625
<NUMBER-OF-SHARES-REDEEMED> 15,582,043
<SHARES-REINVESTED> 1,364,078
<NET-CHANGE-IN-ASSETS> (119,500,917)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 6,571,851
<GROSS-ADVISORY-FEES> 3,828,093
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,892,906
<AVERAGE-NET-ASSETS> 649,803,203
<PER-SHARE-NAV-BEGIN> 11.32
<PER-SHARE-NII> .59
<PER-SHARE-GAIN-APPREC> .08
<PER-SHARE-DIVIDEND> .59
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.40
<EXPENSE-RATIO> 1.16
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
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<CIK> 0000765199
<NAME> MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
<SERIES>
<NUMBER> 003
<NAME> MERRILL LYNCH CALIFORNIA MUNICIPAL BOND FUND CLASS C
<S> <C>
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<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-START> OCT-21-1994
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 638,499,362
<INVESTMENTS-AT-VALUE> 673,287,854
<RECEIVABLES> 33,138,044
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 228,223
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<PAYABLE-FOR-SECURITIES> 36,423,400
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,826,538
<TOTAL-LIABILITIES> 39,249,938
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 656,160,697
<SHARES-COMMON-STOCK> 274,709
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (16,973,155)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 6,571,851
<ACCUM-APPREC-OR-DEPREC> 34,788,492
<NET-ASSETS> 3,130,524
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 45,693,141
<OTHER-INCOME> 0
<EXPENSES-NET> 7,892,906
<NET-INVESTMENT-INCOME> 37,800,235
<REALIZED-GAINS-CURRENT> (16,973,155)
<APPREC-INCREASE-CURRENT> 17,518,587
<NET-CHANGE-FROM-OPS> 38,345,667
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 69,364
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 343,686
<NUMBER-OF-SHARES-REDEEMED> 72,055
<SHARES-REINVESTED> 3,078
<NET-CHANGE-IN-ASSETS> (119,500,917)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 6,571,851
<GROSS-ADVISORY-FEES> 3,828,093
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,892,906
<AVERAGE-NET-ASSETS> 1,611,160
<PER-SHARE-NAV-BEGIN> 10.94
<PER-SHARE-NII> .49
<PER-SHARE-GAIN-APPREC> .46
<PER-SHARE-DIVIDEND> .49
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.40
<EXPENSE-RATIO> 1.27
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
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<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 638,499,362
<INVESTMENTS-AT-VALUE> 673,287,854
<RECEIVABLES> 33,138,044
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 228,223
<TOTAL-ASSETS> 706,654,121
<PAYABLE-FOR-SECURITIES> 36,423,400
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,826,538
<TOTAL-LIABILITIES> 39,249,938
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 656,160,697
<SHARES-COMMON-STOCK> 337,469
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (16,973,155)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 6,571,851
<ACCUM-APPREC-OR-DEPREC> 34,788,492
<NET-ASSETS> 3,846,498
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 45,693,141
<OTHER-INCOME> 0
<EXPENSES-NET> 7,892,906
<NET-INVESTMENT-INCOME> 37,800,235
<REALIZED-GAINS-CURRENT> (16,973,155)
<APPREC-INCREASE-CURRENT> 17,518,587
<NET-CHANGE-FROM-OPS> 38,345,667
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 119,172
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 405,943
<NUMBER-OF-SHARES-REDEEMED> 76,184
<SHARES-REINVESTED> 7,710
<NET-CHANGE-IN-ASSETS> (119,500,917)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 6,571,851
<GROSS-ADVISORY-FEES> 3,828,093
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,892,906
<AVERAGE-NET-ASSETS> 2,493,017
<PER-SHARE-NAV-BEGIN> 10.94
<PER-SHARE-NII> .54
<PER-SHARE-GAIN-APPREC> .46
<PER-SHARE-DIVIDEND> .54
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.40
<EXPENSE-RATIO> .76
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
