<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 29, 1995
SECURITIES ACT FILE NO. 33-55864
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. 4 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 18 /X/
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH CALIFORNIA INSURED 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: PHILIP L. KIRSTEIN,
BROWN & WOOD ESQ.
ONE WORLD TRADE CENTER FUND ASSET MANAGEMENT
NEW YORK, NEW YORK 10048-0557 P.O. BOX 9011
ATTENTION: THOMAS R. SMITH, JR., ESQ. PRINCETON, NEW JERSEY
BRIAN M. KAPLOWITZ, ESQ. 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 CLASS A, CLASS B,
CLASS C AND CLASS D SHARES OF BENEFICIAL INTEREST UNDER THE SECURITIES ACT OF
1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. THE NOTICE
REQUIRED BY SUCH RULE FOR THE REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON
OCTOBER 24, 1995.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
- ---------------------------------------
<S> <C> <C> <C> <C>
- ---------------------------------------
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF SECURITIES AMOUNT OF SHARES OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED BEING REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
- ---------------------------------------
<S> <C> <C> <C> <C>
Shares of Beneficial Interest
(par value $.10 per share)........... 494,673 $10.36 $289,997 $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 the
Registrant's previous fiscal year was 2,909,691 shares of beneficial
interest.
(3) 2,443,010 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 the Registrant's current fiscal year.
(4) 466,681 of the shares redeemed during the 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 INSURED MUNICIPAL BOND FUND OF 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
Item 4. General Description of Registrant........ Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund................... Fee Table; Management of the Trust;
Inside Back Cover Page
Item 5A. Management's Discussion of Fund
Performance............................ Not Applicable
Item 6. Capital Stock and Other Securities....... Cover Page; Additional Information
Item 7. Purchase of Securities Being Offered..... Cover Page; Merrill Lynch Select
PricingSM System; Fee Table; Purchase
of Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase................. Merrill Lynch Select PricingSM 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 Objective and Policies........ Investment Objective and Policies;
Investment Restrictions
Item 14. Management of the Fund................... Management of the Trust
Item 15. Control Persons and Principal Holders of
Securities............................. Management of the Trust; Additional
Information
Item 16. Investment Advisory and Other Services... Management of the Trust; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and Other
Practices.............................. Portfolio Transactions
Item 18. Capital Stock and Other Securities....... General Information--Description of
Series and Shares
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered............... Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status............................... Distributions and Taxes
Item 21. Underwriters............................. Purchase of Shares
Item 22. Calculation of Performance Data.......... Performance Data
Item 23. Financial Statements..................... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE> 3
PROSPECTUS
DECEMBER 29, 1995
MERRILL LYNCH CALIFORNIA INSURED 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 Insured Municipal Bond Fund (the "Fund") is a
non-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 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"). Under normal circumstances, at least 80% of the Fund's total
assets will be invested in municipal obligations with remaining maturities of
one year or more which are covered by insurance guaranteeing the timely payment
of principal at maturity and interest and at least 65% of the Fund's total
assets will be invested in insured California Municipal Bonds. THE FUND'S
PORTFOLIO INSURANCE RELATES ONLY TO PAYMENT ON THE MUNICIPAL BONDS (AS THAT TERM
IS DEFINED IN THE PROSPECTUS UNDER INVESTMENT OBJECTIVE AND POLICIES) HELD BY
THE FUND AND NOT TO THE VALUE OF FUND SHARES. For a full discussion of the
nature and limitations of insurance, see "Investment Objective and
Policies--Portfolio Insurance" on page 11. Dividends paid by the Fund are exempt
from Federal and California income taxes to the extent they are paid from
interest on California Municipal Bonds. The Fund may invest in certain
tax-exempt securities classified as "private activity bonds" that may subject
certain investors in the Fund to an alternative minimum tax. At times, the Fund
may seek to hedge its portfolio through the use of futures transactions and
options. There can be no assurance that the investment objective of the Fund
will be realized. For more information on the Fund's investment objective and
policies, please see "Investment Objective and Policies" on page 9.
------------------------
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes is
most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select PricingSM 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 that have entered into 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 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
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS)(E):
Investment Advisory Fees(f).................. 0.55% 0.55% 0.55% 0.55%
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 are subject
to reduced account
maintenance fees)
Other Expenses
Custodial Fees........................... 0.02% 0.02% 0.02% 0.02%
Shareholder Servicing Costs(h)........... 0.04% 0.05% 0.05% 0.04%
Miscellaneous............................ 0.26% 0.26% 0.27% 0.26%
-------- ----- ----- --------
Total Other Expenses................. 0.32% 0.33% 0.34% 0.32%
-------- ----- ----- --------
Total Fund Operating Expenses(+)................. 0.87% 1.38% 1.49% 0.97%
-------- ----- ----- --------
-------- ----- ----- --------
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and 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 26.
(c) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares"--page 25.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.00% 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.
+ As of August 31, 1995, the Fund Asset Management, L.P. (the "Manager") has
voluntarily waived a portion of the management fees due from the Fund. The
Fee Table has been restated to assume the absence of any waiver or
reimbursement because the Manager may discontinue or reduce such waiver of
fees without notice. During the fiscal year ended August 31, 1995, the
Manager waived management fees and reimbursed expenses totaling .40% for
Class A shares and .41% for Class B shares after which the Fund's total
expense ratio was .47% for Class A shares and .97% for Class B shares.
During the period October 21, 1994 (commencement of operations) to August
31, 1995, the Manager waived management fees and reimbursed expenses
totaling .40% for Class C shares and .40% for Class D shares after which the
Fund's total expense ratio was 1.09% for Class C shares and .57% for Class D
shares.
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........................................... $ 49 $67 $86 $143
Class B........................................... $ 54 $64 $76 $166
Class C........................................... $ 25 $47 $81 $178
Class D........................................... $ 50 $70 $91 $154
An investor would pay the following expenses on the
same $1,000 investment assuming no redemption at the
end of the period:
Class A........................................... $ 49 $67 $86 $143
Class B........................................... $ 14 $44 $76 $166
Class C........................................... $ 15 $47 $81 $178
Class D........................................... $ 50 $70 $91 $154
</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 charges 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
PricingSM System. The shares of each class may be purchased at a price equal to
the next determined net asset value per share subject to the sales charges and
ongoing fee arrangements described below. Shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives, and shares of Class
B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select PricingSM System is used by more than 60
mutual funds advised by Merrill Lynch Asset Management, L.P. ("MLAM") or its
affiliate, Fund
3
<PAGE> 6
Asset Management, L.P. (the "Manager"). Funds advised by MLAM or the Manager are
referred to herein as "MLAM-advised mutual funds".
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
the Class D shares, 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 PricingSM 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 PricingSM 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>
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
-------------------------------------------------------------------------------------------------------
A Maximum 4.0% initial sales No
charge(2)(3) No No
-------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, at a B shares convert to D shares
rate of 4.0% during the first year, automatically after
decreasing 1.0% annually 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>
(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".
(footnotes continued on following page)
4
<PAGE> 7
(footnotes continued from previous page)
(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 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 also are reduced under a right of accumulation
which takes into account the investor's holdings of all classes of all
MLAM-advised mutual funds. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares".
Class B: Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.25% of the Fund's average net assets
attributable to the Class B shares, 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".
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
5
<PAGE> 8
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 up to 1.00% if the shares
are redeemed within one year after purchase. The schedule of initial
sales charges and reductions for Class D shares is the same as the
schedule for Class A shares. Class D shares also will be issued upon
conversion of Class B shares as described above under "Class B". See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
PricingSM System that the investor believes is most beneficial under his or her
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the deferred sales charges imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
also may elect to purchase Class A or Class D shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class B or
Class C shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Although some investors that previously
purchased Class A shares may no longer be eligible to purchase Class A shares of
other MLAM-advised mutual funds, those previously purchased Class A shares,
together with Class B, Class C and Class D share holdings, will count toward a
right of accumulation which may qualify the investor for reduced initial sales
charges on new initial sales charge purchases. In addition, the ongoing Class B
and Class C account maintenance and distribution fees will cause Class B and
Class C shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class D account
maintenance fees will cause Class D shares to have a higher expense ratio, pay
lower dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares
6
<PAGE> 9
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 CLASS B
----------------------------------------- ------------------
FOR THE YEAR FOR THE YEAR
ENDED AUGUST 31, FOR THE PERIOD ENDED AUGUST 31,
-------------------- FEBRUARY 26, 1993+ ------------------
1995 1994 TO AUGUST 31, 1993 1995
------- ------- ------------------ ------------------
<CAPTION>
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $ 9.54 $ 10.23 $ 10.00 $ 9.54
------- ------- ------- -------
Investment income--net........................ .52 .51 .24 .48
Realized and unrealized gain (loss) on
investments--net............................ .11 (.65) .23 .11
------- ------- ------- -------
Total from investment operations................. .63 (.14) .47 .59
------- ------- ------- -------
Less dividends and distributions:
Investment income--net........................ (.52) (.51) (.24) (.48)
In excess of realized gain on
investments--net............................ -- (.04) -- --
------- ------- ------- -------
Total dividends and distributions................ (.52) (.55) (.24) (.48)
------- ------- ------- -------
Net asset value, end of period................... $ 9.65 $ 9.54 $ 10.23 $ 9.65
======= ======= ======== ========
TOTAL INVESTMENT RETURN**:
Based on net asset value per
share....................................... 6.89% (1.44%) 4.81%# 6.35%
======= ======= ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account maintenance and
distribution fees and net of
reimbursement............................... .47% .33% .14%* .47%
======= ======= ======== ========
Expenses, net of reimbursement................ .47% .33% .14%* .97%
======= ======= ======== ========
Expenses...................................... .87% .96% 1.06%* 1.38%
======= ======= ======== ========
Investment income--net........................ 5.53% 5.16% 4.80%* 5.02%
======= ======= ======== ========
SUPPLEMENTAL DATA:
Net Assets, end of period (in thousands)...... $14,204 $15,946 $ 17,105 $ 71,670
======= ======= ======== ========
Portfolio Turnover............................ 61.53% 93.04% 74.26% 61.53%
======= ======= ======== ========
<CAPTION>
CLASS B CLASS C CLASS D
------------------------- ------- -------
FOR THE PERIOD
OCTOBER 21, 1994+
FOR THE PERIOD TO AUGUST 31,
FEBRUARY 26, 1993+ --------------------
1994 TO AUGUST 31, 1993 1995 1995
------- ------------------ ------- -------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $ 10.23 $ 10.00 $ 9.19 $ 9.19
------- ------- ------- -------
Investment income--net........................ .46 .22 .39 .44
Realized and unrealized gain (loss) on
investments--net............................ (.65) .23 .45 .46
------- ------- ------- -------
Total from investment operations................. (.19) .45 .84 .90
------- ------- ------- -------
Less dividends and distributions:
Investment income--net........................ (.46) (.22) (.39) (.44)
In excess of realized gain on
investments--net............................ (.04) -- -- --
------- ------- ------- -------
Total dividends and distributions................ (.50) (.22) (.39) (.44)
------- ------- ------- -------
Net asset value, end of period................... $ 9.54 $ 10.23 $ 9.64 $ 9.65
======== ======= ======== =======
TOTAL INVESTMENT RETURN**:
Based on net asset value per
share....................................... (1.93%) 4.56%# 9.35%# 9.94%#
======== ======= ======== =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account maintenance and
distribution fees and net of
reimbursement............................... .33% .14%* .49%* .47%*
======== ======= ====== ======
Expenses, net of reimbursement................ .83% .64%* 1.09%* .57%*
======== ======= ====== ======
Expenses...................................... 1.46% 1.56%* 1.49%* .97%*
======== ======= ====== ======
Investment income--net........................ 4.67% 4.31%* 4.76%* 5.33%*
======== ======= ====== ======
SUPPLEMENTAL DATA:
Net Assets, end of period (in thousands)...... $ 74,982 $ 72,861 $1,778 $1,845
======== ======= ====== ======
Portfolio Turnover............................ 93.04% 74.26% 61.53% 61.53%
======== ======= ====== ======
</TABLE>
- ---------------
* Annualized.
+ Commencement of operations.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
8
<PAGE> 11
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
non-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, 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 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 80% of the Fund's total assets will be invested in
Municipal Bonds which are covered by insurance guaranteeing the timely payment
of principal at maturity and interest and at least 65% of the Fund's total
assets will be invested in insured 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 may 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 California Municipal Bonds and 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,
9
<PAGE> 12
among other things, the issuer's financial resources, its sensitivity to
economic conditions and trends, its operating history, the quality of its
management and regulatory matters. See "Investment Objective and Policies" in
the Statement of Additional Information for a more detailed discussion of the
pertinent risk factors involved in investing in "high yield" or "junk" bonds and
Appendix II--"Ratings of Municipal Bonds"--in the Statement of Additional
Information for additional information regarding ratings of debt securities. The
Fund does not intend to purchase debt securities that are in default or which
the Manager believes will be in default.
Certain Municipal Bonds may be entitled to the benefits of letters of
credit or similar credit enhancements issued by financial institutions. In such
instances, the Trustees and the Manager will take into account in assessing the
quality of such bonds not only the creditworthiness of the issuer of such
Municipal Bonds but also the creditworthiness of the financial institution.
The 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 a 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 judgement 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 not exempt
from Federal and California income taxes. 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
10
<PAGE> 13
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.
Under normal circumstances, except when acceptable securities are
unavailable as determined by the Manager, the Fund will invest at least 80% of
its total assets in Municipal Bonds which are covered by insurance and at least
65% of the Fund's total assets will be invested in insured 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 20% 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"). 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 a 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.
PORTFOLIO INSURANCE
Under normal circumstances, at least 80% of the Fund's total assets (and
65% of its California Municipal Bonds) will be invested in Municipal Bonds and
will be comprised of Municipal Bonds which are either (i) insured under an
insurance policy purchased by the Fund or (ii) insured under an insurance policy
obtained by the issuer thereof or any other party. The insurance policies in
either instance will be issued by insurance carriers that have total admitted
assets (unaudited) of at least $75,000,000 and capital and surplus (unaudited)
of at least $50,000,000 and insurance claims-paying ability ratings of AAA from
S&P and Aaa from Moody's. See Appendix III to the Statement of Additional
Information for a description of S&P's and Moody's insurance claims-paying
ability ratings. Currently, it is anticipated that a majority of the insured
Municipal Bonds in the Fund's portfolio will be insured by the following
insurance companies which satisfy the foregoing requirements: AMBAC Indemnity
Corporation, Capital Guaranty Insurance Company, Capital Markets Assurance
Corporation, Financial Guaranty Insurance Company, Financial Security Assurance
and Municipal Bond Investors Assurance Corporation. The Fund also may purchase
Municipal Bonds covered by insurance issued by any other insurance company which
satisfies the foregoing requirements. It is anticipated
11
<PAGE> 14
that a majority of insured Municipal Bonds held by the Fund will be insured
under policies obtained by parties other than the Fund.
The Fund may purchase, but has no obligation to purchase, separate mutual
fund insurance policies (the "Policies") from insurance companies meeting the
requirements set forth above which guarantee the payment of principal and
interest on specified eligible Municipal Bonds purchased by the Fund. A
Municipal Bond will be eligible for coverage if it meets certain requirements of
the insurance company set forth in a Policy. In the event interest or principal
on an insured Municipal Bond is not paid when due, the insurer will be obligated
under its Policy to make such payment not later than 30 days after it has been
notified by, and provided with documentation from, the Fund that such nonpayment
has occurred.
The Policies will be effective only as to insured Municipal Bonds
beneficially owned by the Fund. In the event of a sale of any Municipal Bonds
held by the Fund, the issuer of the relevant Policy will be liable only for
those payments of interest and principal which are then due and owing. The
Policies will not guarantee the market value of the insured Municipal Bonds or
the value of the shares of the Fund.
The insurer will not have the right to withdraw coverage on securities
insured by their Policies and held by the Fund so long as such securities remain
in the Fund's portfolio. In addition, the insurer may not cancel its Policies
for any reason except failure to pay premiums when due. The Trustees of the
Trust will reserve the right to terminate any of the Policies if they determine
that the benefits to the Fund of having its portfolio insured under such
Policies are not justified by the expense involved.
The premiums for the Policies are paid by the Fund, and the yield on the
Fund's portfolio is reduced thereby. The Manager estimates that the cost of the
annual premiums for the Policies currently ranges from approximately .20 of 1%
to .25 of 1% of the principal amount of the Municipal Bonds covered by such
Policies. The estimate is based on the expected composition of the Fund's
portfolio of Municipal Bonds. Additional information regarding the Policies is
set forth in Appendix III to the Statement of Additional Information. In
instances in which the Fund purchases Municipal Bonds insured under policies
obtained by parties other than the Fund, the Fund does not pay the premiums for
such policies; rather, the cost of such policies may be reflected in the
purchase price of the Municipal Bonds.
It is the intention of the Manager to retain any insured securities which
are in default or in significant risk of default and to place a value on the
insurance which ordinarily will be the difference between the market value of
the defaulted security and the market value of similar securities which are not
in default. In certain circumstances, however, the Manager may determine that an
alternative value for the insurance, such as the difference between the market
value of the defaulted security and its par value, is more appropriate. The
Manager will be unable to manage the portfolio to the extent it holds defaulted
securities which may limit its ability in certain circumstances to purchase
other Municipal Bonds.
There can be no assurance that insurance of the kind described above will
continue to be available to the Fund. In the event the Trustees determine that
such insurance is unavailable or that the cost of such insurance outweighs the
benefits to the Fund, the Fund may discontinue its policy of maintaining
insurance for all or any of the Municipal Bonds held in the Fund's portfolio.
Although the Manager periodically reviews the financial condition of each
insurer, there can be no assurance that the insurers will honor their
obligations under all circumstances.
12
<PAGE> 15
The portfolio insurance reduces financial or credit risk (i.e., the
possibility that the owners of the insured Municipal Bonds will not receive
timely scheduled payments of principal or interest). However, the insured
Municipal Bonds are subject to market risk (i.e., fluctuations in market value
as a result of changes in prevailing interest rates).
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 by investing in a professionally managed portfolio consisting
primarily of long-term California Municipal Bonds. Moreover, as noted above, the
existence of portfolio insurance reduces the financial or credit risk of such
investments. 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 (including insurance premiums), and in the case of certain
classes of shares, 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 a municipal
bond mutual fund that is not concentrated in issuers of California Municipal
Bonds to this degree. While at least 80% of the Municipal Bonds (and at least
65% of the California Municipal Bonds) held by the Fund will be insured, the
shares of the Fund are not insured by any government entity and the value of the
shares may fluctuate daily. 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
13
<PAGE> 16
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 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. In the case of certain community facilities district
special tax ("Mello-Roos" in the case of California Municipal Bonds), tax
increment (or tax allocation) and assessment bonds, the payment of the special
tax, tax increment and assessments may be secured solely by remedies against the
land (such as by foreclosure) and not against the individual property owner,
which could be time-consuming and costly.
The two principal classifications of Municipal Bonds are "general
obligation" 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 base or inability to attract new industries, economic limits on the
ability to tax without eroding the tax base, state legislative proposals or
voter initiatives to limit ad valorem real property taxes and the extent to
which the entity relies on Federal or state aid, access to capital markets or
other factors beyond the state or entity's control. 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 issuer's maintenance of
its tax base.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as payments from the
user of the facility being financed; accordingly, the timely payment of interest
and the repayment of principal in accordance with the terms of the revenue or
special obligation bond is a function of the economic viability of such facility
or such revenue source. The Fund 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, governmental regulation and the entity's dependence
on revenues for the
14
<PAGE> 17
operation of the particular facility being financed. For purposes of this
Prospectus, such debt obligations are referred to as Municipal Bonds if the
interest paid thereon is exempt from Federal income tax, and, as California
Municipal Bonds if the interest thereon is exempt from Federal and California
income taxes, even though such bonds may be "private activity bonds" as
discussed above. The Fund may also invest in so-called "moral obligation" bonds,
which are normally issued by special purpose public authorities. If an issuer of
such 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 an index.
To the extent the Fund invests in these types of Municipal Bonds, the Fund's
return on such Municipal Bonds will be subject to risk with respect to the value
of the particular index. 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 provisions of certain state laws, the Fund currently will not invest in
excess of 10% of its total assets in illiquid securities). 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, hedge other portfolio positions or 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 type of financing that may not
15
<PAGE> 18
have the depth of marketability associated with more conventional securities.
Consequently, certain investments in lease obligations may be illiquid. The Fund
may not invest in illiquid lease 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, however, invest
without regard to such limitation in lease obligations which the Manager,
pursuant to guidelines which have been adopted by the Trustees and subject to
the supervision of the Board, determines to be liquid. The Manager will deem
lease obligations liquid if they are publicly offered and have received an
investment grade rating of Baa or better by Moody's, or BBB or better by
Standard & Poor's or Fitch. Unrated lease obligations, or those rated below
investment grade, will be considered liquid if the obligations come to the
market through an underwritten public offering and at least two dealers are
willing to give competitive bids. In reference to obligations rated below
investment grade, the Manager 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.
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.
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 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.
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
16
<PAGE> 19
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 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 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
17
<PAGE> 20
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 futures contracts, thereby ensuring that the use of such
financial futures contract is unleveraged. It is not anticipated that
transactions in financial futures contracts will have the effect of increasing
portfolio turnover.
Although certain risks are involved in options and financial futures
transactions, the Manager believes that, because the Fund will engage in
financial futures transactions only for hedging purposes, the futures portfolio
strategies of the Fund will not subject the Fund to certain risks frequently
associated with speculation in futures transactions. The Fund must meet certain
Federal income tax requirements under the Internal Revenue Code of 1986, as
amended (the "Code") in order to qualify for the special tax treatment afforded
regulated investment companies, including a requirement that less than 30% of
its gross income be derived from the sale or other disposition of securities
held for less than three months. Additionally, the Fund is required to meet
certain diversification requirements under the Code.
The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a futures contract price
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
reached and exceeded the daily limit on a number of consecutive trading days.
The successful use of transactions in financial futures also depends on the
ability of the Manager to forecast correctly the direction and extent of
interest rate movements within a given time frame. To the extent these rates
remain stable during the period in which a financial futures contract is held by
the Fund or moves in a direction opposite to that anticipated, the Fund may
realize a loss on the hedging transaction which is not fully or partially offset
by an increase in the value of portfolio securities. As a result, the Fund's
total return for such period may be less than if it had not engaged in the
hedging transaction. Furthermore, the Fund will only
18
<PAGE> 21
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, would 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 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 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 to be part of any industry); 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 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
19
<PAGE> 22
be invested in such securities. This restriction (iii) shall not apply to
mortgage-backed securities, asset-backed securities or obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by the 1940 Act in the proportion
of its assets that it may invest in obligations of a single issuer. However, the
Fund's investments will be limited so as to qualify for the special treatment
afforded regulated investment companies under the Code. See "Distribution and
Taxes--Taxes". To qualify, among other requirements, the Trust will limit the
Fund's investment 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. A fund
which elects to be classified as "diversified" under the 1940 Act must satisfy
the foregoing 5% and 10% requirements with respect to 75% of its total assets.
To the extent that the Fund assumes large positions in the obligations of a
small number of issuers, the Fund's total return may fluctuate to a greater
extent than that of a diversified company as a result of changes in the
financial condition or in the market's assessment of the issuers.
Investors are referred to the Statement of Additional Information for a
complete description of the Fund's investment restrictions.
MANAGEMENT OF THE TRUST
TRUSTEES
The Trustees of the Trust consist of six individuals, five of whom are not
"interested persons" of the Trust as defined in the 1940 Act. The Trustees are
responsible for the overall supervision of the operations of the Trust and the
Fund and perform the various duties imposed on the directors or trustees of
investment companies by the 1940 Act.
ARTHUR ZEIKEL*--President of the Manager and of 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, of New York
University.
ROBERT R. MARTIN--Director WTC Industries Inc.
JOSEPH L. MAY--Attorney in private practice.
20
<PAGE> 23
ANDRE F. PEROLD--Professor, Harvard Business School.
- ---------------
* Interested person, as defined in the 1940 Act, of the Trust.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, which is an affiliate of MLAM and is owned and controlled by
ML&Co., a financial services holding company, acts as the manager for the Fund
and provides the Fund with management services. The Manager or MLAM acts as the
investment adviser for over 125 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 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.
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 from the Fund a monthly fee based upon the average daily net assets of
the Fund at the following annual rates: 0.55% of the portion of the average
daily net assets not exceeding $500 million; 0.525% of the portion of the
average daily net assets exceeding $500 million but not exceeding $1.0 billion;
and 0.50% of the portion of the average daily net assets exceeding $1.0 billion.
For the fiscal year ended August 31, 1995, the total fee paid by the Fund to the
Manager was $478,480 (based on average net assets of approximately $87.2
million), of which $354,675 was voluntarily waived, and the effective fee rate
was approximately 0.55%.
The Management Agreement obligates the Trust on behalf of the Fund to pay
certain expenses incurred in the Fund's operations, including, among other
things, the management fee, legal and audit fees, unaffiliated Trustees' fees
and expenses, registration fees, custodian and transfer agency fees, accounting
and pricing costs, and certain of the costs of printing proxies, shareholder
reports, prospectuses and statements of additional information. Accounting
services are provided to the Fund by the Manager, and the Fund reimburses the
Manager for its costs in connection with such services. The Manager may waive
all or a portion of its management fee and may voluntarily assume all or a
portion of the Fund's expenses. For the year ended August 31, 1995, the Fund
reimbursed the Manager $46,158 for accounting services. For the year ended
August 31, 1995, the ratio of total expenses, excluding account maintenance and
distribution fees and net of reimbursement, to average net assets was .47% for
the Class A shares and .47% for the Class B shares; for the period October 21,
1994 (commencement of operations) to August 31, 1995, the annualized ratio of
total expenses, excluding account maintenance and distribution fees and net of
reimbursement, to average net assets was .49% for Class C shares and .47% for
Class D shares.
21
<PAGE> 24
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
transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which
is a wholly-owned subsidiary of ML&Co., acts as the Trust's transfer agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
servicing agency agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Fund pays the Transfer
Agent an annual fee of $11.00 per Class A or Class D shareholder account and
$14.00 per Class B or Class C shareholder account, and the Transfer Agent is
entitled to reimbursement from the Fund for out-of-pocket expenses incurred by
the Transfer Agent under the Transfer Agency Agreement. For the year ended
August 31, 1995, the Fund paid the Transfer Agent a total fee of $43,217
pursuant to the Transfer Agency Agreement for providing transfer agency
services. At November 30, 1995, the Fund had 235 Class A shareholder accounts,
1,792 Class B shareholder accounts, 66 Class C shareholder accounts and 57 Class
D shareholder accounts. At this level of accounts, the annual fee paid to the
Transfer Agent would aggregate approximately $29,224, plus out-of-pocket
expenses.
PURCHASE OF SHARES
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(SM)
System, as described below. The applicable offering price for purchase orders is
based upon the net asset value of the
22
<PAGE> 25
Fund next determined after receipt of the purchase orders by the Distributor. As
to purchase orders received by securities dealers prior to the close of business
on the New York Stock Exchange (generally, 4:00 P.M., New York time), which
includes orders received after the close of business on the previous day, the
applicable offering price will be based on the net asset value 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 Trust. The Trust or the Distributor may
suspend the continuous offering of the Fund's shares 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 fees and higher
account maintenance fees. A discussion of the factors that investors should
consider in determining the method of purchasing shares under the Merrill Lynch
Select Pricing(SM) System is set forth under "Merrill Lynch Select Pricing(SM)
System" on page 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
23
<PAGE> 26
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>
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION
CLAS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
-----------------------------------------------------------------------------------------------
A Maximum 4.0% initial sales No
charge(2)(3) 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 shares
0.0% 0.25% 0.25% 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".
(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 a 1.00% CDSC for 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 B
shares of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares acquired
in the exchange will apply, and the holding period for the shares exchanged
will be tacked onto the holding period for the shares acquired.
24
<PAGE> 27
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 fiscal year ended August 31, 1995, the Fund sold 182,796 Class A shares for
aggregate net proceeds of $1,683,426. The gross sales charges for the sale of
Class A shares of the Fund for that year were $14,929, of which $1,321 and
$13,608 were received by the Distributor and Merrill Lynch, respectively. For
the fiscal 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 308,159 Class D
shares for aggregate net proceeds of $2,879,606. The gross sales charges for the
sale of Class D shares of the Fund for the period were $28,487, of which $2,544
and $25,943 were received by the Distributor and Merrill Lynch, respectively.
During such period, the Distributor received no CDSCs with respect to 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
25
<PAGE> 28
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 and
their directors and employees and to members of the Boards of MLAM-advised
investment companies, including the Trust. Certain persons who acquired shares
of certain MLAM-advised closed-end funds 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.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the
26
<PAGE> 29
time of purchase. As discussed below, Class B shares are subject to a four year
CDSC, while Class C shares are subject only to a one year 1.0% CDSC. On the
other hand, approximately ten years after Class B shares are issued, such Class
B shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C shares are subject to
an account maintenance fee of 0.25% of net assets, and Class B and Class C
shares are subject to distribution fees of 0.25% and 0.35%, respectively, of net
assets as discussed below under "Distribution Plans". The proceeds from the
account maintenance fees are used to compensate Merrill Lynch for providing
continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" on page 29.
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 fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder
Services--Exchange Privilege" will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares which
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
27
<PAGE> 30
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
$347,212 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 of 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 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
28
<PAGE> 31
operations) to August 31, 1995, the Distributor received CDSCs of $76 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 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.
29
<PAGE> 32
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 fiscal year ended August 31, 1995, the Fund paid the Distributor
$354,796 pursuant to the Class B Distribution Plan (based on average net assets
subject to such Distribution Plan of approximately $71.0 million), all of which
was 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 $3,740 pursuant to the Distribution Plan relating to
Class C shares (based on average net assets subject to such Distribution Plan of
$729,200), all of which was 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 $696 pursuant to the
Distribution Plan relating to Class D shares (based on average net assets
subject to such Distribution Plan of $814,292), all of which was paid to Merrill
Lynch for providing account maintenance services in connection with Class D
shares. At November 30, 1995, the net assets of the Fund subject to the Class B
Distribution Plan aggregated approximately $73.2 million. At this asset level,
the annual fee payable pursuant to the Class B Distribution Plan would aggregate
$365,775. At November 30, 1995, the net assets of the Fund subject to the Class
C Distribution Plan aggregated approximately $2.8 million. At this asset level,
the annual fee payable pursuant to the Class C Distribution Plan would aggregate
$17,094. At November 30, 1995, the net assets of the Fund subject to the Class D
Distribution Plan aggregated approximately $2.4 million. At this asset level,
the annual fee payable pursuant to the Class D Distribution Plan would aggregate
$2,399.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and
30
<PAGE> 33
quarterly on a "direct expense and revenue/cash" basis. On the fully allocated
accrual basis, revenues consist of the account maintenance fees, distribution
fees, the CDSC and certain other related revenues, and expenses consist of
financial consultant compensation, branch office and regional operation center
selling and transaction processing expenses, advertising, sales promotion and
marketing expenses, corporate overhead and interest expense. On the direct
expense and revenue/cash basis, revenues consist of the account maintenance
fees, distribution fees and CDSCs, and the expenses consist of financial
consultant compensation. As of December 31, 1994, for Class B shares, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch
exceeded fully allocated accrual revenues for such period by approximately
$1,680,000 (2.49% of Class B net assets at that date). As of August 31, 1995,
direct cash expenses for the period since the commencement of operations of
Class B shares exceeded direct cash revenues by approximately $8,812 (0.01% of
Class B net assets at that date). As of August 31, 1995, for Class C shares,
direct cash expenses for the period since commencement of operations of Class C
shares exceeded direct cash revenues by $6,985 (0.39% 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 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
31
<PAGE> 34
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 cost, depending on
the market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Transfer Agent, Merrill Lynch Financial Data Services, Inc.,
P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered
other than by mail should be delivered to Merrill Lynch Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice
of redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. Redemption requests should not be sent to the Trust.
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 term is defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, the
existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. Notarized signatures are not sufficient. In
certain instances, the Transfer Agent may require additional documents such as,
but not limited to, trust instruments, death certificates, appointments as
executor or administrator, or certificates of corporate authority. For
shareholders redeeming directly with the Transfer Agent, payments will be mailed
within seven days of receipt of a proper notice of redemption.
At various times the Trust may be requested to redeem Fund shares for which
it has not yet received good payment (e.g., cash, Federal funds or certified
check drawn on a United States bank). The Trust may delay or cause to be delayed
the mailing of a redemption check until such time as it has assured itself that
good payment has been collected for the purchase of such Fund shares, which may
take up to 10 days.
REPURCHASE
The Trust also will repurchase Fund shares through a shareholder's listed
securities dealer. The Trust normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after receipt of the order by the dealer, provided that the
request for repurchase is received by the dealer prior to the close of business
on the New York Stock Exchange (generally, 4:00 P.M., New York time) on the day
received and is received by the Fund from such dealer not later than 30 minutes
after the close of business on the New York Stock Exchange on the same day.
Dealers
32
<PAGE> 35
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.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Trust (other than the 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 of 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 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 showing any reinvestments of dividends and
capital gains distributions. The statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of taxable
ordinary income, dividends, tax exempt income and long-term capital gains
distributions. These statements 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 will be opened
automatically at the Transfer Agent. Shareholders considering transferring their
Class A or Class D shares from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the Class A or
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<PAGE> 36
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 at any
time in accordance with the rules of the Commission.
Under the Merrill Lynch Select PricingSM 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 any CDSC imposed on such shares, if
any, and with respect to Class B shares, toward satisfaction of the Conversion
Period.
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<PAGE> 37
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 monthly.
Cash payments also can be directly deposited to the shareholder's bank account.
No CDSC will be imposed upon redemption of shares issued as a result of the
automatic reinvestment of dividends or capital gains distributions.
Systematic Withdrawal Plans. A Class A or Class D shareholder 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 prearranged
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) account 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 securities in which the Fund invests are traded
primarily in the over-the-counter market. Where possible, the
35
<PAGE> 38
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 transactions involved, the firm's general
execution and operations facilities, and the firm's risk in positioning the
securities involved and the provision of supplemental investment research by the
firm. While reasonably competitive spreads or commissions are sought, the Fund
will not necessarily be paying the lowest spread or commission available. The
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 generally are traded on a principal basis
and normally do not involve either brokerage commissions or transfer taxes. The
cost of portfolio securities transactions of the 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 for the Fund on an agency basis only.
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 the 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 as of the close of business on
the "payment date" 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 reinvested automatically in shares unless the shareholder
elects to receive such distributions in cash.
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<PAGE> 39
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 (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.
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 benefits 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 personal 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. 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 generally will 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
personal 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 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 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
37
<PAGE> 40
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 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 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 constitutes an item of tax preference for
alternative minimum tax purposes. The Code further provides that corporations
are subject to an alternative minimum tax based, in part, on certain differences
between taxable income as adjusted for other tax preferences and the
corporation's "adjusted current earnings," which more closely reflect a
corporation's economic income. Because an exempt-interest dividend paid by 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 the shares, then the loss such shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any 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.
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<PAGE> 41
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the Trust's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and 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 personal income and corporate franchise 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
yield and tax-equivalent yield for various specified time periods in
advertisements or information furnished to present or prospective shareholders.
Average annual total return, yield and tax-equivalent yield are computed
separately for Class A, Class B, Class C and Class D shares in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period such as
in the case of Class B and Class C shares and the maximum sales charge in the
case of Class A and Class D shares. Dividends paid by the Fund with respect to
Class A and Class B 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
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<PAGE> 42
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 or to
reduced sales charges in the case of Class A or Class D shares, waiver of the
CDSC in the case of Class B or Class C 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 5.46% for Class A shares, 5.19% for Class B shares, 5.09% for Class C
shares and 5.37% for Class D shares and the tax-equivalent yield for the same
period (based on a Federal income tax rate of 28%) was 7.58% for Class A shares,
7.21% for Class B shares, 7.07% for Class C shares and 7.46% for Class D shares.
The yield without voluntary reimbursement or waiver of Fund expenses for the
30-day period would have been 5.08% for Class A shares, 4.79% for Class B
shares, 4.70% for Class C shares and 4.99% for Class D shares with a tax
equivalent yield of 7.06% for Class A shares, 6.65% for Class B shares, 6.53%
for Class C shares and 6.93% 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 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.
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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 the fees payable to the Manager and the Distributor, 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 management investment
company comprised of separate series ("Series"), each of which is a separate
portfolio offering shares to selected groups of purchasers. The Trustees are
authorized to create an unlimited number of Series and, with respect to each
Series, to issue an unlimited number of full and fractional shares of beneficial
interest of $.10 par value of different classes. Shareholder approval is not
required for the authorization of additional Series or classes of a Series of
the Trust. At the date of this Prospectus, the shares of the Fund are divided
into Class A, Class B, Class C and Class D shares. Class A, Class B, Class C and
Class D shares represent interests in the same assets of the Fund and are
identical in all respects except that Class B, Class C and Class D shares bear
certain expenses related to the account maintenance associated with such shares,
and Class B and Class C shares bear certain expenses related to the distribution
of such shares. Each class has exclusive voting rights with respect to matters
relating to account maintenance and distribution expenditures as applicable. See
"Purchase of Shares". The Trust has received an order (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 and to fractional
votes for fractional shares held in the election of Trustees (to the extent
hereinafter provided) and on other matters submitted to the vote of
shareholders. There normally will be no meeting of shareholders for the purpose
of electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees.
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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
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
matter please call your Merrill Lynch financial consultant or Merrill Lynch
Financial Data Services, Inc. at 800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Trust at the address or
telephone number set forth on the cover page of this Prospectus.
------------------------
The Declaration of Trust establishing the Trust, dated 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 such person's private property for the satisfaction of any obligation or
claim of the Trust, but the "Trust Property" (as defined in the Declaration)
only shall be liable.
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MERRILL LYNCH CALIFORNIA INSURED 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 Insured Municipal Bond Fund and establish an
Investment Account as described in the Prospectus. In the event that I am not
eligible to purchase Class A shares, I understand that Class D shares will be
purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to Merrill Lynch Financial
Data Services, Inc., as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
1. ..........................................................
..........................................................
2. ..........................................................
..........................................................
3. ..........................................................
..........................................................
4. ..........................................................
..........................................................
5. ..........................................................
..........................................................
6. ..........................................................
..........................................................
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address.........................................................................
.............................................................
(Zip Code)
Date..........................................................
<TABLE>
<S> <C>
Occupation ...................................................
.............................................................
Signature of Owner
Name and Address of Employer..................................
<S> <C>
............................................................. .............................................................
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 OPTIONS
<TABLE>
<S> <C> <C> <C> <C> <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 Insured 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.
43
<PAGE> 46
MERRILL LYNCH CALIFORNIA INSURED 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
"Distribution 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)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND D SHARES ONLY (SEE TERMS AND CONDITIONS IN
THE STATEMENT OF ADDITIONAL INFORMATION)
<TABLE>
<S> <C>
......................,
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 Insured 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 Insured
Municipal Bond Fund Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch California Insured Municipal Bond Fund held as
security.
<TABLE>
<S> <C>
By............................................................... ...............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint parties, 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 Insured 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
<TABLE>
<S> <C> <C>
- --------- ------------
..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer A/C No.
</TABLE>
44
<PAGE> 47
MERRILL LYNCH CALIFORNIA INSURED 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 No.
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
Insured 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 on your Account............................................................
Bank Name.......................................................................
Bank Number .............................................................
Account Number..................................................................
Bank Address....................................................................
......................................................................
Signature of Depositor
..............................................................................
Date............................................................................
Signature of Depositor..........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
45
<PAGE> 48
MERRILL LYNCH CALIFORNIA INSURED 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 Insured 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 California Insured Municipal Bond Fund 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 preparing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such check or debit. If I change banks or desire to
terminate or suspend this program, I agree to notify you promptly in writing. I
hereby authorize you to take any action to correct erroneous ACH debits of my
bank account or purchases of Fund shares including liquidating shares of the
Fund and crediting my bank account. I further agree that if a check or debit is
not honored upon presentation, Merrill Lynch Financial Data Services, Inc. is
authorized to discontinue immediately the Automatic Investment Plan and to
liquidate sufficient shares held in my account to offset the purchase made with
the dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS DRAWN
BY MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City .................... State ........ Zip Code...............................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc., I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked 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.
46
<PAGE> 49
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 10286
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> 50
- ------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE TRUST, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table....................................... 2
Merrill Lynch Select PricingSM System........... 3
Financial Highlights............................ 8
Investment Objective and Policies............... 9
Portfolio Insurance........................... 11
Potential Benefits............................ 13
Special and Risk Considerations Relating to
Municipal Bonds............................. 13
Description of Municipal Bonds................ 13
When-Issued Securities and Delayed Delivery
Transactions................................ 16
Call Rights................................... 16
Financial Futures Transactions and Options.... 16
Repurchase Agreements......................... 19
Investment Restrictions....................... 19
Management of the Trust......................... 20
Trustees...................................... 20
Management and Advisory Arrangements.......... 21
Code of Ethics................................ 22
Transfer Agency Services...................... 22
Purchase of Shares.............................. 22
Initial Sales Charge Alternatives--
Class A and Class D Shares.................. 25
Deferred Sales Charge Alternatives--
Class B and Class C Shares.................. 26
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......................... 36
Distributions................................. 36
Taxes......................................... 37
Performance Data................................ 39
Additional Information.......................... 41
Determination of Net Asset Value.............. 41
Organization of the Trust..................... 41
Shareholder Reports........................... 42
Shareholder Inquiries......................... 42
Authorization Form.............................. 43
Code # 16574-1295
</TABLE>
[Merrill Lynch Logo]
MERRILL LYNCH
CALIFORNIA INSURED
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> 51
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH CALIFORNIA INSURED 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 Insured Municipal Bond Fund (the "Fund") is a
series of Merrill Lynch California Municipal Series Trust (the "Trust"), an
open-end management 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 personal income taxes
as is consistent with prudent investment management. The Fund invests primarily
in a non-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"). Under normal
circumstances, at least 80% of the Fund's total assets will be invested in
municipal obligations with remaining maturities of one year or more which are
covered by insurance guaranteeing the timely payment of principal at maturity
and interest and at least 65% of the Fund's total assets will be invested in
insured California Municipal Bonds. There can be no assurance that the
investment objective of the Fund will be realized.
------------------------
Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes is
most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
------------------------
The 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> 52
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 personal income taxes
as is consistent with prudent investment management. The Fund seeks to achieve
its objective by investing primarily in a 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 personal 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 80% of the Fund's total assets will be invested in Municipal Bonds which
are covered by insurance guaranteeing the timely payment of principal at
maturity and interest and at least 65% of the Fund's total assets will be
invested in insured 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 ("IDBs") or private activity bonds. The interest on
such obligations may bear a fixed rate or be payable at a variable or floating
rate. The Municipal Bonds purchased by the Fund will be primarily what are
commonly referred to as "investment grade" securities, which are obligations
rated at the time of purchase within the four highest quality ratings as
determined by either Moody's Investors Service, Inc. ("Moody's") (currently Aaa,
Aa, A and Baa), Standard & Poor's Ratings 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" or "FAM"), to other obligations in which the Fund may
invest.
The Fund ordinarily does not intend to realize investment income not exempt
from Federal and California income taxes. 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 ("Non-Municipal Tax-Exempt Securities"), if the Fund
nevertheless believes such securities to be exempt from Federal income taxation.
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 80% of its
total assets in Municipal Bonds which are covered by insurance and at least 65%
of its total assets in insured California Municipal Bonds. For temporary periods
or to provide liquidity, the Fund has the authority to invest as much as 20% of
its total assets in tax-exempt or
2
<PAGE> 53
taxable money market obligations with a maturity of one year or less (such
short-term obligations being referred to herein as "Temporary Investments").
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 is
a fundamental policy 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 on or 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 actually may be higher
than those obtained in the transaction itself; if yields so increase, the value
of the when-issued obligations generally will decrease. 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 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
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, hedge other portfolio positions or vary the
degree of investment leverage relatively efficiently under different market
conditions.
3
<PAGE> 54
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 to 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 California Municipal
Bonds and 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 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 affected adversely 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
4
<PAGE> 55
could be sold only to a limited number of dealers or institutional investors. To
the extent that a secondary trading market for high yield securities does exist,
it generally is not as liquid as the secondary market for higher rated
securities. Reduced secondary market liquidity may have an adverse impact on
market price 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 generally are available on many
high yield securities only from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales.
It is expected that a significant portion of the high yield securities
acquired by 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 affect adversely 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.
PORTFOLIO INSURANCE
Under normal circumstances, at least 80% of the Fund's total assets (and
65% of its California Municipal Bonds) will be comprised of Municipal Bonds
which are either (i) insured under an insurance policy purchased by the Fund or
(ii) insured under an insurance policy obtained by the issuer thereof or any
other party. The insurance policies in either instance will be issued by
insurance carriers that have total admitted assets (unaudited) of at least
$75,000,000 and capital and surplus (unaudited) of at least $50,000,000 and
insurance claims-paying ability ratings of AAA from S&P and Aaa from Moody's.
See Appendix III to this Statement of Additional Information for a brief
description of S&P's and Moody's insurance claims-paying ability ratings.
Currently, it is anticipated that a majority of the insured Municipal Bonds in
the Fund's portfolio will be insured by the following insurance companies which
satisfy the foregoing requirements: AMBAC Indemnity Corporation, Capital
Guaranty Insurance Company, Capital Markets Assurance Corporation, Financial
Guaranty Insurance Company, Financial Security Assurance and Municipal Bond
Investors Assurance Corporation. The Fund also may purchase Municipal Bonds
covered by insurance issued by any other insurance company which satisfies the
foregoing requirements. It is anticipated that a majority of insured Municipal
Bonds held by the Fund will be insured under policies obtained by parties other
than the Fund.
The Fund may purchase, but has no obligation to purchase, separate mutual
fund insurance policies (the "Policies") from insurance companies meeting the
requirements set forth above which guarantee the payment of principal and
interest on specified eligible Municipal Bonds purchased by the Fund. A
Municipal Bond will
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be eligible for coverage if it meets certain requirements of the insurance
company set forth in a Policy. In the event interest or principal on an insured
Municipal Bond is not paid when due, the insurer will be obligated under its
Policy to make such payment not later than 30 days after it has been notified
by, and provided with documentation from, the Fund that such nonpayment has
occurred.
The Policies will be effective only as to insured Municipal Bonds
beneficially owned by the Fund. In the event of a sale of any Municipal Bonds
held by the Fund, the issuer of the relevant Policy will be liable only for
those payments of interest and principal which are then due and owing. The
Policies will not guarantee the market value of the insured Municipal Bonds or
the value of the shares of the Fund.
The insurer will not have the right to withdraw coverage on securities
insured by their Policies and held by the Fund so long as such securities remain
in the Fund's portfolio. In addition, the insurer may not cancel its Policies
for any reason except failure to pay premiums when due. The Trustees of the
Trust will reserve the right to terminate any of the Policies if they determine
that the benefits to the Fund of having its portfolio insured under such
Policies are not justified by the expense involved.
The premiums for the Policies are paid by the Fund, and the yield on the
Fund's portfolio is reduced thereby. The Manager estimates that the cost of the
annual premiums for the Policies currently ranges from approximately 0.20 of 1%
to 0.25 of 1% of the principal amount of the Municipal Bonds covered by such
Policies. The estimate is based on the expected composition of the Fund's
portfolio of Municipal Bonds. Additional information regarding the Policies is
set forth in Appendix III to this Statement of Additional Information. In
instances in which the Fund purchases Municipal Bonds insured under policies
obtained by parties other than the Fund, the Fund does not pay the premiums for
such policies; rather, the cost of such policies may be reflected in the
purchase price of the Municipal Bonds.
It is the intention of the Manager to retain any insured securities which
are in default or in significant risk of default and to place a value on the
insurance which ordinarily will be the difference between the market value of
the defaulted security and the market value of similar securities which are not
in default. In certain circumstances, however, the Manager may determine that an
alternative value for the insurance, such as the difference between the market
value of the defaulted security and its par value, is more appropriate. The
Manager will be unable to manage the portfolio to the extent it holds defaulted
securities which may limit its ability in certain circumstances to purchase
other Municipal Bonds.
There can be no assurance that insurance of the kind described above will
continue to be available to the Fund. In the event the Trustees determine that
such insurance is unavailable or that the cost of such insurance outweighs the
benefits to the Fund, the Fund may discontinue its policy of maintaining
insurance for all or any of the Municipal Bonds held in the Fund's portfolio.
Although the Manager periodically reviews the financial condition of each
insurer, there can be no assurance that the insurers will honor their
obligations under all circumstances.
The portfolio insurance reduces financial or credit risk (i.e., the
possibility that the owners of the insured Municipal Bonds will not receive
timely scheduled payments of principal or interest). However, the insured
Municipal Bonds are subject to market risk (i.e., fluctuations in market value
as a result of changes in prevailing interest rates).
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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 "IDBs" or private activity bonds are issued by or on behalf of
public authorities to finance 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 Municipal Bonds if the
interest paid thereon is, in the opinion of bond counsel to the issuer, excluded
from gross income for Federal income tax purposes and, in the case of California
Municipal Bonds, exempt from California personal income taxes. Other types of
IDBs or private activity bonds, the proceeds of which are used for the
construction, equipment or improvement of privately operated industrial or
commercial facilities, may constitute Municipal Bonds, although the current
Federal tax laws place substantial limitations on the size of such issues. In
the case of certain community facilities district special tax ("Mello-Roos" in
the case of California Municipal Bonds), tax increment (or tax allocation) and
assessment bonds, the payment of the special tax, tax increment and assessments
may be secured solely by remedies against the land (such as by foreclosure) and
not against the individual property owner, which could be time-consuming and
costly.
The two principal classifications of Municipal Bonds are "general
obligation" bonds and "revenue" bonds. 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 industrial development
bonds 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, which are normally issued
by special purpose public authorities. Under a moral obligation bond, if the
issuer thereof is unable to meet its obligations, the repayment of the bond
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
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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 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
Trustees, determines to be liquid. The Manager will deem lease obligations
liquid if they are publicly offered and have received an investment grade rating
of Baa or better by Moody's, or BBB or better by Standard & Poor's or Fitch.
Unrated lease obligations, or those rated below investment grade, will be
considered liquid if the obligations come to the market through an underwritten
public offering and at least two dealers are willing to give competitive bids.
In reference to the latter, the Manager must, among other things, also review
the creditworthiness of the municipality obligated to make payment under the
lease obligation and make certain specified determinations based on such factors
as the existence of a rating or credit enhancement (such as insurance), the
frequency of trades or quotes for the obligation and the willingness of dealers
to make a market in the obligation.
Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the money market and of the municipal bond market, the
size of a particular offering, the financial condition of the issuer, the
maturity of the obligation, and the rating of the issue. The ability of the Fund
to achieve its investment objective also is 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.
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 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.
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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 set at a rate determined by the
remarketing agent or based upon the prime rate of a bank or some other
appropriate interest rate adjustment index. The Fund may invest in all types of
tax-exempt instruments currently outstanding or to be issued in the future which
satisfy the short-term maturity and quality standards of the Fund.
The Fund also may invest in VRDOs in the form of participation interests
("Participating VRDOs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank. Participating VRDOs provide
the Fund with a specified undivided interest (up to 100%) of the underlying
obligation and the right to demand payment of the unpaid principal balance plus
accrued interest on the Participating VRDOs from the financial institution upon
a specified number of days' notice, not to exceed seven days. In addition, a
Participating VRDO is backed by an irrevocable letter of credit or guaranty of
the financial institution. The Fund would have an undivided interest in the
underlying obligation and thus participate on the same basis as the financial
institution in such obligation except that the financial institution typically
retains fees out of the interest paid on the obligation for servicing the
obligation, providing the letter of credit 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 therefore will 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
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"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 insured
fully 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 the case of a repurchase
agreement, the Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement. In the event of default by the
seller under a repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by the Fund but only constitute collateral
for the seller's obligation to pay the repurchase price. Therefore, the Fund may
suffer time delays and incur costs or possible losses in connection with the
disposition of the collateral. The Fund would retain ownership of the securities
in the event of a default under a repurchase agreement that is construed not to
be a collateralized loan. 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.
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
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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 market". At any time
prior to the settlement date of the financial futures contract, the position may
be closed out by taking an opposite position which will operate to terminate the
position in the financial futures contract. A final determination of variation
margin is then made, additional cash is required to be paid to or released by
the broker, and the purchaser realizes a loss or gain. In addition, a nominal
commission is paid on each completed sale transaction.
The Fund may deal 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 nonprofit organization
managed by the exchange membership which also is responsible for handling daily
accounting of deposits or withdrawals of margin.
As described in the Prospectus, the 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
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the Manager and the Trustees should determine that there is normally a
sufficient correlation between the prices of such futures contracts and the
Municipal Bonds in which the Fund invests to make such hedging appropriate.
Futures Strategies. The Fund may sell a financial futures contract (i.e.,
assume a short position) in anticipation of a decline in the value of its
investments in Municipal Bonds resulting from an increase in interest rates or
otherwise. The risk of decline could be reduced without employing futures as a
hedge by selling such Municipal Bonds and either reinvesting the proceeds in
securities with shorter maturities or by holding assets in cash. This strategy,
however, entails increased transaction costs in the form of dealer spreads and
typically would reduce the average yield of the Fund's portfolio securities as a
result of the shortening of maturities. The sale of financial futures contracts
provides an alternative means of hedging against declines in the value of its
investments in Municipal Bonds. As such values decline, the value of the Fund's
positions in the financial futures contracts will tend to increase, thus
offsetting all or a portion of the depreciation in the market value of the
Fund's Municipal Bond investments which are being hedged. While the Fund will
incur commission expenses in selling and closing out financial futures
positions, commissions on financial futures transactions are lower than
transaction costs incurred in the purchase and sale of Municipal Bonds. In
addition, the ability of the Fund to trade in the standardized contracts
available in the financial futures markets may offer a more effective defensive
position than a program to reduce the average maturity of the portfolio
securities due to the unique and varied credit and technical characteristics of
the municipal debt instruments available to the Fund. Employing futures as a
hedge also may permit the Fund to assume a 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.
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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 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 Financial 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 Financial 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 offset completely 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
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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 the 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.
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,
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<PAGE> 65
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
reflected fully in the value of the option purchased.
Municipal Bond Index financial futures contracts were approved for trading
in 1986. Trading in such financial futures contracts may tend to be less liquid
than that in other 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.
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. Invest more than 25% of its assets, taken at market value at the
time of each investment, in the securities of issuers in any particular
industry (excluding the U.S. Government and its agencies and
instrumentalities). For purposes of this restriction, states,
municipalities and their political subdivisions are not considered part of
any industry.
2. Make investments for the purpose of exercising control or
management.
3. Purchase or sell real estate, except that, to the extent permitted
by applicable law, 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.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that 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.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. 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 such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities and (iv) the Fund may purchase
securities on margin to the extent permitted by applicable law. The Fund
may not pledge its assets other than to secure 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.
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<PAGE> 66
7. 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.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box".
c. Invest in securities 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.
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<PAGE> 67
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 (6) above,
borrow amounts in excess of 20% of its total assets taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes. In addition, the Fund will
not purchase securities while borrowings are outstanding.
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 California 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 Fund 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
The Trustees, executive officers and the portfolio manager of the Trust,
their ages and their principal occupations for at least the last five years are
set forth below. Unless otherwise noted, the address of each Trustee and
executive officer is P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (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. ("MLFD" or the
"Distributor") since 1991.
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<PAGE> 68
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; Professor, New York University since 1973; Dean, Gallatin Division of New
York University from 1978 to 1993 and Director from 1975 to 1976; Distinguished
Fellow, Herman Kahn Chair, Hudson Institute from 1984 to 1985; Trustee, Hudson
Naval Institute, since 1980; Director, Damon Corporation since 1991; Overseer,
Center for Naval Analyses from 1983 to 1993.
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)--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; Treasurer of MLFD since 1984 and
Vice President since 1981; Senior Vice President and Treasurer of Princeton
Services since 1993.
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<PAGE> 69
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.
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, together with such Trustee's actual
out-of-pocket expenses relating to attendance at meetings. The Trust also pays
members of its Audit and Nominating Committee, which consists of all 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 the non-affiliated Trustees by the Fund aggregated $5,089.
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
COMPENSATION
PENSION OR FROM FUND AND
RETIREMENT OTHER
BENEFITS FAM/MLAM
ACCRUED AS ADVISED FUNDS
COMPENSATION PART OF FUND'S PAID TO
NAME OF TRUSTEE FROM FUND EXPENSES TRUSTEE(1)
- ------------------------------------------------------ ------------ -------------- -------------
<S> <C> <C> <C>
James H. Bodurtha..................................... $113 None $ 156,250
Herbert I. London..................................... $938 None $ 157,500
Robert R. Martin...................................... $938 None $ 157,500
Joseph L. May......................................... $938 None $ 157,500
Andre F. Perold....................................... $938 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 arrangements of the Fund.
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 its
affiliates. Because of different objectives or other factors, a
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<PAGE> 70
particular security may be bought for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities for
the Fund or other funds for which they act as manager or for their advisory
clients arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that transactions on
behalf of more than one client of the Manager or its affiliates during the same
period may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
Pursuant to a management agreement between the Trust on behalf of the Fund
and the Manager (the "Management Agreement"), the Manager receives for its
services to the Fund monthly compensation 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 portion of the
average daily net assets exceeding $500 million but not exceeding $1.0 billion;
and 0.50% of the portion of the average daily net assets exceeding $1.0 billion.
For the fiscal year ended August 31, 1994, the total advisory fee paid by the
Fund to the Manager aggregated $509,552, all of which was voluntarily waived.
For the fiscal year ended August 31, 1995, the total advisory fee paid by the
Fund to the Manager aggregated $478,480, of which $354,675 was voluntarily
waived.
California imposes limitations on the expenses of the Fund. 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 net assets, 2.0% of the next $70,000,000 of average 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 this limitation are interest, taxes, brokerage commissions and other
items such as extraordinary legal expenses. No fee payment will be made to the
Manager during any fiscal year which will cause such expenses to exceed expense
limitations at the time of such payment. No fee reimbursements were made during
the fiscal years ended August 31, 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 shall 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,
among other things, redemption expenses, expenses of portfolio transactions,
expenses of registering the shares under Federal and state securities laws,
pricing costs (including the daily calculation of net asset value), expenses of
printing shareholder reports, prospectuses and statements of additional
information (except to the extent paid by the Distributor as described below),
fees for legal and auditing services, Commission fees, interest, certain taxes,
and other expenses attributable to a particular Series. Expenses which will be
allocated on the basis of asset size of the respective Series include fees and
expenses of unaffiliated Trustees, state franchise taxes, costs of printing
proxies and other expenses related to shareholder meetings, and other expenses
properly payable by the Trust. The organizational expenses of the Trust were
paid by the Trust, and as additional Series are added to the Trust, the
organizational expenses are allocated among the Series (including the Fund) in a
manner deemed equitable by the Trustees. Depending
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<PAGE> 71
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 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 $46,158 for accounting services. Certain expenses in
connection with account maintenance and the distribution of shares will be
financed by the Fund 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(SM) 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
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<PAGE> 72
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 prospective investors. The Distributor also pays for other
supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Management Agreement described above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
The gross sales charges for the sale of Class A shares for the period
February 26, 1993 (commencement of operations) to August 31, 1993 were $321,978,
of which the Distributor received $5,699 and Merrill Lynch received $316,279.
The gross sales charges for the sale of Class A shares for the fiscal year ended
August 31, 1994 were $23,814 of which the Distributor received $2,428 and
Merrill Lynch received $21,386. The gross sales charges for the sale of Class A
shares for the year ended August 31, 1995 were $14,929, of which the Distributor
received $1,321 and Merrill Lynch received $13,608. 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 $28,487, of which the Distributor received
$2,544 and Merrill Lynch received $25,943.
The term "purchase", as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his 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,
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.
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<PAGE> 73
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 shares; however, its execution will
result in the purchaser paying a lower sales charge at the appropriate quantity
purchase level. A purchase not originally made pursuant to a Letter of Intention
may be included under a subsequent Letter of Intention executed within 90 days
of such purchase if the Distributor is informed in writing of this intent within
such 90-day period. The value of Class A and Class D shares of the Fund and of
other MLAM-advised mutual funds presently held, at cost or maximum offering
price (whichever is higher), on the date of the first purchase under the Letter
of Intention, may be included as a credit toward the completion of such Letter,
but the reduced sales charge applicable to the amount covered by such Letter
will be applied only to new purchases. If the total amount of shares does not
equal the amount stated in the Letter of Intention (minimum of $25,000), the
investor will be notified and must pay, within 20 days of the expiration of such
Letter, the difference between the sales charge on the Class A or Class D shares
purchased at the reduced rate and the sales charge applicable to the shares
actually purchased through the Letter. Class A or Class D shares equal to at
least five percent of the intended amount will be held in escrow during the
thirteen-month period (while remaining registered in the name of the purchaser)
for this purpose. The first purchase under the Letter of Intention must be at
least five percent of the dollar amount of such Letter. If during the term of
such Letter, a purchase brings the total amount invested to an amount equal to
or in excess of the amount indicated in the Letter, the purchaser will be
entitled on that purchase and subsequent purchases to the reduced percentage
sales charge which would be applicable to a single purchase equal to the total
dollar value of the Class A or Class D shares then being purchased under such
Letter, but there will be no retroactive reduction of the sales charges on any
previous purchase. The value of any shares redeemed or otherwise disposed of by
the purchaser prior to termination or completion of the Letter of Intention will
be deducted from the total purchases made under such Letter. An exchange from a
MLAM-advised money market fund into the Fund that creates a sales charge will
count toward completing a new or existing Letter of Intention from the Fund.
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 and directors
or trustees of other MLAM-advised mutual funds, 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.
23
<PAGE> 74
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 that such redemption must
have been made within 60 days prior to the investment in the Fund, and the
proceeds from the redemption must have 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 share 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 and fund shares prior to October 21, 1994
and wish to reinvest the net proceeds of a sale of their closed-end fund shares
of common stock in Eligible Class A shares, if the conditions set forth below
are satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994 and wish to reinvest the net proceeds from a
sale of their closed-end fund shares are offered Class A shares (if eligible to
buy Class A shares) or Class D shares of the Fund and other MLAM-advised mutual
funds ("Eligible Class D Shares"), if the following conditions are met. First,
the sale of closed-end fund shares must be made through Merrill Lynch, and the
net proceeds therefrom must be immediately reinvested in Eligible Class A or
Class D shares. Second, the closed-end fund shares must either have been
acquired in the initial public offering or be shares representing dividends from
shares of common stock acquired in such offering. Third, the closed-end fund
shares must have been continuously maintained in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option. Eligible 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
24
<PAGE> 75
offer conducted by the Senior Floating Rate Fund and reinvest the proceeds
immediately in the Fund. This investment option is available only with respect
to the proceeds of Senior Floating Rate Fund shares as to which no Early
Withdrawal Charge (as defined in the Senior Floating Rate Fund prospectus) is
applicable. Purchase orders from Senior Floating Rate Fund shareholders wishing
to exercise this investment option will be accepted only on the day that the
related Senior Floating Rate Fund tender offer terminates and will be effected
at the net asset value of the Fund 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 of the assets or company
acquired in a tax-free transaction may be adjusted in appropriate cases to
reduce possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities which (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objective and
Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
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
25
<PAGE> 76
Distribution Plan remains in effect, the selection and nomination of Trustees
who are not "interested persons" of the Trust, as defined in the 1940 Act (the
"Independent Trustees"), shall be committed to the discretion of the Independent
Trustees then in office. In approving each Distribution Plan in accordance with
Rule 12b-1, the Independent Trustees concluded that there is reasonable
likelihood that the Distribution Plan will benefit the Fund and its related
class of shareholders. Each Distribution Plan can be terminated at any time,
without penalty, by the vote of a majority of the Independent Trustees or by the
vote of the holders of a majority of the outstanding related class of voting
securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders and all material amendments are required to be
approved by the vote of Trustees, including a majority of the Independent
Trustees who have no direct or indirect financial interest in such Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Trust preserve copies of each Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of such Distribution Plan or such report, the first two years in an easily
accessible place.
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 on
certain asset-based sales charges such as the distribution fee and the
contingent deferred sales charge ("CDSC") borne by the Class B and Class C
shares but not the account maintenance fee. The maximum sales charge rule is
applied separately to each class. As applicable to the Fund, the maximum sales
charge rule limits the aggregate of distribution fee payments and CDSCs payable
by the Fund to (1) 6.25% of eligible gross sales of Class B shares and Class C
shares, computed separately (defined to exclude shares issued pursuant to
dividend reinvestments and exchanges), plus (2) interest on the unpaid balance
for the respective class, computed separately, at the prime rate plus 1% (the
unpaid balance being the maximum amount payable minus amounts received from the
payment of the distribution fee and the CDSC). In connection with the Class B
shares, the Distributor has voluntarily agreed to waive interest charges on the
unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the
maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with the Class B shares is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the interest charges at
any time. To the extent payments would exceed the voluntary maximum, the Fund
will not make further payments of the distribution fee with respect to Class B
shares, and any CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account maintenance fee.
In certain circumstances the amount payable pursuant to the voluntary maximum
may exceed the amount payable under the NASD formula. In such circumstances
payment in excess of the amount payable under the NASD formula will not be made.
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<PAGE> 77
The following table sets forth comparative information as of August 31,
1995 with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to the Class B shares, the Distributor's voluntary
maximum for the period February 26, 1993 (commencement of operations) to August
31, 1995.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF AUGUST 31, 1995
-----------------------------------------------------------------------------------------------------
ANNUAL
ALLOWABLE AMOUNTS DISTRIBUTION
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE FEES AT CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ---------- ------- -------------- --------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B
Under NASD Rule as
Adopted............. $91,870 $ 5,742 $1,015 $6,757 $992 $ 5,765 $ 179
Under Distributor's
Voluntary Waiver.... $91,870 $ 5,742 $ 459 $6,201 $992 $ 5,209 $ 179
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS C
Under NASD Rule as
Adopted............. $ 1,766 $ 110 $ 4 $ 114 $ 2 $ 112 $ 6
</TABLE>
- ------------------
(1) Purchase price of all eligible Class B shares sold since February 26, 1993
(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 or the NASD maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of 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 redemption following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended (the "Code")) of a
Class B shareholder (including one who owns the Class B shares as joint tenant
with his or her spouse), provided the redemption is requested within one year of
the death or initial determination of disability. For the fiscal years ended
August 31, 1993, 1994 and 1995, the Distributor received CDSCs of $22,668,
$177,779 and $347,212, respectively, with respect to redemptions of Class B
shares, all of which was paid to Merrill Lynch. For the period October 21, 1994
(commencement of operations) to August 31, 1995,
27
<PAGE> 78
the Distributor received CDSCs of $76 with respect to redemptions of Class C
shares, all of which was 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 is $500, except that the initial minimum for shares purchased for such
accounts pursuant to the Automatic Investment Program is $50.
PORTFOLIO TRANSACTIONS
Reference is made to "Investment Objective and Policies" and "Portfolio
Transactions" in the 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 Trust, including Merrill Lynch, may not serve as dealer in
connection with transactions with the Fund. 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. For the period February 26, 1993 (commencement of operations)
through August 31, 1993, the Fund engaged in no transactions pursuant to such
order. During the year ended August 31, 1994, the Fund engaged in no
transactions pursuant to such order. For the year ended August 31, 1995, the
Fund engaged in 14 transactions pursuant to such order aggregating approximately
$12.3 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 Trust may serve as broker for the
Fund 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 Trustee 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 such issuer own in the aggregate more than five percent of the
securities of such 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 had applied for a
conditional exemption from these restrictions.
28
<PAGE> 79
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 expenses of the Manager will not necessarily be
reduced as a result of the receipt of such supplemental information.
The Trust has no obligation to deal with any broker in the execution of
transactions for the Fund's portfolio securities. In addition, consistent with
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. and policies established by the Trustees of the Trust, the Manager may
consider sales of shares of the Fund as a factor in the selection of brokers or
dealers to execute portfolio transactions for the Fund.
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such action, for defensive or other reasons, appears
advisable to its Manager. While it is not possible to predict turnover rates
with any certainty, at present it is anticipated that the Fund's annual
portfolio turnover rate, under normal circumstances after the Fund's portfolio
is invested in accordance with its investment objective, will be less than 100%.
(The portfolio turnover rate is calculated by dividing the lesser of purchases
or sales of portfolio securities for the particular fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
particular fiscal year. For purposes of determining this rate, all securities
whose maturities at the time of acquisition are one year or less are excluded.)
The portfolio turnover rate for the fiscal years ended August 31, 1994 and 1995
were 93.04% and 61.53%, 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 (generally, 4:00 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 the
Distributor, 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
29
<PAGE> 80
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 accounts 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 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 statements, at least quarterly, from the
Transfer Agent. The statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of taxable ordinary income
dividends, tax-exempt income and long-term capital gains distributions. The
statements also will show any other activity in the account since the preceding
statement. Shareholders also will receive separate transaction confirmations for
each purchase or sale transaction other than automatic investment purchase and
the reinvestment of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his or her Investment Account
at any time by mailing a check directly to the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
30
<PAGE> 81
Shareholders considering transferring their Class A 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 dealers.
Voluntary accumulation also can be made through a service known as the Automatic
Investment Plan whereby the Fund is authorized through pre-authorized checks 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 their CMA(R) or CBA(R) account 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 can also 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 of the Fund or vice
versa and, commencing ten days after the receipt by the Transfer Agent of such
notice, such instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for
31
<PAGE> 82
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 Trust, the Transfer Agent or
the Distributor. Withdrawal payments should not be considered as dividends,
yield or income. Each withdrawal is a taxable event. If periodic withdrawals
continuously exceed reinvested dividends, the shareholder's original investment
may be reduced correspondingly. Purchases of additional Class A or Class D
shares concurrent with withdrawals are ordinarily disadvantageous to the
shareholder because of sales charges and tax liabilities. The Trust will not
knowingly accept purchase orders for Class A or Class D shares of 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, 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. 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 redemption 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) Automated Investment Program. For more information on the
CMA(R)/CBA(R) Systematic Redemption Program, eligible shareholders should
contact their Merrill Lynch financial consultant.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select Pricing(SM) System, Class A shareholders may exchange Class A
shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his or her
account in which the exchange is made
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<PAGE> 83
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 the same
class of other MLAM-advised mutual funds. For purposes of computing the CDSC
that may be payable upon a disposition of the shares acquired in the exchange,
the holding period for the previously owned shares of the Fund is "tacked" to
the holding period of the newly acquired shares of the other Fund as more fully
described below. Class A, Class B, Class C and Class D shares are also
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. It is contemplated that the
exchange privilege may be applicable to other new mutual funds whose shares may
be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D shares, 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 deferred
sales charge 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 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.
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<PAGE> 84
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 CDSC 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 the 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 Merrill Lynch Global Resources Trust 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).
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.
</TABLE>
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<TABLE>
<S> <C>
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 level of risk by investing
in common stock and other types of securities,
including fixed income securities and convertible
securities.
MERRILL LYNCH BASIC VALUE FUND,
INC. ............................ Capital appreciation and, secondarily, income through
investment in securities, primarily equities, that are
undervalued and therefore represent basic investment
value.
MERRILL LYNCH CALIFORNIA 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.
</TABLE>
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<TABLE>
<S> <C>
MERRILL LYNCH CALIFORNIA 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.
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, 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.
MERRILL LYNCH DRAGON FUND, INC. ... Capital appreciation primarily through investment in
equity and debt securities of issuers domiciled in
developing countries located 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.
</TABLE>
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<TABLE>
<S> <C>
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 rates in earnings.
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.
</TABLE>
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<TABLE>
<S> <C>
MERRILL LYNCH GLOBAL ALLOCATION
FUND, INC. ...................... High total return, consistent with prudent risk, through
a fully managed investment policy utilizing United
States and foreign equity, debt and money market
securities, the combination of which will be varied
from time to time both with respect to the types of
securities and markets in response to changing market
and economic trends.
MERRILL LYNCH GLOBAL BOND FUND FOR
INVESTMENT AND RETIREMENT........ High total investment return from investment in a global
portfolio of debt instruments denominated in various
currencies and multi-national currency units.
MERRILL LYNCH GLOBAL CONVERTIBLE
FUND, INC. ...................... High total return from investment primarily in an
internationally diversified portfolio of convertible
debt securities, convertible preferred stock and
"synthetic" convertible securities consisting of a
combination of debt securities or preferred stock and
warrants or options.
MERRILL LYNCH GLOBAL HOLDINGS, INC.
(residents of Arizona must meet
investor suitability
standards)....................... The highest total investment return consistent with
prudent risk through worldwide investment in an
internationally diversified portfolio of securities.
MERRILL LYNCH GLOBAL 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.
</TABLE>
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<TABLE>
<S> <C>
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
sales from products and services in healthcare.
MERRILL LYNCH INTERNATIONAL EQUITY
FUND............................. Capital appreciation and, secondarily, income by
investing in a diversified portfolio of equity
securities of issuers located in countries other than
the United States.
MERRILL LYNCH LATIN AMERICA FUND,
INC. ............................ Capital appreciation by investing primarily in Latin
American equity and debt securities.
MERRILL LYNCH MARYLAND MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income exempt from Federal
and Maryland income taxes as is consistent with
prudent investment management.
</TABLE>
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<TABLE>
<S> <C>
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.
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.
</TABLE>
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<PAGE> 91
<TABLE>
<S> <C>
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
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.
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.
</TABLE>
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<TABLE>
<S> <C>
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.
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 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.
</TABLE>
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<TABLE>
<S> <C>
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 stock, of relatively small
companies believed to have special investment value
and emerging growth companies regardless of size.
MERRILL LYNCH STRATEGIC DIVIDEND
FUND............................. Long-term total return from investment in dividend
paying common stocks 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.
</TABLE>
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<TABLE>
<S> <C>
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.
Class A Share Money Market Funds:
MERRILL LYNCH READY ASSETS TRUST... Preservation of capital, liquidity and the highest
possible current income consistent with the foregoing
objectives from the short-term money market securities
in which the 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.
</TABLE>
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<TABLE>
<S> <C>
Class B, Class C and Class D Share Money Market Funds:
MERRILL LYNCH GOVERNMENT FUND...... A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective is to provide
current income consistent with liquidity and security
of principal from investment in securities issued or
guaranteed by the U.S. Government, its agencies and
instrumentalities and in repurchase agreements secured
by such obligations.
MERRILL LYNCH INSTITUTIONAL FUND... A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective is to provide
maximum current income consistent with liquidity and
the maintenance of a high quality portfolio of money
market securities.
MERRILL LYNCH INSTITUTIONAL
TAX-EXEMPT FUND.................. A portfolio of Merrill Lynch Funds for Institutions
Series, a series fund, whose objective 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 objective 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 he is not otherwise subject to
backup withholding. See "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 term 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. 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 at any time
in accordance with the rules of the Commission. The Fund
45
<PAGE> 96
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 its income.
As discussed in the Fund's Prospectus, the Trust has established other
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 the Fund's taxable year, at least 50% of the value of its total
assets consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be qualified
to pay exempt-interest dividends to its Class A, Class B, Class C and Class D
shareholders (together, the "shareholders"). Exempt-interest dividends are
dividends or any part thereof paid by the Fund which are attributable to
interest on tax-exempt obligations and designated by the Trust as
exempt-interest dividends in a written notice mailed to the Fund's shareholders
within 60 days after the close of the Fund's taxable year. For this purpose, the
Fund will allocate interest from tax-exempt obligations (as well as ordinary
income, capital gains and tax preference items discussed below) among the Class
A, Class B, Class C and Class D shareholders according to a method (which it
believes is consistent with the Commission's exemptive order permitting the
issuance and sale of multiple classes of shares) that is based on the gross
income allocable to Class A, Class B, Class C and Class D shareholders during
the taxable year or such other method as the Internal Revenue Service may
prescribe. 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
46
<PAGE> 97
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 also will be exempt from
California personal 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 tax in states other than California will realize a lower after-tax
rate of return than California shareholders since the dividends distributed by
the Fund generally will not be exempt, to any significant degree, from income
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
personal income taxes. The Fund will allocate exempt-interest dividends among
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 of the Fund,
including exempt-interest dividends, may be subject to California franchise tax
if received by a corporate shareholder subject to such tax and may also be
subject to tax in states other than California and 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 corporate
franchise tax, should consult their tax advisers with respect to the application
of such taxes to an investment in the Fund, the receipt of Fund dividends and as
to their California tax situation in general.
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 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
47
<PAGE> 98
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 specific
date in one of such months, then such dividend will be treated for tax purposes
as being paid by the Fund and received by its shareholders on December 31 of the
year in which such dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies to
interest received on "private activity bonds" issued after August 7, 1986.
Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference," which could subject 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 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 the exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of 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 advisors concerning the applicability of the United States withholding tax.
48
<PAGE> 99
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividend 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 modified alternative minimum taxable income (computed without
regard to the alternative tax net operating loss deduction and the deduction for
the Environmental Tax) at a rate of $12 per $10,000 (0.12%) of alternative
minimum taxable income in excess of $2,000,000. The Environmental Tax is imposed
for taxable years beginning after December 31, 1986, and before January 1, 1996,
unless extended. The Environmental Tax is imposed even if the corporation is not
required to pay an alternative minimum tax because the corporation's regular
income tax liability exceeds its minimum tax liability. The Code provides,
however, that a RIC, such as the Fund, is not subject to the Environmental Tax.
However, exempt-interest dividends paid by the Fund that create alternative
minimum taxable income for corporate shareholders (as described above) may
subject corporate shareholders of the Fund to the Environmental Tax.
TAX TREATMENT OF FUTURES AND OPTIONS TRANSACTIONS
The Fund may 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,
49
<PAGE> 100
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 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, state, local
or foreign 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 and yield and tax-equivalent yield figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return and 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 the 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.
50
<PAGE> 101
Set forth below is the total return, yield and tax-equivalent yield
information for Class A, Class B, Class C and Class D shares of the Fund for the
period indicated.
<TABLE>
<CAPTION>
CLASS C
CLASS A SHARES CLASS B SHARES SHARES*
------------------------------ ------------------------------- --------------
REDEEMABLE REDEEMABLE
EXPRESSED AS VALUE OF A EXPRESSED AS A VALUE OF A EXPRESSED AS A
A PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE
BASED ON A $1,000 BASED ON A $1,000 BASED ON A
HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT HYPOTHETICAL
$1,000 THE END OF $1,000 THE END OF $1,000
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT
- ----------------------------------------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(including maximum applicable sales charge)
One year ended August 31, 1995.... 2.61% $1,026.10 2.35% $1,023.50
Inception (February 26, 1993) to
August 31, 1995................. 2.35% $1,060.00 2.78% $1,071.10
Inception (October 21, 1994) to
August 31, 1995................. 9.77%
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charge)
Year ended August 31, 1995........ 6.89% $1,068.90 6.35% $1,063.50
Year ended August 31, 1994........ (1.44)% $ 985.60 (1.93)% $ 980.70
Inception (February 26, 1993) to
August 31, 1993................. 4.81% $1,048.10 4.56% $1,045.60
Inception (October 21, 1994) to
August 31, 1995................. 9.35%
AGGREGATE TOTAL RETURN
(including maximum applicable sales charge)
Inception (February 26, 1993) to
August 31, 1995................. 6.00% $1,060.00 7.11% $1,071.10
Inception (October 21, 1994) to
August 31, 1995................. 8.35%
YIELD
30 days ended August 31, 1995..... 5.46% 5.19% 5.09%
TAX EQUIVALENT YIELD**
30 days ended August 31, 1995..... 7.58% 7.21% 7.07%
<CAPTION>
CLASS D SHARES*
-------------------------------
REDEEMABLE REDEEMABLE
VALUE OF A EXPRESSED AS A VALUE OF A
HYPOTHETICAL PERCENTAGE HYPOTHETICAL
$1,000 BASED ON A $1,000
INVESTMENT AT HYPOTHETICAL INVESTMENT AT
THE END OF $1,000 THE END OF
PERIOD THE PERIOD INVESTMENT THE PERIOD
- ---------------------------------- ------------- -------------- -------------
<S> <C> <C> <C>
One year ended August 31, 1995....
Inception (February 26, 1993) to
August 31, 1995.................
Inception (October 21, 1994) to
August 31, 1995................. $1,083.50 6.47% $1,055.40
Year ended August 31, 1995........
Year ended August 31, 1994........
Inception (February 26, 1993) to
August 31, 1993.................
Inception (October 21, 1994) to
August 31, 1995................. $1,093.50 9.94% $1,099.40
Inception (February 26, 1993) to
August 31, 1995.................
Inception (October 21, 1994) to
August 31, 1995................. $1,083.50 5.54% $1,055.40
30 days ended August 31, 1995..... 5.37%
30 days ended August 31, 1995..... 7.46%
</TABLE>
- ---------------
* 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%.
51
<PAGE> 102
In order to reflect the reduced sales charges in the case of Class A or
Class D shares, or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares", respectively, the total return data quoted by 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
charge or the waiver of sales charges, a lower amount of expenses may be
deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Declaration of Trust provides that the Trust shall be comprised of
separate Series each of which will consist of a separate portfolio which will
issue separate shares. The Trust is presently comprised of the Fund and 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 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 of beneficial
interest. 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 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 Fund and in the net assets of such Series upon liquidation or dissolution
remaining after satisfaction of outstanding liabilities, except that, as noted
above, expenses related to the account maintenance and/or distribution of the
Class B, Class C and Class D shares are borne solely by such class. There
normally will be no meeting of shareholders for the purposes of electing
Trustees unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders, at which time the Trustees
then in office will call a shareholders' meeting for the election of Trustees.
Shareholders may, in accordance with the terms of the Declaration of Trust,
cause a meeting of shareholders to be held for the purpose of voting on the
removal of Trustees. Also, the 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.
52
<PAGE> 103
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 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
(estimated at approximately $37,435) were paid by the Fund and are amortized
over a period not exceeding five years. The proceeds realized by the Manager (or
any subsequent holder) 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.................................. $14,204,187 $71,669,604 $1,778,027 $1,845,300
========== ========== ========= =========
Number of Shares Outstanding................ 1,472,276 7,427,977 184,456 191,127
========== ========== ========= =========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding).............................. $ 9.65 $ 9.65 $ 9.64 $ 9.65
Sales Charge (for Class A and Class D
shares: 4.00% of offering price (4.17% of
net asset value per share))*.............. .40 ** ** .40
----------- ----------- ---------- ----------
Offering Price.............................. $ 10.05 $ 9.65 $ 9.64 $ 10.05
========== ========== ========= =========
</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.
53
<PAGE> 104
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Fund. The independent
auditors are responsible for auditing the annual financial statements of the
Fund.
CUSTODIAN
The Bank of New York, 90 Washington Street 12th Floor, New York, New York
10286, acts as the custodian of the Fund's assets. The custodian is responsible
for safeguarding and controlling the Fund's cash and securities, handling the
delivery of securities and collecting interest on the Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Trust'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 shareholders of the Fund at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all of the information set forth in the Registration Statement and the exhibits
relating thereto, which the Trust has filed with the Commission, Washington,
D.C., under the Securities Act 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 any such person's private property for the satisfaction of any obligation
or claim of the Trust but the "Trust Property" (as defined in the Declaration)
only shall be liable.
To the knowledge of the Trust, no person or entity owned beneficially 5% or
more of the Fund's shares on December 1, 1995.
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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
Program --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
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indebtedness. "Full cash value" is defined as "the County Assessor's valuation
of real property as shown on the 1975-76 tax bill under "full cash value" or,
thereafter, the appraised value of real property when purchased, newly
constructed, or a change in ownership has occurred after the 1975 assessment."
The "full cash value" is subject to annual adjustment to reflect increases (not
to exceed 2%) or decreases in the consumer price index or comparable local data,
or to reflect reductions in property value caused by damage, destruction or
other factors.
Article XIIIB of the California Constitution limits the amount of
appropriations of the State and of local governments to the amount of
appropriations of the entity for the prior year, adjusted for changes in the
cost of living, population and the services that the local government has
financial responsibility for providing. To the extent the revenues of the State
and/or local government exceed its appropriations, the excess revenues must be
rebated to the public either directly or through a tax decrease. Expenditures
for voter-approved debt services are not included in the appropriations limit.
In 1986, California voters approved an initiative statute known as
Proposition 62. This initiative (i) required that any tax for general
governmental purposes imposed by local governments be approved by a majority of
the electorate of the government entity, (ii) required that any special tax
(defined as taxes levied for other than general government purposes) imposed by
a local government entity be approved by a two-thirds vote of the voters within
that jurisdiction, (iii) restricted the use of revenues from a special tax to
the purposes or for the service for which the special tax is imposed, (iv)
prohibited the imposition of ad valorem taxes on real property by local
governmental entities except as permitted by Article XIIIA, (v) prohibited the
imposition of transaction taxes and sales taxes on the sale of real property by
local governments, (vi) required that any tax imposed by a local government on
or after August 1, 1985 be ratified by a majority vote of the electorate within
two years of the adoption of the initiative or be terminated by November 15,
1988, (vii) required that, in the event a local government fails to comply with
the provisions of this measure, a reduction in the amount of property tax
revenues allocated to such local government 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
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amount which, as a percentage of the State general fund revenues which may be
appropriated pursuant to Article XIIIB, equals the percentage of such State
general fund revenues appropriated for school districts and community college
districts, respectively, in fiscal year 1986-87 or (ii) the amount required to
ensure that the total allocations to school districts and community college
districts from the State general fund proceeds of taxes appropriated pursuant to
Article XIIIB and allocated local proceeds of taxes shall not be less than the
total amount from these sources in the prior year, adjusted for increases in
enrollment and adjusted for changes in the costs of living pursuant to the
provisions of Article XIIIB. The initiative permits the enactment of
legislation, by a two-thirds vote, to suspend the minimum funding requirement
for one year. As a result of Proposition 98, funds that the State might
otherwise make available to its political subdivisions may be allocated instead
to satisfy such minimum funding level.
On November 3, 1992, voters approved an initiative statute, Proposition
163, which exempts certain food products, including candy and other snack foods,
from California's sales tax. The sales tax had been broadened to include those
items as part of the 1991-92 budget legislation. The State Legislative Analyst
estimates a revenue reduction of $300 million per year ($200 million in
1992-93).
Article XIIIA, Article XIIIB an 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.
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.
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Pending Litigation. The State is a party to numerous legal proceedings,
many of which normally occur in governmental operations. Some of the
more-significant lawsuits pending against the State are described herein.
The State is a defendant in 12 lawsuits involving the exclusion of small
business stock gains from preference tax and in some cases, also from taxation.
The lead cases are Mervin Morris v. Franchise Tax Board and James Lennane v.
Franchise Tax Board. The majority of the remaining cases had been deferred
pending the outcome of the Morris and Lennane cases. The Supreme Court has ruled
against the State in Lennane but has not yet ruled in Morris. The State 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.
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One of the features of the 1994-95 Budget Act is a 2.3 percent reduction in
AFDC payments. in Welch v. Anderson, on August 19, 1994, the San Francisco
Superior Court issued a preliminary injunction against the California Director
of Social Services to prevent the 2.3 percent AFDC cuts from becoming effective
September 1, 1994. While September cuts were already in process and could not be
halted, the court ordered the cuts to be restored. The preliminary injunction
has been 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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<PAGE> 114
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'
Retirements System, et al. v. Pete Wilson, Governor, at 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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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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The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
<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 obligations;
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 or principal payments are not made on the date due even if
the applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The "D" rating also
will be used upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
</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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DESCRIPTION OF STANDARD & POOR'S CORPORATE BOND RATINGS
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and to repay principal and differs from the
highest rated issues only in small degree. Debt rated "A" has a strong capacity
to pay interest and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
debt of a higher-rated category. Debt rated "BBB" is regarded as having an
adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher-rated categories.
The ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
<TABLE>
<C> <S>
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 and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
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<PAGE> 119
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment.
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 A very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
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.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
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Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for any 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
Stable ,
Declining
Uncertain '
</TABLE>
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Credit trend indicators are not predictions that any rating change will
occur, and have a longer-term time frame than issues placed on FitchAlert.
<TABLE>
<S> <C>
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.
</TABLE>
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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APPENDIX III
PORTFOLIO INSURANCE
Set forth below is further information with respect to the mutual fund
insurance policies (the "Policies") which the Fund may obtain from several
insurance companies with respect to insured Municipal Bonds held by the Fund.
The Fund has no obligation to obtain any such Policies and the terms of any
Policies actually obtained may vary significantly from the terms described
below.
In determining eligibility for insurance, insurance companies will apply
their own standards which correspond generally to the standards they normally
use in establishing the insurability of new issues of Municipal Bonds and which
are not necessarily the criteria which would be used in regard to the purchase
of such bonds of the Fund. The Policies do not insure (i) municipal securities
ineligible for insurance and (ii) municipal securities no longer owned by the
Fund.
The Policies do not guarantee the market value of the insured Municipal
Bonds or the value of the shares of the Fund. In addition, if the provider of an
original issuance insurance policy is unable to meet its obligations under such
policy or if the rating assigned to the insurance claims-paying ability of any
such insurer deteriorates, the insurance company will not have any obligation to
insure any issue held by the Fund which is adversely affected by either of the
above-described events. In addition to the payment of premiums, the Policies may
require that the Fund notify the insurance company as to all Municipal Bonds in
the Fund's portfolio and permit the insurance company to audit their records.
The insurance premiums will be payable monthly by the Fund in accordance with a
premium schedule to be furnished by the insurance company at the time the
Policies are issued. Premiums are based upon the amounts covered and the
composition of the portfolio.
The insurance companies will have insurance claims-paying ability ratings
of AAA from Standard & Poor's Corporation ("S&P") and Aaa from Moody's Investors
Service, Inc. ("Moody's").
An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by S&P.
Capacity to honor insurance contracts is adjudged by S&P to be extremely strong
and highly likely to remain so over a long period of time. A Moody's insurance
claims-paying ability rating is an opinion of the ability of an insurance
company to repay punctually senior policyholder obligations and claims. An
insurer with an insurance claims-paying ability rating of Aaa is adjudged by
Moody's to be of the best quality. In the opinion of Moody's, the policy
obligations of an insurance company with an insurance claims-paying ability
rating of Aaa carry the smallest degree of credit risk and, while the financial
strength of these companies is likely to change, such changes as can be
visualized are most unlikely to impair the company's fundamentally strong
position.
An insurance claims-paying ability rating by S&P or Moody's does not
constitute an opinion on any specific contract in that such an opinion can only
be rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take into account deductibles,
surrender or cancellation penalties or the timeliness of payment; nor does it
address the ability of a company to meet nonpolicy obligations (i.e., debt
contracts).
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The assignment of ratings by S&P or Moody's to debt issues that are fully
or partially supported by insurance policies, contracts, or guarantees is a
separate process from the determination of claims-paying ability ratings. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination for such debt issues.
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INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
MERRILL LYNCH CALIFORNIA INSURED 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 Insured 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 two-year period then ended and
for the period February 26, 1993 (commencement of operations) to August 31,
1993. 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 broker. 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 Insured 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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<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California--93.5%
<S> <S> <C> <S> <C>
AAA Aaa $ 1,000 Anaheim, California, Public Financing Authority, Tax Allocation Revenue
Bonds, RITES, 8.745% due 12/28/2018 (d)(e) $ 1,081
AAA Aaa 3,920 Brea, California, Redevelopment Agency, Tax Allocation Refunding Bonds
(Redevelopment Project A-B), 6.125% due 8/01/2013 (d) 3,991
AAA Aaa 1,290 California Fairs Financing Authority Revenue Bonds, 6.50% due 7/01/2011 (f) 1,355
California Health Facilities Financing Authority Revenue Bonds, Series A:
BB Ba 2,000 Refunding (Good Samaritan Health System), 7.50% due 5/01/2015 2,013
AAA Aaa 2,000 (Scripps Memorial Hospital), 6.375% due 10/01/2022 (d) 2,046
AA- Aa 2,000 California HFA, Home Mortgage Revenue Bonds, AMT, Series F-1, 7% due 8/01/2026 2,086
A1 VMIG1++ 300 California Pollution Control Financing Authority, PCR (Southern California
Edison), VRDN, Series A, 3.45% due 2/28/2008 (a) 300
NR* P1 100 California Pollution Control Financing Authority, Resource Recovery Revenue
Refunding Bonds (Ultra Power Malaga Project), VRDN, AMT, Series A, 3.55%
due 4/01/2017 (a) 100
A1+ VMIG1++ 400 California Pollution Control Financing Authority, Solid Waste Disposal
Revenue Bonds (Shell Oil Co.--Martinez Project), VRDN, AMT, Series B,
3.60% due 12/01/2024 (a) 400
California State, Public Works Board, Lease Revenue Bonds, Series A:
A- A 2,000 (Department of Corrections--Monterey County), 7% due 11/01/2019 2,140
AAA Aaa 4,000 (Various University of California Projects), 6.40% due 12/01/2016 (b) 4,141
A1 VMIG1++ 100 California Statewide Community Development Authority Revenue Bonds, COP
(Sutter Health Obligation Group), VRDN, 3.30% due 7/01/2015 (a)(b) 100
AAA Aaa 2,360 Central Coast Water Authority, California, Revenue Bonds (State Water
Project Regional Facilities), 6.50% due 10/01/2014 (b) 2,468
AAA Aaa 2,000 Cerritos, California, Public Financing Authority, Revenue Refunding Bonds
(Los Coyotes Redevelopment Project Loan), Series A, 6.50% due 11/01/2023 (b) 2,178
AAA Aaa 1,200 Cucamonga County, California, Water District Facilities Refinancing Bonds,
COP, 6.50% due 9/01/2022 (c) 1,238
AAA Aaa 2,000 Cupertino, California, Unified School District, Series A, 5.75% due
8/01/2020 (c) 1,948
AAA Aaa 4,000 El Cajon, California, Redevelopment Agency, Tax Allocation Revenue Bonds
(El Cajon Redevelopment Project), 6.60% due 10/01/2022 (b) 4,202
AAA Aaa 2,235 Eureka, California, Public Financing Authority, Tax Allocation Revenue
Refunding Bonds (Eureka Redevelopment Projects), 6.25% due 11/01/2011 (f) 2,325
AAA Aaa 2,500 Fresno, California, Sewer Revenue Bonds (Fowler Avenue Project), Series A,
6.25% due 8/01/2011 (b) 2,585
</TABLE>
PORTFOLIO ABBREVIATIONS
To simplify the listings of Merrill Lynch California Insured
Municipal Bond Fund's portfolio holdings in the Schedule of
Investments, we have abbreviated the names of many of the securities
according to the list below and at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
PCR Pollution Control Revenue Bonds
RITES Residual Interest Tax-Exempt Securities
RITR Residual Interest Trust Receipts
UT Unlimited Tax
VRDN Variable Rate Demand Notes
77
<PAGE> 128
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded)
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
California (concluded)
<S> <S> <C> <S> <C>
AAA Aaa $ 2,500 Industry, California, Urban Development Agency, Revenue Refunding Bonds
(Transportation District Industrial Redevelopment Project 2), 6.50% due
11/01/2016 (d) $ 2,632
AA- Aa 2,000 Los Angeles, California, Department of Water and Power, Electric Plant
Revenue Bonds, Registered RITR, 8.522% due 2/01/2020 (e) 2,075
AAA Aaa 2,000 Los Angeles, California, Harbor Department Revenue Bonds, AMT, Series B,
6.625% due 8/01/2019 (b) 2,094
Los Angeles, California, Wastewater System Revenue Bonds:
AAA Aaa 3,235 Refunding, Series A, 5.70% due 6/01/2020 (d) 3,102
AAA Aaa 1,000 Series B, 6.25% due 6/01/2012 (b) 1,026
AAA Aaa 2,000 Los Angeles County, California, COP (Correctional Facilities Project),
6.50% due 9/01/2013 (d) 2,070
AAA Aaa 1,320 Los Angeles County, California, Transportation Commission, Sales Tax
Revenue Bonds, Series A, 6.75% due 7/01/2001 (c)(g) l,496
AAA Aaa 1,000 Mesa, California, Consolidated Water District, COP (Water Project), 6.375%
due 3/15/2012 (c) 1,040
AAA Aaa 2,500 Mountain View, California, Capital Improvements Financing Authority
Revenue Bonds (City Hall Community Theatre), 6.50% due 8/01/2016 (d) 2,595
AAA Aaa 3,500 Northern California Public Power Agency, Revenue Refunding Bonds
(Hydroelectric Project No. 1), Series A, 6.25% due 7/01/2012 (d) 3,610
AAA Aaa 3,000 Orchard, California, School District, GO, UT, Series A, 6.50% due
8/01/2019 (c) 3,142
AAA Aaa 2,000 Poway, California, Redevelopment Agency, Tax Allocation, Refunding Bonds
(Parguay Redevelopment Project), 5.75% due 12/15/2026 (c) 1,921
Sacramento, California, Municipal Utility District, Electric Revenue
Bonds (d):
AAA Aaa 1,500 Refunding, Series G, 6.50% due 9/01/2013 1,647
AAA Aaa 3,000 Series B, 6.375% due 8/15/2022 3,079
San Francisco, California, City and County Airport Commission,
International Airport, Revenue Refunding Bonds, Second Series:
AAA Aaa 1,500 First Issue, 6.50% due 5/01/2013 (b) 1,577
AAA Aaa 2,500 Second Issue, 6.75% due 5/01/2020 (d) 2,679
AAA Aaa 2,235 San Mateo County, California, Joint Powers Financing Authority, Lease
Revenue Refunding Bonds (Capital Projects Program), 6.50% due 7/01/2015 (d) 2,432
AAA Aaa 2,500 Stockton, California, COP, Revenue Bonds (Wastewater Treatment Plant
Expansion), Series A, 6.70% due 9/01/2014 (c) 2,673
AAA Aaa 1,500 Union City, California, Community Redevelopment Agency, Tax Allocation
Revenue Bonds (Community Redevelopment Project), 5.85% due 10/01/2023 (b) 1,470
University of California Revenue Bonds (Multiple Purpose Projects),
Series D (d):
AAA Aaa 2,235 6.30% due 9/01/2015 2,290
AAA Aaa 2,250 6.375% due 9/01/2019 2,310
Total Investments (Cost--$82,510)--93.5% 83,657
Other Assets Less Liabilities--6.5% 5,840
-------
Net Assets--100.0% $89,497
=======
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate
in effect at August 31, 1995.
(b)AMBAC Insured.
(c)FGIC Insured.
(d)MBIA Insured.
(e)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.
(f)Capital Guaranty.
(g)Prerefunded.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
78
<PAGE> 129
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statement of Assets and Liabilities as of August 31, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$82,510,393) (Note 1a) $ 83,656,783
Cash 63,181
Receivables:
Securities sold $ 5,819,174
Interest 1,512,262
Beneficial interest sold 369,856 7,701,292
------------
Deferred organization expenses (Note 1e) 28,497
Prepaid expenses and other assets (Note 1e) 46,443
------------
Total assets 91,496,196
------------
Liabilities: Payables:
Securities purchased 1,580,263
Beneficial interest redeemed 165,234
Dividends to shareholders (Note 1f) 123,955
Distributor (Note 2) 30,686
Investment adviser (Note 2) 11,144 1,911,282
------------
Accrued expenses and other liabilities 87,796
------------
Total liabilities 1,999,078
------------
Net Assets: Net assets $ 89,497,118
============
Net Assets Class A Shares of beneficial interest, $.10 par value,
Consist of: unlimited number of shares authorized $ 147,227
Class B Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 742,798
Class C Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 18,446
Class D Shares of beneficial interest, $.10 par value,
unlimited number of shares authorized 19,113
Paid-in capital in excess of par 92,193,753
Accumulated realized capital losses on investments--net (Note 5) (4,404,870)
Accumulated distributions in excess of realized capital
gains--net (365,739)
Unrealized appreciation on investments--net 1,146,390
------------
Net assets $ 89,497,118
============
Net Asset Value: Class A--Based on net assets of $14,204,187 and 1,472,276 shares
of beneficial interest outstanding $ 9.65
============
Class B--Based on net assets of $71,669,604 and 7,427,977 shares
of beneficial interest outstanding $ 9.65
============
Class C--Based on net assets of $1,778,027 and 184,456 shares
of beneficial interest outstanding $ 9.64
============
Class D--Based on net assets of $1,845,300 and 191,127 shares
of beneficial interest outstanding $ 9.65
============
See Notes to Financial Statements.
</TABLE>
79
<PAGE> 130
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended
August 31, 1995
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 5,213,964
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 478,480
Account maintenance and distribution fees--Class B (Note 2) 354,796
Registration fees (Note 1e) 68,249
Professional fees 62,500
Accounting services (Note 2) 46,158
Transfer agent fees--Class B (Note 2) 36,271
Printing and shareholder reports 25,439
Custodian fees 14,513
Amortization of organization expenses (Note 1e) 11,443
Transfer agent fees--Class A (Note 2) 6,335
Pricing fees 5,408
Trustees' fees and expenses 5,089
Account maintenance and distribution fees--Class C (Note 2) 3,740
Account maintenance fees--Class D (Note 2) 696
Transfer agent fees--Class C (Note 2) 314
Transfer agent fees--Class D (Note 2) 297
Other 4,909
------------
Total expenses before reimbursement 1,124,637
Reimbursement of expenses (Note 2) (354,675)
------------
Total expenses after reimbursement 769,962
------------
Investment income--net 4,444,002
------------
Realized & Realized loss on investments--net (2,217,617)
Unrealized Change in unrealized depreciation on investments--net 2,985,447
Gain (Loss) on ------------
Investments Net Increase in Net Assets Resulting from Operations $ 5,211,832
- --Net (Notes 1b, ============
1d & 3):
See Notes to Financial Statements.
</TABLE>
80
<PAGE> 131
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 4,444,002 $ 4,410,272
Realized loss on investments--net (2,217,617) (1,974,493)
Change in unrealized appreciation/depreciation on investments--net 2,985,447 (4,299,648)
------------ ------------
Net increase (decrease)in net assets resulting from operations 5,211,832 (1,863,869)
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (814,541) (874,505)
Shareholders Class B (3,562,702) (3,535,767)
(Note 1f): Class C (29,658) --
Class D (37,101) --
In excess of realized gain on investments--net:
Class A -- (67,794)
Class B -- (297,945)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (4,444,002) (4,776,011)
------------ ------------
Beneficial Net increase (decrease) in net assets derived from beneficial
Interest interest transactions (2,198,874) 7,602,289
Transactions ------------ ------------
(Note 4):
Net Assets: Total increase (decrease) in net assets (1,431,044) 962,409
Beginning of year 90,928,162 89,965,753
------------ ------------
End of year $ 89,497,118 $ 90,928,162
============ ============
See Notes to Financial Statements.
</TABLE>
81
<PAGE> 132
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Financial Highlights
Class A
For the
Period
The following per share data and ratios have been derived Feb. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1995 1994 1993
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.54 $ 10.23 $ 10.00
Operating -------- -------- --------
Performance: Investment income--net .52 .51 .24
Realized and unrealized gain (loss) on investments--net .11 (.65) .23
-------- -------- --------
Total from investment operations .63 (.14) .47
-------- -------- --------
Less dividends and distributions:
Investment income--net (.52) (.51) (.24)
In excess of realized gain on investments--net -- (.04) --
-------- -------- --------
Total dividends and distributions (.52) (.55) (.24)
-------- -------- --------
Net asset value, end of period $ 9.65 $ 9.54 $ 10.23
======== ======== ========
Total Investment Based on net asset value per share 6.89% (1.44%) 4.81%+++
Return:** ======== ======== ========
Ratios to Expenses, net of reimbursement .47% .33% .14%*
Average ======== ======== ========
Net Assets: Expenses .87% .96% 1.06%*
======== ======== ========
Investment income--net 5.53% 5.16% 4.80%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 14,204 $ 15,946 $ 17,105
Data: ======== ======== ========
Portfolio turnover 61.53% 93.04% 74.26%
======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
82
<PAGE> 133
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Financial Highlights (continued)
Class B
For the
Period
The following per share data and ratios have been derived Feb. 26,
from information provided in the financial statements. For the Year 1993++ to
Ended August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1995 1994 1993
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.54 $ 10.23 $ 10.00
Operating -------- -------- --------
Performance: Investment income--net .48 .46 .22
Realized and unrealized gain (loss) on investments--net .11 (.65) .23
-------- -------- --------
Total from investment operations .59 (.19) .45
-------- -------- --------
Less dividends and distributions:
Investment income--net (.48) (.46) (.22)
In excess of realized gain on investments--net -- (.04) --
-------- -------- --------
Total dividends and distributions (.48) (.50) (.22)
-------- -------- --------
Net asset value, end of period $ 9.65 $ 9.54 $ 10.23
======== ======== ========
Total Investment Based on net asset value per share 6.35% (1.93%) 4.56%+++
Return:** ======== ======== ========
Ratios to Expenses, excluding account maintenance and
Average distribution fees and net of reimbursement .47% .33% .14%*
Net Assets: ======== ======== ========
Expenses, net of reimbursement .97% .83% .64%*
======== ======== ========
Expenses 1.38% 1.46% 1.56%*
======== ======== ========
Investment income--net 5.02% 4.67% 4.31%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 71,670 $ 74,982 $ 72,861
Data: ======== ======== ========
Portfolio turnover 61.53% 93.04% 74.26%
======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
83
<PAGE> 134
FINANCIAL INFORMATION (concluded)
<TABLE>
<CAPTION>
Financial Highlights (concluded)
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. October 21, 1994++ to
August 31, 1995
Increase (Decrease) in Net Asset Value: Class C Class D
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 9.19 $ 9.19
Operating -------- --------
Performance: Investment income--net .39 .44
Realized and unrealized gain on investments--net .45 .46
-------- --------
Total from investment operations .84 .90
-------- --------
Less dividends from investment income--net (.39) (.44)
-------- --------
Net asset value, end of period $ 9.64 $ 9.65
======== ========
Total Investment Based on net asset value per share 9.35%+++ 9.94%+++
Return:** ======== ========
Ratios to Expenses, excluding account maintenance and distribution fees and
Average net of reimbursement .49%* .47%*
Net Assets: ======== ========
Expenses, net of reimbursement 1.09%* .57%*
======== ========
Expenses 1.49%* .97%*
======== ========
Investment income--net 4.76%* 5.33%*
======== ========
Supplemental Net assets, end of period (in thousands) $ 1,778 $ 1,845
Data: ======== ========
Portfolio turnover 61.53% 61.53%
======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
84
<PAGE> 135
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch California Insured 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 non-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 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 valu-
ations 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) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
85
<PAGE> 136
NOTES TO FINANCIAL STATEMENTS (concluded)
(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.
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 average daily
net assets in excess thereof. FAM's obligation to reimburse the Fund
is limited to the amount of the management fee. No fee payment will
be made to FAM during any fiscal year which will cause such expenses
to exceed expense limitations at the time of such payment. For the
year ended August 31, 1995, FAM earned fees of $478,480, of which
$354,675 was voluntarily waived.
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 $1,321 $13,608
Class D $2,544 $25,943
For the year ended August 31, 1995, MLPF&S received contingent
deferred sales charges of $347,212 and $76 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.
86
<PAGE> 137
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1995 were $50,756,645 and $52,098,785,
respectively.
Net realized and unrealized gains (losses) as of August 31, 1995
were as follows:
Realized Unrealized
Losses Gains
Long-term investments $ (1,941,023) $ 1,146,390
Financial futures contracts (276,594) --
------------ -------------
Total $ (2,217,617) $ 1,146,390
============ =============
As of August 31, 1995, net unrealized appreciation for Federal
income tax purposes aggregated $1,146,390, of which $1,860,991
related to appreciated securities and $714,601 related to
depreciated securities. The aggregate cost of investments at August
31, 1995 for Federal income tax purposes was $82,510,393.
4. Beneficial Interest Transactions:
Net increase (decrease) in net assets derived from beneficial
interest transactions was $(2,198,874) and $7,602,289 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 182,796 $ 1,683,426
Shares issued to share-
holders in reinvestment
of dividends 33,346 310,570
----------- ------------
Total issued 216,142 1,993,996
Shares redeemed (415,410) (3,820,473)
----------- ------------
Net decrease (199,268) $ (1,826,477)
=========== ============
Class A Shares for the Year Dollar
Ended August 31, 1994 Shares Amount
Shares sold 301,766 $ 3,002,096
Shares issued to share-
holders in reinvestment of
dividends and distributions 39,457 389,777
----------- ------------
Total issued 341,223 3,391,873
Shares redeemed (342,542) (3,318,587)
----------- ------------
Net increase (decrease) (1,319) $ 73,286
=========== ============
Class B Shares for the Year Dollar
Ended August 31, 1995 Shares Amount
Shares sold 1,704,924 $ 15,799,247
Shares issued to share-
holders in reinvestment
of dividends 174,843 1,629,535
----------- ------------
Total issued 1,879,767 17,428,782
Shares redeemed (2,311,348) (21,348,197)
----------- ------------
Net decrease (431,581) $ (3,919,415)
=========== ============
Class B Shares for the Year Dollar
Ended August 31, 1994 Shares Amount
Shares sold 1,864,973 $ 18,580,245
Shares issued to share-
holders in reinvestment of
dividends and distributions 198,811 1,962,586
----------- ------------
Total issued 2,063,784 20,542,831
Shares redeemed (1,329,588) (13,013,828)
----------- ------------
Net increase 734,196 $ 7,529,003
=========== ============
Class C Shares for the Period Dollar
Oct. 21, 1994++ to Aug. 31, 1995 Shares Amount
Shares sold 247,131 $ 2,347,801
Shares issued to share-
holders in reinvestment
of dividends 1,481 14,182
----------- ------------
Total issued 248,612 2,361,983
Shares redeemed (64,156) (608,073)
----------- ------------
Net increase 184,456 $ 1,753,910
=========== ============
++Commencement of Operations.
Class D Shares for the Period Dollar
Oct. 21, 1994++ to Aug. 31, 1995 Shares Amount
Shares sold 308,159 $ 2,879,606
Shares issued to share-
holders in reinvestment
of dividends 1,745 16,707
----------- ------------
Total issued 309,904 2,896,313
Shares redeemed (118,777) (1,103,205)
----------- ------------
Net increase 191,127 $ 1,793,108
=========== ============
++Commencement of Operations.
5. Capital Loss Carryforward:
At August 31, 1995, the Fund had a net capital loss carryforward of
approximately $2,950,000, all of which expires in 2003. This amount
will be available to offset like amounts of any future taxable
gains.
87
<PAGE> 138
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies............ 2
Portfolio Insurance........................ 5
Description of Municipal Bonds and Temporary
Investments................................ 7
Description of Municipal Bonds............. 7
Description of Temporary Investments....... 8
Repurchase Agreements...................... 10
Financial Futures Transactions and
Options.................................. 10
Investment Restrictions...................... 15
Management of the Trust...................... 17
Trustees and Officers...................... 17
Compensation of Trustees................... 19
Management and Advisory Arrangements....... 19
Purchase of Shares........................... 21
Alternative Sales Arrangements............. 21
Initial Sales Charge Alternatives--Class A
and Class D Shares....................... 22
Reduced Initial Sales Charges.............. 22
Distribution Plans......................... 25
Limitations on the Payment of Deferred
Sales Charges............................ 26
Redemption of Shares......................... 27
Deferred Sales Charges--Class B and Class C
Shares................................... 27
Portfolio Transactions....................... 28
Determination of Net Asset Value............. 29
Shareholder Services......................... 30
Investment Account......................... 30
Automatic Investment Plans................. 31
Automatic Reinvestment of Dividends and
Capital Gains Distributions.............. 31
Systematic Withdrawal Plans--Class A and
Class D Shares........................... 31
Exchange Privilege......................... 32
Distributions and Taxes...................... 46
Environmental Tax.......................... 49
Tax Treatment of Futures and Options
Transactions............................. 49
Performance Data............................. 50
General Information.......................... 52
Description of Shares...................... 52
Computation of Offering Price Per Share.... 53
Independent Auditors....................... 54
Custodian.................................. 54
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
Appendix III
Portfolio Insurance........................ 74
Independent Auditors' Report................. 76
Financial Statements......................... 77
Code #16576-1295
</TABLE>
[MERRILL LYNCH LOGO]
MERRILL LYNCH
CALIFORNIA INSURED
MUNICIPAL BOND FUND
MERRILL LYNCH CALIFORNIA
MUNICIPAL SERIES TRUST
STATEMENT OF
ADDITIONAL
INFORMATION
December 29, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 139
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> 140
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 two-year period
ended August 31, 1995 and for the period February 26, 1993
(commencement of operations) to August 31, 1993.
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 two-year period
ended August 31, 1995 and for the period February 26, 1993
(commencement of operations) to August 31, 1993.
(b) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------
<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).
</TABLE>
<TABLE>
<S> <C> <C>
(c) -- Amendment to Declaration of Trust, dated October 3, 1988(a).
(d) -- Instrument establishing Merrill Lynch California Insured Municipal Bond Fund
(the "Fund") as a Series of Registrant.(a)
(e) -- Instrument establishing Class A shares and Class B shares of beneficial
interest of the Fund(a).
(f) -- Amendment to Declaration of Trust, dated October 17, 1994 and instrument
establishing Class C and Class D shares of beneficial interest.(f)
2 -- By-Laws of the 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 the Registrant and Fund Asset Management,
L.P.(a).
(b) -- Supplement to Management Agreement between Registrant and Fund Asset
Management, L.P.(e)
6(a) -- Form of Revised Class A Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected Dealers
Agreement).(e)
(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).(e)
(d) -- Form of Class D Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc. (including Form of Selected Dealers
Agreement).(e)
(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.(d)
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, Inc.(a).
14 -- None.
</TABLE>
C-1
<PAGE> 141
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------
<S> <C> <C>
15(a) -- Amended and Restated Class B Shares Distribution Plan and Class B Shares
Distribution Plan Sub-Agreement(d).
(b) -- Form of Class C Shares Distribution Plan and Class C Shares Distribution
Plan Sub-Agreement of the Registrant.(e)
(c) -- Form of Class D Shares Distribution Plan and Class D Shares Distribution
Plan Sub-Agreement of the Registrant.(e)
16(a) -- Schedule of computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class A Shares(c).
(b) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class B Shares(c).
(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, VII, IX, X
and XI of the Registrant's Declaration of Trust, as amended, filed as
Exhibits 1(a), 1(b), 1(c) and 1(f) with Post-Effective Amendment No. 4 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) and 1(e), respectively,
with Post-Effective Amendment No. 4 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. 4 to the Registration Statement.
(c) Filed on July 23, 1993 as an Exhibit to Post-Effective Amendment No. 1 to
the Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933.
(d) Filed on December 23, 1993 as an Exhibit to Post-Effective Amendment No. 2
to the Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933.
(e) Filed on October 13, 1994 as an Exhibit to Post-Effective Amendment No. 3 to
the Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933.
(f) Incorporated by reference to Exhibit 1(g) to Post-Effective Amendment No. 11
on Form N-1A under the Securities Act of 1933 filed on December 29, 1995,
relating to shares of Merrill Lynch California Municipal Bond Fund series of
the Registrant (File No. 2-96581).
C-2
<PAGE> 142
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........... 235
Class B shares of beneficial interest, par value $0.10 per share........... 1,792
Class C shares of beneficial interest, par value $0.10 per share........... 66
Class D shares of beneficial interest, par value $0.10 per share........... 57
</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.
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.
C-3
<PAGE> 143
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 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.
C-4
<PAGE> 144
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 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
C-5
<PAGE> 145
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.
</TABLE>
<TABLE>
<S> <C> <C>
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> 146
<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 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>
(2) (3)
(1) 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
Vice President and Assistant
Sharon Creveling.............. 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-7
<PAGE> 147
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-8
<PAGE> 148
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
- --------------------------------------------- ------------------------ ------------------
<C> <S> <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> 149
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 Insured
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> 150
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<S> <C> <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 Insured 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)..........................................
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(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
Received: Mar 20 1985
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 ", "Assiqment", "Commission",
"Interested Person", "Majority Shareholder Vote" (the 67% or 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 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 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.
"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 the 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 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 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
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 and the
regulations promulgated thereunder, as amended from time to time.
3.
<PAGE> 4
ARTICLE II
Trustees
2.1. Number and Qualification. The number of Trustees shall be fixed
from time to time by written instrument signed by a majority of the Trustees
then in office, provided, however, that the number of Trustees shall in no
event be less than three or more than fifteen (except prior to the first public
offering of Shares). Any vacancy created by an increase in Trustees may, to
the extent permitted by the 1940 Act, be filled by the appointment of an
individual having the qualifications described in this Article made by a
written instrument signed by a majority of the Trustees then in office. Any
such appointment shall not become effective, however, until the individual
named in the written instrument of appointment shall have accepted in writing
such appointment and agreed in writing to be bound by the terms of this
Declaration of Trust. No reduction in the number of Trustees shall have the
effect of removing any Trustee from office 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 termination as hereinafter provided; except (a)
that any Trustee may resign his trust by written instrument signed by him and
delivered to the other Trustees, which shall take effect upon such delivery or
upon such later date as is specified therein; (b) that any Trustee may 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 re-
tired 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. The term of office of a Trustee shall terminate 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 Declar-
ation 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, to the extent permitted by the 1940 Act, a majority of the
Trustees continuing in office acting by written instrument or instruments,
may fill such vacancy, and any Trustee so elected by the Trustees shall
hold-office as provided in this Declaration.
2.4. Meetings. Meetings of the Trustees shall be held from time to time
upon the call of the Chairman, if any, the President, the Secretary or any
two Trustees. Regular meetings of the Trustees may be held without call
or notice at a time and place fixed by the By-Laws or by resolution of the
Trustees. Notice of any other meeting shall be mailed or otherwise given
not less than 48 hours before the meeting but may be waived in writing by
any Trustee either before or after such meeting. The attendance of a
Trustee at a meeting shall constitute a waiver of notice of such meeting
except where a Trustee attends a meeting for the express purpose of
objecting to the transaction of any business on the ground that the
meeting has not been lawfully called or convened. The Trustees may act
with or without a meeting. A quorum for all meetings of the Trustees
shall be a majority of the Trustees. Unless provided otherwise in this
Declaration 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 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 committee of the Trustees,
Trustees who are Interested Persons of the Trust within the meaning of
Section 1.2 hereof or otherwise interested in any action to be taken may
be counted for quorum purposes under 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 communications equipment by
means of which all persons participating in the meeting can hear each
other and participation in a meeting pursuant to such communications
systems shall constitute presence in person at such meeting.
2.5. Officers. The Trustees shall annually elect a President, a Sec-
retary 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 may 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 any 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 Govern-
ment or its agencies or instrumentalities, or international instru-
mentalities, 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, a associations or
corporations to exercise any of said rights, powers and privileges in re-
spect 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 obigations maturing be-
fore the possible termination of the Trust or any Series, nor shall the
Trustees be limited by any law limiting the investments which may be made
by fiduciaries.
7.
<PAGE> 8
3.3. Leqal 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 my 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 may 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 title 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, re ire, 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 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 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 Jr 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 brokerage services, as they in good faith may deem
reasonable and reimbursement for expenses reasonably incurred by
themselves on behalf of the Trust.
3.9. Miscellaneous Powers. The Trustees shall have the power to:
(a) employ or contract with the 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, employees, 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, administrator, 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) determine and change the fiscal year of the
Trust and the method in which its accounts shall be kept; and (i) adopt a
seal for the Trust but the absence of such seal shall not impair the
validity of any instrument executed on behalf of the Trust.
3.10. Further Powers. The Trustees shall have power to conduct
the business of the Trust or any Series thereof and carry on its operations
in any and all of its branches and maintain offices both within and without
the Comonwealth of Massachusetts, in any and all states of the United
States of America, in the District of Colmbia, and in any and all
Commonwealths, territories, dependencies, colonies, possessions, agencies
or instrumentalities of the United States of America and of foreign
governments, and to do all such other things and execute all such
instruments as they deem necessary, proper or desirable in order to promote
the interests of the Trust 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 duly Series thereof made by the Trustees in good
faith shall be conclusive. In construing the provisions of this
Declaration, the presumption shall be in favor of a grant of power to the
Trustees. The Trustees will not be required to obtain any court order to
deal with the Trust Property.
9.
<PAGE> 10
ARTICLE IV
Advisory, Management and Distribution Arrangements
4.l. Advisory and Management Arrangements. Subject to a Majority
Shareholder Vote of the applicable Series, as required by the 1940 Act,
the Trustees way 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 term 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 recommendations of any such advisor,
administrator or manager (and all without further action by the
Trustees). Any such purchases, sales, loans and exchanges shall be deemed
to have been authorized by all of the Trustees.
4.2. Distribution Arrangements. The Trustees may in their
discretion from time to time enter into a contract, providing for the sale
of the Shares of the Trust 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 on 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 may also provide for the repurchase or sale of
Shares by such other party as principal or as agent of the Trust and may
provide that such other party may enter into selected dealer agreements
with registered securities dealers to further the purpose of the
distribution or repurchase of the Shares.
4.3. Parties to Contract. Any contract of the character
described in Section 4.1 and 4.2 of this Article IV or in Article VII
hereof may be entered into with any 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 officers of such
other party to the contract, and no such contract shall be invalidated or
rendered voidable by reason of the existence of any such relationship, nor
shall any person holding such relationship be liable merely by reason of
such relationship for any loss or expense to the Trust under or by reason
of said contract or accountable for any profit realized directly or indi-
rectly therefrom, provided that the contract when entered into was
reasonable and fair and not inconsistent with the provisions of this
Article IV or the By-laws. The same person (including a firm,
corporation, trust, or association) may be the other party to contracts
entered into pursuant to Sections 4.1 and 4.2.above or Article VII, and any
individual may be financially interested or
10.
<PAGE> 11
herwise affiliated with persons who are parties to any or all of the
contracts mentioned in this Section 4.3.
4.4. Provisions and Amendments. Any contract entered into
pursuant to Section 4.1 and 4.2 of this Article IV shall be consistent with
and subject to the requirements of Section 15 of the 1940 Act with respect to
its continuance in effect, its termination, and the method of authorization
and approval of such contract or renewal thereof, and no amendment to any
contract entered into pursuant to Section 4.1 shall be effective unless
assented to by a majority Shareholder Vote 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
Shareholder shall be subject to any personal liability whatsoever to
any Person in connection with Trust Property or the acts, obligations or
affairs of the Trust or any Series thereof. 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, save only that arising from his bad faith,
willful misfeasance, gross negligence or reckless disregard of his duty
to such Person; and all such Persons shall look solely to the Trust
Property for satisfaction of claims of any nature arising in
connection with the affairs of the Trust 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 proceeding to enforce any such
liability, he shall not on account thereof, be held to any personal
liability. The Trust shall indemnify and hold each Shareholder harmless
from and against all claims and liabilities, to which such Shareholder
may become subject by reason of his being or having been a
Shareholder, and shall reimburse such Shareholder for all legal and
other expenses reasonably incurred by him in connection with any such
claim or liability. The rights accruing to a Shareholder under this
Section 5.1 shall not exclude any other right to which such Shareholder
may be lawfully entitled, nor shall anything herein contained restrict
the right of the Trust to indemnify or reimburse a Shareholder in any
appropriate situation even though not specifically provided herein.
5.2. Non-Liability of Trustees, etc. No Trustee, officer, employee
or agent of the Trust shall be liable to the Trust, 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 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
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 willful misfeasance, gross negligence or reckless
disregard of duty, or the matter of good faith and reasonable belief as to
the best interests of the Trust, had been adjudicated, it would have been
adjudicated in favor of such person. The rights accruing to any Person
under these provisions shall not exclude any other right to which he may be
lawfully entitled; provided that no Person may satisfy any right of
indemnity or reimbursement granted herein or in Section 5.1 or to which he
may be otherwise entitled except out of the property of the Trust, and no
Shareholder shall be personally liable to any Person with respect to any
claim for indemnity or reimbursement or otherwise. The Trustees may make
advance payments in connection with indemnification under this Section 5.3,
provided that the indemnified person shall have given a written undertaking
to reimburse the Trust in the event it is subsequently determined that he
is not entitled to such indemnification.
5.4. No Bond Required of Trustees. No Trustee shall, as such, be
obligated to give any bond or 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
on 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 reliance in good faith upon the books of account or
other records of the Trust, upon an opinion of counsel, or upon reports
made to the Trust by any of its officers or employees or by any advisor,
administrator, manager, distributor, selected dealer, accountants appraiser
or other expert or consultant selected with reasonable care by the
Trustees, officers or employees of the Trust, regardless 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 Shares issued hereunder
including, without limitation, Shares issued in connection with a dividend
in Shares or a split of Shares, shall be fully paid and nonassessable.
6.2. 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) 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 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 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 asset, 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 amounts 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 from time to tine in such manner an 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 expenses, Costs, charges and reserves attributable to that 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, 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 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 Declaraticn.
6.3. Riqhts of Shareholders. The ownership of the Trust Property
of every description and the right too 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 associaticn.
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 agents, and a registrar or
registrars, with respect to the Shares of the various Series. The
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 Bich transfer agent and registrars
shall perform the duties usually performed by transfer agents and
registrars of certificates of stock in a corporation, except as modified
by the Trustees.
6.8. Transfer of Shares. Shares shall be transferable on the records
of the Trust only by the record holder thereof or by his agent thereto
duly authorized in writing, upon delivery to the Trustees or a transfer
agent of the Trust of a duly executed instrument of transfer, together
with such evidence of the genuineness of each such execution and
authorization and of other matters as may reasonably be required. Upon
such delivery the transfer shall be recorded on the 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 and all communications shall be deemed duly
served or given if mailed, postage prepaid, addressed to any Shareholder
of record at his last known address as recorded on the applicable register
of the Trust.
18.
<PAGE> 19
ARTICLE VII
Custodians
7.1. Appointment and Duties. The Trustees shall at all times employ a
custodian or custodians, meeting the qualifications 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, limitations and other
requirements, if any, as may be contained in the By-laws of the Trust and the
1940 Act:
(1) to hold the securities owned by the Trust or the Series and
deliver the same 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 time 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 tire, 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 Boldinq. If the Trustees
shall, at any time and in good faith, be of the opinion that direct or
indirect ownership of Shares or other securities of the Trust has or may
become concentrated in any person to an extent which would disqualify the
Trust as a regulated investment company under the Internal Revenue Code,
then the Trustees shall have the power by lot or other means deemed
equitable by them (i) to call for redemption a number, or principal amount,
of Shares or other securities of the Trust sufficient, in the opinion of
the Trustees, to maintain or bring the direct or indirect ownership of
Shares or other securities of the Trust into conformity with the
requirements for such qualification and (ii) to refuse to acquisition of
the Shares or other securities of the Trust in question would in transfer
or issue Shares or other securities of the Trust to any Person whose the
opinion of the Trustees result in such disqualification. The redemption
shall be effected at a redemption price determined in accordance with
Section 8.1.
The holders of Shares or other securities of the Trust shall upon
demand disclose to the Trustees in writing such information with respect to
direct and indirect ownership of Shares or other securities of the Trust as the
Trustees deem necessary to comply with the provisions of the Internal Revenue
Code, or to comply with the requirements of any other taxing authority.
8.3. Redemptions of Accounts of Less than $1,000. Due to the
relatively high cost of maintaining investment accounts of less than $1,000,
the Trustees shall have the power to redeem shares at a redemption price
determined in accordance with Section 8.1 if at any time the total investment
in such account does not have a value of at least $1,000; provided, however,
that the Trustees
21.
<PAGE> 22
may 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 Formula. 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 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 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,
administrator, manager, custodian, transfer agent or such other person as the
Trustees may determine. The Trustees may suspend the daily determination of
net asset value to the extent permitted by the 1940 Act.
9.2. Distributions to Shareholders. The Trustees shall from time to
time distribute ratably among the Shareholders of any Series such proportion
of the net profits, surplus (including paid-in surplus), capital, 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 such Series 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 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 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.
9.3. Constant Net Asset Value; Reduction of Outstanding Shares. The
Trustees shall have the power to determine 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 determination. 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
determining the per share net asset value of the Trust's Shares or net
income, or the declaration and payment of dividends and distributions as
they may deem necessary or desirable 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 hereafter 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 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 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 hall be governed by Section 9.2 hereof.
10.5. Proxies, etc. At any meeting of Shareholder, 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 one or more of
the officers of the Trust. Only Shareholders of record shall be entitled
to vote. Each full Share shall be entitled to one vote and fractional
Shares shall be entitled to a vote of such fraction. When any Share is
held jointly by several persons, any one of them may vote at any meeting
in person or by proxy in respect of such Share, but if more than one of
them shall be present at such meeting in person or by proxy, and such
joint owners or their proxies so present disagree as to any vote to be
cast, such vote shall not be received in respect of such Share. A proxy
purporting to be executed by or on behalf of a Shareholder shall be
deemed valid unless challenged at or prior to its exercise, and the
burden of proving invalidity shall rest on the challenger. If the holder
of any such Share is a minor or a person of unsound mind, and subject to
guardianship or to the legal control of any other person as regards the
charge or management of such Share, he may vote by his guardian or such
other person appointed or having such control, and such vote may be given
in person or by proxy.
10.6. Reports. The Trustees shall cause to be prepared 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 accepted 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 he same extent as is permitted
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 on the matter (or such
larger proportion thereof as shall be required by any express provision
of this Declaration) consent to the action in writing and the written
consents are filed with the records of the meetings of Shareholders.
Such consent shall be treated for all purposes as a vote taken at a
meeting of Shareholders.
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 or such Series and all of the rowers 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 amount of the
con- sideration 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 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 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. The 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 if
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 assessments upon
Shareholders.
(c) A certification in recordable form signed by a majority of
the Trustees setting forth an amendment and reciting that it was duly
adopted by the Shareholders or by the Trustees as aforesaid or a copy of
the Declaration, as amended, in recordable form, and executed by a majority
of the Trustees, shall be conclusive evidence of such amendment when lodged
among the records of the Trust.
Notwithstanding any other provision hereof, until such time as a
Registration Statement under the Securities Act of 1933, as amnded,
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 instruments 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 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 corporation, partnership, trust,
association or organization in which the Trust holds or is about to acquire
shares or any other interest. The Trustees may also cause 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 such other places as may be required under the laws of
Massachusetts and may also be filed or recorded in such other places as
the Trustees deem appropriate. Each 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 amendment or such certificate sets forth some later time for the
effectiveness of such amendment, such amendment shall be effective upon
its filing. A restated Declaration, containing the original Declaration
and all amendmen theretofore made, may be executed from time to time by a
majority of the Trustees and shall, upon filing with the Secretary of the
Commonwealth of Massachusetts, be conclusive evidence of all amendments
contained therein and may thereafter be referred to in lieu of the
original Declaration and the various amendments thereto.
12.2. Resident Agent. The Trust shall maintain a resident agent in
the Commonwealth of Massachusetts, which agent shall initially be CT
Corporation System, 10 Post Office Square, Boston, Massachusetts 02109.
The Trustees may designate a successor resident agent, provided, however,
that such appointment shall not become effective until written notice
thereof is delivered to the office of the Secretary of the CCommonwealth.
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 requirenents of this Declaration, (g) 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 and their Successors.
12.6. Provisions in Conflict With Law or Regulations.
(a) The provisions of this Declaration are severable, and if
the Trustees shall detemine, with the advice of counsel, that any of such
provi- IL sions 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 never to have
constituted a part of this Declaration; provided, however, that such
detemination shall not affect any of the remaining provisions of this
Declaration or render invalid or improper any action taken or omitted
prior to such determination.
(b) If any provision of this Declaration shall be held invalid
or unenforceable in any jurisdiction, such invalidity or unenforoeability
shall attach only to such provision in such jurisdiction and shall not in
any manner affect such provision in any other jurisdiction or any other
provision of this Declaration in any jurisdiction.
IN WITNESS WHEREOF, the undersigned have caused these presents to be
exe- cuted 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
-----------------------------
111 Windsor Road
Needham, Massachusetts 02192
32.
<PAGE> 1
Ex-99.1 (b)
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
JULY 25, 1985
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 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 25th day of July, 1985.
/s/ PHILIP L. KIRSTEIN /s/ GERALD M. RICHARD
- ------------------------- -------------------------------
9 Liberty Street 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
<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> 1
Ex-99.1(d)
MERRILL, LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
Establishment and Designation
Merrill Lynch California Insured Municipal Bond 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
Insured Municipal Bond 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 and statement of additional
information of the Trust relating to shares of the Fund,
as amended from time to time, under the Securities Act
of 1933, as amended.
<PAGE> 2
IN WITNESS WHEREOF, the undersigned have signed this in- strument and
have caused a duplicate original to be lodged among the records of the Trust
this 18th day of December, 1992.
/s/ KENNETH S. AXELSON /s/ HERBERT I. LONDON
- ---------------------------- ---------------------------
75 Jameson Point Road New York University
Rockland, Maine 04841 113-115 University Place
9th Floor
New York, New York 10003
/s/ JOSEPH L. MAY /s/ ANDRE F. PEROLD
- ---------------------------- ---------------------------
222 Fourth Avenue North Andre F. Perold
Nashville, Tennessee 37215 Morgan Hall
Soldiers Field Road
Boston, Massachusetts 02l63
/s/ ARTHUR ZEIKEL
- --------------------------------
Box 9011
Princeton, New Jersey 08543-9011
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
"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> 3
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 Insured Municipal Bond 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 De- claration 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 Insured Municipal Bond Fund" (the "Fund") of the Trust, par
value $.10 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 Sharas 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.
<PAGE> 4
IN WITNESS WHEREOF, the undersigned have signed this instru- ment and have
caused a duplicate original to be lodged among the records of Trust this 18th
day of December, 1992.
/s/ KENNETH S. AXELSON /s/ ANDRE F. PEROLD
- ------------------------------ ---------------------------
75 Jameson Point Road Andre F. Perold
Rockland, Maine 04841 Morgan Hall
Soldiers Field Road
Boston, Massachusetts 02163
/s/ HERBERT I. LONDON /s/ ARTHUR ZEIKEL
- ------------------------------ -----------------------------
New York University Box 9011
113-115 University Place Princeton, New Jersey 08543-9011
9th Floor
New York, New York 10003
/s/ JOSEPH L. MAY
- -------------------------
Joseph L. May
222 Fourth Avenue North
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 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 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-99.2
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 meaning 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.
<PAGE> 2
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> 3
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> 4
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
4.
<PAGE> 5
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.
5.
<PAGE> 6
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> 7
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 3.5 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> 8
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 therewise 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, agree- ments, deeds, mortgages, and other
instruments in writing, and to emoloy 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> 9
each Vice-President shall have the power in the name and on beha1f 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> 10
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> 11
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.
11.
<PAGE> 12
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> 13
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> 14
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 18th day of December, 1992, 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 an 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 separate classes
of shares; and
WHEREAS, the Trustees have established and designated the
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND (the "Fund") as
a 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
WHEREAS, the Trust desires to retain the Manager to render
management and investment advisory services to the Trust and the Fund
in the manner and on the terms hereinafter set forth; and
<PAGE> 2
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 independent contractors and shall, unless otherwise
expressly provided or authorized, have no authority to act for or
represent the Trust or the Fund in any way or otherwise be deemed
agents 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
2
<PAGE> 3
and the Fund including administering shareholder accounts and
handling shareholder relations. The Manager shall provide the Trust
and 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 "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 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
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<PAGE> 4
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 Fund'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 Fund'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 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 this 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.
4
<PAGE> 5
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.
ARTICILE 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
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 paid 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,
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<PAGE> 6
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 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 not
exceeding $500 million, 0.525 of 1.0% (.525%) of the average daily
net assets of the Fund exceeding $500 million but not exceeding $1.0
billion and 0.50 of 1.0% (.50%) of the average daily net assets of
the Fund exceeding $1.0 billion, commencing on the day following
effectiveness hereof.
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<PAGE> 7
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 the part of the month that 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 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 that 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
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
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<PAGE> 8
claims and liabilities and litigation costs and any indemnification
related thereto) paid or payable by the Trust with respect to 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 management fee due to the Manager.
Should two or more such expense limitations be applicable as of 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 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.
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<PAGE> 9
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") are 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 a shareholder or
otherwise.
ARTICLE VI
Duration and Termination of this Contract
This Agreement shall become effective as of the date first above
written and shall remain in force until November 30, 1994 and
thereafter, but only for so long as such continuance is specifically
approved at least annually by (i) the Trustees, or by the vote of a
majority of the outstanding 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.
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<PAGE> 10
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.
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.
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<PAGE> 11
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"), 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.
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<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the day and year first above written.
MERRILL LYNCH CALIFORNIA
MUNICIPAL SERIES TRUST
By /s/ ARTHUR ZEIKEL
---------------------------
Title:President
FUND ASSET MANAGEMENT,INC.
By /s/ GERALD M. RICHARD
---------------------------------
Title: Senior Vice President
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<PAGE> 1
Ex-99.6(b)
CLASS B SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 18th day of December, 1992, 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 an open-end investment
company and it is affirmatively in the interest of the Trust to offer its
shares for sale continuously; and
WHEREAS, the Trustees of the Trust (the "Trustees") are authorized to
establish separate series (the "Series") relating to separate portfolios of
securities, each of which will offer separate classes of shares of beneficial
interest, par value $0.10 per share (collectively referred to as "shares") to
selected groups of purchasers; and
WHEREAS, the Trustees have established and designated the Merrill Lynch
California Insured Municipal Bond Fund (the "Fund") as a series of the Trust;
and
WHEREAS, the Distributor is a securities firm engaged in the business of
selling shares of investment companies either 'directly to purchasers or
through other securities dealers; and
<PAGE> 2
WHEREAS, the Trust and the Distributor wish to enter into an agreement
with each other with respect to the subscription offering and the continuous
offering of the Class B shares of beneficial interest of the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Trust hereby appoints the
Distributor as the principal underwriter and distributor of the Trust to sell
Class B shares of beneficial interest of the Fund (sometimes herein referred to
as "Class B shares") to the public and hereby agrees during the term of this
Agreement to sell shares of the Fund to the Distributor upon the terms and
conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor shall be the
exclusive representative of the Trust to act as principal underwriter and
distributor of Class B shares of the Fund, except that:
(a) The Trust may, upon written notice to the Distributor, from time to
time designate other principal underwriters and distributors of Class B shares
with respect to areas other than the United States as to which the Distributor
may have expressly waived in writing its right to act as such. If such
designation is deemed exclusive, the right of the Distributor under this
Agreement to sell Class B shares in the areas so designated shall terminate,
but this Agreement shall remain otherwise in full effect until terminated in
accordance with the other provisions hereof.
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<PAGE> 3
(b) The exclusive rights granted to the Distributor to purchase Class B
shares from the Trust shall not apply to Class B shares issued in connection
with the merger or consolidation of any other investment company or personal
holding company with the Trust or the acquisition by purchase or otherwise of
all (or substantially all) the assets or the outstanding Class B shares of any
such company by the Trust.
(c) Such exclusive rights also shall not apply to Class B shares issued
pursuant to reinvestment of dividends or capital gains distributions.
(d) Such exclusive rights also shall not apply to Class B shares issued
pursuant to any reinstatement privilege afforded redeeming shareholders.
Section 3. Purchase of Class B Shares from the Trust.
(a) Prior to the continuous offering of the Class B shares, commencing on
a date agreed upon by the Trust and the Distributor, it is contemplated that
the Distributor will solicit subscriptions for Class B 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 five business
days after the termination of the subscription period, at which time the Fund
will commence operations.
(b) After the Fund commences operations, the Trust will commence an
offering of Class B shares of the Fund and thereafter the Distributor shall
have the right to buy from the Trust the Class B shares needed, but not more
than the Class B shares
3
<PAGE> 4
needed (except for clerical errors in transmission) to fill unconditional
orders for Class B shares of the Fund placed with the Distributor by investors
or securities dealers. The price which the Distributor shall pay for the Class
B shares so purchased from the Trust shall be the net asset value, determined
as set forth in Section 3(d) hereof.
(c) The Class B 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 Class B shares of the Fund shall be determined
by the Trust or any agent of the Trust in accordance with the method set forth
in the prospectus and statement of additional information relating to the Fund
and guidelines established by the Board of Trustees.
(e) The Trust shall have the right to suspend the sale of Class B 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 Class B shares if trading on the New York Stock Exchange shall have been
suspended, if a banking moratorium shall have been declared by Federal or New
York authorities, or if there shall have been some other event, which, in the
judgment of the Trust, makes it impracticable or inadvisable to sell the
shares.
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<PAGE> 5
(f) The Trust, or any agent of the Trust designated in writing by the
Trust, shall be promptly advised of all purchase orders for Class B shares
received by the Distributor. Any order may be rejected by the Trust;
provided, however, that the Trust will not arbitrarily or without reasonable
cause refuse to accept or confirm orders for the purchase of Class B shares.
The Trust (or its agent) will confirm orders upon their receipt, will make
appropriate book entries and, upon receipt by the Trust (or its agent) of
payment therefor, will deliver deposit receipts or certificates for such Class
B shares pursuant to the instructions of the Distributor. Payment shall be
made to the Trust in New York Clearing House funds. The Distributor agrees to
cause such payment and such instructions to be delivered promptly to the Trust
(or its agent).
Section 4. Repurchase or Redemption of Class B Shares by the Trust.
(a) Any of the outstanding Class B shares may be tendered for redemption
at any time, and the Trust agrees to repurchase or redeem the Class B shares
so tendered in accordance with its obligations as set forth in Article VIII of
its Declaration of Trust, as amended from time to time, and in accordance with
the applicable provisions set forth in the prospectus and statement of
additional information relating to the Fund. The price to be paid to redeem
or repurchase the Class B shares shall be equal to the net asset value
calculated in accordance with the provisions of Section 3(d) hereof, less the
redemption fee or other charge,
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<PAGE> 6
if any, set forth in the prospectus and statement of additional information
relating to the Fund. All payments by the Trust hereunder shall be made in the
manner set forth below.
The Trust shall pay the total amount of the redemption price as defined in
the above paragraph pursuant to the instructions of the Distributor on or
before the seventh business day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of shares shall be
paid by the Trust as follows: (i) any applicable contingent deferred sales
charge shall be paid to the Distributor and (ii) the balance shall be paid to
or for the account of the shareholder, in each case in accordance with the
applicable provisions of the prospectus and statement of additional
information.
(b) Redemption of Class B shares or payment may be suspended at times when
the New York Stock Exchange is closed, when trading on said Exchange is closed,
when trading on said Exchange is restricted, when an emergency exists as a
result of which disposal by the Trust of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Trust fairly
to determine the value of the net assets of the Fund, or during any other
period when the Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Trust.
(a) The Trust shall furnish to the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the
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<PAGE> 7
distribution of Class B shares of the Fund, and this shall include, upon
request by the Distributor, one certified copy of all financial statements
prepared for the Trust by independent public accountants. The Trust shall
make available to the Distributor such number of copies of its prospectus and
statement of additional information relating to the Fund as the Distributor
shall reasonably request.
(b) The Trust shall take, from time to time, but subject to the necessary
approval of the shareholders, all necessary action to fix the number of
authorized shares and such steps as may be necessary to register the same
under the Securities Act of 1933, as amended (the "Securities Act"), to the
end that there will be available for sale such number of Class B shares as the
Distributor reasonably may be expected to sell.
(c) The Trust shall use its best efforts to qualify and maintain the
qualification of an appropriate number of Class B shares for sale under the
securities laws of such states as the Distributor and the Trust may approve.
Any such qualification may be withheld, terminated or withdrawn by the Trust
at any time in its discretion. As provided in Section 8(c) hereof, the
expense of qualification and maintenance of qualification shall be borne by
the Trust. The Distributor shall furnish such information and other material
relating to its affairs and activities as may be required by the Trust in
connection with such qualification.
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<PAGE> 8
(d) The Trust will furnish, in reasonable quantities upon request by the
Distributor, copies of annual and interim reports relating to the Fund.
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort to effect
sales of Class B shares of the Fund, but shall not be obligated to sell any
specific number of shares. The services of the Distributor to the Trust
hereunder are not to be deemed exclusive and nothing herein contained shall
prevent the Distributor from entering into like arrangements with other
investment companies so long as the performance of its obligations hereunder is
not impaired thereby.
(b) In selling the Class B shares of the Fund, the Distributor shall use
its best efforts in all respects duly to conform with the requirements of all
Federal and state laws relating to the sale of such securities. Neither the
Distributor nor any selected dealer, as defined in Section 7 hereof, nor any
other person is authorized by the Trust to give any information or to make any
representations, other than those contained in the registration statement or
related prospectus and statement of additional information and any sales
literature specifically approved by the Trust.
(c) The Distributor shall adopt and follow procedures, as approved by the
officers of the Trust, for the confirmation of sales to investors and selected
dealers, the collection of amounts payable by investors and selected dealers on
such sales,
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<PAGE> 9
and the cancellation of unsettled transactions, as may be necessary to comply
with the requirements of the National Association of Securities Dealers, Inc.
(the "NASD"), as such requirements may from time to time exist.
Section 7. Selected Dealer Agreements.
(a) The Distributor shall have the right to enter into selected dealer
agreements with securities dealers of its choice ("selected dealers") for the
sale of Class B shares; provided, that the Trust shall approve the forms of
agreements with dealers. Class B shares sold to selected dealers shall be for
resale by such dealers only at net asset value determined as set forth in
Section 3(d) hereof. The form of agreement with selected dealers to be used
during the subscription period described in Section 3(a) is attached hereto as
Exhibit A and the initial form of agreement with selected dealers to be used
in the continuous offering of the shares is attached hereto as Exhibit B.
(b) Within the United States, the Distributor shall offer and sell Class
B shares only to such selected dealers as are members in good standing of the
NASD.
Section 8. Payment of Expenses.
(a) The Trust shall bear all costs and expenses of the Fund, including
fees and disbursements of its counsel and auditors, in connection with the
preparation and filing of any required registration statements and/or
prospectuses and statements of additional information under the Investment
Company
9
<PAGE> 10
Act, the Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy materials to Class B
shareholders (including but not limited to the expense of setting in type any
such registration statements, prospectuses, statements of additional
information, annual or interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments made to selected
dealers as reimbursement for their expenses associated with payments of sales
commissions to financial consultants. In addition, after the prospectuses,
statements of additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs and expenses of
printing and distributing any copies thereof which are to be used in connection
with the offering of Class B shares to selected dealers or investors pursuant
to this Agreement. The Distributor shall bear the costs and expenses of
preparing, printing and distributing any other literature used by the
Distributor or furnished by it for use by selected dealers in connection with
the offering of the Class B shares for sale to the public and any expenses of
advertising incurred by the Distributor in connection with such offering. It
is understood and agreed that, so long as the Fund's Class B Distribution Plan
pursuant to Rule 12b-1 under the Investment Company Act remains in effect, any
expenses incurred by the Distributor hereunder may be paid from amounts
recovered by it from the Fund under such Plan.
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<PAGE> 11
(c) The Trust shall bear the cost and expenses of qualification of the
Class B shares for sale pursuant to this Agreement, and, if necessary or
advisable in connection therewith, of qualifying the Trust as a broker or
dealer, in such states of the United States or other jurisdictions as shall be
selected by the Trust and the Distributor pursuant to Section 5(c) hereof and
the cost and expenses payable to each such state for continuing qualification
therein until the Trust decides to discontinue such qualification pursuant to
Section 5(c) hereof.
Section 9. Indemnification.
(a) The Trust shall indemnify and hold harmless the Distributor and each
person, if any, who controls the Distributor against any loss, liability,
claim, damage or expense (including the reasonable cost of investigating or
defending any alleged loss, liability, claim, damage or expense and reasonable
counsel fees incurred in connection therewith, as incurred, arising by reason
of any person acquiring any Class B shares, which may be based upon the
Securities Act, or on any other statute or at common law, on the ground that
the registration statement or related prospectus and statement of additional
information relating to the Fund, as from time to time amended and
supplemented, or an annual or interim report to Class B shareholders of the
Fund, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, unless such statement or omission was
<PAGE> 12
made in reliance upon, and in conformity with, information furnished to the
Trust in connection therewith by or on behalf of the Distributor; provided,
however, that in no case (i) is the indemnity of the Trust in favor of the
Distributor and any such controlling persons to be deemed to protect such
Distributor or any such controlling persons thereof against any liability to
the Trust or its security holders to which the Distributor or any such
controlling persons would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of their duties
or by reason of the reckless disregard of their obligations and duties under
this Agreement; or (ii) is the Trust to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made against the
Distributor or any such controlling persons, unless the Distributor or such
controlling persons, as the case may be, shall have notified the Trust in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon the
Distributor or such controlling persons (or after the Distributor or such
controlling persons shall have received notice of such service on any
designated agent), but failure to notify the Trust of any such claim shall not
relieve it from any liability which it may have to the person against whom such
action is brought otherwise than on account of its indemnity agreement
contained in this paragraph. The Trust will be entitled to participate at its
own expense in the defense, or, if it so elect, to assume the
12
<PAGE> 13
defense of any suit brought to enforce any such liability, but if the Trust
elects to assume the defense, such defense shall be conducted by counsel chosen
by it and satisfactory to the Distributor or such controlling person or
persons, defendant or defendants in the suit. In the event the Trust elects to
assume the defense of any such suit and retain such counsel, the Distributor or
such controlling person or persons, defendant or defendants in the suit, shall
bear the fees and expenses, as incurred, of any additional counsel retained by
them, but, in case the Trust does not elect to assume the defense of any such
suit, it will reimburse the Distributor or such controlling person or persons,
defendant or defendants in the suit, for the reasonable fees and expenses, as
incurred, of any counsel retained by them. The Trust shall promptly notify the
Distributor of the commencement of any litigation or proceedings against it or
any of its officers or Trustees in connection with the issuance or sale of any
of the Class B shares.
(b) The Distributor shall indemnify and hold harmless the Trust and each
of its Trustees and officers and each person, if any, who controls the Trust
against any loss, liability, claim, damage or expense, as incurred, described
in the foregoing indemnity contained in subsection (a) of this Section, but
only with respect to statements or omissions made in reliance upon,, and in
conformity with, information furnished to the Trust in writing by or on behalf
of the Distributor for use in connection with the registration statement or
related prospectus and
13
<PAGE> 14
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 November 30, 1994 and thereafter, but only so long as such
continuance is specifically approved at least annually by (i) the Trustees, or
by the vote of a majority of the outstanding Class B voting securities of the
Fund, and (ii) by the vote of a majority of those Trustees who are not parties
to this Agreement or interested persons of any such party cast in person at a
meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Trustees or by vote of a majority of the outstanding Class B
voting securities of the Fund, or by the Distributor, on sixty days' written
notice to the other party. This Agreement shall automatically terminate in the
event of its assignment.
14
<PAGE> 15
The terms "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person" and "interested person," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 11. Amendments of this Agreement. This Agreement may be amended
by the parties only if such amendment is specifically approved by (i) the
Trustees, or by the vote of a majority of outstanding Class B voting securities
of the Fund, and (ii) by the vote of a majority of those Trustees of the Trust
who are not parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on such approval.
Section 12. Governing Law. The provisions of this Agreement shall be
construed and interpreted in accordance with the laws of the State of New York
as at the time in effect and the applicable provisions of the Investment
Company Act. To the extent that the applicable law of the State of New York,
or any of the provisions herein, conflict with the applicable provisions of the
Investment Company Act, the latter shall control.
Section 13. Personal Liability. The Declaration of Trust establishing
Merrill Lynch 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
15
<PAGE> 16
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 [SIG]
------------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By /s/ GERALD M. RICHARD
------------------------------------
Title:
16
<PAGE> 17
EXHIBIT A
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
CLASS B 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 Massachusetts business
trust (the "Trust"), pursuant to which it acts as the distributor for the sale
of Class B shares of beneficial interest, par value $0.10 per share (herein
referred to as "Class B shares"), of the Trust relating to Merrill Lynch
California Insured Municipal Bond Fund (the "Fund"), and as such has the right
to distribute Class B shares of the Fund for resale. The Trust is an open-end
investment company registered under the Investment Company Act of 1940, as
amended, and the Fund's Class B shares being offered to the public are
registered under the Securities Act of 1933, as amended. Such Class B 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 Class B shares Distribution Agreement (the
"Distribution Agreement") between ourself 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, Class B 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 February 19, 1993. 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 Class B 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.
<PAGE> 18
2. In all sales of these Class B shares to the public you shall act as
dealer for your own account, and in no transaction shall you have any authority
to act as agent for the Trust, for us or for any other member of the Selected
Dealers Group.
3. You shall not place orders for any of the Class B shares unless you
have already received purchase orders for such Class B shares at the applicable
public offering prices and subject to the terms hereof and of the Distribution
Agreement. 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 Class B shares
except under circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales and offers
to sell Class B shares you will furnish to each person to whom any such sale or
offer is made a copy of the Prospectus and, if requested, the Statement of
Additional Information (as then amended or supplemented) relating to the Fund
and will not furnish to any person any information relating to the Class B
shares of the Fund which is inconsistent in any respect with the information
contained in the Prospectus and Statement of Additional Information (as then
amended or supplemented) or cause any advertisement to be published in any
newspaper or posted in any public place without our consent and the consent of
the Trust.
4. Payment for Class B shares purchased by you is to be made by Federal
funds wire or by certified or official bank check at the office of Merrill
Lynch Funds Distributor, Inc., Box 9011, Princeton, New Jersey 08543-9011, 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 Financial Data
Services, Inc., as shareholder servicing agent, acknowledging the deposit with
it of the Class B shares so purchased by you. You agree that as promptly as
practicable after the delivery of such Class B 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 Class B shares.
5. No person is authorized to make any representations concerning Class B
shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information relating to the Fund and in such printed
information subsequently issued by us or the Trust as information supplemental
to such
A-2
<PAGE> 19
Prospectus and Statement of Additional Information. In purchasing Class B
shares through us you shall rely solely on the representations contained in the
Prospectus and Statement of Additional Information and supplemental information
above mentioned. Any printed information which we furnish you other than the
Fund's Prospectus and 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.
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 relating to the Fund. You further
agree to endeavor to obtain Proxies from such purchasers. Additional copies of
the Prospectus and Statement of Additional Information, annual or interim
reports and proxy solicitation materials of the 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 Class B 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 nay 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 Class B shares have been qualified for sale under, or are exempt
from the requirements of, the
A-3
<PAGE> 20
respective securities laws of such states, but we assume no responsibility or
obligation as to your right to sell Class B shares in any jurisdiction. We
will file with the Department of State in New York a Further State Notice with
respect to the Class B shares, if necessary.
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.
12. You agree that you will not sell any Class B 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:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name:
------------------------------------
By:
------------------------------------------
Address:
-------------------------------------
Date:
-----------------------------------------
A-4
<PAGE> 21
EXHIBIT B
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND
MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
CLASS B SHARES OF BENEFICIAL INTEREST
SELECTED DEALERS AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor") has an agreement
with Merrill Lynch California Municipal Series Trust, a Massachusetts business
trust (the "Trust"), pursuant to which it acts as the distributor for the sale
of Class B shares of beneficial interest, par value $0.10 per share (herein
referred to as the "Class B shares"), of the Trust relating to Merrill Lynch
California Insured Municipal Bond Fund (the "Fund"), and as such has the right
to distribute Class B shares of the Fund for resale. The Trust is an open-end
investment company registered under the Investment Company Act of 1940, as
amended, and the Fund's Class B shares being offered to the public are
registered under the Securities Act of 1933, as amended. You have received a
copy of the Class B shares Distribution Agreement (the "Distribution
Agreement") between ourself and the 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,
Class B shares of the Fund upon the following terms and conditions:
1. In all sales of these Class B shares to the public you shall act as
dealer for your own account, and in no transaction shall you have any authority
to act as agent for the 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 relating to 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
<PAGE> 22
time to you. All orders are subject to acceptance or rejection by the
Distributor or the Trust in the sole discretion of either. The minimum initial
and subsequent purchase requirements are as set forth in the current Prospectus
and Statement of Additional Information relating to the Fund.
3. You shall not place orders for any of the Class B shares unless you
have already received purchase orders for such Class B shares at the applicable
public offering prices and subject to the terms hereof and of the Distribution
Agreement. You agree that you will not offer or sell any of the Class B shares
except under circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales and offers
to sell Class B shares you will furnish to each person to whom any such sale or
offer is made a copy of the Prospectus and, if requested, the Statement of
Additional Information (as then amended or supplemented) and will not furnish
to any person any information relating to the Class B shares of the Fund, which
is inconsistent in any respect with the information contained in the Prospectus
and Statement of Additional Information (as then amended or supplemented) or
cause any advertisement to be published in any newspaper or posted in any
public place without our consent and the consent of the Trust.
4. As a selected dealer, you are hereby authorized (i) to place orders
directly with the Trust for Class B shares of the Fund to be resold by us to
you subject to the applicable terms and conditions governing the placement of
orders by us set forth in Section 3 of the Distribution Agreement, and (ii) to
tender Class B shares directly to the Trust or its agent for redemption subject
to the applicable terms and conditions set forth in Section 4 of the
Distribution Agreement.
5. You shall not withhold placing orders received from your customers so
as to profit yourself as a result of such withholding: e.g., by a change in the
"net asset value" from that used in determining the offering price to your
customers.
6. No person is authorized to make any representations concerning Class B
shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information relating to the Fund and in such printed
information subsequently issued by us or the Trust as information supplemental
to such Prospectus and Statement of Additional Information. In purchasing
Class B shares through us you shall rely solely on the representations
contained in the Prospectus and Statement of Additional Information and
supplemental information above
B-2
<PAGE> 23
mentioned. Any printed information which we furnish you other than the
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.
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 relating to the Fund. You further
agree to endeavor to obtain proxies from such purchasers. Additional copies of
the Prospectus and Statement of Additional Information, annual or interim
reports and proxy solicitation materials will be supplied to you in reasonable
quantities upon request.
S. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of Class B shares entirely. Each party hereto
has the right to cancel this Agreement upon notice to the other party.
9. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this
paragraph is intended to operate as, and the provisions of this paragraph shall
not in any way whatsoever constitute, a waiver by you of compliance with any
provision of the Securities Act of 1933, as amended, or of the rules and
regulations of the Securities and Exchange Commission issued thereunder.
10. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United States,
we both hereby agree to abide by the Rules of Fair Practice of such
Association.
11. Upon application to us, we will inform you as to the states in which
we believe the Class B shares have been qualified for sale under, or are exempt
from the requirements of, the respective securities laws of such states, but we
assume no responsibility or obligation as to your right to sell Class B shares
in any jurisdiction. We will file with the Department of
B-3
<PAGE> 24
State in New York a Further State Notice with respect to the Class B shares, if
necessary.
12. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the
address specified by you below.
13. Your first order placed pursuant to this Agreement for the purchase of
Class B shares of the Fund will represent your acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
------------------------------------
(Authorized Signature)
Please return one signed copy
of this Agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name:
------------------------------------
By:
------------------------------------------
Address:
--------------------------------------
Date:
-----------------------------------------
B-4
<PAGE> 1
Ex-99.8
CUSTODY AGREEMENT
Agreement made as of this Sth 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 way 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 brokerdealer 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 Company ( "DTC"), a
clearing agency registered with the Securities 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 merchant, 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 Corporation, a clearing
agency registered under Section 17A of the Securities Exchange Act of 1934, its
successor or successors, 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 person or persons, whether or not any such other person is an officer
of the Fund, 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 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 instructions 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 Contracts, Financial Futures Contract Options,
Reverse Repurchase 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 recordation or otherwise, within the custody
account in which certain 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.
4
<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 bilateral agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to a specified 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 contract 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 communications
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 communications
is able to verify by codes or otherwise with a reasonable 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 hereinafter 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 specifically 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
Custodian a certified resolution of the Board of Trustees of the Fund,
substantially in the form of Exhibit A hereto, approving, authorizing and
instructing the Custodian on a continuous and on-going basis to deposit in
the Book-Entry System all Securities eligible for deposit therein, 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, withOut 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 Depository, the Fund shall
deliver to the Custodian a certified resolution of the Board of Trustees of
the Fund, substantially in the form of Exhibit B hereto, approving,
authorizing and instructing the Custodian on a continuous and ongoing
basis until instructed to the contrary by a Certificate 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 settlements of purchases and sales of Securities, loans of
Securities, 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 customers, 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
<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 attributable 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 Securities in a fungible bulk of Securities registered in the
name of the Custodian (or its nominee) or shown on the Custodian's account
on the books of the Book-Entry System or the Depository. At least monthly
and from time to time, the Custodian shall furnish the Fund with a detailed
statement, 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 BookEntry System or the
Depository or their successor or successors, 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
transfer, 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 allocated 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 Certificate, the Custodian by
Itself, or through the use of the Book-Entry System or the Depository
with respect to Securities 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 declarations 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 similar 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, authorizations, 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 connection with the liquidation, reorganization,
refinancing, merger, consolidation or recapitalization of any corporation,
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 possession 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 instruments or
certificates are available. The Fund shall deliver to the Custodian such a
Certificate no later than the business day preceding the availability of
any such instrument
<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 Custodian 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, notwithstanding any
provision in this Agreement to the contrary, make payment for any Futures
Contract, Option, or Futures Contract Option for which such instruments or
such certificates are available only against the delivery to the
Custodian of such instrument or such certificate, 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 certificate
delivered to the Custodian shall be held by the Custodian hereunder in
accordance with, and subject to, the provisions of this Agreement.
ARTICLE IV
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the Fund, other
than a purchase of an Option, a Futures Contract, or a Futures Contract
Option, the Fund shall deliver to the Custodian (i) with respect to each
purchase of Securities which are not Money Market Securities, a 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 specifically allocated;
(b) the name of the issuer and the title of the Securities; (a) 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 purchased
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 Agreement, the Fund shall deliver to the Custodian (i)
with respect to each sale of Securities which are not Money Market
Securities, a Certificate, and (ii) with respect to each sale of Money
Market Securities, a Certificate, Oral Instructions or Written Instructions,
specifying with respect to each such sale: (a) the Series to which such
Securities 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 specified
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); (a) 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 registered 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 1 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 1 hereof, the Fund shall
deliver to the Custodian a Certificate 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 1 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 paragraph 1 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 Certificate 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; (c) 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 specified 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 Certificate
specifically allocated to such Series such restrictions 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 the
total amount payable to the Fund upon such delivery. Upon the return
and/or cancellation of any receipts delivered pursuant 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 specifying 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, specifically 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
cancellation 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 specifically 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 identify the
Stock Index Option being exercised; (c) the Clearing Member through whom
such Stock Index option is being exercised; (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 Securities, 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 paragraph 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 Clearing
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 Securities, 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 restrictions 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 Contract, 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 underlying
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 Securities, 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 Contract was
entered into; and (i) the amount of fee or commission, if any, to be paid
and the name of the broker, dealer, or futures commission merchant to whom
such 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 he 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 accordance with the terms and conditions of the Margin
Account Agreement.
(b) Any variation margin payment or similar payment 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 accordance 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 settlement 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
Certificate, and delete such Futures Contract from the statements
delivered to the Fund pursuant to paragraph 3 of Article III herein.
4. Whenever the Fund shall enter into a Futures Contract to
offset a Futures Contract held by the Custodian hereunder, the Fund shall
deliver to the Custodian a Certificate specifying: (a) the items of
information required in a Certificate described in paragraph 1 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 paragraph 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 purchased; (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 Certificate.
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 Certificate 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 underlying 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 cancellation of the Futures Contract
Option being closed against payment to the Custodian of the total amount
payable to the Fund, provided the same conforms to the total amount payable
as set forth in such Certificate.
3. Whenever a Futures Contract Option purchased by the Fund pursuant
to paragraph I 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; (e) 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 Certificate, make out of the moneys and Securities specifically
allocated to such Series the deposits into the Senior Security 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 conditions 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 specifically 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 Contract 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 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.
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 allocated; (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 commission 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 specifically 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 Securities, 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 accordance 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 specified 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.
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<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 closingout: (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 effet 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 payable 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 Repurchase 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 Repurchase 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 connection 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 allocated
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 Certificate, 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 Certificate,
Oral Instructions, or Written Instructions.
2. Upon the termination of a Reverse Repurchase Agreement
described in preceding paragraph 1 of this Article, 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 withdrawn 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 withdrawals, 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 Securities 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 Custodian against the loan of the
Securities, including the amount of cash collateral and the premium, if
any, separately 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 payable to the order of the Fund or the Custodian drawn
on New York Clearing House funds and may deliver Securities in accordance with
the customs prevailing among dealers in securities.
2. Promptly after each termination of the loan of Securities by the
Fund, the Fund shall deliver or cause to be delivered to the Custodian a
Certificate specifying with respect to each such loan termination and return of
Securities: (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 Certificate), 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 allocated 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 commission 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 Custodian should realize on any such property net proceeds which
are less than the Custodian's obligations under any Put Option guarantee
letter or similar document or any receipt, such deficiency shall be a debt
owed the Custodian by the Fund within the scope of Article XIV herein.
5. 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 business day in
which cash and/or Securities are maintained in a Collateral Account for any
Series, the Custodian shall furnish the Fund with a Statement with respect
to such Collateral Account specifying the amount of cash and/or the amount
and kind of Securities held therein. No later than the close of business
next succeeding the delivery to the Fund of such statement, the Fund shall
furnish to the
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 a 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, certified by the Secretary, the
Clerk, any Assistant Secretary or any Assistant Clerk, either (1) 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 subdividend 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 distributions 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 resolution, Oral
Instructions, Written Instructions or Certificate, 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.
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<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 allocated 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 described 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 payment 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 foregoing 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 presented 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 pursuant to a separate agreement and
subject to the provisions of paragraph 2 of this Article), such overdraft
or indebtedness shall be deemed to be a loan made by the Custodian to the
Fund 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) f rom 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,
(e) 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 temporary 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 possession, but such collateral shall
be subject to all rights therein given the lending bank by virtue of any
promissory note or loan agreement. The Custodian shall deliver such
Securities as additional collateral as may be specified in a Certificate to
collateralize further any transaction described in this paragraph. The
Fund shall cause all Securities released from collateral status to be
returned directly to the Custodian, and the Custodian shall receive from
time to time such return of collateral as may be tendered to it. In the
event that the Fund fails to specify in a Certificate the 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 Custodian 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 Custodian nor its
nominee shall be liable for any loss or damage, including counsel fees,
resulting from its action or omission 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, misfeasance 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 Securities, nor shall
the Custodian be under any duty or obligation 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 Custodian 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 financial 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 considered 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 obligation 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 obligation 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 presentation, 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.
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<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 executed by the Custodian,
the Fund and the appointed institution.
7. The Custodian shall not be under any duty or obligation (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 expenses 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 specifically 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-custodians and foreign branches of the Custodian
incurred in settling outside of New York City transactions involving the
purchase and sale of Securities of the Fund.
9. The Custodian shall be entitled to rely upon any Certificate,
notice or other instrument in writing received by the Custodian and
reasonably believed by the Custodian to be a Certificate. The Custodian
shall be entitled to rely upon any Oral Instructions and any Written
Instructions actuallyreceived by the Custodian hereinabove provided
33
<PAGE> 34
for. The Fund agrees to forward to the Custodian a Certificate or
facsimile thereof confirming such Oral Instructions or Written Instructions
in such manner so that such Certificate or facsimile thereof is received by
the Custodian, whether by hand delivery, telecopier or other similar device,
or 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 Custotian 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
concerning such transactions provided such instructions reasonably appear
to have been received from an Authorized Person.
10. The Custodian shall be entitled to rely upon any instrument,
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
instrument 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 Custodian shall be the property of the Fund. Such books
and records shall be prepared and maintained as required by the Investment
Company Act of 1940, as amended, and other applicable securities laws and
rules and regulations. The Fund, or the Fund's authorized representatives,
shall have access to such books and records during the Custodian's normal
business hours. Upon the reasonable request of the Fund, copies of any such
books and records shall be provided by the Custodian to the Fund or the
Fund's authorized representative, and the Fund shall reimburse the Custodian
its expenses of providing such copies.
12. The Custodian shall provide the Fund with any report obtained by
the Custodian on the system of internal accounting control of the Book-Entry
System, 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 pursuant
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 Agreement, 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 accordance with the customs prevailing from time to time among
brokers or dealers in such Securities.
15. The Custodian shall have no duties or responsibilities 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
successor custodian or custodians, each of which shall be a bank or trust
company having not less than $2,000,000 aggregate capital, surplus and
undivided profits. In the event such notice is given by the Custodian, the
Fund shall, on or before the termination date, deliver to the Custodian a
copy of a resolution of the Board of Trustees of the Fund, certified 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 profits. 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 Securities and moneys then owned by the Fund and
held by it as Custodian, after deducting all fees, expenses and other
amounts for the payment or 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 paragraph, 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 Authorized Persons as
set forth in the last delivered Certificate.
2. Annexed hereto as Appendix B is a Certificate signed by two of
the present Officers of the Fund under its seal, setting forth the names
and the signatures of the present Officers of the Fund. The Fund agrees
to furnish to the Custodian a new Certificate in similar form in the event
any such present Officer ceases to be an Officer of the Fund, or in the
event that other or additional Officers are
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 Certificate.
3. Any notice or other instrument in writing, authorized or
required by this Agreement to be given to the Custodian, shall be
sufficiently given if addressed to the Custodian 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, authorized 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 binding 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 consent 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 original, 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 Massachusetts, 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.
By: /s/ GERALD M. RICHARD
---------------------
Gerald M. Richard
Attest:
- ------------------
THE BANK OF NEW YORK
By: [SIG]
------------------------------------
Attest:
- ------------------
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 positions 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 confomity 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, /s/ JORGE ROMOS ,an Assistant Vice President
with THE BANK OF NEW 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
allocated, and to utilize the Book-Entry System 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> 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
Depository, as defined in the Custody Agreement, all securities
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, DIVIDEND DISBURSING AGENCY
AND SHAREHOLDER SERVICING AGENCY AGREEMENT
THIS AGREEMENT made as of the 18th day of December, 1992, by and between
Merrill Lynch California Municipal Series Trust, on behalf of itself and its
constituent Series (the "Fund") and Merrill Lynch Financial Data Services, Inc.
("FDS"), a New Jersey corporation.
WITNESSETH:
WHEREAS, the Fund wishes to appoint FDS to be the Transfer Agent,
Dividend Disbursing Agent and Shareholder Servicing Agent upon, and subject to,
the terms and provisions of this Agreement, and FDS is desirous of accepting
such appointment upon, and subject to, such terms and provisions:
NOW THEREFORE, in consideration of mutual covenants contained in this
Agreement, the Fund and FDS agree as follows:
I. Appointment of FDS as Transfer Agent, Dividend Disbursing Agent and
Shareholder Servicing Agent.
A. The Fund hereby appoints FDS to act as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent for the Fund upon, and
subject to, the terms and provisions of this Agreement.
B. FDS hereby accepts the appointment as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent for the Fund, and agrees
to act as such upon, and subject to, the terms and provisions of this
Agreement.
II. Definitions.
In this Agreement:
A. The term "Act" means the Investment Company Act of 1940 as amended
from time to time and any rule or regulation thereunder;
B. The term "Account" means any account of a Shareholder, or, if the
shares are held in an account in the name of MLPF&S for benefit of an
identified customer, such account, including a Plan Account, any account
under a plan (by whatever name referred to in the Prospectus) pursuant to
the Self-Employed Individuals Retirement Act of 1962 ("Keogh Act Plan")
and any plan (by whatever name referred to in the Prospectus) in
conjunction with Section 401 of the Internal Revenue Code ("Corporation
Master Plan");
<PAGE> 2
C. The term "application" means an application made by a Shareholder
or prospective Shareholder respecting the opening of an Account;
D. The term "MLFD" means Merrill Lynch Funds Distributor, Inc., a
Delaware corporation;
E. The term "MLPF&S" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a Delaware corporation;
F. The term "Officer's Instruction" means an instruction in writing
given on behalf of the Fund to FDS, and signed on behalf of the Fund by
the President, any Vice President, the Secretary or the Treasurer of the
Fund;
G. The term "Prospectus" means the Prospectus and the Statement of
Additional Information of the Fund as from time to time in effect;
H. The term "Shares" means shares of stock or beneficial interest, as
the case may be, of the Fund, irrespective of class or series;
I. The term "Shareholder" means the holder of record of Shares;
J. The term "Plan Account" means an account opened by a Shareholder
or prospective Shareholder in respect to an open account, monthly payment
or withdrawal plan (in each case by whatever name referred to in the
Prospectus), and may also include an account relating to any other Plan if
and when provision is made for such plan in the Prospectus.
2
<PAGE> 3
III. Duties of FDS as Transfer Agent, Dividend Disbursing Agent and
Shareholder Servicing Agent.
A. Subject to the succeeding provisions of the Agreement, FDS hereby
agrees to perform the following functions as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent for the Fund;
1. Issuing, transferring and redeeming Shares;
2. Opening, maintaining, servicing and closing Accounts;
3. Acting as agent for the Fund Shareholders and/or customers of
MLPF&S in connection with Plan Accounts, upon the terms and subject to
the conditions contained in the Prospectus and application relating to
the specific Plan Account;
4. Acting as agent of the Fund and/or MLPF&S, maintaining such
records as may permit the imposition of such contingent deferred sales
charges as may be described in the Prospectus, including such reports as
may be reasonably requested by the Fund with respect to such Shares as
may be subject to a contingent deferred sales charge;
5. Upon the redemption of Shares subject to such a contingent
deferred sales charge, calculating and deducting from the redemption
proceeds thereof the amount of such charge in the manner set forth in the
Prospectus. FDS shall pay, on behalf of MLFD, to MLPF&S such deducted
contingent deferred sales charges imposed upon all Shares maintained in
the name of MLPF&S, or maintained in the name of an account identified as
a customer account of MLPF&S. Sales charges imposed upon any other
Shares shall be paid by FDS to MLFD.
6. Exchanging the investment of an investor into, or from the shares
of other open-end investment companies or other series portfolios of the
Fund, if any, if and to the extent permitted by the Prospectus at the
direction of such investor.
7. Processing redemptions;
8. Examining and approving legal transfers;
9. Replacing lost, stolen or destroyed certificates representing
Shares, in accordance with, and subject to, procedures and conditions
adopted by the Fund;
3
<PAGE> 4
10. Furnishing such confirmations of transactions relating to their
Shares as required by applicable law;
11. Acting as agent for the Fund and/or MLPF&S, furnishing such
appropriate periodic statements relating to Accounts, together with
additional enclosures, including appropriate income tax information and
income tax forms duly completed, as required by applicable law;
12. Acting as agent for the Fund and/or MLPF&S, mailing annual,
semi-annual and quarterly reports prepared by or on behalf of the Fund,
and mailing new Prospectuses upon their issue to Shareholders as required
by applicable law;
13. Furnishing such periodic statements of transactions effected by
FDS, reconciliations, balances and summaries as the Fund may reasonably
request;
14. Maintaining such books and records relating to transactions
effected by FDS as are required by the Act, or by any other applicable
provision of law, rule or regulation, to be maintained by the Fund or its
transfer agent with respect to such transactions, and preserving, or
causing to be preserved any such books and records for such periods as
may be required by any such law, rule or regulation and as may be agreed
upon from time to time between FDS and the Fund. In addition, FDS agrees
to maintain and preserve master files and historical computer tapes on a
daily basis in multiple separate locations a sufficient distance apart to
insure preservation of at least one copy of such information;
15. Withholding taxes on non-resident alien Accounts preparing and
filing U.S. Treasury Department Form 1099 and other appropriate forms as
required by applicable law with respect to dividends and distributions;
and
16. Reinvesting dividends for full and fractional shares and
disbursing cash dividends, as applicable.
B. FDS agrees to act as proxy agent in connection with the holding
of annual, if any, and special meetings of Shareholders, mailing such
notices, proxies and proxy statements in connection with the holding of
such meetings as may be required by applicable law, receiving and
tabulating votes cast by proxy and communicating to the Fund the results
of such tabulation accompanied by appropriate certifications, and
preparing and furnishing to the Fund certified lists of Shareholders as
of such date, in such form and containing such information as may be
required by the Fund.
4
<PAGE> 5
C. FDS agrees to deal with, and answer in a timely manner, all
correspondence and inquiries relating to the functions of FDS under this
Agreement with respect to Accounts.
D. FDS agrees to furnish to the Fund such information and at such
intervals as is necessary for the Fund to comply with the registration
and/or the reporting requirements (including applicable escheat laws) of
the Securities and Exchange Commission, Blue Sky authorities or other
governmental authorities.
E. FDS agrees to provide to the Fund such information as may
reasonably be required to enable the Fund to reconcile the number of
outstanding Shares between FDS's records and the account books of the
Fund.
F. Notwithstanding anything in the foregoing provisions of this
paragraph, FDS agrees to perform its functions thereunder subject to such
modification (whether in respect of particular cases or in any particular
class of cases) as may from time to time be contained in an Officer's
Instruction.
IV. Compensation.
The charges for services described in this Agreement, including
"out-of-pocket" expenses, will be set forth in the Schedule of Fees attached
hereto.
V. Right of Inspection.
FDS agrees that it will in a timely manner make available to, and permit,
any officer, accountant, attorney or authorized agent of the Fund to examine
and make transcripts and copies (including photocopies and computer or other
electronic information storage media and print-outs) of any and all of its
books and records which relate to any transaction or function performed by FDS
under or pursuant to this Agreement.
VI. Confidential Relationship.
FDS agrees that it will, on behalf of itself and its officers and
employees, treat all transactions contemplated by this Agreement, and all
information germane thereto, as confidential and not to be disclosed to any
person (other than the Shareholder concerned, or the Fund, or as may be
disclosed in the examination of any books or records by any person lawfully
entitled to examine the same) except as may be authorized by the Fund by way of
an Officer's Instruction.
5
<PAGE> 6
VII. Indemnification.
The Fund shall indemnify and hold FDS harmless from any loss, costs,
damage and reasonable expenses, including reasonable attorney's fees (provided
that such attorney is appointed with the Fund' sconsent, which consent shall
not be unreasonably withheld), incurred by it resulting from any claim, demand,
action, or suit in connection with the performance of its duties hereunder,
provided that this indemnification shall not apply to actions or omissions of
FDS in cases of willful misconduct, failure to act in good faith or negligence
by FDS, it's officers, employees or agents, and further provided, that prior to
confessing any claim against it which may be subject to this indemnification,
FDS shall give the Fund reasonable opportunity to defend against said claim in
its own name or in the name of FDS. An action taken by FDS upon any Officer's
Instruction reasonably believed by it to have been properly executed shall not
constitute willful misconduct, failure to act in good faith or negligence under
this Agreement.
VIII. Regarding FDS.
A. FDS hereby agrees to hire, purchase, develop and maintain such
dedicated personnel, facilities, equipment, software, resources and
capabilities as may be reasonably determined by the Fund to be necessary
for the satisfactory performance of the duties and responsibilities of
FDS. FDS warrants and represents that its officers and supervisory
personnel charged with carrying out its functions as Transfer Agent,
Dividend Disbursing Agent and Shareholder servicing Agent for the Fund
possess the special skill and technical knowledge appropriate for that
purpose. FDS shall at all times exercise due care and diligence in the
performance of its functions as Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent for the Fund. FDS agrees that, in
determining whether it has exercised due care and diligence, its conduct
shall be measured by the standard applicable to persons possessing such
special skill and technical knowledge.
B. FDS warrants and represents that it is duly authorized and
permitted to act as Transfer Agent, Dividend Disbursing Agent, and
Shareholder Servicing Agent under all applicable laws and that it will
immediately notify the Fund of any revocation of such authority or
permission or of the commencement of any proceeding or other action which
may lead to such revocation.
IX. Termination.
A. This Agreement shall become effective as of the date first above
written and shall thereafter continue from
6
<PAGE> 7
year to year. This Agreement may be terminated by the Fund or FDS
(without penalty to the Fund or FDS) provided that the terminating party
gives the other party written notice of such termination at least sixty
(60) days in advance, except that the Fund may terminate this Agreement
immediately upon written notice to FDS if the authority or permission of
FDS to act as Transfer Agent, Dividend Disbursing Agent and Shareholder
Servicing Agent has been revoked or if any proceeding or other action
which the Fund reasonably believes will lead to such revocation has been
commenced.
B. Upon termination of this Agreement, FDS shall deliver all unissued
and canceled stock certificates representing Shares remaining in its
possession, and all Shareholder records, books, stock ledgers,
instruments and other documents (including computerized or other
electronically stored information) made or accumulated in the performance
of its duties as Transfer Agent, Dividend Disbursing Agent and
Shareholder Servicing Agent for the Fund along with a certified locator
document clearly indicating the complete contents therein, to such
successor as may be specified in a notice of termination or Officer's
Instruction; and the Fund assumes all responsibility for failure
thereafter to produce any paper, record or documents so delivered and
identified in the locator document, if and when required to be produced.
X. Amendment.
Except to the extent that the performance by FDS or its functions under
this Agreement may from time to time be modified by an Officer's Instruction,
this Agreement may be amended or modified only by further written Agreement
between the parties.
XI. Governing Law.
This Agreement shall be governed by the laws of the State of New Jersey.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective duly authorized officers and their respective
corporate seals hereunto duly affixed and attested, as of the day and year
above written.
MERRILL LYNCH CALIFORNIA
MUNICIPAL SERIES TRUST
By:/s/
----------------------------
Title: Vice-President
-------------------------
FINANCIAL DATA SERVICES, INC.
By: /s/ ROBERT HARRIS
----------------------------
Title: Vice President
-------------------------
8
<PAGE> 1
Ex-99.13
CERTIFICATE OF SOLE SHAREHOLDER
Fund Asset Management, Inc. ("FAMI"), the holder of 5,000 Class A shares
of beneficial interest, par value $0.10 per share, and 5,000 Class B shares of
beneficial interest, par value $0.10 per share, of Merrill Lynch California
Insured Municipal Bond Fund (the "Fund"), of Merrill Lynch California Municipal
Series Trust (the "Trust"), a Massachusetts business 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 Fund's organizational expenses, the proceeds
thereof will be reduced by the proportionate amount of unamortized
organizational expenses which the number of shares being redeemed bears to the
number of shares initially purchased and outstanding at the time of redemption.
FAMI further agrees that in the event such shares are sold or otherwise
transferred to any other party, that prior to such sale or transfer FAMI will
obtain on behalf of the Fund an agreement from such other party to comply with
the foregoing as to the reduction of redemption proceeds and to obtain a
similar agreement from any transferee of such party.
FUND ASSET MANAGEMENT, INC.
By:/s/ PHILIP L. KIRSTEIN
---------------------------
Philip L. Kirstien
Dated: January 20, 1993
<PAGE> 1
EXHIBIT 16(a)
CALIFORNIA INSURED MUNICIPAL BOND
FUND CLASS A
FEBRUARY 26,1993-MAY 31,1993
AVERAGE ANNUAL AND TOTAL RETURNS
<TABLE>
<CAPTION>
SINCE
INCEPTION SINCE
AVG. INCEPTION
ANNUAL TOTAL
RETURN RETURN*
--------- ----------
<S> <C> <C>
Initial Investment....................................................... $1,000.00 $1,000.00
Divided by Maximum Offering Price**...................................... 10.42
---------
Divided by Net Asset Value............................................... 10.00
----------
Equals Shares Purchased.................................................. 95.97 100.00
Plus Shares Acquired through Dividend Reinvestment....................... 1.10 1.12
--------- ----------
Equals Shares Held at 5/31/93............................................ 97.07 101.12
Multiplied by Net Asset Value at 5/31/93................................. 9.86 9.86
--------- ----------
Equals Ending Redeemable Value at $1,000 Investment (ERV) at 5/31/93.... $ 957.10 $ 997.00
Divided by $1,000 (P).................................................... 0.9571 0.9970
Subtract 1............................................................... -0.0429 -0.0030
Expressed as a percentage equals the Aggregate Total Return for the
Period (T)............................................................. -4.29%
==========
Expressed as a percentage equals the Aggregate Total Return for
the Period............................................................. -0.30%
==========
ERV divided by P......................................................... 0.9571
Raise to the power of.................................................... 3.8830
Equals................................................................... 0.8435
Subtract 1............................................................... -0.1565
Expressed as a percentage equals the Average Annualized Total Return..... -15.65%
=========
- ------------
</TABLE>
*Does not include sales charge for the period.
**Includes 4.0% sales charge.
<PAGE> 2
EXHIBIT 16(a) Continued
30 DAYS STANDARDIZED YIELD FOR PERIOD
ENDING MAY 31,1993
CALIFORNIA INSURED MUNICIPAL BOND FUND-CLASS A
<TABLE>
<S> <C>
Long term income generally based on yield to maturity
times market value of each security.................................... $ 62,197
Plus short term income accrued for the past thirty days.................. 2,468
------------
Equals Total Income..................................................... 64,665
Less expenses for the past thirty days.................................. (513)
------------
Equals net monthly income for yield calculation......................... 64,152
------------
Average shares outstanding for 30 days.................................. 1,495,589
Times the Maximum Offering Price........................................ 10.26
-----------
Equals total dollars.................................................... $ 15,344,742
============
Net monthly income divided by total dollars equals...................... 0.004180721
------------
Add 1................................................................... 1.004180721
------------
Raise to the power of 6................................................. 1.025347970
------------
Subtract 1.............................................................. 0.025347970
------------
Times 2................................................................. 0.050695940
------------
Expressed as a percentage equals the
Standardized Yield for 30 day period.................................. 5.07%
============
Tax Rate................................................................ 28.00%
X = 1 minus Tax Rate.................................................... 72.00%
Standardized Yield divided by X equals
Tax Equivalent Yield for 30 day period................................ 7.04%
============
</TABLE>
<PAGE> 1
EXHIBIT 16 (b)
CALIFORNIA INSURED MUNICIPAL BOND FUND CLASS B
FEBRUARY 26,1993-MAY 31,1993
AVERAGE ANNUAL AND TOTAL RETURNS
<TABLE>
<CAPTION>
Since
Inception Since
Avg. Inception
Annual Total
Return Return*
--------- ---------
<S> <C> <C>
Initial Investment............................ $1,000.00 $1,000.00
Divided by Net Asset Value.................... 10.00 10.00
--------- ---------
Equals Shares Purchased....................... 100.00 100.00
Plus Shares Acquired through
Dividend Reinvestment......................... 0.99 0.99
--------- ---------
Equals Shares Held at 5/31/93................. 100.99 100.99
Multiplied by Net Asset Value at 5/31/93...... 9.86 9.86
--------- ---------
Equals Ending Value before deduction
for contingent deferred sales charge.......... 995.80 995.80
Less deferred sales charge.................... (39.30) 0.00
--------- ---------
Equals Ending Redeemable Value at $1,000
Investment (ERV).............................. $ 956.50 $ 995.80
--------- ---------
Divided by $1,000 (P)......................... 0.9565 0.9958
Subtract 1.................................... -0.0435 -0.0042
Expressed as a percentage equals the..........
Aggregate Total Return for the Period (T)..... -4.35%
=========
Expressed as a percentage equals the
Aggregate Total Return for the Period......... -0.42%
=========
ERV divided by P.............................. 0.9565
Raise to the power of......................... 3.8830
Equals........................................ 0.8414
Subtract 1.................................... -0.1586
Expressed as a percentage equals the
Average Annualized Total Return............... -15.86%
========
- -----------
</TABLE>
*Does not include sales charge for the period.
<PAGE> 1
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 Insured 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 494,673 shares of beneficial interest, par value $0.10 per
share (the "Shares"), of the Merrill Lynch California Insured 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. 33-55864), as amended (the
"Registration Statement").
As counsel for the Trust, we are familiar with the proceedings taken by
it in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Declaration of Trust of the
Trust, as amended, the By-Laws of the Trust and such other documents as we have
deemed relevant to the matters referred to in this opinion.
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par 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 Insured Municipal Bond Fund of Merrill Lynch California
Municipal Series Trust:
We consent to the use in Post-Effective Amendment No. 4 to Registration
Statement No. 33-55864 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 INSURED MUNICIPAL BOND FUND - CLASS C
10/21/94 - 08/31/95
<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVERAGE ANNUAL TOTAL
TOTAL RETURN RETURN*
-------------- --------------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Net Asset Value 9.19 9.19
---------- ----------
Equals Shares Purchased 108.814 108.814
Plus Shares Acquired through Dividend Reinvestment 4.499 4.499
---------- ----------
Equals Shares Held at 08/31/95 113.313 113.313
Multiplied by Net Asset Value at 08/31/95 9.65 9.65
---------- ----------
Equals Ending Value before deduction for contingent
deferred sales charge 1,093.47 1,093.47
Less deferred sales charge (10.00) 0.00
---------- ----------
Equals Ending Redeemable Value at $1000 Investment
(ERV) at 08/31/95 1,083.47 1,093.47
---------- ----------
Divided by $1,000 (P) 1.0835 1.0935
Subtract 1 0.0835 0.0935
Expressed as a percentage equals the Aggregate
Total Return for the Period (T) 8.35%
==========
Expressed as a percentage equals the Aggregate
Total Return for the Period 9.35%
==========
ERV divided by P 1.0835
Raise to the power of 1.1624
Equals 1.0977
Subtract 1 0.0977
Expressed as a percentage equals the Average
Annualized Total Return 9.77%
==========
</TABLE>
* Does not include sales charge for the period.
<PAGE> 2
EXHIBIT 16(c)
30 DAYS STANDARDIZED YIELD FOR PERIOD
ENDING 08-31-95
Merrill Lynch California Insured 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 $7,291
Plus short term income accrued for the past thirty days 480
-----------
Equals Total Income 7,771
Less expenses for the past thirty days (1,294)
-----------
Equals net monthly income for yield calculation 6,477
-----------
Average shares outstanding for 30 days 160,006
Times the Maximum Offering Price 9.64
-----------
Equals total dollars $1,542,455
===========
Net monthly income dividend by total dollars equals 0.004199001
Add 1 1.004199001
Raise to the power of 6 1.025459963
Subtract 1 0.025459963
Times 2 0.050919926
Expressed as a percentage equals the standardized
yield for 30 day period 5.09%
=======
Tax Rate 28.00%
X = 1 minus Tax Rate 72.00%
Standardized Yield divided by X equals Tax Equivalent
Yield for 30 day period 7.07%
=======
</TABLE>
<PAGE> 1
EXHIBIT 16(d)
MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND - 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 9.57
----------
Divided by Net Asset Value 9.19
----------
Equals Shares Purchased 104.462 108.814
Plus Shares Acquired through Dividend Reinvestment 4.796 5.000
---------- ----------
Equals Shares Held at 08/31/95 109.258 113.814
Multiplied by Net Asset Value at 08/31/95 9.66 9.66
---------- ----------
Equals Ending Redeemable Value at $1000 Investment
(ERV) at 08/31/95 1,055.43 1,099.44
Divided by $1,000 (P) 1.0554 1.0994
Subtract 1 0.0554 0.0994
Expressed as a percentage equals the Aggregate
Total Return for the Period (T) 5.54%
==========
Expressed as a percentage equals the Aggregate
Total Return for the Period 9.94%
==========
ERV divided by P 1.0554
Raise to the power of 1.1624
Equals 1.0647
Subtract 1 0.0647
Expressed as a percentage equals the Average
Annualized Total Return 6.47%
==========
</TABLE>
* Does not include sales charge for the period.
<PAGE> 2
EXHIBIT 16(d)
30 DAYS STANDARDIZED YIELD FOR PERIOD
ENDING 08-31-95
Merrill Lynch California Insured Municipal Bond Fund of Merrill Lynch
California Municipal Series Trust - Class D
<TABLE>
<S> <C>
Long term income generally based on yield to
maturity times market value of each security $ 8,498
Plus short term income accrued for the past
thirty days 559
----------
Equals Total Income 9,057
Less expenses for the past thirty days (773)
----------
Equals net monthly income for yield calculation 8,284
----------
Average shares outstanding for 30 days 186,214
Times the Net Asset Value 10.05
----------
Equals total dollars $1,871,451
==========
Net monthly income divided by total dollars equals 0.004426523
Add 1 1.004426523
Raise to the power of 6 1.026854789
Substract 1 0.026854789
Times 2 0.053709577
Expressed as a percentage equals the
standardized yield for the 30 day period 5.37%
====
Tax Rate 28.00%
X = 1 minus Tax Rate 72.00%
Standardized Yield divided by x equals
Tax Equivalent Yield for 30 day period 7.46%
====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000895399
<NAME> MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
<SERIES>
<NUMBER> 001
<NAME> MERRILL LYNCH CALIFORNIA INSURED 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> 82510393
<INVESTMENTS-AT-VALUE> 83656783
<RECEIVABLES> 7701292
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 138121
<TOTAL-ASSETS> 91496196
<PAYABLE-FOR-SECURITIES> 1580263
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 418815
<TOTAL-LIABILITIES> 1999078
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 93121337
<SHARES-COMMON-STOCK> 1472276
<SHARES-COMMON-PRIOR> 1671544
<ACCUMULATED-NII-CURRENT> (4404870)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 365739
<ACCUM-APPREC-OR-DEPREC> 1146390
<NET-ASSETS> 14204187
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5213964
<OTHER-INCOME> 0
<EXPENSES-NET> 769962
<NET-INVESTMENT-INCOME> 4444002
<REALIZED-GAINS-CURRENT> (2217617)
<APPREC-INCREASE-CURRENT> 2985447
<NET-CHANGE-FROM-OPS> 5211832
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 814541
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 182796
<NUMBER-OF-SHARES-REDEEMED> 415410
<SHARES-REINVESTED> 33346
<NET-CHANGE-IN-ASSETS> (1431044)
<ACCUMULATED-NII-PRIOR> (2187253)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 365739
<GROSS-ADVISORY-FEES> 478480
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1124637
<AVERAGE-NET-ASSETS> 14717766
<PER-SHARE-NAV-BEGIN> 9.54
<PER-SHARE-NII> .52
<PER-SHARE-GAIN-APPREC> .11
<PER-SHARE-DIVIDEND> .52
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.65
<EXPENSE-RATIO> .87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000895399
<NAME> MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
<SERIES>
<NUMBER> 002
<NAME> MERRILL LYNCH CALIFORNIA INSURED 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> 82510393
<INVESTMENTS-AT-VALUE> 83656783
<RECEIVABLES> 7701292
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 138121
<TOTAL-ASSETS> 91496196
<PAYABLE-FOR-SECURITIES> 1580263
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 418815
<TOTAL-LIABILITIES> 1999078
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 93121337
<SHARES-COMMON-STOCK> 7427977
<SHARES-COMMON-PRIOR> 7859558
<ACCUMULATED-NII-CURRENT> (4404870)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 365739
<ACCUM-APPREC-OR-DEPREC> 1146390
<NET-ASSETS> 71669604
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5213964
<OTHER-INCOME> 0
<EXPENSES-NET> 769962
<NET-INVESTMENT-INCOME> 4444002
<REALIZED-GAINS-CURRENT> (2217617)
<APPREC-INCREASE-CURRENT> 2985447
<NET-CHANGE-FROM-OPS> 5211832
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3562702
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1704924
<NUMBER-OF-SHARES-REDEEMED> 2311348
<SHARES-REINVESTED> 174843
<NET-CHANGE-IN-ASSETS> (1431044)
<ACCUMULATED-NII-PRIOR> (2187253)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 365739
<GROSS-ADVISORY-FEES> 478480
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1124637
<AVERAGE-NET-ASSETS> 70959146
<PER-SHARE-NAV-BEGIN> 9.54
<PER-SHARE-NII> .48
<PER-SHARE-GAIN-APPREC> .11
<PER-SHARE-DIVIDEND> .48
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.65
<EXPENSE-RATIO> 1.38
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000895399
<NAME> MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
<SERIES>
<NUMBER> 003
<NAME> MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND CLASS C
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-START> OCT-21-1994
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 82510393
<INVESTMENTS-AT-VALUE> 83656783
<RECEIVABLES> 7701292
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 138121
<TOTAL-ASSETS> 91496196
<PAYABLE-FOR-SECURITIES> 1580263
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 418815
<TOTAL-LIABILITIES> 1999078
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 93121337
<SHARES-COMMON-STOCK> 184456
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (4404870)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 365739
<ACCUM-APPREC-OR-DEPREC> 1146390
<NET-ASSETS> 1778027
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5213964
<OTHER-INCOME> 0
<EXPENSES-NET> 769962
<NET-INVESTMENT-INCOME> 4444002
<REALIZED-GAINS-CURRENT> (2217617)
<APPREC-INCREASE-CURRENT> 2985447
<NET-CHANGE-FROM-OPS> 5211832
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 29658
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 247131
<NUMBER-OF-SHARES-REDEEMED> 64156
<SHARES-REINVESTED> 1481
<NET-CHANGE-IN-ASSETS> (1431044)
<ACCUMULATED-NII-PRIOR> (2187253)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 365739
<GROSS-ADVISORY-FEES> 478480
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1124637
<AVERAGE-NET-ASSETS> 729200
<PER-SHARE-NAV-BEGIN> 9.19
<PER-SHARE-NII> .39
<PER-SHARE-GAIN-APPREC> .45
<PER-SHARE-DIVIDEND> .39
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.64
<EXPENSE-RATIO> 1.49
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000895399
<NAME> MERRILL LYNCH CALIFORNIA MUNICIPAL SERIES TRUST
<SERIES>
<NUMBER> 004
<NAME> MERRILL LYNCH CALIFORNIA INSURED MUNICIPAL BOND FUND CLASS D
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-START> OCT-21-1994
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 82510393
<INVESTMENTS-AT-VALUE> 83656783
<RECEIVABLES> 7701292
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 138121
<TOTAL-ASSETS> 91496196
<PAYABLE-FOR-SECURITIES> 1580263
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 418815
<TOTAL-LIABILITIES> 1999078
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 93121337
<SHARES-COMMON-STOCK> 191127
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (4404870)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 365739
<ACCUM-APPREC-OR-DEPREC> 1146390
<NET-ASSETS> 1845300
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5213964
<OTHER-INCOME> 0
<EXPENSES-NET> 769962
<NET-INVESTMENT-INCOME> 4444002
<REALIZED-GAINS-CURRENT> (2217617)
<APPREC-INCREASE-CURRENT> 2985447
<NET-CHANGE-FROM-OPS> 5211832
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 37101
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 308159
<NUMBER-OF-SHARES-REDEEMED> 118777
<SHARES-REINVESTED> 1745
<NET-CHANGE-IN-ASSETS> (1431044)
<ACCUMULATED-NII-PRIOR> (2187253)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 365739
<GROSS-ADVISORY-FEES> 478480
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1124637
<AVERAGE-NET-ASSETS> 814292
<PER-SHARE-NAV-BEGIN> 9.19
<PER-SHARE-NII> .44
<PER-SHARE-GAIN-APPREC> .46
<PER-SHARE-DIVIDEND> .44
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.65
<EXPENSE-RATIO> .97
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
