<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 7, 1998
SECURITIES ACT FILE NO. 333-28619
INVESTMENT COMPANY ACT FILE NO. 811-4311
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1 POST-EFFECTIVE AMENDMENT NO. [ ]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH CONVERTIBLE FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
(609) 282-2800
(AREA CODE AND TELEPHONE NUMBER)
------------------------
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES:
NUMBER, STREET, CITY, STATE, ZIP CODE)
------------------------
ARTHUR ZEIKEL
MERRILL LYNCH CONVERTIBLE FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN A. MACKINNON, ESQ. PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT, L.P.
ONE WORLD TRADE CENTER 800 SCUDDERS MILL ROAD
NEW YORK, NY 10048-0557 PLAINSBORO, NJ 08536
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the Registration Statement becomes effective under the Securities Act of 1933.
------------------------
TITLE OF SECURITIES BEING REGISTERED: Common Stock, par value $.10 per
share.
No filing fee is required because of reliance on Section 24(f) under the
Investment Company Act of 1940, as amended. Pursuant to Rule 429, this
Registration Statement relates to shares previously registered on Form N-1A
(File No. 333-28619).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
MERRILL LYNCH CONVERTIBLE FUND, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(a) UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
FORM N-14 PROXY STATEMENT AND
ITEM NO. PROSPECTUS CAPTION
- ---------------------------------------------------- -------------------------------------
<S> <C>
PART A
Item 1. Beginning of Registration Statement and
Outside Front Cover Page of Prospectus..... Registration Statement Cover Page;
Proxy Statement and Prospectus Cover
Page
Item 2. Beginning and Outside Back Cover Page of
Prospectus................................. Table of Contents
Item 3. Fee Table, Synopsis Information and Risk
Factors.................................... Summary; Risk Factors and Special
Considerations
Item 4. Information about the Transaction.......... Summary; The Reorganization --
Agreement and Plan of
Reorganization
Item 5. Information about the Registrant........... Proxy Statement and Prospectus Cover
Page; Summary; Comparison of the
Funds; Additional Information
Item 6. Information about the Company Being
Acquired................................... Proxy Statement and Prospectus Cover
Page; Summary; Comparison of the
Funds; Additional Information
Item 7. Voting Information......................... Notice of Special Meeting of
Stockholders; Introduction;
Summary; Comparison of the Funds;
Information Concerning the Special
Meeting; Additional Information
Item 8. Interest of Certain Persons and Experts.... Not Applicable
Item 9. Additional Information Required for
Reoffering by Persons Deemed to be
Underwriters............................... Not Applicable
PART B
Item 10. Cover Page................................. Cover Page
Item 11. Table of Contents.......................... Table of Contents
Item 12. Additional Information about the
Registrant........................................ General Information
Item 13. Additional Information about the Company
Being Acquired............................. General Information
Item 14. Financial Statements....................... Financial Statements
</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
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
------------------------
TO BE HELD ON FEBRUARY 11, 1998
TO THE STOCKHOLDERS OF
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the
"Meeting") of Merrill Lynch Global Convertible Fund, Inc. ("Global Convertible")
will be held at the offices of Merrill Lynch Asset Management, L.P., 800
Scudders Mill Road, Plainsboro, New Jersey on Wednesday, February 11, 1998 at
9:00 a.m., New York time, for the following purposes:
(1) To approve an Agreement and Plan of Reorganization (the "Agreement
and Plan of Reorganization") providing for the acquisition of substantially
all of the assets of Global Convertible by Merrill Lynch Convertible Fund,
Inc. ("Convertible Fund"), and the assumption of substantially all of the
liabilities of Global Convertible by Convertible Fund, in exchange solely
for an equal aggregate value of newly-issued shares of Convertible Fund.
The Agreement and Plan of Reorganization also provides for distribution of
such shares of Convertible Fund to stockholders of Global Convertible in
liquidation of Global Convertible. A vote in favor of this proposal will
constitute a vote in favor of the liquidation and dissolution of Global
Convertible and the termination of its registration under the Investment
Company Act of 1940, as amended; and
(2) To transact such other business as properly may come before the
Meeting or any adjournment thereof.
The Board of Directors of Global Convertible has fixed the close of
business on December 19, 1997 as the record date for the determination of
stockholders entitled to notice of, and to vote at, the Meeting or any
adjournment thereof.
A complete list of the stockholders of Global Convertible entitled to vote
at the Meeting will be available and open to the examination of any stockholders
of Global Convertible for any purpose germane to the Meeting during ordinary
business hours from and after January 28, 1998 at the offices of Global
Convertible, 800 Scudders Mill Road, Plainsboro, New Jersey.
You are cordially invited to attend the Meeting. Stockholders who do not
expect to attend the Meeting in person are requested to complete, date and sign
the enclosed form of proxy and return it promptly in the envelope provided for
that purpose. The enclosed proxy is being solicited on behalf of the Board of
Directors of Global Convertible.
By Order of the Board of Directors,
LAWRENCE A. ROGERS
Secretary
Plainsboro, New Jersey
Dated: January 7, 1998
<PAGE> 4
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
MERRILL LYNCH CONVERTIBLE FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800
------------------------
SPECIAL MEETING OF STOCKHOLDERS OF
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
------------------------
FEBRUARY 11, 1998
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Board of Directors of Merrill Lynch
Global Convertible Fund, Inc., a Maryland corporation ("Global Convertible"),
for use at the Special Meeting of Stockholders of Global Convertible (the
"Meeting") called to approve or disapprove the proposed reorganization whereby
Merrill Lynch Convertible Fund, Inc., a Maryland corporation ("Convertible
Fund"), will acquire substantially all of the assets, and will assume
substantially all of the liabilities, of Global Convertible, in exchange solely
for an equal aggregate value of newly-issued shares of Convertible Fund (the
"Reorganization"). Immediately upon the receipt by Convertible Fund of Global
Convertible's assets and the assumption by Convertible Fund of Global
Convertible's liabilities, as described in the preceding sentence, Corresponding
Shares (defined below) of Convertible Fund will be distributed to Global
Convertible stockholders. Thereafter, Global Convertible will terminate its
registration under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and will dissolve in accordance with the laws of the
State of Maryland.
(continued on next page)
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROXY STATEMENT AND PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
This Proxy Statement and Prospectus sets forth concisely the information
about Convertible Fund that stockholders of Global Convertible should know
before considering the Reorganization and should be retained for future
reference. Global Convertible has authorized the solicitation of proxies in
connection with the Reorganization solely on the basis of this Proxy Statement
and Prospectus and the accompanying documents.
A statement of additional information relating to the Reorganization (the
"Statement of Additional Information"), including pro forma financial statements
of Global Convertible and Convertible Fund, is on file with the Commission. It
is available from Convertible Fund without charge, upon oral request by calling
the toll free telephone number set forth on page 2 or upon written request by
writing Convertible Fund at its principal executive offices. The Statement of
Additional Information, dated January 7, 1998 is incorporated by reference into
this Proxy Statement and Prospectus. The Commission maintains a web site
(http://www.sec.gov) that contains the Statement of Additional Information, the
Convertible Fund Prospectus, the Global Convertible Prospectus, the Convertible
Fund Statement, the Global Convertible Statement, other material incorporated by
reference and other information regarding the Funds.
The address of the principal executive offices of both Global Convertible
and Convertible Fund is 800 Scudders Mill Road, Plainsboro, New Jersey 08536,
and the telephone number is (609) 282-2800.
------------------------
THE DATE OF THIS PROXY STATEMENT AND PROSPECTUS IS JANUARY 7, 1998.
<PAGE> 5
Holders of shares in Global Convertible will receive that class of shares
of Convertible Fund having the same letter designation (i.e., Class A, Class B,
Class C or Class D) and the same distribution fees, account maintenance fees,
and sales charges (including contingent deferred sales charges ("CDSCs"), if any
(the "Corresponding Shares"), as the shares of Global Convertible held by them
immediately prior to the Reorganization. The aggregate net asset value of the
Corresponding Shares of Convertible Fund to be issued to the stockholders of
Global Convertible will equal the aggregate net asset value of the outstanding
shares of Global Convertible as set forth in the Agreement and Plan of
Reorganization. Global Convertible and Convertible Fund sometimes are referred
to herein collectively as the "Funds" and individually as a "Fund," as the
context requires. The fund resulting from the Reorganization is sometimes
referred to herein as the "Combined Fund."
This Proxy Statement and Prospectus serves as a prospectus of Convertible
Fund under the Securities Act of 1933, as amended (the "Securities Act"), in
connection with the issuance of shares of Convertible Fund to Global Convertible
pursuant to the terms of the Reorganization.
Both Global Convertible and Convertible Fund are open-end management
investment companies with similar, though not identical, investment objectives.
Convertible Fund seeks to provide stockholders with high total return by
investing primarily in a portfolio of convertible debt securities, convertible
preferred stocks and synthetic convertible securities. Global Convertible seeks
to provide stockholders with high total return by investing primarily in an
internationally diversified portfolio of convertible debt securities,
convertible preferred stocks and synthetic convertible securities consisting of
a combination of debt securities or preferred stock and warrants or options.
There can be no assurance that, after the Reorganization, Convertible Fund will
achieve its investment objective.
The current prospectus relating to Convertible Fund, dated December 29,
1997 (the "Convertible Fund Prospectus") accompanies this Proxy Statement and
Prospectus and is incorporated herein by reference. The Annual Report to
Stockholders of Convertible Fund for the year ended August 31, 1997 also
accompanies this Proxy Statement and Prospectus. A statement of additional
information relating to Convertible Fund, dated December 29, 1997 (the
"Convertible Fund Statement"), a prospectus of Global Convertible dated February
24, 1997 (the "Global Convertible Prospectus") and a statement of additional
information relating to Global Convertible, dated February 24, 1997 (the "Global
Convertible Statement"), have been filed with the Securities and Exchange
Commission (the "Commission"). Such documents may be obtained, without charge,
by writing either Global Convertible or Convertible Fund at the address above,
or by calling 1-800-456-4587, ext. 123.
2
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION.......................................................................... 4
SUMMARY............................................................................... 4
The Reorganization.......................................................... 4
Pro Forma Fee Table......................................................... 6
RISK FACTORS AND SPECIAL CONSIDERATIONS............................................... 13
COMPARISON OF THE FUNDS............................................................... 16
Financial Highlights........................................................ 16
Investment Objectives and Policies.......................................... 21
Other Investment Policies................................................... 24
Information Regarding Options, Futures and Foreign Exchange Transactions.... 25
Investment Restrictions..................................................... 25
Management.................................................................. 26
Purchase of Shares.......................................................... 27
Redemption of Shares........................................................ 27
Performance................................................................. 27
Voting Rights............................................................... 28
Dividends and Distributions................................................. 28
Tax Information............................................................. 28
Portfolio Transactions...................................................... 29
Portfolio Turnover.......................................................... 29
Additional Information...................................................... 29
THE REORGANIZATION.................................................................... 30
General..................................................................... 30
Procedure................................................................... 31
Terms of the Agreement and Plan of Reorganization........................... 31
Potential Benefits to Stockholders as a Result of the Reorganization........ 33
Tax Consequences of the Reorganization...................................... 34
Capitalization.............................................................. 35
INFORMATION CONCERNING THE SPECIAL MEETING............................................ 36
Date, Time and Place of Meeting............................................. 36
Solicitation, Revocation and Use of Proxies................................. 36
Record Date and Outstanding Shares.......................................... 36
Security Ownership of Certain Beneficial Owners and Management of Global
Convertible and Convertible Fund............................................. 37
Voting Rights and Required Vote............................................. 37
ADDITIONAL INFORMATION................................................................ 38
LEGAL PROCEEDINGS..................................................................... 38
LEGAL OPINIONS........................................................................ 39
EXPERTS............................................................................... 39
STOCKHOLDER PROPOSALS................................................................. 39
EXHIBIT I............................................................................. I-1
</TABLE>
3
<PAGE> 7
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Board of Directors of Global
Convertible for use at the Meeting to be held at the offices of Merrill Lynch
Asset Management, L.P. ("MLAM"), 800 Scudders Mill Road, Plainsboro, New Jersey
on February 11, 1998, at 9:00 a.m., New York time. The mailing address for
Global Convertible is P.O. Box 9011, Princeton, New Jersey 08543-9011. The
approximate mailing date of this Proxy Statement and Prospectus is January 12,
1998.
Any person giving a proxy may revoke it at any time prior to its exercise
by executing a superseding proxy, by giving written notice of the revocation to
the Secretary of Global Convertible at the address indicated above or by voting
in person at the Meeting. All properly executed proxies received prior to the
Meeting will be voted at the Meeting in accordance with the instructions marked
thereon or otherwise as provided therein. Unless instructions to the contrary
are marked, properly executed proxies will be voted "FOR" the proposal to
approve the Agreement and Plan of Reorganization between Global Convertible and
Convertible Fund (the "Agreement and Plan of Reorganization").
Approval of the Agreement and Plan of Reorganization will require the
affirmative vote of Global Convertible stockholders representing a majority of
the total number of votes entitled to be cast thereon. Stockholders will vote as
a single class on the proposal to approve the Agreement and Plan of
Reorganization. See "Information Concerning the Special Meeting."
The Board of Directors of Global Convertible knows of no business other
than that discussed above which will be presented for consideration at the
Meeting. If any other matter is properly presented, it is the intention of the
persons named in the enclosed proxy to vote in accordance with their best
judgment.
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and Prospectus (including documents incorporated by
reference) and is qualified in its entirety by reference to the more complete
information contained in this Proxy Statement and Prospectus and in the
Agreement and Plan of Reorganization, attached hereto as Exhibit I.
In this Proxy Statement and Prospectus, the term "Reorganization" refers
collectively to (i) the acquisition of substantially all of the assets and the
assumption of substantially all of the liabilities of Global Convertible by
Convertible Fund in exchange for the Corresponding Shares and the subsequent
distribution of Corresponding Shares of Convertible Fund to the stockholders of
Global Convertible; and (ii) the subsequent deregistration and dissolution of
Global Convertible.
THE REORGANIZATION
At a special meeting of the Board of Directors of Global Convertible held
on November 6, 1997, the Board of Directors of Global Convertible approved a
proposal that Convertible Fund acquire substantially all of the assets, and
assume substantially all of the liabilities, of Global Convertible in exchange
solely for shares of Convertible Fund to be distributed to the stockholders of
Global Convertible.
Based upon their evaluation of all relevant information, the Directors of
Global Convertible have determined that the Reorganization will potentially
benefit the stockholders of Global Convertible. Specif-
4
<PAGE> 8
ically, after the Reorganization, Global Convertible stockholders will remain
invested in an open-end fund that has an investment objective similar, though
not identical, to that of Global Convertible. In addition, after the
Reorganization, on a pro forma combined basis, Convertible Fund will pay an
advisory fee to MLAM at a lower annual rate than that currently paid by Global
Convertible and MLAM anticipates that Global Convertible stockholders will
further benefit from a reduced overall operating expense ratio as a result of
certain economies of scale expected after the Reorganization. See "The
Reorganization -- Potential Benefits to Stockholders as a Result of the
Reorganization."
The Board of Directors of Global Convertible, including a majority of the
Directors who are not "interested persons," as defined in the Investment Company
Act, has determined that the Reorganization is in the best interests of Global
Convertible and that the interests of existing Global Convertible stockholders
will not be diluted as a result of effecting the Reorganization.
If all of the requisite approvals are obtained, it is anticipated that the
Reorganization will occur as soon as practicable after such approval, provided
that Global Convertible and Convertible Fund have obtained prior to that time a
favorable private letter ruling from the Internal Revenue Service (the "IRS")
concerning the tax consequences of the Reorganization as set forth in the
Agreement and Plan of Reorganization. Under the Agreement and Plan of
Reorganization, however, the Board of Directors of Global Convertible or the
Board of Directors of Convertible Fund may cause the Reorganization to be
postponed or abandoned should either Board determine that it is in the best
interests of the stockholders of either Global Convertible or Convertible Fund,
respectively, to do so. The Agreement and Plan of Reorganization may be
terminated, and the Reorganization abandoned, whether before or after approval
by the stockholders of Global Convertible, at any time prior to the Exchange
Date (as defined below), (i) by mutual consent of the Board of Directors of
Global Convertible and the Board of Directors of Convertible Fund; (ii) by the
Board of Directors of Global Convertible if any condition to Global
Convertible's obligations has not been fulfilled or waived by such Board; or
(iii) by the Board of Directors of Convertible Fund if any condition to
Convertible Fund's obligations has not been fulfilled or waived by such Board.
5
<PAGE> 9
PRO FORMA FEE TABLE FOR CLASS A AND CLASS B STOCKHOLDERS OF GLOBAL CONVERTIBLE,
CONVERTIBLE FUND
AND THE COMBINED FUND AS OF SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
CLASS A SHARES(a) CLASS B SHARES(b)
------------------------------------- ---------------------------------------------
ACTUAL ACTUAL
------------------------- -----------------------------
GLOBAL CONVERTIBLE PRO FORMA GLOBAL CONVERTIBLE PRO FORMA
CONVERTIBLE FUND COMBINED CONVERTIBLE FUND COMBINED
----------- ----------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
STOCKHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price)...................... 5.25%(c) 5.25%(c) 5.25%(c) None None None
Sales Charge Imposed on Dividend
Reinvestments........................ None None None None None None
Deferred Sales Charge (as a percentage
of original purchase price or
redemption proceeds, whichever is
lower)............................... None(d) None(d) None(d) 4.0% during the first year, decreasing 1.0%
annually thereafter to 0.0% after the fourth
year(e)
Exchange Fee........................... None None None None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Investment Advisory Fees(f)............ 0.65% 0.60% 0.60% 0.65% 0.60% 0.60%
12b-1-Fees(g):
Account Maintenance Fees............. None None None 0.25% 0.25% 0.25%
Distribution Fees.................... None None None 0.75% 0.75% 0.75%
Other Expenses:
Stockholder Servicing Costs(h)....... 0.70% 0.08% 0.05% 0.70% 0.08% 0.05%
Other................................ 1.27% 0.28% 0.29% 1.27% 0.28% 0.29%
------ ------ ----- ---- ---- ----
Total Other Expenses............. 1.97% 0.36% 0.34% 1.97% 0.36% 0.34%
------ ------ ----- ---- ---- ----
Total Fund Operating Expenses.......... 2.62% 0.96% 0.94% 3.62% 1.96% 1.94%
====== ====== ===== ==== ==== ====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A stockholders, certain retirement plans and participants in certain
fee-based programs. See "Comparison of the Funds -- Purchase of Shares."
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Comparison of the Funds -- Purchase of
Shares."
(c) Reduced for Class A purchases of $25,000 and over, and waived for purchases
by certain retirement plans and in connection with certain fee-based
programs. Purchases of $1,000,000 or more may not be subject to an initial
sales charge. See "Comparison of the Funds -- Purchase of Shares."
(d) Class A shares are not subject to a CDSC, except that certain purchases of
$1,000,000 or more that are not subject to an initial sales charge may
instead be subject to a CDSC of 1.0% of amounts redeemed within the first
year of purchase. Such CDSC may be waived in connection with certain
fee-based programs.
(e) The CDSC may be modified in connection with certain fee-based programs.
(f) See "Comparison of the Funds -- Management."
(g) See "Comparison of the Funds -- Purchase of Shares."
(h) See "Comparison of the Funds -- Additional Information -- Transfer Agent,
Dividend Disbursing Agent and Registrar."
6
<PAGE> 10
CUMULATIVE EXPENSES PAID ON CLASS A AND CLASS B SHARES FOR THE PERIOD OF:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------- -------------------------------------
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
An investor would pay the
following expenses on a $1,000
investment, including the
maximum sales load of $52.50
(Class A shares only) and
assuming (1) the Total Fund
Operating Expenses set forth on
page 6 for the relevant fund,
(2) a 5% annual return
throughout the periods and (3)
redemption at the end of the
period (including any applicable
CDSC for Class B shares):
Global Convertible........... $78 $130 $184 $332 $76 $131 $187 $372*
Convertible Fund............. $62 $ 81 $103 $164 $60 $ 82 $106 $209*
Combined Fund+............... $62 $ 81 $102 $162 $60 $ 81 $105 $207*
An investor would pay the
following expenses on the same
$1,000 investment assuming no
redemption at the end of the
period:
Global Convertible........... $78 $130 $184 $332 $36 $111 $187 $372*
Convertible Fund............. $62 $ 81 $103 $164 $20 $ 62 $106 $209*
Combined Fund+............... $62 $ 81 $102 $162 $20 $ 61 $105 $207*
</TABLE>
- ---------------
* Assumes conversion of Class B shares to Class D shares approximately eight
years after initial purchase.
+ Assuming the Reorganization had taken place on October 1, 1996 (the first day
of the year ended September 30, 1997).
7
<PAGE> 11
PRO FORMA FEE TABLE FOR CLASS C AND CLASS D STOCKHOLDERS OF GLOBAL CONVERTIBLE,
CONVERTIBLE FUND
AND THE COMBINED FUND AS OF SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
------------------------------------- ---------------------------------------
ACTUAL ACTUAL
------------------------- --------------------------
GLOBAL CONVERTIBLE PRO FORMA GLOBAL CONVERTIBLE PRO FORMA
CONVERTIBLE FUND COMBINED CONVERTIBLE FUND COMBINED
----------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
STOCKHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)..... None None None 5.25%(a) 5.25%(a) 5.25%(a)
Sales Charge Imposed on Dividend
Reinvestments........................... None None None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)........... 1.0% for(b) 1.0% for(b) 1.0% for (b) None(c) None(c) None(c)
one year one year one year
Exchange Fee.............................. None None None None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Investment Advisory Fees(d)............... 0.65% 0.60% 0.60% 0.65% 0.60% 0.60%
12b-1-Fees(e):
Account Maintenance Fees................ 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Distribution Fees....................... 0.75% 0.75% 0.75% None None None
Other Expenses:
Stockholder Servicing Costs(f).......... 0.70% 0.08% 0.05% 0.70% 0.08% 0.05%
Other................................... 1.27% 0.28% 0.29% 1.27% 0.28% 0.29%
----- ----- ----- ------- ------- ------
Total Other Expenses................ 1.97% 0.36% 0.34% 1.97% 0.36% 0.34%
===== ===== ===== ======= ======= ======
Total Fund Operating Expenses............. 3.62% 1.96% 1.94% 2.87% 1.21% 1.19%
===== ===== ===== ======= ======= ======
</TABLE>
- ---------------
(a) Reduced for Class D purchases of $25,000 and over. Like Class A purchases,
certain Class D purchases of $1,000,000 or more may not be subject to an
initial sales charge. See "Comparison of the Funds -- Purchase of Shares."
(b) The CDSC may be waived in connection with certain fee-based programs.
(c) Like Class A shares, Class D shares are not subject to a CDSC, except that
purchases of $1,000,000 or more that are not subject to an initial sales
charge may instead be subject to a CDSC of 1.0% of amounts redeemed within
the first year after purchase. Such CDSC may be waived in connection with
certain fee-based programs.
(d) See "Comparison of the Funds -- Management."
(e) See "Comparison of the Funds -- Purchase of Shares."
(f) See "Comparison of the Funds -- Additional Information -- Transfer Agent,
Dividend Disbursing Agent and Registrar."
8
<PAGE> 12
CUMULATIVE EXPENSES PAID ON CLASS C AND CLASS D SHARES FOR THE PERIOD OF:
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
------------------------------------- -------------------------------------
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
An investor would pay the
following expenses on a $1,000
investment, including the
maximum sales load of $52.50
(Class D shares only) and
assuming (1) the Total Fund
Operating Expenses set forth on
page 8 for the relevant fund,
(2) a 5% annual return
throughout the periods and (3)
redemption at the end of the
period (including any applicable
CDSC for Class C shares):
Global Convertible........... $46 $111 $187 $388 $80 $137 $196 $355
Convertible Fund............. $30 $ 62 $106 $229 $64 $ 89 $116 $191
Combined Fund+............... $30 $ 61 $105 $226 $64 $ 88 $115 $189
An investor would pay the
following expenses on the same
$1,000 investment assuming no
redemption at the end of the
period:
Global Convertible........... $36 $111 $187 $388 $80 $137 $196 $355
Convertible Fund............. $20 $ 62 $106 $229 $64 $ 89 $116 $191
Combined Fund+............... $20 $ 61 $105 $226 $64 $ 88 $115 $189
</TABLE>
- ---------------
+ Assuming the Reorganization had taken place on October 1, 1996 (the first day
of the year ended September 30, 1997).
The foregoing Fee Tables are intended to assist investors in understanding
the costs and expenses that a Global Convertible or Convertible Fund stockholder
bears directly or indirectly as compared to the costs and expenses that would be
borne by such investors taking into account the Reorganization. The Examples set
forth above assume reinvestment of all dividends and distributions and utilize a
5% annual rate of return as mandated by Commission regulations. THE EXAMPLES
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL
RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLES. See "Summary," "The
Reorganization -- Potential Benefits to Stockholders as a Result of the
Reorganization," "Comparison of the Funds -- Management," "-- Purchase of
Shares" and "-- Redemption of Shares."
BUSINESS OF GLOBAL
CONVERTIBLE................ Global Convertible was incorporated under the laws
of the State of Maryland on October 22, 1987 and
commenced operations on February 26, 1988. Global
Convertible is a diversified, open-end management
investment company.
As of October 31, 1997, Global Convertible had net
assets of approximately $28,922,000.
9
<PAGE> 13
BUSINESS OF CONVERTIBLE
FUND....................... Convertible Fund was incorporated under the laws of
the State of Maryland on May 24, 1985 and commenced
operations on August 2, 1985 as a dual-purpose
closed-end management investment company. Effective
August 4, 1997, Convertible Fund converted to
open-end status and since that date has operated as
a non-diversified, open-end management investment
company.
As of October 31, 1997, Convertible Fund had net
assets of approximately $86,826,000.
COMPARISON OF THE FUNDS.... Investment Objectives. Convertible Fund seeks to
provide stockholders with high total return by
investing primarily in a portfolio of convertible
debt securities, convertible preferred stocks and
synthetic convertible securities. Global
Convertible seeks to provide stockholders with high
total return by investing primarily in an
internationally diversified portfolio of
convertible debt securities, convertible preferred
stocks and synthetic convertible securities
consisting of a combination of debt securities or
preferred stock and warrants or options.
Investment Policies. Global Convertible invests,
under normal circumstances, at least 65% of its
total assets in convertible securities and 80% of
its assets in convertible securities and synthetic
convertible securities of at least three different
countries including the United States. It may
invest up to 20% of its assets in other types of
securities including equity securities and
nonconvertible debt securities of United States and
non-United States issuers. Convertible Fund
invests, under normal circumstances, at least 65%
of its total assets in convertible securities and
synthetic convertible securities of United States
and non-United States issuers. It may invest up to
35% of its assets in other types of securities,
including common stock, preferred stock, options,
warrants, Long-term Equity Appreciation
Participation Securities ("LEAPS") and
nonconvertible debt securities of United States and
non-United States issuers.
Each Fund may invest in securities denominated in
any currency that are convertible into common
stocks of companies located throughout the world,
but it is expected that a majority of each Fund's
assets will be invested in securities denominated
in United States dollars, currencies of Pacific
Basin countries and currencies of Western European
countries. When investing in convertible
securities, each Fund considers both the yield on
the convertible security and the potential capital
appreciation that is offered by the underlying
common stock. Neither Fund has established rating
criteria for the debt securities in which it may
invest and such securities may not be rated at all
for creditworthiness. In addition, each Fund may
engage in various portfolio strategies to seek to
increase its return through the use of options on
portfolio securities and
10
<PAGE> 14
to hedge its portfolio against movements in the
equity markets, interest rates and exchange rates
between currencies.
Convertible Fund and Global Convertible each may
borrow amounts not in excess of 33 1/3% of its
total assets taken at market value, from banks as a
temporary measure for extraordinary or emergency
purposes. Global Convertible may borrow an
additional 5% of its total assets for temporary
purposes. As a non-fundamental restriction,
however, Global Convertible is further limited and
may not borrow amounts in excess of 20% of its
total assets taken at market value, and then only
from banks as a temporary measure for extraordinary
or emergency purposes.
Advisory Fees. The investment adviser for both
Global Convertible and Convertible Fund is MLAM.
MLAM is responsible for the management of each
Fund's investment portfolio and for providing
administrative services to each Fund.
Daniel A. Luchansky serves as portfolio manager for
both Funds.
Pursuant to a separate management agreement between
each Fund and MLAM, Convertible Fund pays MLAM a
monthly fee at the annual rate of 0.60% of the
average daily net assets of the Fund; Global
Convertible pays MLAM a monthly fee at the annual
rate of 0.65% of the average daily net assets of
the Fund. Convertible Fund pays advisory fees at a
lower rate than does Global Convertible and after
the Reorganization the advisory fee paid by the
Combined Fund would be at Convertible Fund's lower
rate of 0.60%. See "Summary -- Pro Forma Fee
Tables" and "Comparison of the
Funds -- Management."
MLAM has retained Merrill Lynch Asset Management
U.K. Limited ("MLAM U.K.") as sub-adviser to each
of the Funds. Pursuant to a separate sub-advisory
agreement between MLAM and MLAM U.K. with respect
to each Fund, MLAM pays MLAM U.K. a fee for
providing investment advisory services to MLAM with
respect to each Fund, in an amount to be determined
from time to time by MLAM and MLAM U.K. but in no
event in excess of the amount MLAM actually
receives for providing services to each Fund
pursuant to each management agreement.
Class Structure. Each Fund offers four classes of
shares under the Merrill Lynch Select Pricing(SM)
System. The Class A, Class B, Class C and Class D
shares issued by Convertible Fund are identical in
all respects to the Class A, Class B, Class C and
Class D shares issued by Global Convertible, except
that they represent ownership interests in a
different investment portfolio. See "Comparison of
the Funds -- Purchase of Shares."
11
<PAGE> 15
Overall Expense Ratio. The overall operating
expense ratio for Class A shares for the year ended
September 30, 1997 was 2.62% for Global Convertible
and 0.96% for Convertible Fund. If the
Reorganization had taken place on October 1, 1996
(the first day of the year ended September 30,
1997), the overall operating expense ratio for
Class A shares of the Combined Fund on a pro forma
basis would have been 0.94%.
The foregoing expense ratios are for Class A
shares. Such ratios would differ for Class B, Class
C and Class D shares as a result of class specific
distribution and account maintenance expenditures.
See "Summary -- Pro Forma Fee Tables."
Purchase of Shares. Shares of Convertible Fund are
offered continuously for sale to the public in
substantially the same manner as shares of Global
Convertible. See "Comparison of the
Funds -- Purchase of Shares."
Redemption of Shares. The redemption procedures
for shares of Convertible Fund are the same as the
redemption procedures for shares of Global
Convertible. For purposes of computing any CDSC
that may be payable upon disposition of
Corresponding Shares of Convertible Fund acquired
by Global Convertible stockholders in the
Reorganization, the holding period of Global
Convertible shares outstanding on the date the
Reorganization takes place will be "tacked" onto
the holding period of the Corresponding Shares of
Convertible Fund acquired in the Reorganization.
See "Comparison of the Funds -- Redemption of
Shares."
Dividends and Distributions. Global Convertible's
policies with respect to dividends and
distributions are substantially the same as those
of Convertible Fund, except that Global Convertible
is required to pay dividends from net investment
income quarterly, while Convertible Fund is
required to pay dividends from net investment
income at least annually. See "Comparison of the
Funds -- Dividends and Distributions."
Net Asset Value. Both Global Convertible and
Convertible Fund determine net asset value of each
class of shares once daily 15 minutes after the
close of business on the New York Stock Exchange
(the "NYSE") (generally, 4:00 p.m. New York time),
on each day during which the NYSE is open for
trading. Both Funds compute net asset value per
share in the same manner. See "Comparison of the
Funds -- Additional Information -- Net Asset
Value."
Voting Rights. The corresponding voting rights of
the holders of shares of common stock of each Fund
are substantially the same. See "The
Reorganization -- Comparison of the
Funds -- Capital Stock."
12
<PAGE> 16
Other Significant Considerations. Stockholder
services, including exchange privileges, available
to Global Convertible and Convertible Fund
stockholders are substantially the same. See
"Comparison of the Funds -- Additional
Information -- Stockholder Services." An automatic
dividend reinvestment plan is available to
stockholders of both Funds. The plans are
identical. See "Comparison of the Funds --
Automatic Dividend Reinvestment Plan." Other
stockholder services, including the provision of
annual and semi-annual reports, are the same for
both Funds. See "Comparison of the
Funds -- Stockholder Services."
TAX CONSIDERATIONS......... Global Convertible and Convertible Fund jointly
have requested a private letter ruling from the
Internal Revenue Service ("IRS") with respect to
the Reorganization to the effect that, among other
things, neither Global Convertible nor Convertible
Fund will recognize gain or loss on the
transaction, and Global Convertible stockholders
will not recognize gain or loss on the exchange of
their shares of Global Convertible stock for
Corresponding Shares of Convertible Fund. The
consummation of the Reorganization is subject to
the receipt of such ruling. The Reorganization will
not affect the status of Convertible Fund as a
regulated investment company. See "The
Reorganization -- Tax Consequences of the
Reorganization."
RISK FACTORS AND SPECIAL CONSIDERATIONS
Many of the investment risks associated with an investment in Convertible
Fund are substantially the same as those of Global Convertible. Such risks
include investing in derivative instruments, illiquid securities and unrated
debt securities as well as investing on an international basis. The principal
difference in risks results from Convertible Fund's non-diversified status.
Non-Diversified Status. Global Convertible is organized as a diversified
investment company. Convertible Fund is organized as a non-diversified
investment company. To the extent Convertible Fund may therefore diversify its
investments among fewer issuers, its exposure to credit and market risks
associated with such issuers may be greater than that to which a more
diversified fund such as Global Convertible would be subject. However,
Convertible Fund's investments are limited so as to qualify for the tax
treatment afforded "regulated investment companies" under the Internal Revenue
Code of 1986, as amended (the "Code"). In order to so qualify, Convertible Fund
generally must remain diversified as to 50% of its total assets and, with
respect to the remaining 50% of its assets, may not invest more than 25% of its
assets in the securities of a single issuer.
Derivative Investments. Each Fund may engage in transactions in certain
instruments that may be characterized as derivatives. These instruments include
various types of options, futures and options thereon, currency forwards and
options thereon and indexed securities, including inverse securities. The Funds
may engage in these transactions for hedging purposes or, in certain cases, to
enhance total return.
Investments in indexed securities, including inverse securities, subject
the Funds to the risks associated with changes in the particular indices, which
risks may include the loss of amounts invested. Transactions
13
<PAGE> 17
involving options, futures, options on futures or currency may involve the loss
of an opportunity to profit from a price movement in the underlying asset beyond
certain levels or a price increase on other portfolio assets (in the case of
transactions for hedging purposes) or expose the Funds to potential losses that
exceed the amount originally invested by each respective Fund in such
instruments.
Illiquid Securities. Each Fund may invest up to 15% of its net assets in
securities that lack an established secondary trading market or otherwise are
considered illiquid. Liquidity of a security relates to the ability to dispose
easily of the security and the price to be obtained upon disposition of the
security, which may be less than would be obtained for a comparable more liquid
security. Investment of the Fund's assets in illiquid securities may restrict
the ability of the Fund to dispose of its investments in a timely fashion and
for a fair price as well as its ability to take advantage of market
opportunities. The risks associated with illiquidity will be particularly acute
in situations in which the Fund's operations require cash, such as when the Fund
redeems shares or pays dividends, and could result in the Fund borrowing to meet
short-term cash requirements or incurring capital losses on the sale of illiquid
investments. Further, issuers whose securities are not publicly traded are not
subject to the disclosure and other investor protection requirements that would
be applicable if their securities were publicly traded.
No Rating Criteria for Debt Securities. Neither Fund has established any
rating criteria for the debt securities in which it may invest and such
securities may not be rated at all for creditworthiness. Securities rated in the
medium to low rating categories of nationally recognized statistical rating
organizations and unrated securities of comparable quality ("high yield
securities") are 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. Neither Fund intends to purchase debt securities that are 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 adversely affected by
specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of high yield securities because such securities may be unsecured and
may be subordinated to other creditors of the issuer. Moreover, the Fund may
have difficulty disposing of certain high yield securities because there may be
a thin trading market for such securities.
Investing on an International Basis. Because a substantial portion of each
Fund's assets may be invested in securities of non-U.S. issuers, investors
should be aware of certain risk factors and special considerations relating to
international investing, which may involve risks that are not typically
associated with investments in securities of U.S. issuers.
Investing on an international basis involves certain risks not involved in
domestic investments, including fluctuations in foreign exchange rates, future
political and economic developments, different legal systems and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions. Securities prices in different countries are subject to different
economic, financial, political and social factors. Since both
14
<PAGE> 18
Funds invest heavily in securities denominated or quoted in currencies other
than the U.S. dollar, changes in foreign currency exchange rates will affect the
value of securities in each Fund and the unrealized appreciation or depreciation
of investments. Currencies of certain countries may be volatile and, therefore,
may affect the value of securities denominated in such currencies. In addition,
with respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, difficulty in obtaining or
enforcing a court judgment, economic, political or social instability or
diplomatic developments that could affect investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross domestic product, rates of
inflation, capital reinvestment, resources, self-sufficiency and balance of
payments position. Certain foreign investments also may be subject to foreign
withholding taxes. These risks often are heightened for investments in smaller,
emerging capital markets.
Many of the foreign securities held by the Funds will not be registered
with the Commission, nor will the issuers thereof be subject to the reporting
requirements of such agency. Accordingly, there may be less publicly available
information about a foreign issuer than about a U.S. issuer and such foreign
issuers may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of U.S. issuers. As a result,
traditional investment measurements, such as price/earnings ratios, as used in
the United States, may not be applicable to certain smaller, emerging foreign
capital markets. Foreign issuers, and issuers in smaller, emerging capital
markets in particular, may not be subject to uniform accounting, auditing and
financial reporting standards or to practices and requirements comparable to
those applicable to domestic issuers.
Foreign financial markets, while often growing in trading volume, have, for
the most part, substantially less volume than U.S. markets, and securities of
many foreign companies are less liquid and their prices may be more volatile
than securities of comparable domestic companies. Foreign markets also have
different clearance and settlement procedures, and in certain markets there have
been times when settlements have failed to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Further, satisfactory custodial services for investment securities may not be
available in some countries that have smaller, emerging capital markets, which
may result in the Funds incurring additional costs and delays in transporting
and custodying such securities outside such countries. Delays in settlement
could result in periods when assets of the Funds are uninvested and no return is
earned thereon. The inability of the Funds to make intended security purchases
due to settlement problems or the risk of intermediary counterparty failures
could cause the Funds to miss attractive investment opportunities. The inability
to dispose of a portfolio security due to settlement problems could result
either in losses to the Funds due to subsequent declines in the value of such
portfolio security or, if a contract to sell the security has been entered,
could result in possible liability to the purchaser.
There generally is less governmental supervision and regulation of
exchanges, brokers and issuers in foreign countries than there is in the United
States. For example, there may be no comparable provisions under certain foreign
laws to insider trading and similar investor protection securities laws that
apply with respect to securities transactions consummated in the United States.
Further, brokerage commissions and other transaction costs on foreign securities
exchanges generally are higher than in the United States.
15
<PAGE> 19
COMPARISON OF THE FUNDS
FINANCIAL HIGHLIGHTS
Convertible Fund. The financial information in the table below has been
audited in conjunction with the annual audits of the financial statements of
Convertible Fund by Deloitte & Touche LLP, independent auditors. Financial
information is not presented for Class B, Class C and Class D shares prior to
August 4, 1997 since no shares of those classes were publicly issued prior to
that date. Prior to August 4, 1997, the Class A shares were designated Capital
Shares and the Fund operated as a closed-end "dual purpose" management
investment company.
The following per share data and ratios have been derived from information
provided in Convertible Fund's audited financial statements.
<TABLE>
<CAPTION>
CLASS A(1)
--------------------------------------------------------------------------------------
FOR THE
PERIOD
JAN. 1, 1997 FOR THE YEAR ENDED DECEMBER 31,
TO --------------------------------------------------------------------
AUG. 31, 1997# 1996# 1995 1994 1993 1992 1991
-------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:+++
Net asset value, beginning of period....... $ 15.57 $ 13.43 $ 11.13 $ 13.21 $ 12.87 $ 10.91 $ 7.67
-------- -------- -------- -------- -------- -------- --------
Investment income -- net.................. .06 -- -- -- -- -- --
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net..................... 1.75 2.78 2.66 (2.12) 1.43 2.03 3.24
Distributions of realized gain on
investments -- net...................... -- (.64) (.36) (.01) (1.17) (.12) --
Effect of repurchase of Treasury Stock.... -- -- --+ .05 .08 .05 --
Capital charge resulting from issuance of
new classes of shares................... (.02) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of period............. $ 17.36 $ 15.57 $ 13.43 $ 11.13 $ 13.21 $ 12.87 $ 10.91
======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share......... 11.50%## 20.60% 24.44% (15.68)% 13.94% 19.48% 42.24%
======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses***................................ .90%* .78% .79% .87% .80% .80% .83%
======== ======== ======== ======== ======== ======== ========
Investment income -- net................... 4.76%* 4.98% 5.40% 5.43% 5.10% 6.34% 7.24%
======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)... $110,178 $289,993 $265,127 $238,466 $274,999 $289,366 $275,045
======== ======== ======== ======== ======== ======== ========
Portfolio turnover......................... 92.86% 129.06% 87.69% 69.37% 116.03% 76.54% 54.90%
======== ======== ======== ======== ======== ======== ========
Average commission rate paid++............. $ .0522 $ .0447 -- -- -- -- --
======== ======== ======== ======== ======== ======== ========
<CAPTION>
CLASS A(1)
----------------------------------------------------------------
FOR THE
FOR THE YEAR ENDED DECEMBER 31, YEAR
-------------------------------------------- ENDED
1990 1989 1988 1987### JUNE 30, 1987
-------- -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:+++
Net asset value, beginning of period....... $ 10.12 $ 8.69 $ 8.49 $ 11.88 $ 12.26
-------- -------- -------- -------- --------
Investment income -- net.................. -- -- -- -- --
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net..................... (2.45) 1.43 .20 (3.39) .38
Distributions of realized gain on
investments -- net...................... -- -- -- -- --
Effect of repurchase of Treasury Stock.... -- -- -- -- --
Capital charge resulting from issuance of
new classes of shares................... -- -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of period............. $ 7.67 $ 10.12 $ 8.69 $ 8.49 $ 11.88
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share......... (24.21)% 16.46% 2.36% (28.54)%## 3.16%
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses***................................ .86% .80% .79% .83%* .75%
======== ======== ======== ======== ========
Investment income -- net................... 7.39% 7.15% 7.55% 6.37%* 6.08%
======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)... $230,851 $264,339 $245,077 $243,073 $292,704
======== ======== ======== ======== ========
Portfolio turnover......................... 40.28% 50.47% 48.72% 23.09% 62.35%
======== ======== ======== ======== ========
Average commission rate paid++............. -- -- -- -- --
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) The above financial information reflects the Fund's performance as a
closed-end investment company and, therefore, may not be indicative of
its performance as an open-end investment company. Capital Shares of the
Fund existing on August 4, 1997, the time of its conversion to an
open-end investment company, have been classified as Class A shares.
* Annualized.
** Total investment returns exclude the effects of sales loads. Performance
results prior to August 31, 1997 are for when the Fund was a
dual-structure closed-end management investment company and include only
the returns for the Capital Shares but exclude results from the Income
Shares.
*** Excluding taxes on undistributed net realized long-term capital gains for
years prior to the period January 1, 1997 to August 31, 1997.
+ Amount is less than $.01 per share.
++ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities.
+++ Excludes the effect of per share operating performance of the Fund's
Income Shares, which were redeemed on July 31, 1997.
Per share operating performance prior to the period January 1, 1997 to
August 31, 1997 reflects when the Fund was a dual-structure closed-end
management investment company. For the period January 1, 1997 to
July 31, 1997, investment income -- net per Income Share was $0.73 and
dividends of investment income -- net per Income Share were $0.70.
# Based on average shares outstanding during the period.
## Aggregate total investment return.
### For the six months ended December 31, 1987.
16
<PAGE> 20
CONVERTIBLE FUND -- FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
FOR THE PERIOD AUGUST 4, 1997+ TO
AUGUST 31, 1997
-------------------------------------
CLASS B# CLASS C# CLASS D#
--------- --------- ---------
<S> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 16.91 $ 16.91 $ 16.91
------ ------ ------
Investment income -- net..................................... .05 .05 .07
Realized and unrealized gain on investments and foreign
currency transactions -- net............................... .39 .40 .38
------ ------ ------
Total from investment operations............................. .44 .45 .45
------ ------ ------
Net Asset value, end of period............................... $ 17.35 $ 17.36 $ 17.36
====== ====== ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........................... 2.60%++ 2.66%++ 2.66%++
====== ====== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses..................................................... 2.66%* 2.74%* 1.92%*
====== ====== ======
Investment income -- net..................................... 3.77%* 3.58%* 4.81%*
====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..................... $ 5,759 $ 1,014 $ 1,365
====== ====== ======
Portfolio turnover........................................... 92.86% 92.86% 92.86%
====== ====== ======
Average commission rate paid................................. $ .0522 $ .0522 $ .0522
====== ====== ======
</TABLE>
- ---------------
<TABLE>
<S> <C>
+ Commencement of operations.
++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Based on average outstanding shares during the period.
## For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average
commission rate per share for purchases and sales of equity securities.
</TABLE>
17
<PAGE> 21
Global Convertible. The financial information in the table below has been
audited in conjunction with the annual audits of the financial statements of
Global Convertible by Deloitte & Touche LLP, independent auditors.
The following per share data and ratios have been derived from information
provided in Global Convertible's audited Financial Statements:
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------------------------
1997++ 1996++ 1995 1994 1993 1992 1991 1990 1989+
------- ------- ------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 10.54 $ 10.71 $ 10.75 $11.08 $ 9.79 $ 9.39 $ 8.37 $ 9.95 $ 9.97
------- ------- ------- ------ ------ ------ ------ ------ ------
Investment income -- net............ .33 .32 .42 .33 .23 .21 .25 .38 .39
Realized and unrealized gain (loss)
on investments and foreign
currency transactions -- net...... 1.47 .62 .11 (.27) 1.45 .68 1.22 (1.11) .21
------- ------- ------- ------ ------ ------ ------ ------ ------
Total from investment operations.... 1.80 .94 .53 .06 1.68 .89 1.47 (.73) .60
------- ------- ------- ------ ------ ------ ------ ------ ------
Less dividends and distributions:
Investment income -- net.......... (.24) (.48) (.46) (.30) (.23) (.25) (.37) (.42) (.45)
In excess of investment
income -- net................... (.01) -- -- -- -- -- -- -- --
Realized gain on
investments -- net.............. (.22) (.63) (.11) (.09) (.16) (.24) (.08) (.43) (.17)
------- ------- ------- ------ ------ ------ ------ ------ ------
Total dividends and distributions... (.47) (1.11) (.57) (.39) (.39) (.49) (.45) (.85) (.62)
------- ------- ------- ------ ------ ------ ------ ------ ------
Net asset value, end of period...... $ 11.87 $ 10.54 $ 10.71 $10.75 $11.08 $ 9.79 $ 9.39 $ 8.37 $ 9.95
======= ======= ======= ====== ====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share............................. 17.79% 9.34% 5.10% .61% 17.64% 10.00% 18.09% (7.86)% 6.29%#
======= ======= ======= ====== ====== ====== ====== ====== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement...... 1.81% 1.57% 1.38% 1.66% 2.22% 2.47% 2.47% 2.39% 1.77%*
======= ======= ======= ====== ====== ====== ====== ====== ======
Expenses............................ 1.81% 1.57% 1.38% 1.66% 2.22% 2.86% 2.87% 2.39% 1.77%*
======= ======= ======= ====== ====== ====== ====== ====== ======
Investment income -- net............ 3.01% 3.05% 4.03% 2.97% 2.36% 2.61% 3.16% 4.55% 5.62%*
======= ======= ======= ====== ====== ====== ====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)........................ $ 3,466 $17,741 $23,634 $7,850 $4,557 $2,283 $ 448 $ 162 $ 194
======= ======= ======= ====== ====== ====== ====== ====== ======
Portfolio turnover.................. 33.42% 14.72% 101.12% 38.04% 26.02% 4.91% 18.02% 22.76% 15.91%
======= ======= ======= ====== ====== ====== ====== ====== ======
Average Commission Rate Paid##...... $ .0607 $ .0679 -- -- -- -- -- -- --
======= ======= ======= ====== ====== ====== ====== ====== ======
</TABLE>
- ---------------
+ Class A shares commenced operations on November 4, 1988.
++ Based on average shares outstanding during the period.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The Average Commission Rate Paid includes
commissions paid in foreign currencies, which have been converted into
U.S. dollars using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the rate
shown.
18
<PAGE> 22
GLOBAL CONVERTIBLE -- FINANCIAL HIGHLIGHTS (CONTINUED)
The following per share data and ratios have been derived from information
provided in Global Convertible's audited financial statements.
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------
1997+ 1996+ 1995 1994 1993 1992
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $ 10.61 $ 10.77 $ 10.80 $ 11.13 $ 9.84 $ 9.44
------- ------- ------- ------- ------- -------
Investment income -- net................................. .21 .21 .37 .21 .13 .12
Realized and unrealized gain (loss) on investments and
foreign currency transactions -- net.................... 1.49 .62 .05 (.25) 1.46 .67
------- ------- ------- ------- ------- -------
Total from investment operations......................... 1.70 .83 .42 (.04) 1.59 .79
------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income -- net................................ (.18) (.36) (.34) (.20) (.14) (.15)
In excess of investment income -- net................... (.01) -- -- -- -- --
Realized gain on investments -- net..................... (.22) (.63) (.11) (.09) (.16) (.24)
------- ------- ------- ------- ------- -------
Total dividends and distributions........................ (.41) (.99) (.45) (.29) (.30) (.39)
------- ------- ------- ------- ------- -------
Net asset value, end of period........................... $ 11.90 $ 10.61 $ 10.77 $ 10.80 $ 11.13 $ 9.84
======= ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share....................... 16.56% 8.13% 4.01% (.37)% 16.45% 8.77%
======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........................... 2.87% 2.64% 2.37% 2.69% 3.26% 3.49%
======= ======= ======= ======= ======= =======
Expenses................................................. 2.87% 2.64% 2.37% 2.69% 3.26% 3.96%
======= ======= ======= ======= ======= =======
Investment income -- net................................. 1.92% 1.98% 2.95% 1.95% 1.32% 1.53%
======= ======= ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................. $17,730 $38,830 $58,660 $53,121 $29,831 $13,975
======= ======= ======= ======= ======= =======
Portfolio turnover....................................... 33.42% 14.72% 101.12% 38.04% 26.02% 4.91%
======= ======= ======= ======= ======= =======
Average Commission Rate Paid##........................... $ .0607 $ 0.679 -- -- -- --
======= ======= ======= ======= ======= =======
<CAPTION>
CLASS B
--------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
-------------------------------------------
1991 1990 1989 1988++
------- ------- ------- -------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $ 8.39 $ 9.95 $ 9.94 $ 10.00
------- ------- ------- -------
Investment income -- net................................. .18 .29 .37 .27
Realized and unrealized gain (loss) on investments and
foreign currency transactions -- net.................... 1.20 (1.10) .17 (.10)
------- ------- ------- -------
Total from investment operations......................... 1.38 (.81) .54 .17
------- ------- ------- -------
Less dividends and distributions:
Investment income -- net................................ (.25) (.32) (.36) (.23)
In excess of investment income -- net................... -- -- -- --
Realized gain on investments -- net..................... (.08) (.43) (.17) --
------- ------- ------- -------
Total dividends and distributions........................ (.33) (.75) (.53) (.23)
------- ------- ------- -------
Net asset value, end of period........................... $ 9.44 $ 8.39 $ 9.95 $ 9.94
======= ======= ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share....................... 16.79% (8.68)% 5.58% 1.70%#
======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........................... 3.50% 3.41% 2.63% 2.48%*
======= ======= ======= =======
Expenses................................................. 3.88% 3.41% 2.97% 2.60%*
======= ======= ======= =======
Investment income -- net................................. 2.25% 3.51% 3.62% 3.74%*
======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................. $14,973 $18,296 $30,813 $41,232
======= ======= ======= =======
Portfolio turnover....................................... 18.02% 22.76% 15.91% 20.24%
======= ======= ======= =======
Average Commission Rate Paid##........................... -- -- -- --
======= ======= ======= =======
</TABLE>
- ---------------
+ Based on average shares outstanding during the period.
++ Class B shares commenced operations on February 26, 1988.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The Average Commission Rate Paid includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
19
<PAGE> 23
GLOBAL CONVERTIBLE -- FINANCIAL HIGHLIGHTS (CONCLUDED)
The following per share data and ratios have been derived from information
provided in Global Convertible's audited financial statements.
<TABLE>
<CAPTION>
CLASS C CLASS D
------------------------------------------- --------------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE YEAR ENDED OCT. 21, FOR THE YEAR ENDED OCT. 21,
OCTOBER 31, 1994+ TO OCTOBER 31, 1994+ TO
----------------------------- OCT. 31, ----------------------------- OCT. 31,
1997++ 1996++ 1995 1994++ 1997++ 1996++ 1995 1994++
------ ------ ------- --------- ------ ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $10.59 $10.75 $ 10.81 $ 10.74 $10.55 $10.72 $ 10.76 $10.69
------ ------ ------- ------ ------ ------ ------- ------
Investment income -- net............ .21 .21 .36 -- .30 .31 .42 --
Realized and unrealized gain on
investments and foreign currency
transactions -- net............... 1.47 .62 .05 .07 1.47 .61 .09 .07
------ ------ ------- ------ ------ ------ ------- ------
Total from investment operations.... 1.68 .83 .41 .07 1.77 .92 .51 .07
------ ------ ------- ------ ------ ------ ------- ------
Less dividends and distributions:
Investment income -- net.......... (.17) (.36) (.36) -- (.23) (.46) (.44) --
In excess of investment
income -- net................... (.01) -- -- -- (.01) -- -- --
Realized gain on
investments -- net.............. (.22) (.63) (.11) -- (.22) (.63) (.11) --
------ ------ ------- ------ ------ ------ ------- ------
Total dividends and distributions... (.40) (.99) (.47) -- (.46) (1.09) (.55) --
------ ------ ------- ------ ------ ------ ------- ------
Net asset value, end of period...... $11.87 $10.59 $ 10.75 $ 10.81 $11.86 $10.55 $ 10.72 $10.76
====== ====== ======= ====== ====== ====== ======= ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share............................. 16.40% 8.14% 3.89% .65%# 17.41% 9.07% 4.87% .65%#
====== ====== ======= ====== ====== ====== ======= ======
RATIOS TO AVERAGE NET ASSETS:
Expenses............................ 2.89% 2.65% 2.41% 5.64%* 2.09% 1.77% 1.62% 5.13%*
====== ====== ======= ====== ====== ====== ======= ======
Investment income (loss) -- net..... 1.91% 1.97% 2.99% (1.74)%* 2.69% 2.85% 3.79% (1.24)%*
====== ====== ======= ====== ====== ====== ======= ======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)........................ $1,112 $4,123 $ 4,598 $ 203 $6,614 $8,585 $ 3,499 $ 179
====== ====== ======= ====== ====== ====== ======= ======
Portfolio turnover.................. 33.42% 14.72% 101.12% 38.04% 33.42% 14.72% 101.12% 38.04%
====== ====== ======= ====== ====== ====== ======= ======
Average Commission Rate Paid##...... $.0607 $.0679 -- -- $.0607 $.0679 -- --
====== ====== ======= ====== ====== ====== ======= ======
</TABLE>
- ---------------
[S] [C]
+ Commencement of operations.
++ Based on average shares outstanding during the period.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The Average Commission Rate Paid includes
commissions paid in foreign currencies, which have been converted into
U.S. dollars using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the rate shown.
20
<PAGE> 24
INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives. The investment objectives of Global Convertible and
Convertible Fund are similar, though not identical. While each Fund seeks high
total return from a combination of capital appreciation and investment income,
Convertible Fund seeks to provide stockholders with high total return by
investing primarily in a portfolio of convertible debt securities, convertible
preferred stocks and synthetic convertible securities; Global Convertible seeks
to provide stockholders with high total return by investing primarily in an
internationally diversified portfolio of convertible debt securities,
convertible preferred stocks and synthetic convertible securities.
There can be no assurance that, after the Reorganization, Convertible Fund
will achieve its investment objective.
Investment Policies Generally. Global Convertible invests, under normal
circumstances, at least 65% of its total assets in convertible securities and
80% of its assets in convertible securities and synthetic convertible securities
of at least three different countries including the United States. It may invest
up to 20% of its assets in other types of securities including equity securities
and nonconvertible debt securities of United States and non-United States
issuers. Convertible Fund invests, under normal circumstances, at least 65% of
its total assets in convertible securities and synthetic convertible securities
of United States and non-United States issuers. It may invest up to 35% of its
assets in other types of securities, including common stock, preferred stock,
options, warrants, Long-term Equity Appreciation Participation Securities
("LEAPS") and nonconvertible debt securities of United States and non-United
States issuers.
Each Fund may invest in securities denominated in any currency that are
convertible into common stock of companies located throughout the world, but it
is expected that a majority of each Fund's assets will be invested in securities
denominated in United States dollars, currencies of Pacific Basin countries and
currencies of Western European countries. When investing in convertible
securities, each Fund considers both the yield on the convertible security and
the potential capital appreciation that is offered by the underlying common
stock. Neither Fund has established rating criteria for the debt securities in
which it may invest and such securities may not be rated at all for
creditworthiness. In addition, each Fund may engage in various portfolio
strategies to seek to increase its return through the use of options on
portfolio securities and to hedge its portfolio against movements in the equity
markets, interest rates and exchange rates between currencies.
To reduce overall exposure to risk, each Fund may spread its investments
over many different companies in a variety of industries. However, neither Fund
may invest more than 25% of its assets, taken at market value, in the securities
of any particular industry (excluding securities issued by the U.S. Government
and its agencies and instrumentalities).
MLAM believes that the securities currently held in the Global Convertible
portfolio are consistent with the investment objectives and policies of
Convertible Fund and are not prohibited by the investment restrictions of
Convertible Fund. Convertible Fund has no plan or intention to sell or otherwise
dispose of any of the assets of Global Convertible acquired in the
Reorganization, except for dispositions made in the ordinary course of business.
A more specific comparison of the investment policies of Global Convertible
and Convertible Fund follows.
21
<PAGE> 25
Convertible Securities. Convertible Fund invests at least 65% of its total
assets in convertible and synthetic convertible securities. Global Convertible
invests at least 65% of its total assets in convertible securities and 80% of
its total assets in convertible securities including synthetic convertible
securities of at least three different countries including the United States.
Convertible securities are issued and traded in a number of securities markets.
For the past several years, the principal markets have been the United States,
the Euromarket and Japan. Issuers during this period have included major
corporations domiciled in the United States, Japan, France, Switzerland, Canada
and the United Kingdom. Since the Funds will invest a substantial portion of
their assets in the United States market and the Euromarket, where convertible
bonds have been primarily denominated in the United States dollar, it is
expected that ordinarily a substantial portion of the convertible securities
held by the Funds will be denominated in United States dollars. However, the
underlying equity securities typically will be quoted in the currency of the
country where the issuer is domiciled. With respect to convertible securities
denominated in a currency different from that of the underlying equity
securities, the conversion price may be based on a fixed exchange rate
established at the time the security is issued. As a result, fluctuations in the
exchange rate between the currency in which the debt security is denominated and
the currency in which the share price is quoted will affect the value of the
convertible security. As described below, the Funds are authorized to enter into
foreign currency hedging transactions in which such Fund may seek to reduce the
effect of such fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion value," which is the
market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock. If, because of the low price of the
common stock the conversion value is substantially below the investment value of
the convertible security, the price of the convertible security is governed
principally by its investment value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed-income security. The yield and conversion premium of
convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value.
Holders of convertible securities generally have a claim on the assets of
the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by a Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the holder which
entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security under certain
circumstances.
22
<PAGE> 26
Money Market Securities. Each of the Funds reserves the right as a
temporary defensive measure to hold money market securities, including
repurchase agreements and purchase and sale contracts, of United States and
non-United States issuers, or cash (foreign currencies or United States
dollars), in such proportions as, in the opinion of MLAM, prevailing market,
economic or political conditions warrant. The Fund has established no rating
criteria for money market securities that it may hold as a defensive measure.
Warrants. Each Fund may invest in warrants. Warrants involve the risk that
the price of the security underlying the warrant may not exceed the exercise
price of the warrant and the warrant may expire without any value.
Indexed and Inverse Securities. Both Funds may invest in indexed and
inverse securities. Indexed securities are securities whose potential investment
return is based on the change in particular measurements of value and/or rate
(an "index"). As an illustration, the Funds may invest in debt securities that
pay interest and return principal based on the change in the value of a
securities index or a basket of securities, or based on the relative changes of
two indices. In addition, the Funds may invest in securities the potential
return of which is based inversely on the change in an index. For example, the
Funds may invest in securities that pay a higher rate of interest when a
particular index decreases and pay a lower rate of interest (or do not fully
return principal) when the value of the index increases. If the Fund invests in
such securities, it may be subject to reduced or eliminated interest payments or
loss of principal in the event of an adverse movement in the relevant index or
indices.
Certain indexed and inverse securities may have the effect of providing
investment leverage because the rate of interest or amount of principal payable
increases or decreases at a rate that is a multiple of the changes in the
relevant index. As a consequence, the market value of such securities may be
substantially more volatile than the market values of other debt securities. The
Funds believe that indexed and inverse securities may provide portfolio
management flexibility that permit the Fund to seek enhanced returns, hedge
other portfolio positions or vary the degree of portfolio leverage with greater
efficiency than would otherwise be possible under certain market conditions.
Illiquid Securities. Each Fund may invest up to 15% of its net assets in
securities that lack an established secondary trading market or otherwise are
considered illiquid. Liquidity of a security relates to the ability to dispose
easily of the security and the price to be obtained upon disposition of the
security, which may be less than would be obtained for a comparable more liquid
security. Investment of a Fund's assets in illiquid securities may restrict the
ability of that Fund to dispose of its investments in a timely fashion and for a
fair price as well as its ability to take advantage of market opportunities.
No Rating Criteria for Debt Securities. Neither Fund has established any
rating criteria for the debt securities in which it may invest and such
securities may not be rated at all for creditworthiness. Securities rated in the
medium to low rating categories of nationally recognized statistical rating
organizations and unrated securities of comparable quality are 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. Neither Fund intends to purchase
debt securities that are in default.
23
<PAGE> 27
OTHER INVESTMENT POLICIES
Both Global Convertible and Convertible Fund have adopted certain other
investment policies as set forth below:
Borrowings. Convertible Fund and Global Convertible each may borrow
amounts not in excess of 33 1/3% of its total assets, taken at market value,
from banks as a temporary measure for extraordinary or emergency purposes.
Global Convertible may borrow an additional 5% of its total assets for temporary
purposes. As a non-fundamental restriction, however, Global Convertible is
further limited and may not borrow amounts in excess of 20% of its total assets
taken at market value, and then only from banks as a temporary measure for
extraordinary or emergency purposes. See "Comparison of the Funds -- Investment
Policies."
Non-Diversified Status. Convertible Fund is classified as
"non-diversified" within the meaning of the Investment Company Act, which means
that the Fund is not limited by such Act in (i) the percentage of its total
assets that it may invest in securities of a single issuer (excluding U.S.
Government securities) or (ii) the amount of voting securities of a single
issuer (excluding U.S. Government securities) that it may purchase. However,
each of the Fund's investments is limited so as to qualify for the special
treatment afforded regulated investment companies under the Code. To qualify,
among other requirements, Convertible Fund will limit its investments so that,
at the close of each quarter of the taxable year, (i) not more than 25% of the
market value of the Fund's total assets will be invested in the securities of a
single issuer, and (ii) with respect to 50% of the market value of its total
assets, (a) not more than 5% of the market value of its total assets will be
invested in the securities of a single issuer, and (b) the Fund will not own
more than 10% of the outstanding voting securities of a single issuer. As in the
case of the Investment Company Act requirements discussed above, investment in
the securities of the U.S. Government, its agencies and instrumentalities are
excluded from the investment limitations for purposes of the diversification
requirements of the Code. Global Convertible, which elects to be classified as
"diversified" under the Investment Company Act, must satisfy the foregoing 5%
and 10% requirements with respect to 75% of its total assets. To the extent that
Convertible Fund assumes large positions in the securities of a small number of
issuers, Convertible Fund's yield 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.
Standby Commitment Agreements. Convertible Fund may from time to time
enter into standby commitment agreements. For a description of standby
commitment agreements and the risks associated with investment therein, see
"Investment Objective and Policies -- Other Investment Policies and Practices"
in the Convertible Fund Prospectus.
Repurchase Agreements. Each Fund may enter into repurchase agreements. For
a description of repurchase agreements and the risks associated with investment
therein, see "Investment Objective and Policies -- Other Investment Policies and
Practices" in the Convertible Fund Prospectus.
When-Issued Securities and Delayed Delivery Transactions. Convertible Fund
may purchase or sell securities on a delayed delivery basis or on a when-issued
basis at fixed purchase or sale terms. For a description of when-issued
securities and delayed delivery transactions, including the risks associated
with investment therein, see "Investment Objective and Policies -- Other
Investment Policies and Practices" in the Convertible Fund Prospectus.
24
<PAGE> 28
Lending of Portfolio Securities. Each Fund may from time to time lend
securities from its portfolio with a value not exceeding 33 1/3% of its total
assets to banks, brokers and other financial institutions and receive collateral
in cash or securities issued or guaranteed by the U.S. Government.
Short Sales. Convertible Fund may make short sales of securities. Global
Convertible generally does not engage in short sales except in short sales
"against the box." Convertible Fund will not make a short sale if, after giving
effect to such sale, the market value of all securities sold short exceeds 25%
of the value of its total assets or the Fund's aggregate short sales of a
particular class of securities exceeds 25% of the outstanding securities of that
class. Convertible Fund, however, may make short sales "against the box" without
respect to such limitations.
INFORMATION REGARDING OPTIONS, FUTURES AND FOREIGN EXCHANGE TRANSACTIONS
Each Fund may engage in various portfolio strategies to seek to increase
its return through the use of options on portfolio securities and to hedge its
portfolio against movements in the equity, debt and currency markets. Each Fund
has authority to write (i.e., sell) covered call options on its portfolio
securities, purchase put options on securities and engage in transactions in
stock index options, stock index futures and financial futures, and related
options on such futures. Each Fund may also deal in forward foreign exchange
transactions and foreign currency options and futures, and related options on
such futures.
Global Convertible may not (i) commit more than 15% of its total assets to
position hedging contracts, (ii) incur potential net liabilities of more than
20% of its total assets from foreign currency options, futures or related
options, or (iii) speculate in foreign currency options, futures or related
options. Convertible Fund, however, may speculate in currency instruments in
order to seek to enhance total return, although it is expected that the
Convertible Fund will engage in such transactions predominantly for hedging
purposes. Neither Global Convertible nor Convertible Fund will hedge a currency
substantially in excess of the market value of securities that it owns
(including receivables for unsettled securities sales), or has committed to or
anticipates purchasing, which are denominated in such currency.
The investment policies of each Fund with respect to futures and options
transactions are not fundamental policies and may be modified by the Board of
Directors of each Fund without the approval of the Fund's stockholders. Each
Fund is subject to the restrictions of the Commodity Futures Trading Commission
with respect to its investments in futures and options thereon.
For a detailed discussion of the Funds' investment policies regarding
futures and options, including the risks associated therewith, see "Investment
Practices and Restrictions -- Portfolio Strategies Involving Options and
Futures" in the Global Convertible Prospectus and "Investment Objective and
Policies -- Other Investment Policies and Practices -- Portfolio Strategies
Involving Options and Futures" in the Convertible Fund Prospectus.
INVESTMENT RESTRICTIONS
Other than as noted above under "Comparison of the Funds -- Investment
Objectives and Policies," Global Convertible and Convertible Fund have identical
investment restrictions. See "Investment Objective and Policies -- Investment
Restrictions" in the Convertible Fund Statement and "Investment Objective and
Policies -- Investment Restrictions" in the Global Convertible Statement.
25
<PAGE> 29
MANAGEMENT
Directors. The Board of Directors of each of Global Convertible and
Convertible Fund consists of the same six individuals, five of whom are not
"interested persons" as defined in the Investment Company Act. The Directors are
responsible for the overall supervision of the operation of each Fund and
perform the various duties imposed on the directors of investment companies by
the Investment Company Act.
The Directors of each Fund are:
ARTHUR ZEIKEL* -- Chairman of the Manager and its affiliate, FAM; President
of the Manager and FAM from 1977 to 1997; President and Director of Princeton
Services, Inc. ("Princeton Services") from 1993 to 1997; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.").
JAMES H. BODURTHA -- Director and Executive Vice President, The China
Business Group, Inc.
HERBERT I. LONDON -- John M. Olin Professor of Humanities, New York
University.
ROBERT R. MARTIN -- Former Chairman, Kinnard Investments, Inc.
JOSEPH L. MAY -- Attorney in private practice.
ANDRE F. PEROLD -- Professor, Harvard Business School
- ---------------
* Interested person, as defined by the Investment Company Act, of each of the
Funds.
Management and Advisory Arrangements. MLAM serves as the manager for both
Global Convertible and Convertible Fund pursuant to separate management
agreements (each, a "Management Agreement") that, except for their fee
structures and certain minor differences, are identical.
Pursuant to the Management Agreement between Convertible Fund and MLAM,
Convertible Fund pays MLAM a monthly fee at the annual rate of 0.60% of the
average daily net assets of the Fund. Pursuant to the Management Agreement
between Global Convertible and MLAM, Global Convertible pays MLAM a monthly fee
at the annual rate of 0.65% of the average daily net assets of the Fund. The
advisory fee paid by Convertible Fund is at a lower rate than the advisory fee
rate paid by Global Convertible and after the Reorganization the advisory fee
paid by the Combined Fund would be at the lower rate (0.60%).
MLAM has retained Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.")
as sub-adviser to each of Global Convertible and Convertible Fund. Pursuant to a
separate sub-advisory agreement between MLAM and MLAM U.K. with respect to each
Fund, MLAM pays MLAM U.K. a fee for providing investment advisory services to
MLAM with respect to each Fund, in an amount to be determined from time to time
by MLAM and MLAM U.K. but in no event in excess of the amount MLAM actually
receives for providing services to each Fund pursuant to each Management
Agreement. The address of MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y
9HA, England.
After the Reorganization, on a pro forma combined basis, Convertible Fund
will pay an advisory fee to MLAM at a lower annual rate than that currently paid
by Global Convertible and the total operating expenses of Convertible Fund after
the Reorganization, as a percent of net assets, would be less than the current
operating expenses for Global Convertible. In addition, certain fixed costs,
such as costs of printing stockholder reports and proxy statements, legal
expenses, audit fees, registration fees, mailing costs and other expenses would
be spread across a larger asset base, thereby lowering the expense ratio borne
by Global
26
<PAGE> 30
Convertible stockholders. The Board of Directors of each of Global Convertible
and Convertible Fund have determined that the Reorganization would be
potentially beneficial to both Funds and their stockholders. See "The
Reorganization -- Potential Benefits to Stockholders as a Result of the
Reorganization" and "Summary -- Pro Forma Fee Tables."
PURCHASE OF SHARES
The class structure and purchase and distribution procedures for shares of
Global Convertible are identical to those of Convertible Fund. For a complete
discussion of the four classes of shares and the purchase and distribution
procedures related thereto, see "Merrill Lynch Select Pricing(SM) System" and
"Purchase of Shares" in either the Convertible Fund Prospectus or the Global
Convertible Prospectus.
REDEMPTION OF SHARES
The procedure for redeeming shares of Convertible Fund is identical to the
procedure for redeeming shares of Global Convertible. For purposes of computing
any CDSC that may be payable upon disposition of Corresponding Shares of
Convertible Fund acquired by Global Convertible stockholders in the
Reorganization, the holding period of Global Convertible shares outstanding on
the date the Reorganization takes place will be tacked onto the holding period
of the Corresponding Shares of Convertible Fund acquired in the Reorganization.
PERFORMANCE
General. The following tables provide performance information for each
class of shares of Global Convertible and Convertible Fund, including and
excluding maximum applicable sales charges, for the periods indicated. Past
performance is not indicative of future performance.
CONVERTIBLE FUND
AVERAGE ANNUAL TOTAL RETURN (%)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES*** CLASS C SHARES*** CLASS D SHARES***
------------------ ------------------ ------------------ ------------------
WITHOUT WITH WITHOUT WITH WITHOUT WITH WITHOUT WITH
SALES SALES SALES SALES SALES SALES SALES SALES
PERIOD CHARGE CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE CHARGE*
- --------------------------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
11 months ended
11/30/97+................ 10.41 4.61 1.35 (1.62) 1.43 0.68 1.56 (3.77)
Year Ended 12/31/96........ 20.60 14.27 -- -- -- -- -- --
Five Years Ended
12/31/96................. 11.49 10.30 -- -- -- -- -- --
Inception** through
12/31/96................. 7.19 6.68 -- -- -- -- -- --
</TABLE>
- ---------------
* Assumes the maximum applicable sales charge. The maximum initial sales
charge on Class A and Class D shares is 5.25%. The maximum contingent
deferred sales charge ("CDSC") on Class B shares is 4.0% and is reduced to
0% after four years. Class C shares are subject to a 1.0% CDSC for one year.
** Class A shares commenced operations on August 2, 1985. Prior to August 4,
1997, the Class A shares were designated Capital Shares and the Fund
operated as a closed-end "dual-purpose" management investment company. Class
B, Class C and Class D shares commenced operations on August 4, 1997.
*** Figures are since inception (August 4, 1997).
+ Aggregate total returns.
27
<PAGE> 31
GLOBAL CONVERTIBLE
AVERAGE ANNUAL TOTAL RETURN (%)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES*** CLASS D SHARES***
------------------ ------------------ ------------------ ------------------
WITHOUT WITH WITHOUT WITH WITHOUT WITH WITHOUT WITH
SALES SALES SALES SALES SALES SALES SALES SALES
PERIOD CHARGE CHARGE* CHARGE CHARGE* CHARGE CHARGE* CHARGE CHARGE*
- --------------------------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended 10/31/97........ 17.79 11.60 16.56 12.56 16.40 15.40 17.41 11.25
Five Years Ended
10/31/97................. 9.88 8.70 8.75 8.75 -- -- -- --
Inception** through
10/31/97................. 8.24 7.59 6.82 6.82 9.50 9.50 10.47 8.52
</TABLE>
- ---------------
* Assumes the maximum applicable sales charge. The maximum initial sales
charge on Class A and Class D shares is 5.25%. The maximum CDSC on Class B
shares is 4.0% and is reduced to 0% after four years. Class C shares are
subject to a 1.0% CDSC for one year.
** Class A shares commenced operations on November 4, 1988. Class B shares
commenced operations on February 26, 1988. Class C and Class D shares
commenced operations on October 21, 1994.
*** Figures are since inception (October 21, 1994).
VOTING RIGHTS
Stockholders of Convertible Fund are entitled to one vote for each share
held and fractional votes for fractional shares held and will vote on the
election of Directors and any other matter submitted to a stockholder vote.
Convertible Fund does not intend to hold meetings of stockholders in any year in
which the Investment Company Act does not require stockholders to act upon any
of the following matters: (i) election of Directors; (ii) approval of an
investment advisory agreement; (iii) approval of distribution arrangements; and
(iv) ratification of selection of independent accountants. Voting rights for
Directors are not cumulative. Shares of Convertible Fund to be issued to Global
Convertible stockholders in the Reorganization will be fully paid and
non-assessable, will have no preemptive rights, and will have the conversion
rights described in this Prospectus and Proxy Statement and in the Convertible
Fund Prospectus. Each share of Convertible Fund common stock is entitled to
participate equally in dividends and distributions declared by the Fund and in
the net assets of the Fund on liquidation or dissolution after satisfaction of
outstanding liabilities, except that Class B, Class C and Class D shares bear
certain additional expenses. Rights attributable to shares of Global Convertible
are identical to those described above.
DIVIDENDS AND DISTRIBUTIONS
Global Convertible's current policy with respect to dividends and
distributions is identical to Convertible Fund's policy, except that Global
Convertible is required to pay dividends from net investment income quarterly
and Convertible Fund is required to pay dividends from net investment income at
least annually. It is each Fund's intention to distribute all of its net
investment income, if any. In addition, each Fund distributes all net realized
capital gains, if any, to stockholders at least annually.
TAX INFORMATION
The tax consequences associated with investment in shares of Global
Convertible are substantially identical to the tax consequences associated with
investment in shares of Convertible Fund.
28
<PAGE> 32
PORTFOLIO TRANSACTIONS
The procedures for engaging in portfolio transactions are generally the
same for both Global Convertible and Convertible Fund. For a discussion of these
procedures, see "Investment Objective and Policies -- Other Investment Policies
and Practices" in the Convertible Fund Prospectus and "Portfolio Transactions
and Brokerage" in the Convertible Fund Statement.
Each Fund may effect portfolio transactions on foreign securities exchanges
and may incur settlement delays on certain of such exchanges. In addition, costs
associated with transactions in foreign securities are generally higher than
such costs associated with transactions in U.S. securities.
PORTFOLIO TURNOVER
Generally, neither Global Convertible nor Convertible Fund purchases
securities for short-term trading profits. However, either Fund may dispose of
securities without regard to the time that they have been held when such action,
for defensive or other reasons, appears advisable to MLAM. Neither Fund has any
limit on its rate of portfolio turnover. The portfolio turnover rates for Global
Convertible for its fiscal years ended October 31, 1996 and 1997 were 14.72% and
33.42%, respectively. The portfolio turnover rate for Convertible Fund for its
fiscal year ended December 31, 1996, during which period it operated as a
closed-end investment company, was 129.06%. The portfolio turnover rate for
Convertible Fund for the period January 1, 1997 to August 31, 1997 was 92.86%.
On August 4, 1997 Convertible Fund converted to open-end status. The higher
portfolio turnover in 1996 was the result of sales of securities to enhance
Convertible Fund's liquidity in anticipation of the redemption of Income Shares
and the conversion to open-end status, as well as strategies undertaken by
Convertible Fund to reduce its tax liability for long-term capital gains. Higher
portfolio turnover may contribute to higher transactional costs and negative tax
consequences, such as an increase in capital gain dividends or in ordinary
income dividends of accrued market discount.
ADDITIONAL INFORMATION
Net Asset Value. Both Global Convertible and Convertible Fund determine
net asset value of each class of its shares once daily 15 minutes after the
close of business on the NYSE (generally, 4:00 p.m. New York time), on each day
during which the NYSE is open for trading. Net asset value is computed by
dividing the market value of the securities held by the Fund plus any cash or
other assets (including interest and dividends accrued but not yet received)
minus all liabilities (including accrued expenses) by the total number of shares
outstanding at such time.
Stockholder Services. Convertible Fund offers a number of stockholder
services and investment plans designed to facilitate investment in shares of the
Fund. In addition, U.S. stockholders of each class of shares of Convertible Fund
have an exchange privilege with certain other MLAM-advised mutual funds.
Stockholder services, including exchange privileges, available to stockholders
of Global Convertible and Convertible Fund are identical. For a description of
these services, see "Stockholder Services" in the Convertible Fund Prospectus.
Custodian. The Chase Manhattan Bank ("Chase") acts as custodian of the
cash and securities of Convertible Fund. The principal business address of Chase
is Chase MetroTech Center, Brooklyn, New York 11245. State Street Bank and Trust
Company ("State Street") acts as custodian for Global Convertible. State
29
<PAGE> 33
Street's principal business address is P.O. Box 351, Boston, Massachusetts
02101. After the Reorganization, State Street will act as custodian for the
Combined Fund.
Transfer Agent, Dividend Disbursing Agent and Registrar. Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484, serves as the transfer agent, dividend disbursing agent and
registrar with respect to each Fund (the "Transfer Agent"), at the same rate,
pursuant to separate registrar, transfer agency and service agreements with each
of the Funds.
Capital Stock. Global Convertible has an authorized capital of 400,000,000
shares of common stock, par value $.10 per share, divided into four classes,
designated Class A, Class B, Class C and Class D common stock, each of which
consists of 100,000,000 shares. Convertible Fund has an authorized capital of
400,000,000 shares of common stock, par value $0.10 per share, divided into four
classes, also designated Class A, Class B, Class C and Class D common stock,
each of which consists of 100,000,000 shares. The rights, preferences and
expenses attributable to the Class A, Class B, Class C and Class D shares of
Global Convertible are identical in all respects to those of the Class A, Class
B, Class C and Class D shares of Convertible Fund.
Stockholder Inquiries. Stockholder inquiries with respect to Global
Convertible and Convertible Fund may be addressed to either Fund by telephone at
(609) 282-2800 or at the address set forth on the cover page of this Proxy
Statement and Prospectus.
THE REORGANIZATION
GENERAL
Under the Agreement and Plan of Reorganization (attached hereto as Exhibit
I), Convertible Fund will acquire substantially all of the assets, and will
assume substantially all of the liabilities, of Global Convertible, in exchange
solely for an equal aggregate value of shares to be issued by Convertible Fund.
Upon receipt by Global Convertible of such shares, Global Convertible will
distribute the shares to the holders of shares of Global Convertible, as
described below.
Generally, the assets transferred by Global Convertible to Convertible Fund
will equal all investments of Global Convertible held in its portfolio as of the
Valuation Time (as defined in the Agreement and Plan of Reorganization) and all
other assets of Global Convertible as of such time, except for any cash or cash
equivalents reserved by Global Convertible to discharge its unpaid or contingent
liabilities existing at the Valuation Time. Any unexpended portion of the
foregoing funds retained by Global Convertible will be disbursed by Global
Convertible pro rata to the stockholders of Global Convertible of record as of
the date of the Reorganization upon dissolution of Global Convertible as a final
liquidating dividend.
Global Convertible will distribute the shares of Convertible Fund received
by it pro rata to its stockholders in exchange for such stockholders'
proportional interests in Global Convertible. The shares of Convertible Fund
received by Global Convertible stockholders will be of the same class and have
the same aggregate net asset value as each such stockholder's interest in Global
Convertible as of the Valuation Time (previously defined as the "Corresponding
Shares"). (See, "The Agreement and Plan of Reorganization -- Valuation of Assets
and Liabilities" for information concerning the calculation of net asset value.)
The distribution will be accomplished by opening new accounts on the books of
Convertible Fund in the names of all stockholders of Global Convertible,
including stockholders holding Global Convertible shares in certificate
30
<PAGE> 34
form, and transferring to each stockholder's account the Corresponding Shares of
Convertible Fund representing such stockholder's interest previously credited to
the account of Global Convertible. Stockholders holding Global Convertible
shares in certificate form may receive certificates representing the
Corresponding Shares of Convertible Fund credited to their account in respect of
such Global Convertible shares by sending the certificates to the Transfer Agent
accompanied by a written request for such exchange.
Since the Corresponding Shares of Convertible Fund would be issued at net
asset value in exchange for the net assets of Global Convertible having a value
equal to the aggregate net asset value of those shares of Global Convertible,
the net asset value per share of Convertible Fund should remain virtually
unchanged solely as a result of the Reorganization. Thus, the Reorganization
should result in virtually no dilution of net asset value of Convertible Fund
immediately following consummation of the Reorganization. However, as a result
of the Reorganization, a stockholder of Global Convertible likely would hold a
reduced percentage of ownership in Convertible Fund than he or she did in Global
Convertible prior to the Reorganization.
PROCEDURE
On November 6, 1997, the Board of Directors of Global Convertible,
including a majority of the Directors who are not "interested persons," as
defined by the Investment Company Act, approved the Agreement and Plan of
Reorganization and the submission of such Agreement and Plan to Global
Convertible stockholders for approval. The Board of Directors of Convertible
Fund, including a majority of the Directors who are not interested persons, also
approved the Agreement and Plan of Reorganization on November 6, 1997.
If the stockholders of Global Convertible approve the Reorganization and
all required regulatory approvals are obtained, the Reorganization will take
place as early as possible in calendar year 1998.
THE BOARD OF DIRECTORS OF GLOBAL CONVERTIBLE RECOMMENDS THAT GLOBAL
CONVERTIBLE STOCKHOLDERS APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION.
TERMS OF THE AGREEMENT AND PLAN OF REORGANIZATION
The following is a summary of the significant terms of the Agreement and
Plan of Reorganization. This summary is qualified in its entirety by reference
to the Agreement and Plan of Reorganization, attached hereto as Exhibit I.
Valuation of Assets and Liabilities. The respective assets of Global
Convertible and Convertible Fund will be valued as of the Valuation Time. The
assets in each Fund will be valued according to the procedures set forth under
"Additional Information -- Determination of Net Asset Value" in the Convertible
Fund Prospectus. Purchase orders for Global Convertible shares which have not
been confirmed as of the Valuation Time will be treated as assets of Global
Convertible for purposes of the Reorganization; redemption requests which have
not settled as of the Valuation Time will be treated as liabilities for purposes
of the Reorganization.
Distribution of Convertible Fund Shares. On the next full business day
following the Valuation Time (the "Exchange Date"), Convertible Fund will issue
to Global Convertible a number of shares the aggregate net asset value of which
will equal the aggregate net asset value of shares of Global Convertible as of
the Valuation Time. Each holder of Global Convertible shares will receive, in
exchange for his or her
31
<PAGE> 35
proportionate interest in Global Convertible, Corresponding Shares of
Convertible Fund of the same class and having the same aggregate net asset value
as the Global Convertible shares held by such stockholder as of the Valuation
Time.
Expenses. The expenses of the Reorganization that are directly
attributable to each Fund and the conduct of its business will be deducted from
the assets of that Fund as of the Valuation Time. These expenses are expected to
include the expenses incurred in preparing materials to be distributed to each
Fund's board, legal fees incurred in preparing each Fund's board materials,
attending each Fund's board meetings and preparing the minutes, and accounting
fees associated with each Fund's financial statements. The expenses of the
Reorganization that are attributable to the transaction itself, including
expenses in connection with obtaining the IRS private letter ruling, will be
borne pro rata by each Fund according to its net assets as of the Valuation
Time. These expenses are expected to include expenses incurred in connection
with the preparation of the Agreement and Plan of Reorganization and the
Registration Statement on Form N-14 (including the Prospectus and Proxy
Statement), Commission and other filing fees and legal and audit fees in
connection with the Reorganization. Expenses associated with the dissolution of
Global Convertible under Maryland law and termination of its registration under
the Investment Company Act will be borne by Global Convertible.
Required Approvals. Under Global Convertible's Articles of Incorporation
(as amended to date) and relevant Maryland law, stockholder approval of the
Agreement and Plan of Reorganization requires the affirmative vote of Global
Convertible stockholders representing a majority of the total number of votes
entitled to be cast thereon.
Deregistration and Dissolution. Following the transfer of the assets and
liabilities of Global Convertible to Convertible Fund and the distribution of
Corresponding Shares of Convertible Fund to Global Convertible stockholders,
Global Convertible will terminate its registration under the Investment Company
Act and its incorporation under Maryland law and will withdraw its authority to
do business in any state where it is required to do so.
Amendments and Conditions. The Agreement and Plan of Reorganization may be
amended at any time prior to the Exchange Date with respect to any of the terms
therein. The obligations of Global Convertible and Convertible Fund pursuant to
the Agreement and Plan of Reorganization are subject to various conditions,
including a registration statement on Form N-14 being declared effective by the
Commission, approval of the Reorganization by Global Convertible stockholders, a
favorable IRS ruling being received as to tax matters, an opinion of counsel
being received as to securities matters and the continuing accuracy of various
representations and warranties of Global Convertible and Convertible Fund being
confirmed by the respective parties.
Postponement, Termination. Under the Agreement and Plan of Reorganization,
the Board of Directors of either Global Convertible or Convertible Fund may
cause the Reorganization to be postponed or abandoned should either Board
determine that it is in the best interests of the stockholders of either Global
Convertible or Convertible Fund, respectively, to do so. The Agreement and Plan
of Reorganization may be terminated, and the Reorganization abandoned at any
time, whether before or after adoption thereof by the Global Convertible
stockholders, prior to the Exchange Date or the Exchange Date may be postponed:
(i) by mutual consent of the Boards of Directors of Global Convertible and
Convertible Fund; (ii) by the Board of Directors of Global Convertible if any
condition to Global Convertible's obligations has not been fulfilled or waived
by such Board; or (iii) by the Board of Directors of Convertible Fund if any
condition to Convertible Fund's obligations has not been fulfilled or waived by
such Board.
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<PAGE> 36
POTENTIAL BENEFITS TO STOCKHOLDERS AS A RESULT OF THE REORGANIZATION
MLAM and the Board of Directors of each of Global Convertible and
Convertible Fund have identified certain potential benefits to stockholders that
are likely to result from the Reorganization. First, following the
Reorganization, Global Convertible stockholders will remain invested in an
open-end fund that has an investment objective similar, although not identical,
to that of Global Convertible. In addition, Global Convertible stockholders are
likely to experience certain additional benefits, including lower expenses per
share, economies of scale and greater flexibility in portfolio management.
Specifically, as described above under "Comparison of the
Funds -- Management -- Management and Advisory Fees," after the Reorganization,
on a pro forma basis, Convertible Fund will pay an advisory fee to MLAM at a
lower annual rate than that currently paid by Global Convertible and the total
operating expenses of Convertible Fund after the Reorganization, as a percent of
net assets, would be less than the current operating expenses for Global
Convertible. See "Summary -- Pro Forma Fee Tables." In addition, certain fixed
costs, such as costs of printing stockholder reports and proxy statements, legal
expenses, audit fees, registration fees, mailing costs and other expenses would
be spread across a larger asset base, thereby lowering the expense ratio borne
by Global Convertible stockholders. To illustrate the potential economies of
scale, on August 31, 1997, the total operating expense ratio for Global
Convertible Class A shares was 2.62% (based on net assets of $29.2 million) and
the total operating expense ratio for Convertible Fund Class A shares was 0.96%
(based on net assets of $119.0 million). If the Reorganization had taken place
on that date, the total operating expense ratio for Convertible Fund Class A
shares on a pro forma basis would have been 0.94% (based on net assets of $148.0
million).
The following table sets forth the net assets of Global Convertible as of
its last four fiscal year ends and of Convertible Fund as of its last three
fiscal year ends and as of October 31, 1997.
<TABLE>
<CAPTION>
CONVERTIBLE FUND GLOBAL CONVERTIBLE
- --------------------------------------------- --------------------------------------------
DATE NET ASSETS DATE NET ASSETS
- ------------------------------- ------------ ------------------------------- -----------
<S> <C> <C> <C>
12/31/94 $238,465,727 10/31/94 $61,353,181
12/31/95 $265,126,998 10/31/95 $90,391,378
12/31/96 $289,992,873 10/31/96 $69,278,923
10/31/97 $ 86,825,865* 10/31/97 $28,922,287
</TABLE>
- ---------------
* Prior to its conversion to open-end status on August 4, 1997, Convertible Fund
was named Convertible Holdings, Inc. and operated as a diversified closed-end,
"dual-purpose" management investment company. Its Income Shares were redeemed
on July 31, 1997 and its Capital Shares were designated Class A shares upon
open-ending.
The above table illustrates that although Global Convertible's net assets
increased in 1995 over 1994, since then the Fund's assets have been steadily
decreasing primarily as a result of redemptions. As a closed-end fund, the
assets of Convertible Fund did not fluctuate as a result of purchases and
redemptions of its shares. The increase in Convertible Fund's assets was due to
the performance of its portfolio securities. Recently, Convertible Fund's assets
have decreased significantly as a result of (i) the Fund's redemption on July
31, 1997 of $109.3 million of Income Shares and (ii) stockholder redemptions
aggregating $82.5 million in August 1997 following the Fund's conversion to
open-end status. Were these trends to continue, MLAM anticipates that both Funds
could experience higher operating expense ratios due to a continuing reduction
in assets. Although there can be no assurance that the foregoing would in fact
occur, MLAM believes that the
33
<PAGE> 37
economies of scale that may be realized as a result of the Reorganization would
be beneficial to both Convertible Fund and Global Convertible stockholders.
In addition, the Board of Directors of Global Convertible considered that
the Reorganization may potentially provide increased flexibility to MLAM in
managing Global Convertible's assets as part of Convertible Fund since
Convertible Fund is organized as a non-diversified fund. As a non-diversified
fund, Convertible Fund is not limited by the Investment Company Act in (i) the
proportion of its assets that it may invest in the securities of a single issuer
(excluding U.S. Government securities) or (ii) the amount of voting securities
of a single issuer (excluding U.S. Government securities) that it may purchase.
In this regard, the Board of Directors of Global Convertible considered it
potentially advantageous that, unlike Global Convertible, Convertible Fund might
not have to forego attractive investment opportunities, or alternatively
liquidate existing positions prematurely to take advantage of such
opportunities, in order to stay within the diversification limits of the
Investment Company Act. Convertible Fund would, however, continue to comply with
the diversification requirements under the Code. See "Comparison of the
Funds -- Other Investment Policies -- Non-Diversified Status."
Based on the foregoing, the Board of Directors of Global Convertible
concluded that the Reorganization presents no significant risks or costs
(including legal, accounting and administrative costs) that would outweigh the
benefits discussed above.
In approving the Reorganization, the Board of Directors of both Funds
determined that the interests of existing stockholders of both Funds would not
be diluted as a result of the Reorganization.
TAX CONSEQUENCES OF THE REORGANIZATION
General. The Reorganization has been structured with the intention that it
qualify for Federal income tax purposes as a tax-free reorganization under
Section 368(a)(1)(C) of the Code. Global Convertible and Convertible Fund have
elected and qualified for the special tax treatment afforded "regulated
investment companies" under the Code, and Convertible Fund intends to continue
to so qualify after the Reorganization. Global Convertible and Convertible Fund
have jointly requested a private letter ruling from the IRS to the effect that
for Federal income tax purposes: (i) the Reorganization, as described, will
constitute a reorganization within the meaning of Section 368(a)(1)(C) of the
Code and Global Convertible and Convertible Fund will each be deemed a "party"
to the Reorganization within the meaning of Section 368(b); (ii) in accordance
with Section 354(a)(1) of the Code, no gain or loss will be recognized by the
stockholders of Global Convertible upon the receipt of Corresponding Shares of
Convertible Fund in the Reorganization solely in exchange for their shares of
Global Convertible; (iii) in accordance with Section 358 of the Code,
immediately after the Reorganization, the tax basis of the Corresponding Shares
of Convertible Fund received by the stockholders of Global Convertible in the
Reorganization will be equal, in the aggregate, to the tax basis of the shares
of Global Convertible surrendered in exchange; (iv) in accordance with Section
1223 of the Code, the holding period of the Corresponding Shares of Convertible
Fund received by stockholders of Global Convertible in the Reorganization will
include the holding period of the shares of Global Convertible immediately prior
to the liquidation of Global Convertible (provided that at the time of the
Reorganization the shares of Global Convertible were held as capital assets);
(v) in accordance with Section 361(a) of the Code, no gain or loss will be
recognized by Global Convertible on the asset transfer solely in exchange for
Convertible Fund shares or on the distribution of Convertible Fund shares to
Global Convertible stockholders under Section 361(c)(1); (vi) under Section 1032
of the Code, no gain or loss will be recognized by
34
<PAGE> 38
Convertible Fund on the exchange of its shares for Global Convertible assets;
(vii) in accordance with Section 362(b) of the Code, the tax basis of the assets
of Global Convertible in the hands of Convertible Fund will be the same as the
tax basis of such assets in the hands of Global Convertible immediately prior to
the Reorganization; (viii) in accordance with Section 1223 of the Code, the
holding period of the transferred assets in the hands of Convertible Fund will
include the holding period of such assets in the hands of Global Convertible;
and (ix) the taxable year of Global Convertible will end on the effective date
of the Reorganization and pursuant to Section 381(a) of the Code and regulations
thereunder, Convertible Fund will succeed to and take into account certain tax
attributes of Global Convertible, such as earnings and profits, capital loss
carryovers and method of accounting.
To the extent Convertible Fund has unrealized capital gains at the time of
the Reorganization, Global Convertible stockholders may incur taxable gains in
the year that Convertible Fund realizes and distributes those gains. This will
be true notwithstanding that the unrealized gains were reflected in the price of
Convertible Fund shares at the time they were exchanged for assets of Global
Convertible in the Reorganization. Conversely, stockholders of Convertible Fund
will share in unrealized capital gains of Global Convertible after the
Reorganization and bear a tax consequence on the subsequent realization of such
gains. Stockholders should consult their tax advisers regarding the effect of
the Reorganization in light of their individual circumstances. As the foregoing
relates only to Federal income tax consequences, stockholders also should
consult their tax advisers as to the foreign, state and local tax consequences
of the Reorganization.
Status as a Regulated Investment Company. Both Global Convertible and
Convertible Fund have elected and qualified to be taxed as regulated investment
companies under Sections 851-855 of the Code, and after the Reorganization,
Convertible Fund intends to continue to operate so as to qualify as a regulated
investment company. Following the liquidation and dissolution of Global
Convertible and distribution of shares of Convertible Fund to Global Convertible
stockholders, Global Convertible will terminate its registration under the
Investment Company Act and its incorporation under Maryland law.
CAPITALIZATION
The following table sets forth as of September 30, 1997: (i) the
capitalization of Global Convertible, (ii) the capitalization of Convertible
Fund and (iii) the pro forma capitalization of the Combined Fund as adjusted to
give effect to the Reorganization.
CAPITALIZATION OF GLOBAL CONVERTIBLE, CONVERTIBLE FUND AND COMBINED FUND
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
CONVERTIBLE FUND
--------------------------------------------------------
CLASS A CLASS B CLASS C CLASS D
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total Net Assets......................... $87,178,363 $5,759,668 $1,189,444 $1,429,983
Shares Outstanding....................... 6,675,384 441,357 91,123 109,519
Net Asset Value Per Share.............. $ 13.06 $ 13.05 $ 13.05 $ 13.06
</TABLE>
35
<PAGE> 39
<TABLE>
<CAPTION>
GLOBAL CONVERTIBLE
--------------------------------------------------------
CLASS A CLASS B CLASS C CLASS D
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Total Net Assets......................... $3,526,541 $18,230,235 $1,182,820 $6,739,882
Shares Outstanding....................... 292,110 1,505,099 97,871 558,599
Net Asset Value Per Share.............. $ 12.07 $ 12.11 $ 12.09 $ 12.07
</TABLE>
<TABLE>
<CAPTION>
COMBINED FUND
---------------------------------------------------------
ADJUSTED* CLASS A CLASS B CLASS C CLASS D
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Total Net Assets........................ $90,704,904 $23,989,903 $2,372,264 $8,169,865
Shares Outstanding...................... 6,945,245 1,838,307 181,782 625,564
Net Asset Value Per Share............. $ 13.06 $ 13.05 $ 13.05 $ 13.06
</TABLE>
- ---------------
* Total Net Assets and Net Asset Value Per Share include the aggregate value of
Global Convertible's net assets which would have been transferred to
Convertible Fund had the Reorganization been consummated on September 30,
1997. The data does not take into account expenses incurred in connection with
the Reorganization or the actual number of shares that would have been issued.
No assurance can be given as to how many shares of Convertible Fund the Global
Convertible stockholders will receive on the date the Reorganization takes
place, and the foregoing should not be relied upon to reflect the number of
shares of Convertible Fund that actually will be received on or after such
date.
INFORMATION CONCERNING THE SPECIAL MEETING
DATE, TIME AND PLACE OF MEETING
The Meeting will be held on February 11, 1998, at the offices of Merrill
Lynch Asset Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey at
9:00 a.m., New York time.
SOLICITATION, REVOCATION AND USE OF PROXIES
A stockholder executing and returning a proxy has the power to revoke it at
any time prior to its exercise by executing a superseding proxy or by submitting
a notice of revocation to the Secretary of Global Convertible. Although mere
attendance at the Meeting will not revoke a proxy, a stockholder present at the
Meeting may withdraw his or her proxy and vote in person.
All shares represented by properly executed proxies, unless such proxies
previously have been revoked, will be voted at the Meeting in accordance with
the directions on the proxies; if no direction is indicated on a properly
executed proxy, such shares will be voted "FOR" approval of the Agreement and
Plan of Reorganization.
It is not anticipated that any matters other than the adoption of the
Agreement and Plan of Reorganization will be brought before the Meeting. If,
however, any other business properly is brought before the Meeting, proxies will
be voted in accordance with the judgment of the persons designated on such
proxies.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of shares of Global Convertible at the close of
business on December 19, 1997 (the "Record Date") are entitled to vote at the
Meeting or any adjournment thereof. At the close of business
36
<PAGE> 40
on the Record Date, there were 2,659,296 shares of Global Convertible common
stock issued and outstanding and entitled to vote.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF GLOBAL
CONVERTIBLE
AND CONVERTIBLE FUND
To the knowledge of Global Convertible, as of the Record Date, no person or
entity owned beneficially or of record 5% or more of the outstanding shares of
Global Convertible.
At the Record Date, the Directors and officers of Global Convertible as a
group (12 persons) owned an aggregate of less than 1% of the outstanding shares
of Global Convertible. At such date, Mr. Zeikel, a Director and officer of
Global Convertible, and the other officers of Global Convertible, owned an
aggregate of less than 1% of the outstanding shares of common stock of ML & Co.
To the knowledge of Convertible Fund, as of January 1, 1998, the following
person owned beneficially 5% or more of Convertible Fund's shares outstanding:
<TABLE>
<CAPTION>
PERCENT OF NUMBER OF
SHARES SHARES
NAME ADDRESS OUTSTANDING OUTSTANDING
- -------------------------- ------------------------ ----------- -----------
<C> <S> <C> <C>
Charles Schwab & Co. Inc. 101 Montgomery St. 6.95% 478,467.432
San Francisco, CA 94104
</TABLE>
As of December 19, 1997, the Directors and officers of Convertible Fund as
a group (14 persons) owned an aggregate of less than 1% of the outstanding
shares of Convertible Fund. At such date, Mr. Zeikel, a Director and officer of
Convertible Fund, and the other officers of Convertible Fund, owned less than 1%
of the outstanding shares of common stock of ML & Co.
VOTING RIGHTS AND REQUIRED VOTE
For purposes of this Proxy Statement and Prospectus, each share of each
class of Global Convertible is entitled to one vote. Approval of the Agreement
and Plan of Reorganization requires the affirmative vote of Global Convertible
stockholders representing a majority of the total votes entitled to be cast
thereon, with all shares voting as a single class.
Under Maryland law, stockholders of a registered open-end investment
company such as Global Convertible are not entitled to demand the fair value of
their shares upon a transfer of assets and will be bound by the terms of the
Reorganization if approved at the Meeting. However, any stockholder of Global
Convertible may redeem his Global Convertible shares prior to the
Reorganization.
A quorum for purposes of the Meeting consists of a majority of the shares
entitled to vote at the Meeting, present in person or by proxy. If, by the time
scheduled for the Meeting, a quorum of Global Convertible's stockholders is not
present or if a quorum is present but sufficient votes in favor of the Agreement
and Plan of Reorganization are not received from the stockholders of Global
Convertible, the persons named as proxies may propose one or more adjournments
of the Meeting to permit further solicitation of proxies from stockholders. Any
such adjournment will require the affirmative vote of a majority of the shares
of Global Convertible present in person or by proxy and entitled to vote at the
session of the Meeting to be adjourned. The persons named as proxies will vote
in favor of any such adjournment if they determine that adjournment and
additional solicitation are reasonable and in the interests of the Fund's
stockholders.
37
<PAGE> 41
ADDITIONAL INFORMATION
The expenses of preparation, printing and mailing of the enclosed form of
proxy, the accompanying Notice and this Proxy Statement and Prospectus will be
borne by Convertible Fund and Global Convertible pro rata according to the
aggregate net assets of each Fund's portfolio on the date of Reorganization.
Such expenses are currently estimated to be $200,000.
Global Convertible will reimburse banks, brokers and others for their
reasonable expenses in forwarding proxy solicitation materials to the beneficial
owners of shares of Global Convertible and certain persons that Global
Convertible may employ for their reasonable expenses in assisting in the
solicitation of proxies from such beneficial owners of shares of Global
Convertible.
In order to obtain the necessary quorum at the Meeting, supplementary
solicitation may be made by mail, telephone, telegraph or personal interview by
officers of Global Convertible. Global Convertible and Convertible Fund also may
hire proxy solicitors at their expense. It is expected that the cost of such
supplementary solicitation, if any, will be nominal.
Broker-dealer firms, including Merrill Lynch, holding shares of Global
Convertible in "street name" for the benefit of their customers and clients will
request the instructions of such customers and clients on how to vote their
shares before the Meeting. Broker-dealer firms, including Merrill Lynch, will
not be permitted to vote without instructions with respect to the approval of
the Agreement and Plan of Reorganization. Properly executed proxies that are
returned but that are marked "abstain" or with respect to which a broker-dealer
has received no instructions and therefore has declined to vote on the proposal
("broker non-votes") will be counted as present for the purposes of determining
a quorum. However, abstentions and broker non-votes will have the same effect as
a vote against approval of the Agreement and Plan of Reorganization.
This Proxy Statement and Prospectus does not contain all of the information
set forth in the registration statements and the exhibits relating thereto which
Global Convertible and Convertible Fund, respectively, have filed with the
Commission, under the Securities Act and the Investment Company Act, to which
reference is hereby made.
Global Convertible and Convertible Fund both file reports and other
information with the Commission. Reports, proxy statements, registration
statements and other information filed by Global Convertible and Convertible
Fund can be inspected and copied at the public reference facilities of the
Commission in Washington, D.C. and at the New York Regional Office of the
Commission at Seven World Trade Center, New York, New York 10048. Copies of such
materials also can be obtained by mail from the Public Reference Branch, Office
of Consumer Affairs and Information Services, Securities and Exchange
Commission, Washington, D.C. 20549, at prescribed rates. The Commission
maintains a web site (http://www.sec.gov) that contains the Statement of
Additional Information, the Convertible Fund Prospectus, the Global Convertible
Prospectus, the Convertible Fund Statement, the Global Convertible Statement,
other material incorporated by reference and other information regarding the
Funds.
LEGAL PROCEEDINGS
There are no material legal proceedings to which Global Convertible or
Convertible Fund is a party.
38
<PAGE> 42
LEGAL OPINIONS
Certain legal matters in connection with the Reorganization will be passed
upon for Global Convertible and Convertible Fund by Brown & Wood LLP, One World
Trade Center, New York, New York.
EXPERTS
The financial highlights of Global Convertible and Convertible Fund
included in this Proxy Statement and Prospectus have been so included in
reliance on the reports of Deloitte & Touche LLP, independent auditors, given on
their authority as experts in auditing and accounting. The principal business
address of Deloitte & Touche LLP is 117 Campus Drive, Princeton, New Jersey
08540.
STOCKHOLDER PROPOSALS
A stockholder proposal intended to be presented at any subsequent meeting
of stockholders of Global Convertible must be received by Global Convertible in
a reasonable time before the Board of Directors solicitation relating to such
meeting is to be made in order to be considered in Global Convertible's proxy
statement and form of proxy relating to the meeting.
By Order of the Board of Directors,
Lawrence A. Rogers
Secretary, Merrill Lynch Global
Convertible Fund, Inc.
39
<PAGE> 43
EXHIBIT I
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as of
the 7th day of January, 1998, by and between Merrill Lynch Global Convertible
Fund, Inc., a Maryland corporation ("Global Convertible"), and Merrill Lynch
Convertible Fund, Inc., a Maryland corporation ("Convertible Fund").
PLAN OF REORGANIZATION
The reorganization will comprise the acquisition by Convertible Fund of
substantially all of the assets, and the assumption of substantially all of the
liabilities, of Global Convertible in exchange solely for an equal aggregate
value of newly issued shares of Convertible Fund's common stock, with a par
value of $.10 per share, and the subsequent distribution of Corresponding Shares
(defined below) of Convertible Fund to Global Convertible stockholders in
exchange for their shares of common stock of Global Convertible, with a par
value of $.10 per share, in liquidation of Global Convertible, all upon and
subject to the terms hereinafter set forth (the "Reorganization").
In the course of the Reorganization, shares of Convertible Fund will be
distributed to Global Convertible stockholders as follows: each holder of Global
Convertible shares will be entitled to receive the number of shares of that
class of shares of Convertible Fund having the same letter designation (e.g.,
Class A, Class B, Class C or Class D), and the same distribution fees, account
maintenance fees and sales charges (including contingent deferred sales
charges), if any ("Corresponding Shares"), as the shares of Global Convertible
owned by such stockholder on the Exchange Date (as defined in Section 7 of this
Agreement). The aggregate net asset value of the Corresponding Shares of
Convertible Fund to be received by each stockholder of Global Convertible will
equal the aggregate net asset value of the Global Convertible shares owned by
such stockholder on the Exchange Date. In consideration therefor, on the
Exchange Date, Convertible Fund shall acquire substantially all of the assets of
Global Convertible and assume substantially all of Global Convertible's
obligations and liabilities then existing, whether absolute, accrued, contingent
or otherwise. It is intended that the Reorganization described in this Plan
shall be a reorganization within the meaning of Section 368(a)(1)(C) of the
Internal Revenue Code of 1986, as amended (the "Code"), and any successor
provision.
As promptly as practicable after the liquidation of Global Convertible
pursuant to the Reorganization, Global Convertible shall be dissolved in
accordance with the laws of the State of Maryland and will terminate its
registration under the Investment Company Act of 1940, as amended (the "1940
Act").
I-1
<PAGE> 44
AGREEMENT
In order to consummate the Reorganization and in consideration of the
premises and the covenants and agreements hereinafter set forth, and intending
to be legally bound, Global Convertible and Convertible Fund hereby agree as
follows:
1. REPRESENTATIONS AND WARRANTIES OF GLOBAL CONVERTIBLE.
Global Convertible represents and warrants to, and agrees with, Convertible
Fund that:
(a) Global Convertible is a corporation duly organized, validly
existing and in good standing in conformity with the laws of the State of
Maryland, and has the power to own all of its assets and to carry out this
Agreement. Global Convertible has all necessary Federal, state and local
authorizations to carry on its business as it is now being conducted and to
carry out this Agreement.
(b) Global Convertible is duly registered under the 1940 Act as a
diversified, open-end management investment company (File No. 811-5395),
and such registration has not been revoked or rescinded and is in full
force and effect. Global Convertible has elected and qualified for the
special tax treatment afforded regulated investment companies ("RICs")
under Sections 851-855 of the Code at all times since its inception and
intends to continue to so qualify for its taxable year ending upon
liquidation.
(c) As used in this Agreement, the term "Investments" shall mean (i)
the investments of Global Convertible shown on the schedule of its
investments as of the Valuation Time (as defined in Section 3(c) of this
Agreement) furnished to Convertible Fund, with such additions thereto and
deletions therefrom as may have arisen in the course of Global
Convertible's business up to the Valuation Time; and (ii) all other assets
owned by Global Convertible or liabilities incurred as of the Valuation
Time, except that Global Convertible shall retain cash, bank deposits or
cash equivalent securities in an estimated amount necessary to (1)
discharge its unpaid liabilities on its books at the Valuation Time
(including, but not limited to, its income dividend and capital gains
distributions, if any, payable for the period prior to the Valuation Time),
and (2) pay such contingent and other liabilities as the Directors of
Global Convertible reasonably shall deem to exist against the Fund, if any,
at Valuation Time, for which contingent and other appropriate liability
reserves shall be established on Global Convertible's books. Global
Convertible also shall retain any and all rights which it may have over and
against any other person which may have accrued up to the Valuation Time.
Any unexpended portion of the foregoing funds retained by Global
Convertible shall be disbursed by Global Convertible pro rata to its
stockholders upon dissolution of Global Convertible as a final liquidating
dividend.
(d) Global Convertible has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
action of its Board of Directors, and this Agreement constitutes a valid
and binding contract enforceable in accordance with its terms, subject to
the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance
and similar laws relating to or affecting creditors' rights generally and
court decisions with respect thereto.
(e) Convertible Fund has been furnished with a statement of assets and
liabilities and a schedule of investments of Global Convertible, each as of
October 31, 1997, said financial statements having been examined by
Deloitte & Touche LLP, independent public accountants. An unaudited
statement of assets
I-2
<PAGE> 45
and liabilities of Global Convertible and an unaudited schedule of
investments of Global Convertible, each as of the Valuation Time, will be
furnished to Convertible Fund at or prior to the Exchange Date for the
purpose of determining the number of shares of Convertible Fund to be
issued pursuant to Section 4 of this Agreement; and each will fairly
present the financial position of Global Convertible as of the Valuation
Time in conformity with generally accepted accounting principles applied on
a consistent basis.
(f) Convertible Fund has been furnished with the prospectus and
statement of additional information of Global Convertible, each dated
February 24, 1997, said prospectus and statement of additional information
do not contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(g) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Global Convertible, threatened against
Global Convertible which assert liability on the part of Global Convertible
or which materially affect its financial condition or its ability to
consummate the Reorganization. Global Convertible is not charged with or,
to the best of its knowledge, threatened with any violation or
investigation of any possible violation of any provisions of any Federal,
state or local law or regulation or administrative ruling relating to any
aspect of its business.
(h) There are no material contracts outstanding to which Global
Convertible is a party that have not been disclosed in the N-14
Registration Statement (as defined in subsection (n) below) or will not
otherwise be disclosed to Convertible Fund prior to the Valuation Time.
(i) Global Convertible is not a party to or obligated under any
provision of its Articles of Incorporation, as amended, or its by-laws, as
amended, or any contract or other commitment or obligation, and is not
subject to any order or decree which would be violated by its execution of
or performance under this Agreement.
(j) Global Convertible has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of assets
and liabilities referred to above, those incurred in the ordinary course of
its business as an investment company since October 31, 1997, and those
incurred in connection with the Reorganization. As of the Valuation Time,
Global Convertible will advise Convertible Fund in writing of all known
liabilities, contingent or otherwise, whether or not incurred in the
ordinary course of business, existing or accrued as of such time.
(k) Global Convertible has filed, or has obtained extensions to file,
all Federal, state and local tax returns which are required to be filed by
it, and has paid or has obtained extensions to pay, all Federal, state and
local taxes shown on said returns to be due and owing and all assessments
received by it, up to and including the taxable year in which the Exchange
Date occurs. All tax liabilities of Global Convertible have been adequately
provided for on its books, and no tax deficiency or liability of Global
Convertible has been asserted and no question with respect thereto has been
raised by the Internal Revenue Service or by any state or local tax
authority for taxes in excess of those already paid, up to and including
the taxable year in which the Exchange Date occurs.
(l) At both the Valuation Time and the Exchange Date, Global
Convertible will have full right, power and authority to sell, assign,
transfer and deliver the Investments. At the Exchange Date, subject only to
the delivery of the Investments as contemplated by this Agreement, Global
Convertible will have
I-3
<PAGE> 46
good and marketable title to all of the Investments, and Convertible Fund
will acquire all of the Investments free and clear of any encumbrances,
liens or security interests and without any restrictions upon the transfer
thereof (except those imposed by the Federal or state securities laws and
those imperfections of title or encumbrances as do not materially detract
from the value or use of the Investments or materially affect title
thereto).
(m) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Global
Convertible of the Reorganization, except such as may be required under the
Securities Act of 1933, as amended (the "Securities Act"), the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act or
state securities laws (which term as used herein shall include the laws of
the District of Columbia and Puerto Rico).
(n) The registration statement filed by Convertible Fund on Form N-14
relating to the shares of Convertible Fund to be issued pursuant to this
Agreement which includes the proxy statement of Global Convertible and the
prospectus of Convertible Fund with respect to the transaction contemplated
herein, and any supplement or amendment thereto or to the documents therein
(as amended, the "N-14 Registration Statement"), on the effective date of
the N-14 Registration Statement, at the time of the stockholders' meeting
referred to in Section 6(a) of this Agreement and on the Exchange Date,
insofar as it relates to Global Convertible (i) complied or will comply in
all material respects with the provisions of the 1933 Act, the 1934 Act and
the 1940 Act and the rules and regulations thereunder, and (ii) did not or
will not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading; and the prospectus included therein did
not or will not contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in this
subsection shall apply only to statements in or omissions from the N-14
Registration Statement made in reliance upon and in conformity with
information furnished by Global Convertible for use in the N-14
Registration Statement as provided in Section 9 of this Agreement.
(o) Global Convertible is authorized to issue 400,000,000 shares of
common stock, par value $.10 per share, divided into four classes,
designated Class A, Class B, Class C and Class D Common Stock, each of
which consists of 100,000,000 shares, each outstanding share of which is
fully paid and nonassessable and has full voting rights.
(p) The books and records of Global Convertible made available to
Convertible Fund and/or its counsel are substantially true and correct and
contain no material misstatements or omissions with respect to the
operations of Global Convertible.
(q) Global Convertible will not sell or otherwise dispose of any of
the shares of Convertible Fund to be received in the Reorganization, except
in distribution to the stockholders of Global Convertible.
2. REPRESENTATIONS AND WARRANTIES OF CONVERTIBLE FUND.
Convertible Fund represents and warrants to, and agrees with, Global
Convertible that:
(a) Convertible Fund is a corporation duly organized, validly existing
and in good standing in conformity with the laws of the State of Maryland,
and has the power to own all of its assets and to carry
I-4
<PAGE> 47
out this Agreement. Convertible Fund has all necessary Federal, state and
local authorizations to carry on its business as it is now being conducted
and to carry out this Agreement.
(b) Convertible Fund is duly registered under the 1940 Act as a
non-diversified, open-end management investment company (File No.
811-4311), and such registration has not been revoked or rescinded and is
in full force and effect. Convertible Fund has elected and qualified for
the special tax treatment afforded RICs under Sections 851-855 of the Code
at all times since its inception, and intends to continue to so qualify
both until consummation of the Reorganization and thereafter.
(c) Global Convertible has been furnished with a statement of assets
and liabilities and a schedule of investments of Convertible Fund, each as
of August 31, 1997, said financial statements having been examined by
Deloitte & Touche LLP, independent public accountants. An unaudited
statement of assets and liabilities of Convertible Fund and an unaudited
schedule of investments of Convertible Fund, each as of the Valuation Time,
will be furnished to Global Convertible at or prior to the Exchange Date
for the purpose of determining the number of shares of Convertible Fund to
be issued pursuant to Section 4 of this Agreement; and each will fairly
present the financial position of Convertible Fund as of the Valuation Time
in conformity with generally accepted accounting principles applied on a
consistent basis.
(d) Global Convertible has been furnished with the prospectus and
statement of additional information of Convertible Fund, dated December 29,
1997 and said prospectus and statement of additional information do not
contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(e) Convertible Fund has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
action of its Board of Directors and this Agreement constitutes a valid and
binding contract enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto.
(f) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Convertible Fund, threatened against
Convertible Fund which assert liability on the part of Convertible Fund or
which materially affect its financial condition or its ability to
consummate the Reorganization. Convertible Fund is not charged with or, to
the best of its knowledge, threatened with any violation or investigation
of any possible violation of any provisions of any Federal, state or local
law or regulation or administrative ruling relating to any aspect of its
business.
(g) Convertible Fund is not a party to or obligated under any
provision of its Articles of Incorporation, as amended, or its by-laws, as
amended, or any contract or other commitment or obligation, and is not
subject to any order or decree which would be violated by its execution of
or performance under this Agreement.
(h) There are no material contracts outstanding to which Convertible
Fund is a party that have not been disclosed in the N-14 Registration
Statement or will not otherwise be disclosed to Global Convertible prior to
the Valuation Time.
I-5
<PAGE> 48
(i) Convertible Fund has no known liabilities of a material amount,
contingent or otherwise, other than those shown on Convertible Fund's
statements of assets and liabilities referred to above, those incurred in
the ordinary course of its business as an investment company since August
31, 1997 and those incurred in connection with the Reorganization. As of
the Valuation Time, Convertible Fund will advise Global Convertible in
writing of all known liabilities, contingent or otherwise, whether or not
incurred in the ordinary course of business, existing or accrued as of such
time.
(j) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Convertible Fund
of the Reorganization, except such as may be required under the 1933 Act,
the 1934 Act, the 1940 Act or state securities laws.
(k) The N-14 Registration Statement, on its effective date, at the
time of the stockholders' meeting referred to in Section 6(a) of this
Agreement and at the Exchange Date, insofar as it relates to Convertible
Fund (i) complied or will comply in all material respects with the
provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and
regulations thereunder and (ii) did not or will not contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading; and the prospectus included therein did not or will not contain
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the
representations and warranties in this subsection only shall apply to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by Convertible
Fund for use in the N-14 Registration Statement as provided in Section 9 of
this Agreement.
(l) Convertible Fund is authorized to issue 400,000,000 shares of
common stock, par value $.10 per share, divided into four classes,
designated Class A, Class B, Class C and Class D Common Stock, each of
which consists of 100,000,000 shares, each outstanding share of which is
fully paid and nonassessable and has full voting rights.
(m) The Convertible Fund shares to be issued to Global Convertible
pursuant to this Agreement will have been duly authorized and, when issued
and delivered pursuant to this Agreement, will be legally and validly
issued and will be fully paid and nonassessable and will have full voting
rights, and no stockholder of Convertible Fund will have any preemptive
right of subscription or purchase in respect thereof.
(n) At or prior to the Exchange Date, the Convertible Fund shares to
be transferred to Global Convertible on the Exchange Date will be duly
qualified for offering to the public in all states of the United States in
which the sale of shares of Convertible Fund presently are qualified, and
there are a sufficient number of such shares registered under the 1933 Act
and, as may be necessary, with each pertinent state securities commission
to permit the transfers contemplated by this Agreement to be consummated.
(o) At or prior to the Exchange Date, Convertible Fund will have
obtained any and all regulatory, Director and stockholder approvals,
necessary to issue the shares of Convertible Fund to Global Convertible.
I-6
<PAGE> 49
3. THE REORGANIZATION.
(a) Subject to receiving the requisite approval of the stockholders of
Global Convertible, and to the other terms and conditions contained herein,
Global Convertible agrees to convey, transfer and deliver to Convertible Fund
for the benefit of Convertible Fund, and Convertible Fund agrees to acquire from
Global Convertible for the benefit of Convertible Fund, on the Exchange Date all
of the Investments (including interest accrued as of the Valuation Time on debt
instruments) of Global Convertible, and assume substantially all of the
liabilities of Global Convertible, in exchange solely for that number of shares
of Convertible Fund provided in Section 4 of this Agreement. Pursuant to this
Agreement, as soon as practicable Global Convertible will distribute all
Convertible Fund shares received by it to its stockholders in exchange for their
corresponding Global Convertible shares. Such distribution shall be accomplished
by the opening of stockholder accounts on the stock ledger records of
Convertible Fund in the amounts due the stockholders of Global Convertible based
on their respective holdings in Global Convertible as of the Valuation Time.
(b) Global Convertible will pay or cause to be paid to Convertible Fund any
interest it receives on or after the Exchange Date with respect to the
Investments transferred to Convertible Fund hereunder.
(c) The Valuation Time shall be 4:00 p.m., New York time, on March 20,
1998, or such earlier or later day and time as may be mutually agreed upon in
writing (the "Valuation Time").
(d) Convertible Fund will acquire substantially all of the assets of, and
assume substantially all of the known liabilities of, Global Convertible, except
that recourse for such liabilities will be limited to the net assets of Global
Convertible acquired by Convertible Fund. The known liabilities of Global
Convertible as of the Valuation Time shall be confirmed in writing to
Convertible Fund by Global Convertible pursuant to Section 1(j) of this
Agreement.
(e) Convertible Fund and Global Convertible will jointly file Articles of
Transfer with the State Department of Assessments and Taxation of Maryland and
any such other instrument as may be required by the State of Maryland to effect
the transfer of Investments of Global Convertible to Convertible Fund.
(f) Global Convertible will be dissolved following the Exchange Date by
filing Articles of Dissolution with the State Department of Assessments and
Taxation of Maryland.
4. ISSUANCE AND VALUATION OF CONVERTIBLE FUND SHARES IN THE REORGANIZATION.
Full Convertible Fund shares, and to the extent necessary, a fractional
Convertible Fund share, of an aggregate net asset value equal to the net asset
value of the assets of Global Convertible acquired, determined as hereinafter
provided, reduced by the amount of liabilities of Global Convertible assumed by
Convertible Fund, shall be issued by Convertible Fund in exchange for such
assets of Global Convertible. The net asset value of each of Global Convertible
and Convertible Fund shall be determined in accordance with the procedures
described in the Convertible Fund Prospectus as of the Valuation Time. Such
valuation and determination shall be made by Convertible Fund in cooperation
with Global Convertible. Convertible Fund shall issue its Class A, Class B,
Class C and Class D shares to Global Convertible in four certificates or share
deposit receipts (one in respect of each class) registered in the name of Global
Convertible. Global Convertible shall distribute Corresponding Shares of
Convertible Fund to its stockholders by redelivering such certificates to
Merrill Lynch Financial Data Services, Inc.
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5. PAYMENT OF EXPENSES.
(a) With respect to expenses incurred in connection with the
Reorganization, (i) Convertible Fund shall pay all expenses incurred which are
attributable solely to Convertible Fund and the conduct of its business, (ii)
Global Convertible shall pay all expenses incurred which are attributable solely
to Global Convertible and the conduct of its business, and (iii) Global
Convertible and Convertible Fund shall pay, subsequent to the Exchange Date and
pro rata according to each Fund's net assets on the Exchange Date, all expenses
incurred in connection with the Reorganization, including, but not limited to,
all costs related to the preparation and distribution of the N-14 Registration
Statement. Such fees and expenses shall include the cost of preparing and filing
a ruling request with the Internal Revenue Service, legal and accounting fees,
printing costs, filing fees, portfolio transfer taxes (if any), and any similar
expenses incurred in connection with the Reorganization. Global Convertible
shall pay all expenses associated with its dissolution under Maryland law and
the termination of its registration as an investment company under the 1940 Act.
(b) If for any reason the Reorganization is not consummated, no party shall
be liable to any other party for any damages resulting therefrom, including,
without limitation, consequential damages.
6. COVENANTS OF GLOBAL CONVERTIBLE AND CONVERTIBLE FUND.
(a) Global Convertible agrees to call a special meeting of its stockholders
as soon as is practicable after the effective date of the N-14 Registration
Statement for the purpose of considering the Reorganization as described in this
Agreement, and it shall be a condition to the obligations of each of the parties
hereto that the holders of a majority of the shares of Global Convertible issued
and outstanding and entitled to vote thereon, shall have approved this Agreement
at such a meeting at or prior to the Valuation Time.
(b) Global Convertible and Convertible Fund each covenants to operate its
respective business as presently conducted between the date hereof and the
Exchange Date.
(c) Global Convertible agrees that following the consummation of the
Reorganization, it will dissolve in accordance with the laws of the State of
Maryland and any other applicable law, it will not make any distributions of any
Convertible Fund shares other than to the stockholders of Global Convertible and
without first paying or adequately providing for the payment of all of Global
Convertible's liabilities not assumed by Convertible Fund, if any, and on and
after the Exchange Date it shall not conduct any business except in connection
with its dissolution.
(d) Global Convertible undertakes that if the Reorganization is
consummated, it will file an application pursuant to Section 8(f) of the 1940
Act for an order declaring that Global Convertible has ceased to be a registered
investment company.
(e) Convertible Fund will file the N-14 Registration Statement with the
Securities and Exchange Commission (the "Commission") and will use its best
efforts to provide that the N-14 Registration Statement becomes effective as
promptly as practicable. Global Convertible and Convertible Fund agree to
cooperate fully with each other, and each will furnish to the other the
information relating to itself to be set forth in the N-14 Registration
Statement as required by the 1933 Act, the 1934 Act, the 1940 Act, and the rules
and regulations thereunder and the state securities laws.
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(f) Convertible Fund has no plan or intention to sell or otherwise dispose
of the assets of Global Convertible to be acquired in the Reorganization, except
for dispositions made in the ordinary course of business.
(g) Global Convertible and Convertible Fund each agrees that by the
Exchange Date all of its Federal and other tax returns and reports required to
be filed on or before such date shall have been filed and all taxes shown as due
on said returns either have been paid or adequate liability reserves have been
provided for the payment of such taxes. In connection with this covenant,
Convertible Fund and Global Convertible agree to cooperate with each other in
filing any tax return, amended return or claim for refund, determining a
liability for taxes or a right to a refund of taxes or participating in or
conducting any audit or other proceeding in respect of taxes. Convertible Fund
agrees to retain for a period of ten (10) years following the Exchange Date all
returns, schedules and work papers and all material records or other documents
relating to tax matters of Global Convertible for its taxable period first
ending after the Exchange Date and for all prior taxable periods. Any
information obtained under this subsection shall be kept confidential except as
otherwise may be necessary in connection with the filing of returns or claims
for refund or in conducting an audit or other proceeding. After the Exchange
Date, Global Convertible shall prepare, or cause its agents to prepare, any
Federal, state or local tax returns, including any Forms 1099, required to be
filed by Global Convertible with respect to Global Convertible's final taxable
year ending with its complete liquidation and for any prior periods or taxable
years and further shall cause such tax returns and Forms 1099 to be duly filed
with the appropriate taxing authorities. Notwithstanding the aforementioned
provisions of this subsection, any expenses incurred by Global Convertible
(other than for payment of taxes) in connection with the preparation and filing
of said tax returns and Forms 1099 after the Exchange Date shall be borne by
Global Convertible to the extent such expenses have been accrued by Global
Convertible in the ordinary course without regard to the Reorganization; any
excess expenses shall be borne by Merrill Lynch Asset Management, L.P. ("MLAM")
at the time such tax returns and Forms 1099 are prepared.
(h) Global Convertible agrees to mail to its stockholders of record
entitled to vote at the special meeting of stockholders at which action is to be
considered regarding this Agreement, in sufficient time to comply with
requirements as to notice thereof, a combined Proxy Statement and Prospectus
which complies in all material respects with the applicable provisions of
Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act, and the rules
and regulations, respectively, thereunder.
(i) Following the consummation of the Reorganization, Convertible Fund
expects to stay in existence and continue its business as an open-end management
investment company registered under the 1940 Act.
7. EXCHANGE DATE.
(a) Delivery of the assets of Global Convertible to be transferred,
together with any other Investments, and the Convertible Fund shares to be
issued, shall be made at the offices of Brown & Wood LLP, One World Trade
Center, New York, New York 10048, at 10:00 a.m. on the next full business day
following the Valuation Time, or at such other place, time and date agreed to by
Global Convertible and Convertible Fund, the date and time upon which such
delivery is to take place being referred to herein as the "Exchange Date." To
the extent that any Investments, for any reason, are not transferable on the
Exchange Date, Global Convertible shall cause such Investments to be transferred
to Convertible Fund's account with State Street Bank and Trust Company at the
earliest practicable date thereafter.
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(b) Global Convertible will deliver to Convertible Fund on the Exchange
Date confirmations or other adequate evidence as to the tax basis of each of the
Investments delivered to Convertible Fund hereunder, certified by Deloitte &
Touche LLP.
(c) As soon as practicable after the close of business on the Exchange
Date, Global Convertible shall deliver to Convertible Fund a list of the names
and addresses of all of the stockholders of record of Global Convertible on the
Exchange Date and the number of shares of Global Convertible owned by each such
stockholder, certified to the best of their knowledge and belief by the transfer
agent for Global Convertible or by its President.
8. GLOBAL CONVERTIBLE CONDITIONS.
The obligations of Global Convertible hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the affirmative vote of the
holders of a majority of the shares of Global Convertible, issued and
outstanding and entitled to vote thereon, voting together as a single
class, and by the Board of Directors of Convertible Fund; and that
Convertible Fund shall have delivered to Global Convertible a copy of the
resolution approving this Agreement adopted by Convertible Fund's Board of
Directors, certified by the Secretary of Convertible Fund.
(b) That Convertible Fund shall have furnished to Global Convertible a
statement of Convertible Fund's assets and liabilities, with values
determined as provided in Section 4 of this Agreement, together with a
schedule of its investments, all as of the Valuation Time, certified on
Convertible Fund's behalf by its President (or any Vice President) and its
Treasurer, and a certificate signed by Convertible Fund's President (or any
Vice President) and its Treasurer, dated as of the Exchange Date,
certifying that as of the Valuation Time and as of the Exchange Date there
has been no material adverse change in the financial position of
Convertible Fund since August 31, 1997, other than changes in its portfolio
securities since that date or changes in the market value of its portfolio
securities.
(c) That Convertible Fund shall have furnished to Global Convertible a
certificate signed by Convertible Fund's President (or any Vice President)
and its Treasurer, dated as of the Exchange Date, certifying that, as of
the Valuation Time and as of the Exchange Date all representations and
warranties of Convertible Fund made in this Agreement are true and correct
in all material respects with the same effect as if made at and as of such
dates, and that Convertible Fund has complied with all of the agreements
and satisfied all of the conditions on its part to be performed or
satisfied at or prior to each of such dates.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) That Global Convertible shall have received an opinion of Brown &
Wood LLP, as counsel to both Convertible Fund and Global Convertible, in
form and substance satisfactory to Global Convertible and dated the
Exchange Date, to the effect that (i) each of Convertible Fund and Global
Convertible is a corporation duly organized, validly existing and in good
standing in conformity with the laws of the State of Maryland; (ii) the
Corresponding Shares of Convertible Fund to be issued pursuant to this
Agreement are duly authorized and, upon delivery, will be validly issued
and outstanding and fully paid and
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nonassessable by Convertible Fund, and no stockholder of Convertible Fund
has any preemptive right to subscription or purchase in respect thereof
(pursuant to the Articles of Incorporation, as amended, or the by-laws of
Convertible Fund or, to the best of such counsel's knowledge, otherwise);
(iii) this Agreement has been duly authorized, executed and delivered by
each of Convertible Fund and Global Convertible, and represents a valid and
binding contract, enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization or
other similar laws pertaining to the enforcement of creditors' rights
generally and court decisions with respect thereto; provided, such counsel
shall express no opinion with respect to the application of equitable
principles in any proceeding, whether at law or in equity; (iv) the
execution and delivery of this Agreement does not, and the consummation of
the Reorganization will not, violate any material provisions of the
Articles of Incorporation, as amended, the by-laws, as amended, or any
agreement (known to such counsel) to which either Convertible Fund or
Global Convertible is a party or by which either Convertible Fund or Global
Convertible is bound, except insofar as the parties have agreed to amend
such provision as a condition precedent to the Reorganization or Maryland
law; (v) Global Convertible has the power to sell, assign, transfer and
deliver the assets transferred by it hereunder and, upon consummation of
the Reorganization in accordance with the terms of this Agreement, Global
Convertible will have duly transferred such assets and liabilities in
accordance with this Agreement; (vi) to the best of such counsel's
knowledge, no consent, approval, authorization or order of any United
States federal court, Maryland state court or governmental authority is
required for the consummation by Convertible Fund and Global Convertible of
the Reorganization, except such as have been obtained under the 1933 Act,
the 1934 Act and the 1940 Act and the published rules and regulations of
the Commission thereunder and under Maryland law and such as may be
required under state securities laws; (vii) the N-14 Registration Statement
has become effective under the 1933 Act, no stop order suspending the
effectiveness of the N-14 Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the 1933 Act, and the N-14 Registration Statement, and
each amendment or supplement thereto, as of their respective effective
dates, appear on their face to be appropriately responsive in all material
respects to the requirements of the 1933 Act, the 1934 Act and the 1940 Act
and the published rules and regulations of the Commission thereunder;
(viii) the descriptions in the N-14 Registration Statement of statutes,
legal and governmental proceedings and contracts and other documents are
accurate and fairly present the information required to be shown; (ix) such
counsel does not know of any statutes, legal or governmental proceedings or
contracts or other documents related to the Reorganization of a character
required to be described in the N-14 Registration Statement which are not
described therein or, if required to be filed, filed as required; (x)
neither Convertible Fund nor Global Convertible, to the knowledge of such
counsel, is required to qualify to do business as a foreign corporation in
any jurisdiction except as may be required by state securities laws, and
except where each has so qualified or the failure so to qualify would not
have a material adverse effect on Convertible Fund, Global Convertible or
their respective stockholders; (xi) such counsel does not have actual
knowledge of any material suit, action or legal or administrative
proceeding pending or threatened against Convertible Fund or Global
Convertible, the unfavorable outcome of which would materially and
adversely affect Convertible Fund or Global Convertible; (xii) all
corporate actions required to be taken by Convertible Fund and Global
Convertible to authorize this Agreement and to effect the Reorganization
have been duly authorized by all necessary corporate actions on the part of
Convertible Fund and Global Convertible; and (xiii) such opinion is solely
for the benefit of Convertible Fund and Global Convertible and their
Directors and officers. Such opinion also shall state that (x) while
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such counsel cannot make any representation as to the accuracy or
completeness of statements of fact in the N-14 Registration Statement or
any amendment or supplement thereto, nothing has come to their attention
that would lead them to believe that, on the respective effective dates of
the N-14 Registration Statement and any amendment or supplement thereto,
(1) the N-14 Registration Statement or any amendment or supplement thereto
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; and (2) the prospectus included in the
N-14 Registration Statement contained any untrue statement of a material
fact or omitted to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and (y) such counsel does not express any opinion or belief as
to the financial statements or other financial or statistical data relating
to Convertible Fund or Global Convertible contained or incorporated by
reference in the N-14 Registration Statement. In giving the opinion set
forth above, Brown & Wood LLP may state that it is relying on certificates
of officers of Convertible Fund and Global Convertible with regard to
matters of fact and certain certificates and written statements of
governmental officials with respect to the good standing of Convertible
Fund and Global Convertible.
(f) That Global Convertible shall have received a private letter
ruling from the Internal Revenue Service to the effect that for Federal
income tax purposes (i) the transfer of substantially all of the
Investments of Global Convertible to Convertible Fund in exchange solely
for shares of Convertible Fund as provided in this Agreement will
constitute a reorganization within the meaning of Section 368(a)(1)(C) of
the Code, and Global Convertible and Convertible Fund will each be deemed
to be a "party" to the Reorganization within the meaning of Section 368(b);
(ii) in accordance with Section 361(a) of the Code, no gain or loss will be
recognized to Global Convertible as a result of the asset transfer solely
in exchange for Convertible Fund shares or on the distribution of the
Convertible Fund stock to Global Convertible stockholders under Section
361(c)(1); (iii) under Section 1032 of the Code, no gain or loss will be
recognized to Convertible Fund on the receipt of assets of Global
Convertible in exchange for Convertible Fund shares; (iv) in accordance
with Section 354(a)(1) of the Code, no gain or loss will be recognized to
the stockholders of Global Convertible on the receipt of Corresponding
Shares of Convertible Fund in exchange for their shares of Global
Convertible; (v) in accordance with Section 362(b) of the Code, the tax
basis of the Global Convertible assets in the hands of Convertible Fund
will be the same as the tax basis of such assets in the hands of Global
Convertible immediately prior to the consummation of the Reorganization;
(vi) in accordance with Section 358 of the Code, immediately after the
Reorganization, the tax basis of the Corresponding Shares of Convertible
Fund received by the stockholders of Global Convertible in the
Reorganization will be equal, in the aggregate, to the tax basis of the
shares of Global Convertible surrendered in exchange; (vii) in accordance
with Section 1223 of the Code, a stockholder's holding period for the
Corresponding Shares of Convertible Fund will be determined by including
the period for which such stockholder held the shares of Global Convertible
exchanged therefor, provided, that such Global Convertible shares were held
as a capital asset; (viii) in accordance with Section 1223 of the Code,
Convertible Fund's holding period with respect to the Global Convertible
assets transferred will include the period for which such assets were held
by Global Convertible; and (ix) the taxable year of Global Convertible will
end on the effective date of the Reorganization and pursuant to Section
381(a) of the Code and regulations thereunder, Convertible Fund will
succeed to and take into account certain tax attributes of Global
Convertible, such as earnings and profits, capital loss carryovers and
method of accounting.
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(g) That all proceedings taken by Convertible Fund and its counsel in
connection with the Reorganization and all documents incidental thereto
shall be satisfactory in form and substance to Global Convertible.
(h) That the N-14 Registration Statement shall have become effective
under the 1933 Act, and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of Convertible Fund, contemplated
by the Commission.
(i) That Global Convertible shall have received from Deloitte & Touche
LLP a letter dated as of the effective date of the N-14 Registration
Statement and a similar letter dated within five days prior to the Exchange
Date, in form and substance satisfactory to Global Convertible, to the
effect that (i) they are independent public accountants with respect to
Convertible Fund within the meaning of the 1933 Act and the applicable
published rules and regulations thereunder; (ii) in their opinion, the
financial statements and supplementary information of Convertible Fund
included or incorporated by reference in the N-14 Registration Statement
and reported on by them comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules
and regulations thereunder; and (iii) on the basis of limited procedures
agreed upon by Global Convertible and Convertible Fund and described in
such letter (but not an examination in accordance with generally accepted
auditing standards) consisting of a reading of any unaudited interim
financial statements and unaudited supplementary information of Convertible
Fund included in the N-14 Registration Statement, and inquiries of certain
officials of Convertible Fund responsible for financial and accounting
matters, nothing came to their attention that caused them to believe that
(a) such unaudited financial statements and related unaudited supplementary
information do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules
and regulations thereunder, (b) such unaudited financial statements are not
fairly presented in conformity with generally accepted accounting
principles, applied on a basis substantially consistent with that of the
audited financial statements, or (c) such unaudited supplementary
information is not fairly stated in all material respects in relation to
the unaudited financial statements taken as a whole; and (iv) on the basis
of limited procedures agreed upon by Global Convertible and Convertible
Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards), the information relating to
Convertible Fund appearing in the N-14 Registration Statement, which
information is expressed in dollars (or percentages derived from such
dollars) (with the exception of performance comparisons, if any), has been
obtained from the accounting records of Convertible Fund or from schedules
prepared by officials of Convertible Fund having responsibility for
financial and reporting matters and such information is in agreement with
such records, schedules or computations made therefrom.
(j) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, and no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of Convertible Fund or
would prohibit the Reorganization.
(k) That Global Convertible shall have received from the Commission
such orders or interpretations as Brown & Wood LLP, as counsel to Global
Convertible, deems reasonably necessary or desirable under the 1933 Act and
the 1940 Act in connection with the Reorganization, provided, that such
counsel
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shall have requested such orders as promptly as practicable, and all such
orders shall be in full force and effect.
9. CONVERTIBLE FUND CONDITIONS.
The obligations of Convertible Fund hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the Board of Directors of
Global Convertible and by the affirmative vote of the holders of a majority
of the shares of common stock of Global Convertible issued and outstanding
and entitled to vote thereon, voting together as a single class; and that
Global Convertible shall have delivered to Convertible Fund a copy of the
resolution approving this Agreement adopted by Global Convertible's Board
of Directors, and a certificate setting forth the vote Global Convertible
stockholders obtained, each certified by the Secretary of Global
Convertible.
(b) That Global Convertible shall have furnished to Convertible Fund a
statement of Global Convertible's assets and liabilities, with values
determined as provided in Section 4 of this Agreement, together with a
schedule of investments with their respective dates of acquisition and tax
costs, all as of the Valuation Time, certified on Global Convertible's
behalf by its President (or any Vice President) and its Treasurer, and a
certificate signed by Global Convertible's President (or any Vice
President) and its Treasurer, dated as of the Exchange Date, certifying
that as of the Valuation Time and as of the Exchange Date there has been no
material adverse change in the financial position of Global Convertible
since October 31, 1997, other than changes in the Investments since that
date or changes in the market value of the Investments.
(c) That Global Convertible shall have furnished to Convertible Fund a
certificate signed by Global Convertible's President (or any Vice
President) and its Treasurer, dated the Exchange Date, certifying that as
of the Valuation Time and as of the Exchange Date all representations and
warranties of Global Convertible made in this Agreement are true and
correct in all material respects with the same effect as if made at and as
of such dates and Global Convertible has complied with all of the
agreements and satisfied all of the conditions on its part to be performed
or satisfied at or prior to such dates.
(d) That Global Convertible shall have delivered to Convertible Fund a
letter from Deloitte & Touche LLP, dated the Exchange Date, stating that
such firm has performed a limited review of the Federal, state and local
income tax returns of Global Convertible for the period ended October 31,
1997 (which returns originally were prepared and filed by Global
Convertible), and that based on such limited review, nothing came to their
attention which caused them to believe that such returns did not properly
reflect, in all material respects, the Federal, state and local income
taxes of Global Convertible for the period covered thereby; and that for
the period from November 1, 1997, to and including the Exchange Date and
for any taxable year of Global Convertible ending upon the liquidation of
Global Convertible, such firm has performed a limited review to ascertain
the amount of applicable Federal, state and local taxes, and has determined
that either such amount has been paid or reserves established for payment
of such taxes, this review to be based on unaudited financial data; and
that based on such limited review, nothing has come to their attention
which caused them to believe that the taxes paid or reserves set aside for
payment of such taxes were not adequate in all material respects for the
satisfaction of Federal, state and local taxes for the period from November
1, 1997, to and including the Exchange Date and for any
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taxable year of Global Convertible ending upon the liquidation of Global
Convertible or that Global Convertible would not continue to qualify as a
regulated investment company for Federal income tax purposes.
(e) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(f) That Convertible Fund shall have received an opinion of Brown &
Wood LLP, as counsel to both Convertible Fund and Global Convertible, in
form and substance satisfactory to Convertible Fund and dated the Exchange
Date, with respect to the matters specified in Section 8(e) of this
Agreement and such other matters as Convertible Fund reasonably may deem
necessary or desirable.
(g) That Convertible Fund shall have received a private letter ruling
from the Internal Revenue Service with respect to the matters specified in
Section 8(f) of this Agreement.
(h) That Convertible Fund shall have received from Deloitte & Touche
LLP a letter dated as of the effective date of the N-14 Registration
Statement and a similar letter dated within five days prior to the Exchange
Date, in form and substance satisfactory to Convertible Fund, to the effect
that (i) they are independent public accountants with respect to Global
Convertible within the meaning of the 1933 Act and the applicable published
rules and regulations thereunder; (ii) in their opinion, the financial
statements and supplementary information of Global Convertible included or
incorporated by reference in the N-14 Registration Statement and reported
on by them comply as to form in all material respects with the applicable
accounting requirements of the 1933 Act and the published rules and
regulations thereunder; (iii) on the basis of limited procedures agreed
upon by Global Convertible and Convertible Fund and described in such
letter (but not an examination in accordance with generally accepted
auditing standards) consisting of a reading of any unaudited interim
financial statements and unaudited supplementary information of Global
Convertible included in the N-14 Registration Statement, and inquiries of
certain officials of Global Convertible responsible for financial and
accounting matters, nothing came to their attention that caused them to
believe that (a) such unaudited financial statements and related unaudited
supplementary information do not comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act and the
published rules and regulations thereunder, (b) such unaudited financial
statements are not fairly presented in conformity with generally accepted
accounting principles, applied on a basis substantially consistent with
that of the audited financial statements, or (c) such unaudited
supplementary information is not fairly stated in all material respects in
relation to the unaudited financial statements taken as a whole; and (iv)
on the basis of limited procedures agreed upon by Convertible Fund and
Global Convertible and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the information
relating to Global Convertible appearing in the N-14 Registration
Statement, which information is expressed in dollars (or percentages
derived from such dollars) (with the exception of performance comparisons,
if any), has been obtained from the accounting records of Global
Convertible or from schedules prepared by officials of Global Convertible
having responsibility for financial and reporting matters and such
information is in agreement with such records, schedules or computations
made therefrom.
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(i) That the Investments to be transferred to Convertible Fund shall
not include any assets or liabilities which Convertible Fund, by reason of
charter limitations or otherwise, may not properly acquire or assume.
(j) That the N-14 Registration Statement shall have become effective
under the 1933 Act and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of Global Convertible,
contemplated by the Commission.
(k) That the Commission shall not have issued an unfavorable advisory
report under Section 25(b) of the 1940 Act, nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the
Reorganization under Section 25(c) of the 1940 Act, and no other legal,
administrative or other proceeding shall be instituted or threatened which
would materially affect the financial condition of Global Convertible or
would prohibit the Reorganization.
(l) That Convertible Fund shall have received from the Commission such
orders or interpretations as Brown & Wood LLP, as counsel to Convertible
Fund, deems reasonably necessary or desirable under the 1933 Act and the
1940 Act in connection with the Reorganization, provided, that such counsel
shall have requested such orders as promptly as practicable, and all such
orders shall be in full force and effect.
(m) That all proceedings taken by Global Convertible and its counsel
in connection with the Reorganization and all documents incidental thereto
shall be satisfactory in form and substance to Convertible Fund.
(n) That prior to the Exchange Date, Global Convertible shall have
declared a dividend or dividends which, together with all such previous
dividends, shall have the effect of distributing to its stockholders all of
its investment company taxable income for the period from January 1, 1998
to and including the Exchange Date, if any (computed without regard to any
deduction for dividends paid), and all of its net capital gain, if any,
realized for the period from November 1, 1997 to and including the Exchange
Date.
10. TERMINATION, POSTPONEMENT AND WAIVERS.
(a) Notwithstanding anything contained in this Agreement to the contrary,
this Agreement may be terminated and the Reorganization abandoned at any time
(whether before or after adoption thereof by the stockholders of Global
Convertible) prior to the Exchange Date, or the Exchange Date may be postponed,
(i) by mutual consent of the Boards of Directors of Global Convertible and
Convertible Fund; (ii) by the Board of Directors of Global Convertible if any
condition of Global Convertible's obligations set forth in Section 8 of this
Agreement has not been fulfilled or waived by such Board; or (iii) by the Board
of Directors of Convertible Fund if any condition of Convertible Fund's
obligations set forth in Section 9 of this Agreement has not been fulfilled or
waived by such Board.
(b) If the transactions contemplated by this Agreement have not been
consummated by August 31, 1998, this Agreement automatically shall terminate on
that date, unless a later date is mutually agreed to by the Boards of Directors
of Global Convertible and Convertible Fund.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no further effect, and
there shall not be any liability on the part of either Global Convertible or
Convertible Fund or persons who are their directors, trustees, officers, agents
or stockholders in respect of this Agreement.
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(d) At any time prior to the Exchange Date, any of the terms or conditions
of this Agreement may be waived by the Board of Directors of either Global
Convertible or Convertible Fund, respectively (whichever is entitled to the
benefit thereof), if, in the judgment of such Board after consultation with its
counsel, such action or waiver will not have a material adverse effect on the
benefits intended under this Agreement to the stockholders of their respective
fund, on behalf of which such action is taken. In addition, the Boards of
Directors of Global Convertible and Convertible Fund have delegated to MLAM the
ability to make non-material changes to the transaction if it deems it to be in
the best interests of Global Convertible and Convertible Fund to do so.
(e) The respective representations and warranties contained in Sections 1
and 2 of this Agreement shall expire with, and be terminated by, the
consummation of the Reorganization, and neither Global Convertible nor
Convertible Fund nor any of their officers, directors or trustees, agents or
stockholders shall have any liability with respect to such representations or
warranties after the Exchange Date. This provision shall not protect any
officer, director or trustee, agent or stockholder of Global Convertible or
Convertible Fund against any liability to the entity for which that officer,
director or trustee, agent or stockholder so acts or to its stockholders, to
which that officer, director or trustee, agent or stockholder otherwise would be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties in the conduct of such office.
(f) If any order or orders of the Commission with respect to this Agreement
shall be issued prior to the Exchange Date and shall impose any terms or
conditions which are determined by action of the Boards of Directors of Global
Convertible and Convertible Fund to be acceptable, such terms and conditions
shall be binding as if a part of this Agreement without further vote or approval
of the stockholders of Global Convertible unless such terms and conditions shall
result in a change in the method of computing the number of shares of
Convertible Fund to be issued to Global Convertible in which event, unless such
terms and conditions shall have been included in the proxy solicitation
materials furnished to the stockholders of Global Convertible prior to the
meeting at which the Reorganization shall have been approved, this Agreement
shall not be consummated and shall terminate unless Global Convertible promptly
shall call a special meeting of stockholders at which such conditions so imposed
shall be submitted for approval.
11. INDEMNIFICATION.
(a) Global Convertible hereby agrees to indemnify and hold Convertible Fund
harmless from all loss, liability and expense (including reasonable counsel fees
and expenses in connection with the contest of any claim) which Convertible Fund
may incur or sustain by reason of the fact that (i) Convertible Fund shall be
required to pay any corporate obligation of Global Convertible, whether
consisting of tax deficiencies or otherwise, based upon a claim or claims
against Global Convertible which were omitted or not fairly reflected in the
financial statements to be delivered to Convertible Fund in connection with the
Reorganization; (ii) any representations or warranties made by Global
Convertible in this Agreement should prove to be false or erroneous in any
material respect; (iii) any covenant of Global Convertible has been breached in
any material respect; or (iv) any claim is made alleging that (a) the N-14
Registration Statement included any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements therein not misleading or (b) the Proxy Statement and
Prospectus delivered to the stockholders of Global Convertible and forming a
part of the N-14 Registration Statement included any untrue statement of a
material fact or omitted to state any material fact necessary to make the
statements
I-17
<PAGE> 60
therein, in the light of the circumstances under which they were made, not
misleading, except insofar as such claim is based on written information
furnished to Global Convertible by Convertible Fund.
(b) Convertible Fund hereby agrees to indemnify and hold Global Convertible
harmless from all loss, liability and expenses (including reasonable counsel
fees and expenses in connection with the contest of any claim) which Global
Convertible may incur or sustain by reason of the fact that (i) any
representations or warranties made by Convertible Fund in this Agreement should
prove false or erroneous in any material respect, (ii) any covenant of
Convertible Fund has been breached in any material respect, or (iii) any claim
is made alleging that (a) the N-14 Registration Statement included any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein, not misleading or
(b) the Proxy Statement and Prospectus delivered to stockholders of Global
Convertible and forming a part of the N-14 Registration Statement included any
untrue statement of a material fact or omitted to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except insofar as such claim is
based on written information furnished to Convertible Fund by Global
Convertible.
(c) In the event that any claim is made against Convertible Fund in respect
of which indemnity may be sought by Convertible Fund from Global Convertible
under Section 11(a) of this Agreement, or in the event that any claim is made
against Global Convertible in respect of which indemnity may be sought by Global
Convertible from Convertible Fund under Section 11(b) of this Agreement, then
the party seeking indemnification (the "Indemnified Party"), with reasonable
promptness and before payment of such claim, shall give written notice of such
claim to the other party (the "Indemnifying Party"). If no objection as to the
validity of the claim is made in writing to the Indemnified Party by the
Indemnifying Party within thirty (30) days after the giving of notice hereunder,
then the Indemnified Party may pay such claim and shall be entitled to
reimbursement therefor, pursuant to this Agreement. If, prior to the termination
of such thirty-day period, objection in writing as to the validity of such claim
is made to the Indemnified Party, the Indemnified Party shall withhold payment
thereof until the validity of such claim is established (i) to the satisfaction
of the Indemnifying Party, or (ii) by a final determination of a court of
competent jurisdiction, whereupon the Indemnified Party may pay such claim and
shall be entitled to reimbursement thereof, pursuant to this Agreement, or (iii)
with respect to any tax claims, within seven (7) calendar days following the
earlier of (A) an agreement between Global Convertible and Convertible Fund that
an indemnity amount is payable, (B) an assessment of a tax by a taxing
authority, or (C) a "determination" as defined in Section 1313(a) of the Code.
For purposes of this Section 11, the term "assessment" shall have the same
meaning as used in Chapter 63 of the Code and Treasury Regulations thereunder,
or any comparable provision under the laws of the appropriate taxing authority.
In the event of any objection by the Indemnifying Party, the Indemnifying Party
promptly shall investigate the claim, and if it is not satisfied with the
validity thereof, the Indemnifying Party shall conduct the defense against such
claim. All costs and expenses incurred by the Indemnifying Party in connection
with such investigation and defense of such claim shall be borne by it. These
indemnification provisions are in addition to, and not in limitation of, any
other rights the parties may have under applicable law.
12. OTHER MATTERS.
(a) Pursuant to Rule 145 under the 1933 Act, and in connection with the
issuance of any shares to any person who at the time of the Reorganization is,
to its knowledge, an affiliate of a party to the Reorganization
I-18
<PAGE> 61
pursuant to Rule 145(c), Convertible Fund will cause to be affixed upon the
certificate(s) issued to such person (if any) a legend as follows:
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT
TO MERRILL LYNCH CONVERTIBLE FUND, INC. (OR ITS STATUTORY SUCCESSOR) OR ITS
PRINCIPAL UNDERWRITER UNLESS (I) A REGISTRATION STATEMENT WITH RESPECT
THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933 OR (II) IN THE
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE FUND, SUCH REGISTRATION
IS NOT REQUIRED.
and, further, that stop transfer instructions will be issued to Convertible
Fund's transfer agent with respect to such shares. Global Convertible will
provide Convertible Fund on the Exchange Date with the name of any Global
Convertible stockholder who is to the knowledge of Global Convertible an
affiliate of it on such date.
(b) All covenants, agreements, representations and warranties made under
this Agreement and any certificates delivered pursuant to this Agreement shall
be deemed to have been material and relied upon by each of the parties,
notwithstanding any investigation made by them or on their behalf.
(c) Any notice, report or demand required or permitted by any provision of
this Agreement shall be in writing and shall be made by hand delivery, prepaid
certified mail or overnight service, addressed to Global Convertible or
Convertible Fund, in either case at 800 Scudders Mill Road, Plainsboro, New
Jersey 08536, Attn: Arthur Zeikel, President.
(d) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Reorganization, constitutes the
only understanding with respect to the Reorganization, may not be changed except
by a letter of agreement signed by each party and shall be governed by and
construed in accordance with the laws of the State of New York applicable to
agreements made and to be performed in said state.
(e) Copies of the Articles of Incorporation, as amended, of Global
Convertible and Convertible Fund are on file with the Department of Assessments
and Taxation of the State of Maryland and notice is hereby given that this
instrument is executed on behalf of the Directors of each fund.
I-19
<PAGE> 62
This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original but all
such counterparts together shall constitute but one instrument.
MERRILL LYNCH GLOBAL CONVERTIBLE
FUND, INC.
By: /s/ TERRY K. GLENN
--------------------------------------
(Terry K. Glenn, Executive Vice
President)
Attest:
/s/ LAWRENCE A. ROGERS
- --------------------------------------
(Lawrence A. Rogers, Secretary)
MERRILL LYNCH CONVERTIBLE
FUND, INC.
By: /s/ ARTHUR ZEIKEL
--------------------------------------
(Arthur Zeikel, President)
Attest:
/s/ IRA P. SHAPIRO
- --------------------------------------
(Ira P. Shapiro, Secretary)
I-20
<PAGE> 63
[PROXY CARD FRONT] MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
PROXY
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and
Lawrence A. Rogers as proxies, each with the power to appoint his substitute,
and hereby authorizes each of them to represent and to vote, as designated on
the reverse hereof, all of the shares of common stock of Merrill Lynch Global
Convertible Fund, Inc. (the "Fund") held of record by the undersigned on
December 19, 1997 at a Special Meeting of Stockholders of the Fund to be held
on February 11, 1998, or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1.
(Continued and to be signed on the reverse side)
<PAGE> 64
[PROXY CARD REVERSE]
1. To approve the Agreement and Plan of Reorganization between Merrill Lynch
Global Convertible Fund, Inc. and Merrill Lynch Convertible Fund, Inc.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In the discretion of such proxies, upon such other business as properly
may come before the meeting or any adjournment thereof.
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney or as executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized persons.
Dated: , 199
--------------------- -
X
---------------------------------
Signature
X
---------------------------------
Signature, if held jointly
PLEASE MARK BOXES /X/ OR [X] IN BLUE OR BLACK INK. SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE> 65
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
MERRILL LYNCH CONVERTIBLE FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Proxy Statement and Prospectus of Merrill Lynch
Global Convertible Fund, Inc. ("Global Convertible") and Merrill Lynch
Convertible Fund, Inc. ("Convertible Fund") dated January 7, 1998 (the "Proxy
Statement and Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling Convertible
Fund at 1-800-456-4587, ext. 123, or by writing to Convertible Fund at the above
address. This Statement of Additional Information has been incorporated by
reference into the Proxy Statement and Prospectus.
Further information about Convertible Fund is contained in and incorporated
by reference to its Prospectus, dated December 29, 1997, and its Statement of
Additional Information, dated December 29, 1997, which are incorporated by
reference into this Statement of Additional Information. Convertible Fund's
Statement of Additional Information accompanies this Statement of Additional
Information.
Further information about Global Convertible is contained in and
incorporated by reference to its Prospectus, dated February 24, 1997, and its
Statement of Additional Information, dated February 24, 1997, which are
incorporated by reference into this Statement of Additional Information. Global
Convertible's Statement of Additional Information accompanies this Statement of
Additional Information.
The Commission maintains a web site (http://www.sec.gov) that contains the
prospectus and statement of additional information of each of Global Convertible
and Convertible Fund, other material incorporated by reference and other
information regarding Global Convertible and Convertible Fund.
The date of this Statement of Additional Information is January 7, 1998
<PAGE> 66
TABLE OF CONTENTS
<TABLE>
<S> <C>
General Information................................................................... 2
Financial Statements.................................................................. 2
Pro Forma Combined Schedule of Investments for Convertible Fund and Global
Convertible as of October 31, 1997 (unaudited)................................... F-1
Pro Forma Combined Statement of Assets and Liabilities for Convertible Fund and
Global Convertible as of October 31, 1997 (unaudited)............................ F-9
Pro Forma Combined Statement of Operations for Convertible Fund and Global
Convertible as of October 31, 1997 (unaudited)................................... F-11
</TABLE>
GENERAL INFORMATION
The stockholders of Merrill Lynch Global Convertible Fund, Inc. ("Global
Convertible") are being asked to approve the acquisition of substantially all of
the assets of Global Convertible, and the assumption of substantially all of the
liabilities of Global Convertible by Merrill Lynch Convertible Fund, Inc. (the
"Convertible Fund"), in exchange solely for an equal aggregate value of shares
of Convertible Fund (the "Reorganization"). Convertible Fund is an openend
management investment company organized as a Maryland corporation. A Special
Meeting of Stockholders of Global Convertible to consider the Reorganization
will be held at 800 Scudders Mill Road, Plainsboro, New Jersey, on Wednesday,
February 11, 1998, at 9:00 a.m., New York time.
For detailed information about the Reorganization, stockholders of Global
Convertible should refer to the Proxy Statement and Prospectus. For further
information about Convertible Fund, Global Convertible stockholders should refer
to Convertible Fund's Statement of Additional Information, dated December 29,
1997, which accompanies this Statement of Additional Information and is
incorporated by reference herein. For further information about Global
Convertible, stockholders should refer to Global Convertible's Statement of
Additional Information, dated February 24, 1997 (the "Global Convertible
Statement"), which accompanies this Statement of Additional Information and is
incorporated by reference herein.
FINANCIAL STATEMENTS
Pro forma financial statements reflecting consummation of the
Reorganization are included herein.
CONVERTIBLE FUND
Financial statements and accompanying notes for the fiscal period January
1, 1997 through August 31, 1997, and the independent auditors' report thereon,
dated October 15, 1997, of Convertible Fund are incorporated by reference from
the Convertible Fund Annual Report to Shareholders for the fiscal year ended
August 31, 1997.
GLOBAL CONVERTIBLE
Financial statements and accompanying notes for the fiscal year ended
October 31, 1997, and the independent auditor's report thereon, dated December
5, 1997, of Global Convertible are incorporated by reference from the Global
Convertible Annual Report to Shareholders for the fiscal year ended October 31,
1997.
2
<PAGE> 67
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH CONVERTIBLE FUND, INC. AND
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
OCTOBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE GLOBAL PRO FORMA FOR
NORTH AMERICA INDUSTRIES SHARES HELD COMMON STOCKS & WARRANTS FUND+ CONVERTIBLE+ COMBINED FUND+
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States Building & 20,000 Toll Brothers Inc. ............. $ 442,500 -- $ 442,500
Construction
Drug 27,400 Bindley Western Industries
Distribution Inc. ......................... 770,625 -- 770,625
Environmental 16,918 Allied Waste Industries,
Inc. ......................... 342,589 -- 342,589
Financial 34,375 Nal Acceptance Corp.
Services (Warrants)(a)++............... 9,797 -- 9,797
Food & Beverage 25,000 RJR Nabisco, Inc. .............. 792,188 -- 792,188
Food/Beverage/ 20,000 ConAgra Inc..................... -- $ 602,500 602,500
Tobacco/Household
Funeral Services 20,000 Service Corporation
International................. 608,750 -- 608,750
Metal 15,479 Trinity Industries Leasing
Fabricating Co. .......................... 692,685 -- 692,685
Paper 17,700 Boise Cascade Corporation....... 612,863 -- 612,863
Pharmaceuticals 3,273 Crescendo Pharmaceuticals
Corp.(c)...................... 24,547 12,274 36,821
Retail Stores 22,500 Home Depot, Inc. ............... -- 1,251,562 1,251,562
Semiconductors 75,800 Cypress Semiconductor
Corporation(c)................ 852,750 -- 852,750
60,000 Integrated Device Technology,
Inc.(c)....................... 690,000 -- 690,000
----------- ---------- ------------
1,542,750 -- 1,542,750
Steel 44,829 AK Steel Holding Corp. ......... 1,888,422 -- 1,888,422
-------------------------------------------
Total Common Stocks and Warrants in the United States.............. 7,727,716 1,866,336 9,594,052
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE GLOBAL PRO FORMA FOR
NORTH AMERICA INDUSTRIES FACE AMOUNT CONVERTIBLE BONDS FUND+ CONVERTIBLE+ COMBINED FUND+
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Canada Metals & Mining US$ 2,200,000 Inco, Limited, 5.75% due
7/01/2004..................... $ 1,526,250 $ 712,250 $ 2,238,500
900,000 Magna International Inc.,
7.25% due 7/05/2005........... 1,009,441 -- 1,009,441
-------------------------------------------
Total Convertible Bonds in Canada.................................. 2,535,691 712,250 3,247,941
United States Assisted Living 1,600,000 Assisted Living Concepts, Inc.
6% due 11/01/2002............. 1,430,000 330,000 1,760,000
</TABLE>
F-1
<PAGE> 68
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH CONVERTIBLE FUND, INC. AND
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. (CONTINUED)
OCTOBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE GLOBAL PRO FORMA FOR
NORTH AMERICA INDUSTRIES FACE AMOUNT CONVERTIBLE BONDS FUND+ CONVERTIBLE+ COMBINED FUND+
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States Automotive $ 2,000,000 Mascotech, Inc. 4.50% due
(continued) Parts........... 12/15/2003.................... $ 1,775,000 -- $ 1,775,000
Pep Boys -- Manny, Moe & Jack (The):
4,000,000 4% due 9/15/1999................ 2,468,750 $1,481,250 3,950,000
1,500,000 4.089% due 9/20/2011............ 789,375 789,375
750,000 Tower Automotive, 5% due
8/01/2004(b).................. 783,750 -- 783,750
----------- ---------- ------------
5,816,875 1,481,250 7,298,125
Conglomerates Polyphase Corporation:+++
1,000,000 12% due 12/01/1997(b)........... 270,000 -- 270,000
2,000,000 12% due 7/01/1999++............. 540,000 -- 540,000
1,500,000 Thermo Electron Corporation,
4.25% due 1/01/2003........... 1,689,375 -- 1,689,375
----------- ---------- ------------
2,499,375 -- 2,499,375
Dental Supplies 550,000 Phoenix Shannon PLC,
9.50% due 11/01/2000(b)....... 165,000 -- 165,000
Environmental 1,605,000 Thermo Ecotek Corp.,
4.875% due 4/15/2004(b)....... 1,631,081 -- 1,631,081
750,000 Thermo Fibertek Inc.,
4.50% due 7/15/2004........... 781,875 -- 781,875
500,000 USA Waste Services, Inc.,
4% due 2/01/2002.............. 526,250 -- 526,250
----------- ---------- ------------
2,939,206 -- 2,939,206
Finance 1,000,000 Kellstorm Industries Inc.,
5.75% due 10/15/2002.......... 988,750 -- 988,750
Healthcare 2,000,000 Integrated Health Services Inc.,
Services 6% due 1/01/2003.............. 2,177,500 -- 2,177,500
6,000,000 PhyCor, Inc., 4.50% due
2/15/2003..................... 4,162,500 1,387,500 5,550,000
3,122,000 Quantum Health Resources, Inc.,
4.75% due 10/01/2000.......... 2,965,900 -- 2,965,900
1,500,000 RoTech Medical Corporation.,
5.25% due 6/01/2003........... 1,503,750 -- 1,503,750
----------- ---------- ------------
10,809,650 1,387,500 12,197,150
Home Builders 1,000,000 Continental Homes Holding Corp.,
6.875% due 11/01/2002......... 1,346,250 -- 1,346,250
Medical Supplies 1,500,000 Thermo Trex Corp.,
3.25% due 11/01/2007.......... 700,000 802,000 1,502,000
</TABLE>
F-2
<PAGE> 69
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH CONVERTIBLE FUND, INC. AND
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. (CONTINUED)
OCTOBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE GLOBAL PRO FORMA FOR
NORTH AMERICA INDUSTRIES FACE AMOUNT CONVERTIBLE BONDS FUND+ CONVERTIBLE+ COMBINED FUND+
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States Miscellaneous $ 1,000,000 Loews Corp.,
(continued) 3.125% due 9/15/2007.......... $ 1,131,250 -- $ 1,131,250
Pharmaceuticals 4,500,000 Alza Corporation,
5% due 5/01/2006.............. 2,925,000 $1,462,500 4,387,500
Real Estate 1,500,000 Capstone Capital Trust Inc.,
Investment 6.55% due 3/14/2002........... 1,456,875 -- 1,456,875
Trusts
Restaurants 500,000 Boston Market
7.75% due 5/01/2004........... 377,500 -- 377,500
1,425,000 Hometown Buffet Inc.,
7% due 12/01/2002............. 1,588,875 -- 1,588,875
----------- ---------- ------------
1,966,375 -- 1,966,375
Retail Stores 3,000,000 Home Depot, Inc. (The),
3.25% due 10/01/2001+++....... 3,137,500 627,500 3,765,000
Retail Office 5,000,000 Office Depot, Inc.
Products 4.891% due 11/01/2008(d)...... 3,125,000 -- 3,125,000
US Office Products Co.:
1,000,000 5.50% due 5/15/2003++........... 935,000 -- 935,000
1,000,000 5.50% due 5/15/2003(b).......... 977,500 -- 977,500
----------- ---------- ------------
5,037,500 -- 5,037,500
Scientific 2,000,000 Thermo Cardiosystems Inc., 4.75%
Equipment due 5/15/2004(b).............. 2,020,000 -- 2,020,000
1,250,000 Thermo Instrument Systems, Inc.,
4.50% due 10/15/2003(b)....... 1,306,250 -- 1,306,250
1,000,000 Thermo Optek Corp.,
5% due 10/15/2000(b).......... 1,146,250 -- 1,146,250
----------- ---------- ------------
4,472,500 -- 4,472,500
Semiconductors 750,000 Cypress Semiconductor Corp., 6%
due 10/01/2002(b)............. 656,250 -- 656,250
Technology 1,000,000 Apple Computer, Inc.,
6% due 6/01/2001.............. 883,500 -- 883,500
750,000 Data General Corporation,
6% due 5/15/2004(b)........... 772,500 -- 772,500
650,000 Premiere Technologies, Inc.,
5.75% due 7/01/2004+++.......... 775,125 -- 775,125
----------- ---------- ------------
2,431,125 -- 2,431,125
Textiles 1,100,000 Fieldcrest Cannon, Inc.,
6% due 3/15/2012.............. 918,500 -- 918,500
</TABLE>
F-3
<PAGE> 70
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH CONVERTIBLE FUND, INC. AND
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. (CONTINUED)
OCTOBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE GLOBAL PRO FORMA FOR
NORTH AMERICA INDUSTRIES FACE AMOUNT CONVERTIBLE BONDS FUND+ CONVERTIBLE+ COMBINED FUND+
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States Transportation $ 600,000 Alaska Air Group, Inc.,
(concluded) 6.50% due 6/15/2005........... $ 951,000 $ 951,000
Water Treatment 1,750,000 US Filter Corporation,
Systems 4.50% due 12/15/2001.......... $ 2,051,875 -- 2,051,875
-------------------------------------------
Total Convertible Bonds in the United States....................... 52,879,856 7,041,750 59,921,606
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE GLOBAL PRO FORMA FOR
NORTH AMERICA INDUSTRIES SHARES HELD CONVERTIBLE PREFERRED STOCKS FUND+ CONVERTIBLE+ COMBINED FUND+
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States Banking & 10,000 Jefferson Pilot Corp. (ACES)
Financial (into NationsBank Corp.(e).... $ 1,060,000 -- $ 1,060,000
Energy 20,000 CalEnergy Capital Trust II,
6.25%(b)...................... 1,017,500 -- 1,017,500
Health Care 50,000 Medpartners Inc. ............... 1,212,500 -- 1,212,500
Insurance 10,000 American General Corp., Pfd. ... -- $ 665,000 665,000
15,000 St. Paul Companies, Inc.,
Pfd. ......................... -- 1,050,000 1,050,000
----------- ---------- ------------
-- 1,715,000 1,715,000
Metals & Mining 30,000 USX Capital Trust I Pfd. ....... 1,425,000 1,425,000
Minerals 43,150 Cyprus Amax Minerals Co., $4.00,
Series A...................... 2,297,738 2,297,738
Oil & Gas 27,000 Lomak Petroleum, Inc.,
Producers $5.75 Pfd..................... 1,010,000 353,500 1,363,500
10,000 Occidental Petroleum Corp.,
Pfd., Series A................ -- 940,000 940,000
----------- ---------- ------------
1,010,000 1,293,000 2,303,500
Paper 40,000 International Paper Co.,
$5.25......................... 2,030,000 -- 2,030,000
Precious Metals 44,200 Coeur d'Alene Mines
Corporation................... 693,388 -- 693,388
Real Estate 30,000 Public Storage Inc., $2.062..... 1,395,000 -- 1,395,000
Investment
Trust 20,000 Merry Land & Investment Company,
Inc., Pfd. ................... -- 552,500 552,500
----------- ---------- ------------
1,395,000 552,500 1,947,500
Restaurants 60,000 Wendy's International, Inc.,
Series A ..................... 3,000,000 -- 3,000,000
</TABLE>
F-4
<PAGE> 71
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH CONVERTIBLE FUND, INC. AND
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. (CONTINUED)
OCTOBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE GLOBAL PRO FORMA FOR
NORTH AMERICA INDUSTRIES SHARES HELD CONVERTIBLE PREFERRED STOCKS FUND+ CONVERTIBLE+ COMBINED FUND+
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States Retail 19,500 Kmart Financing I............... $ 1,110,281 -- $ 1,110,281
(concluded)
Steel WHX Corporation:
40,000 Series A........................ 1,970,000 -- 1,970,000
20,000 Series B........................ -- $ 985,000 985,000
103,610 Worthington Industries, Inc. ... 1,631,858 -- 1,631,858
----------- ---------- ------------
3,601,858 985,000 4,586,858
Transportation 10,000 CNF Transportation Inc.,
Series A...................... 635,000 -- 635,000
Utilities 50,500 Citizens Utilities Company...... 2,398,750 -- 2,398,750
-------------------------------------------
Total Convertible Preferred Stocks in the United States............ 21,462,015 5,971,000 27,433,015
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investments in North American Securities..................... 84,605,278 15,591,336 100,196,614
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
SHARES CONVERTIBLE GLOBAL PRO FORMA FOR
PACIFIC BASIN INDUSTRIES HELD COMMON STOCKS FUND+ CONVERTIBLE+ COMBINED FUND+
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Hong Kong Utilities--Electric 50,000 Shandong Huaneng Power Company
Ltd.(ADR)(c).................. -- $ 371,875 $ 371,875
-----------
Total Common Stocks in Hong Kong................................... -- 371,875 371,875
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
FACE CONVERTIBLE GLOBAL PRO FORMA FOR
PACIFIC BASIN INDUSTRIES AMOUNT CONVERTIBLE BONDS FUND+ CONVERTIBLE+ COMBINED FUND+
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Japan Auto & Truck Y25,000,000 No. 2 Toyota Motor Corp., 1.20%
due 1/28/1998................. -- $ 359,371 $ 359,371
Chemicals 50,000,000 No. 6 Sumitomo Bakelite Co.,
Ltd., 1.20% due 9/29/2006..... -- 499,958 499,958
Electronics Y50,000,000 No. 5 Matsushita Electric
Industrial Co., 1.30% due
3/29/2002..................... -- 532,402 532,402
30,000,000 No. 2 Tokyo Electron Ltd., 0.90%
due 9/30/2003................. -- 488,146 488,146
----------- ---------- ------------
-- 1,020,548 1,020,548
Food & Beverage 14,000,000 No. 1 Sanyo Coca-Cola Bottling,
Inc., 0.90% due 6/30/2003..... -- 110,873 110,873
Industrial 30,000,000 No. 3 Sony Corp., 1.40% due
9/30/2003..................... -- 454,704 454,704
Total Convertible Bonds in Japan................................... -- 2,445,454 2,445,454
-------------------------------------------
Total Investments in the Pacific Basin............................. -- 2,817,329 2,817,329
</TABLE>
F-5
<PAGE> 72
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH CONVERTIBLE FUND, INC. AND
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. (CONTINUED)
OCTOBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
FACE CONVERTIBLE GLOBAL PRO FORMA FOR
WESTERN EUROPE INDUSTRIES AMOUNT CONVERTIBLE BONDS FUND+ CONVERTIBLE+ COMBINED FUND+
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
France Leisure Frf 4,200,000 Euro Disney SCA, 6.75% due
10/01/2001.................... -- $ 780,572 $ 780,572
Pharmaceuticals 7,000 Sanofi S.A. 4% due 1/01/2000
(units)....................... -- 730,963 730,963
-------------------------------------------
Total Convertible Bonds in France.................................. -- 1,511,535 1,511,535
- ---------------------------------------------------------------------------------------------------------------------------------
Netherlands Insurance US $500,000 Aegon N.V., 4.75% due
11/01/2004.................... -- 1,387,500 1,387,500
-------------------------------------------
Total Convertible Bonds in the Netherlands......................... -- 1,387,500 1,387,500
- ---------------------------------------------------------------------------------------------------------------------------------
United Kingdom Food & Beverage L 500,000 Allied-Lyons PLC, 6.75% due
7/07/2008..................... -- 842,994 842,994
US $500,000 Grand Metropolitan PLC, 6.50%
due 1/31/2000................. -- 647,500 647,500
-------------------------------------------
Total Convertible Bonds in the United Kingdom...................... -- 1,490,494 1,490,494
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investments in Western Europe................................ -- 4,389,529 4,389,529
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM FACE CONVERTIBLE GLOBAL PRO FORMA FOR
SECURITIES AMOUNT ISSUE FUND+ CONVERTIBLE+ COMBINED FUND+
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial US$ 2,117,000 General Motors Acceptance Corp.,
Paper* 5.75% due 11/03/1997.......... $ 1,251,400 $ 864,724 $ 2,116,124
3,500,000 Lexington Parker Inc., 5.52% due
11/04/1997.................... 3,497,853 -- 3,497,853
----------- ---------- ------------
4,749,253 864,724 5,613,977
US Government
Obligations* US Treasury Bills:
750,000 4.62% due 11/06/1997............ -- 749,519 749,519
750,000 4.83% due 11/13/1997............ -- 748,793 748,793
1,400,000 4.85% due 11/13/1997............ -- 1,397,737 1,397,737
800,000 4.80% due 11/20/1997............ -- 797,973 797,973
2,500,000 4.85% due 12/04/1997............ -- 2,488,885 2,488,885
750,000 4.85% due 12/11/1997............ -- 745,958 745,958
-- 6,928,865 6,928,865
------------------------------------------
Total Investment in Short-Term Securities.......................... 4,749,253 7,793,589 12,542,842
- --------------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost -$113,771,565)............................. $89,354,531 $30,591,783 $119,946,314
=========== =========== ============
</TABLE>
F-6
<PAGE> 73
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS FOR
MERRILL LYNCH CONVERTIBLE FUND, INC. AND
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. (CONCLUDED)
OCTOBER 31, 1997
(UNAUDITED)
- ---------------
(a) Warrants entitle the Fund to purchase a predetermined number of shares
of Common Stock. The purchase price and number of shares are subject to
adjustment under certain conditions until the expiration date.
(b) The security may be offered and sold to "qualified institutional buyers"
under rule 144A of the Securities Act of 1933.
(c) Non-income producing security.
(d) Represents a zero coupon or step bond; the interest rate shown is the
effective yield at the time of purchase by the Fund.
(e) Adjustable Convertible Extendable Securities.
(f) American Depository Receipt (ADR).
* Commercial Paper and certain US Government Obligations are traded on a
discount basis; the interest rates shown are the discount rates paid at
the time of purchase by Fund.
+ Valued as discussed in Note 1a of Notes to Pro Forma Financial
Statements below.
++ Restricted securities as to resale. The value of Convertible Fund's
investment in restricted securities is approximately $1,485,000,
representing 1.7% of Convertible Fund's net assets and 1.3% of the net
assets of the Combined Fund.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
ACQUISITION VALUE
ISSUE DATE COST (NOTE 1a)
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nal Acceptance Corp. (warrants)........................................... 9/12/1996 -- $ 9,797
Polyphase Corp., 12% due 7/01/1999........................................ 9/12/1996 $2,000,000 540,000
US Office Products Co., 5.50% due 5/15/2003............................... 2/27/1997 842,500 935,000
-------------------------------------------------------------------------------------------------------------------------
Total..................................................................... $2,842,500 $1,484,797
===========================
+++ Covered Short Sales entered into as of October 31, 1997
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES ISSUE (NOTES 1a & 1b)
------------------------------------------------------------------
<S> <C> <C>
40,000 aHome Depot, Inc. (The).................. (2,225,000)
5,500 Polyphase Corporation................... (8,250)
14,700 Premiere Technologies, Inc. ............ (499,800)
------------------------------------------------------------------
Total (Proceeds $2,588,216)...................... (2,733,050)
------------------------------------------------------------------
</TABLE>
F-7
<PAGE> 74
PRO FORMA COMBINED STATEMENT OF ASSETS
AND LIABILITIES FOR
MERRILL LYNCH CONVERTIBLE FUND, INC. AND
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
AS OF OCTOBER 31, 1997
(UNAUDITED)
The following unaudited Pro Forma Combined Statement of Assets and
Liabilities for Merrill Lynch Convertible Fund, Inc. ("Convertible Fund") and
Merrill Lynch Global Convertible Fund, Inc. ("Global Convertible") has been
derived from the Statements of Assets and Liabilities of Convertible Fund and
Global Convertible as of October 31, 1997 and such information has been adjusted
to give effect to the Reorganization as if the Reorganization had occurred on
October 31, 1997. The Pro Forma Statement of Assets and Liabilities is presented
for informational purposes only and does not purport to be indicative of the
financial condition that would have resulted if the Reorganization had been
consummated on October 31, 1997. The Pro Forma Combined Statement of Assets and
Liabilities should be read in conjunction with the financial statements and
related notes from the Annual Report to Stockholders of Convertible Fund for the
period ended August 31, 1997 and from the Global Convertible audited financial
statements and related notes from the Annual Report to Shareholders of Global
Convertible for the fiscal year ended October 31, 1997.
<TABLE>
<CAPTION>
CONVERTIBLE GLOBAL PRO FORMA FOR
FUND CONVERTIBLE ADJUSTMENTS COMBINED FUND
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value* (Note 1a)......... $89,354,531 $30,591,783 -- $ 119,946,314
Cash..................................... 200,346 840,687 -- 1,041,033
Foreign cash (Note 1b)................... -- 241,801 -- 241,801
Deposits on short sales (Note 1h)........ 2,450,610 -- -- 2,450,610
Receivables:
Securities sold........................ 1,612,200 760,125 -- 2,372,325
Interest............................... 797,251 144,790 -- 942,041
Capital shares sold.................... 107,003 16,375 -- 123,378
Dividends.............................. 37,526 1,489 -- 39,015
Prepaid registration fees and other
assets (Note 1f)....................... 59,660 40,417 -- 100,077
----------- ----------- ---------- ------------
Total assets............................. 94,619,127 32,637,467 -- 127,256,594
----------- ----------- ---------- ------------
LIABILITIES:
Common stock sold short, at market value
(proceeds -- $2,588,216) (Notes 1a &
1h).................................... 2,733,050 -- -- 2,733,050
Payables:
Securities purchased................... 3,831,150 2,209,812 -- 6,040,962
Dividends to Shareholders.............. -- -- $ 5,202,408(1) 5,202,408
Capital shares redeemed................ 939,980 129,346 -- 1,069,326
Investment adviser (Note 2)............ 46,441 16,446 -- 62,887
Distributor (Note 2)................... 6,800 18,024 -- 24,824
Accrued expenses and other liabilities... 235,841 1,341,552 (86,261)(2) 1,491,132
----------- ----------- ---------- ------------
Total liabilities........................ 7,793,262 3,715,180 5,116,147 16,624,589
----------- ----------- ---------- ------------
</TABLE>
F-8
<PAGE> 75
PRO FORMA COMBINED STATEMENT OF ASSETS
AND LIABILITIES FOR
MERRILL LYNCH CONVERTIBLE FUND, INC. AND
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
AS OF OCTOBER 31, 1997 -- (CONCLUDED)
(UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE GLOBAL PRO FORMA FOR
FUND CONVERTIBLE ADJUSTMENTS COMBINED FUND
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
NET ASSETS:
Net Assets............................... $86,825,865 $28,922,287 $(5,116,147) $ 110,632,005
NET ASSETS CONSIST OF:
Class A Common Stock, $0.10 par value,
100,000,000 shares authorized.......... $ 605,951 $ 29,199 $ (5,198) $ 629,952
Class B Common Stock, $0.10 par value,
100,000,000 shares authorized.......... 51,306 149,016 (25,987) 174,335
Class C Common Stock, $0.10 par value,
100,000,000 shares authorized.......... 9,801 9,367 (1,656) 17,512
Class D Common Stock, $0.10 par value,
100,000,000 shares authorized.......... 12,100 55,764 (9,948) 57,916
Paid-in capital in excess of par......... 82,009,882 21,584,498 129,050 103,723,430
Undistributed investment income -- net... 694,690 -- (694,690) 0
Accumulated distributions in excess of
investment income -- net............... -- (48,084) 48,084 0
Undistributed realized capital gains on
investments -- net..................... 767,700 3,788,102 (4,555,802) 0
Unrealized appreciation on
investments -- net..................... 2,674,435 3,354,425 -- 6,028,860
----------- ----------- ---------- ------------
Net assets............................... $86,825,865 $28,922,287 $(5,116,147) $ 110,632,005
----------- ----------- ---------- ------------
NET ASSET VALUE:
Class A:
Net assets............................. $77,478,436 $ 3,465,875 $(1,693,194) $ 79,251,117
Shares outstanding..................... 6,059,510 291,989 (51,982) 6,299,517
Net asset value........................ $ 12.79 $ 11.87 -- $ 12.58
Class B:
Net assets............................. $ 6,549,530 $17,730,531 $(2,382,628) $ 21,897,433
Shares outstanding..................... 513,064 1,490,162 (259,877) 1,743,349
Net asset value........................ $ 12.77 $ 11.90 -- $ 12.56
Class C:
Net assets............................. $ 1,251,405 $ 1,112,046 $ (163,306) $ 2,200,145
Shares outstanding..................... 98,006 93,671 (16,554) 175,123
Net asset value........................ $ 12.77 $ 11.87 -- $ 12.56
Class D:
Net assets............................. $ 1,546,494 $ 6,613,835 $ (877,019) $ 7,283,310
Shares outstanding..................... 121,004 557,641 (99,486) 579,159
Net asset value........................ $ 12.78 $ 11.86 -- $ 12.58
*Identified cost......................... $86,534,684 $27,236,881 -- $ 113,771,565
</TABLE>
- ---------------
(1) Reflects the payment of undistributed net investment income and
undistributed realized capital gains.
(2) Reflects the charge for estimated Reorganization expenses of $200,000 and
anticipated savings of the Reorganization.
See Notes to Financial Statements.
F-9
<PAGE> 76
PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR
MERRILL LYNCH CONVERTIBLE FUND, INC. AND
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
FOR THE TWELVE MONTHS ENDED OCTOBER 31, 1997
(UNAUDITED)
The following unaudited Pro Forma Combined Statement of Operations for
Convertible Fund and Global Convertible has been derived from the Statements of
Operations of Convertible Fund and Global Convertible as of October 31, 1997 and
such information has been adjusted to give effect to the Reorganization as if
the Reorganization had occurred on November 1, 1996. The Pro Forma Statement of
Operations is presented for informational purposes only and does not purport to
be indicative of the financial condition that would have resulted if the
Reorganization had been consummated on November 1, 1996. The Pro Forma Combined
Statement of Operations should be read in conjunction with the financial
statements and related notes from the Annual Report to Stockholders of
Convertible Fund for the fiscal year ended August 31, 1997 and from the Global
Convertible audited financial statements and related notes from the Annual
Report to Shareholders of Global Convertible for the year ended October 31,
1997.
<TABLE>
<CAPTION>
CONVERTIBLE GLOBAL PRO FORMA FOR
FUND CONVERTIBLE ADJUSTMENTS COMBINED FUND
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (NOTES 1D & 1E):
Interest and discount earned*...................... $10,360,703 $ 1,585,213 -- $11,945,916
Dividends**........................................ 3,882,778 637,281 -- 4,520,059
--
----------- ---------- --------- -----------
Total income....................................... 14,243,481 2,222,494 -- 16,465,975
EXPENSES:
Investment advisory fees (Note 2).................. 1,503,127 301,179 -- 1,804,306
Account maintenance and distribution fees -- Class
B (Note 2)....................................... 11,957 267,689 -- 279,646
Dividends on securities sold short................. 191,197 -- -- 191,197
Accounting services (Note 2)....................... 86,408 69,859 $ (46,400)(2) 109,867
Printing and shareholder reports................... 65,588 90,433 (87,730)(2) 68,291
Transfer agent fees -- Class A (Note 2)............ 104,458 36,491 -- 140,949
Professional fees.................................. 68,112 65,021 (66,883)(2) 66,250
Transfer agent fees -- Class B (Note 2)............ 2,287 114,858 -- 117,145
Directors' fees and expenses....................... 49,450 45,388 (49,638)(2) 45,200
Registration fees (Note 1f)........................ 11,099 67,344 -- 78,443
Custodian fees..................................... 25,897 15,132 -- 41,029
Listing fees....................................... 35,610 -- (35,610)(2) --
Interest on securities sold short.................. 33,136 -- -- 33,136
Transfer agent fees -- Class D (Note 2)............ 510 28,456 -- 28,966
Amortization of organization expenses (Note 1f).... 27,827 -- -- 27,827
Account maintenance and distribution fees -- Class
C (Note 2)....................................... 2,211 24,342 -- 26,553
Account maintenance fees -- Class D (Note 2)....... 702 18,545 -- 19,247
Pricing fees....................................... 2,769 9,942 -- 12,711
Transfer agent fees -- Class C (Note 2)............ 433 11,193 -- 11,626
Other.............................................. 17,805 4,519 200,000(1) 222,324
--
----------- ---------- --------- -----------
Total expenses..................................... 2,240,583 1,170,391 (86,261) 3,324,713
----------- ---------- --------- -----------
Investment income -- net........................... 12,002,898 1,052,103 86,261 13,141,262
----------- ---------- --------- -----------
</TABLE>
F-10
<PAGE> 77
PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR
MERRILL LYNCH CONVERTIBLE FUND, INC. AND
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
FOR THE TWELVE MONTHS ENDED OCTOBER 31, 1997 -- (CONCLUDED)
(UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE GLOBAL PRO FORMA FOR
FUND CONVERTIBLE ADJUSTMENTS COMBINED FUND
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS -- NET (NOTES
1B, 1C, 1E & 3):
Realized gain (loss) from:
Investments -- net............................... $58,362,184 $ 4,313,181 -- $62,675,365
Foreign currency transactions -- net............. (101,691) (961,097) -- (1,062,788)
Income taxes on realized gain on investments..... (4,841,320) -- -- (4,841,320)
----------- ---------- -----------
Total realized gain................................ 53,419,173 3,352,084 -- 56,771,257
----------- ---------- -----------
Change in unrealized appreciation/depreciation on:
Investments -- net............................... (25,748,374) 3,226,474 -- (22,521,900)
Foreign currency transactions -- net............. (2,875) (63,442) -- (66,317)
----------- ---------- -----------
Total change in unrealized
appreciation/depreciation........................ (25,751,249) 3,163,032 -- (22,588,217)
----------- ---------- -----------
Net realized and unrealized gain on investments and
foreign currency transactions.................... 27,667,924 6,515,116 -- 34,183,040
----------- ---------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS....................................... $39,670,822 $ 7,567,219 86,261 $47,324,302
=========== ========== ===========
* Net foreign withholding tax on interest......... -- $ 6,762 -- $ 6,762
** Net foreign withholding tax on dividends........ -- $ 963 -- $ 963
</TABLE>
- ---------------
(1) Reflects the charge for estimated Reorganization expenses of $200,000.
(2) Reflects the anticipated savings of the Reorganization.
See Notes to Financial Statements
F-11
<PAGE> 78
MERRILL LYNCH CONVERTIBLE FUND, INC.
AND MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Convertible Fund, Inc. (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 -- Portfolio securities which are traded on
stock exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last available bid price
prior to the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange designated by or
under the authority of the Board of Directors as the primary market. Securities
which are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market. Options written
are valued at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last asked price.
Options purchased are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the over-the-
counter market, the last bid price. Short-term securities are valued at
amortized cost, which approximates market value. Other investments, including
futures contracts and related options, are stated at market value. Securities
and assets for which market value quotations are not available are valued at
their fair value as determined in good faith by or under the direction of the
Fund's Board of Directors.
(b) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
(c) 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 equity, debt and currency markets. Losses may
arise due to changes in the value of the contract or if the counterparty does
not perform under the contract.
- Forward foreign exchange contracts -- The Fund is authorized to enter
into forward foreign exchange contracts as a hedge against either
specific transactions or portfolio positions. Such contracts are not
F-12
<PAGE> 79
MERRILL LYNCH CONVERTIBLE FUND, INC.
AND MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
entered on the Fund's records. However, the effect on operations is
recorded from the date the Fund enters into such contracts. Premium or
discount is amortized over the life of the contracts.
- Foreign currency options and futures -- The Fund may also purchase or
sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as a
short or long hedge against possible variations in foreign exchange
rates. Such transactions may be effected with respect to hedges on
non-US dollar denominated securities owned by the Fund, sold by the Fund
but not yet delivered, or committed or anticipated to be purchased by
the Fund.
- 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.
- Options -- The Fund is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked to market
to reflect the current market value of the option written.
When a security is purchased or sold through an exercise of an option,
the related premium paid (or received) is added to (or deducted from) the
basis of the security acquired or deducted from (or added to) the
proceeds of the security sold. When an option expires (or the Fund enters
into a closing transaction), the Fund realizes a gain or loss on the
option to the extent of the premiums received or paid (or gain or loss to
the extent the cost of the closing transaction exceeds the premium paid
or received).
Written and purchased options are non-income producing investments.
(d) 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. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(e) Security transactions and investment income -- Security transactions
are recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently recorded
F-13
<PAGE> 80
MERRILL LYNCH CONVERTIBLE FUND, INC.
AND MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
when the Fund has determined the ex-dividend date. Interest income (including
amortization of discount) is recognized on the accrual basis. Realized gains and
losses on security transactions are determined on the identified cost basis.
(f) Prepaid registration fees -- Prepaid registration fees are charged to
expense as the related shares are issued.
(g) Dividends and distributions -- Dividends and distributions paid by the
Fund are recorded on the ex-dividend dates. Distributions in excess of net
investment income are due primarily to differing tax treatments for foreign
currency transactions.
(h) Short Sales -- When the Fund engages in a short sale, an amount equal
to the proceeds received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked to market to
reflect the market value of the short sale. The Fund maintains a segregated
account of securities as collateral for the short sales. The Fund is exposed to
market risk based on the amount, if any, that the marked value of the stock
exceeds the market value of the securities in the segregated account.
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
The Fund has entered into a Management Agreement with Merrill Lynch Asset
Management, L.P. ("MLAM"). The general partner of MLAM 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
Distribution Agreements and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of
Merrill Lynch Group, Inc.
MLAM 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 at the annual rate of 0.60% of the average daily value of the Fund's
net assets.
Pursuant to 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:
<TABLE>
<CAPTION>
ACCOUNT MAINTENANCE FEE DISTRIBUTION FEE
----------------------- ----------------
<S> <C> <C>
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
</TABLE>
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith, Incorporated ("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
F-14
<PAGE> 81
MERRILL LYNCH CONVERTIBLE FUND, INC.
AND MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONCLUDED)
(UNAUDITED)
maintenance services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the twelve months ended October 31, 1997, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the combined Fund's
Class A and Class D shares as follows:
<TABLE>
<CAPTION>
MERRILL LYNCH MERRILL LYNCH
CONVERTIBLE FUND, INC. GLOBAL CONVERTIBLE FUND, INC.
---------------------- -----------------------------
<S> <C> <C>
Class A:
MLFD $ 5,628 $ 42
MLPF&S $ 5,893 $ 519
Class D:
MLFD $ 2,858 $ 395
MLPF&S $ 34,333 $ 5,780
</TABLE>
For the twelve months ended October 31, 1997, MLPF&S received contingent
deferred sales charges relating to transactions in Class B and Class C Shares as
follows:
<TABLE>
<CAPTION>
MERRILL LYNCH MERRILL LYNCH
CONVERTIBLE FUND, INC. GLOBAL CONVERTIBLE FUND, INC.
---------------------- -----------------------------
<S> <C> <C>
Class B: $ 22,602 $ 209,470
Class C: $ 2,269 $ 1,308
</TABLE>
During the twelve months ended October 31, 1997, the combined Funds paid
Merrill Lynch Security Pricing Service, an affiliate of MLPF&S, $663 and $59 for
security price quotations to compute the net asset value of Merrill Lynch
Convertible Fund, Inc. and Merrill Lynch Global Convertible Fund, Inc.,
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 MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors
of MLAM, PSI, MLFDS, MLFD, and/or ML & Co.
F-15
<PAGE> 82
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
Reference is made to Article V of Registrant's Amended and Restated
Articles of Incorporation, Article VI of Registrant's By-Laws, Section 2-418 of
the Maryland General Corporation Law and Section 9 of the Class A, Class B,
Class C and Class D Distribution Agreements.
Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or any
stockholder thereof to which such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. Absent a court determination that
an officer or director seeking indemnification was not liable on the merits or
guilty of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office, the decision by the
Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent directors, after
review of the facts, that such officer or director is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Each officer and director of the Registrant claiming indemnification within
the scope of Article VI of the By-Laws shall be entitled to advances from the
Registrant for payment of the reasonable expenses incurred by him in connection
with proceedings to which he is a party in the manner and to the full extent
permitted under the General Laws of the State of Maryland; provided, however,
that the person seeking indemnification shall provide to the Registrant a
written affirmation of his good faith belief that the standard of conduct
necessary for indemnification by the Registrant has been met and a written
undertaking to repay any such advance, if it should ultimately be determined
that the standard of conduct has not been met, and provided further that at
least one of the following additional conditions is met: (a) the person seeking
indemnification shall provide a security in form and amount acceptable to the
Registrant for his undertaking; (b) the Registrant is insured against losses
arising by reason of the advance; (c) a majority of a quorum of non-party
independent directors, or independent legal counsel in a written opinion, shall
determine, based on a review of facts readily available to the Registrant at the
time the advance is proposed to be made, that there is reason to believe that
the person seeking indemnification will ultimately be found to be entitled to
indemnification.
The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his or her activities as an
officer or director of the Registrant. The Registrant, however, may not purchase
insurance on behalf of any officer or director of the Registrant that protects
or purports to protect such person from liability to the Registrant or to its
stockholders to which such officer or director would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.
The Registrant may indemnify, make advances or purchase insurance to the
extent provided in Article VI of the By-Laws on behalf of an employee or agent
who is not an officer or director of the Registrant.
In Section 9 of the Class A, Class B, Class C and Class D 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 (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 Directors, 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
C-1
<PAGE> 83
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 Director, 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 Director, 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.
ITEM 16. EXHIBITS.
<TABLE>
<S> <C>
(1)(a) -- Form of Amended and Restated Articles of Incorporation of the Registrant.(a)
(1)(b) -- Form of Articles Supplementary to Amended and Restated Articles of Incorporation
of the Registrant.(a)
(2) -- By-Laws of the Registrant, as amended.(a)
(3) -- Not applicable.
(4) -- Form of Agreement and Plan of Reorganization between the Registrant and Merrill
Lynch Global Convertible Fund, Inc.(b)
(5) -- Copies of instruments defining the rights of stockholders, including the relevant
portions of the Articles of Incorporation, as amended and restated, and the
By-Laws, as amended, of the Registrant.(c)
(6)(a) -- Form of Management Agreement between the Registrant and Merrill Lynch Asset
Management, L.P. ("MLAM").(d)
(6)(b) -- Form of Sub-Advisory Agreement between MLAM and Merrill Lynch Asset Management
U.K. Limited.(d)
(7)(a) -- Form of Class A Shares Distribution Agreement between the Registrant and Merrill
Lynch Funds Distributor, Inc. (including Form of Selected Dealers Agreement).(d)
(7)(b) -- Form of Class B Shares Distribution Agreement between the Registrant and Merrill
Lynch Funds Distributor, Inc.(including Form of Selected Dealers Agreement).(d)
(7)(c) -- Form of Class C Shares Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc. (including Form of Selected Dealers Agreement).(d)
(7)(d) -- Form of Class D Shares Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc. (including Form of Selected Dealers Agreement).(d)
(8) -- None.
(9) -- Form of Custodian Agreement between the Registrant and State Street Bank and Trust
Company.
(10)(a) -- Form of Class B Shares Distribution Plan of the Registrant (including Class B
Shares Distribution Plan Sub-Agreement).(d)
(10)(b) -- Form of Class C Shares Distribution Plan of the Registrant (including Class C
Shares Distribution Plan Sub-Agreement).(d)
(10)(c) -- Form of Class D Shares Distribution Plan of the Registrant (including Class D
Shares Distribution Plan Sub-Agreement).(d)
(10)(d) -- Merrill Lynch Select Pricing(SM) System Plan pursuant to Rule 18f-3.(e)
(11) -- Opinion and Consent of Brown & Wood LLP, counsel for the Registrant.
(12) -- Private Letter Ruling from the Internal Revenue Service.(f)
(13) -- Not applicable.
(14)(a) -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
</TABLE>
C-2
<PAGE> 84
<TABLE>
<S> <C>
(14)(b) -- Consent of Deloitte & Touche LLP, independent auditors for Merrill Lynch Global
Convertible Fund, Inc.
(15) -- Not applicable.
(16) -- Power of Attorney.(g)
(17)(a) -- Declaration pursuant to Rule 24f-2 under the Investment Company Act of 1940 of the
Registrant (incorporated by reference to Registrant's Registration Statement on
Form N-1A, filed June 6, 1997).
(17)(b) -- Prospectus dated December 29, 1997, and Statement of Additional Information dated
December 29, 1997, of the Registrant.
(17)(c) -- Prospectus dated February 24, 1997, and Statement of Additional Information dated
February 24, 1997, of Merrill Lynch Global Convertible Fund, Inc.
(17)(d) -- Annual Report to Stockholders of the Registrant for the fiscal year ended August
31, 1997.
(17)(e) -- Annual Report to Stockholders of Merrill Lynch Global Convertible Fund, Inc. for
the fiscal year ended October 31, 1997.
</TABLE>
- ---------------
(a) Filed on August 4, 1997, as an Exhibit to Pre-Effective Amendment No. 1 to
the Registrant's Registration Statement on Form N-1A (File No. 333-28619)
under the Securities Act of 1933 (the "Registration Statement").
(b) Included in Exhibit I to the Proxy Statement Prospectus contained in this
Registration Statement.
(c) Reference is made to Articles IV, V (Sections 3, 5, 6 and 7), VI, VII and IX
of the Registrant's Amended and Restated Articles of Incorporation, as
supplemented, filed as Exhibits 1(a) and 1(b) to the Registration Statement;
and to Articles II, III (Sections 1, 3, 5 and 6), VI, VII, XIII and XIV of
the Registrant's By-Laws, as amended, filed as Exhibit 2 to the Registration
Statement.
(d) Filed on June 6, 1997, as an Exhibit to the Registration Statement.
(e) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of 1933,
as amended, filed on January 25, 1996 relating to shares of Merrill Lynch
New York Municipal Bond Fund series of Merrill Lynch Multi-State Municipal
Series Trust (File No. 2-99473).
(f) To be filed by post-effective amendment.
(g) Included on the signature page of the Registrant's Registration Statement on
Form N-14 filed on December 5, 1997 and incorporated by reference herein.
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through use of a prospectus which is part of this
Registration Statement by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c) of the Securities Act of 1933, as amended, the
reoffering prospectus will contain information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, as
amended, each post-effective amendment shall be deemed to be a new registration
statement for the securities offered therein, and the offering of securities at
that time shall be deemed to be the initial bona fide offering of them.
(3) The Registrant undertakes to file, by post-effective amendment, a copy
of the Internal Revenue Service private letter ruling applied for within a
reasonable time after receipt of such ruling.
C-3
<PAGE> 85
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the Township of Plainsboro and State
of New Jersey, on the 6th day of January, 1998.
MERRILL LYNCH CONVERTIBLE FUND, INC.
(Registrant)
/s/ TERRY K. GLENN
--------------------------------------
(Terry K. Glenn, Executive Vice
President)
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------- ---------------------------------- -----------------
<C> <S> <C>
ARTHUR ZEIKEL* President (Principal Executive
- ------------------------------------- Officer)
(Arthur Zeikel) and Director
GERALD M. RICHARD* Treasurer (Principal Financial and
- ------------------------------------- Accounting Officer)
(Gerald M. Richard)
JAMES H. BODURTHA* Director
- -------------------------------------
(James H. Bodurtha)
HERBERT I. LONDON* Director
- -------------------------------------
(Herbert I. London)
ROBERT R. MARTIN* Director
- -------------------------------------
(Robert R. Martin)
JOSEPH L. MAY* Director
- -------------------------------------
(Joseph L. May)
ANDRE F. PEROLD* Director
- -------------------------------------
(Andre F. Perold)
*By: /S/ TERRY K. GLENN January 6, 1998
- -------------------------------------
(Terry K. Glenn, Attorney-in-Fact)
</TABLE>
C-4
<PAGE> 86
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C> <C>
(9) -- Form of Custodian Agreement between the Registrant and State Street Bank and
Trust Company.
(11) -- Opinion and Consent of Brown & Wood LLP, counsel for the Registrant.
(14)(a) -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
(14)(b) -- Consent of Deloitte & Touche LLP, independent auditors for Merrill Lynch Global
Convertible Fund, Inc.
(17)(b) -- Prospectus dated December 29, 1997, and Statement of Additional Information dated
December 29, 1997, of the Registrant.
(17)(c) -- Prospectus dated February 24, 1997, and Statement of Additional Information dated
February 24, 1997, of Merrill Lynch Global Convertible Fund, Inc.
(17)(d) -- Annual Report to Stockholders of the Registrant for the fiscal year ended August
31, 1997.
(17)(e) -- Annual Report to Stockholders of Merrill Lynch Global Convertible Fund, Inc. for
the fiscal year ended October 31, 1997.
</TABLE>
<PAGE> 1
CUSTODIAN CONTRACT
Between
MERRILL LYNCH CONVERTIBLE FUND, INC.
and
STATE STREET BANK AND TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Employment of Custodian and Property to be Held By
It...................................................................................................... 1
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian in the United States.................................................. 1
2.1 Holding Securities............................................................................. 1
2.2 Delivery of Securities......................................................................... 2
2.3 Registration of Securities..................................................................... 4
2.4 Bank Accounts.................................................................................. 4
2.5 Availability of Federal Funds.................................................................. 4
2.6 Collection of Income........................................................................... 4
2.7 Payment of Fund Monies......................................................................... 5
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased................................................................ 6
2.9 Appointment of Agents.......................................................................... 6
2.10 Deposit of Fund Assets in Securities System.................................................... 6
2.10A Fund Assets Held in the Custodian's Direct
Paper System................................................................................... 7
2.11 Segregated Account............................................................................. 8
2.12 Ownership Certificates for Tax Purposes........................................................ 8
2.13 Proxies........................................................................................ 8
2.14 Communications Relating to Portfolio Securities................................................ 9
2.15 Reports to Fund by Independent Public Accountants.............................................. 9
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States.............................................................. 9
3.1 Appointment of Foreign Sub-Custodians.......................................................... 9
3.2 Assets to be Held.............................................................................. 9
3.3 Foreign Securities Depositories................................................................ 10
3.4 Agreements with Foreign Banking Institutions................................................... 10
3.5 Access of Independent Accountants of the Fund.................................................. 10
3.6 Reports by Custodian........................................................................... 10
3.7 Transactions in Foreign Custody Account........................................................ 10
3.8 Liability of Foreign Sub-Custodians............................................................ 11
3.9 Liability of Custodian......................................................................... 11
3.10 Reimbursement for Advances..................................................................... 11
3.11 Monitoring Responsibilities.................................................................... 11
3.12 Branches of U.S. Banks......................................................................... 12
3.13 Tax Law........................................................................................ 12
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
4. Payments for Sales or Repurchase or Redemptions
of Shares of the Fund................................................................................... 12
5. Proper Instructions..................................................................................... 13
6. Actions Permitted Without Express Authority............................................................. 13
7. Evidence of Authority................................................................................... 13
8. Duties of Custodian With Respect to the Books of Account and Calculation
of Net Asset Value and Net Income....................................................................... 14
9. Records................................................................................................. 14
10. Opinion of Fund's Independent Accountants............................................................... 14
11. Compensation of Custodian............................................................................... 14
12. Responsibility of Custodian............................................................................. 15
13. Effective Period, Termination and Amendment............................................................. 15
14. Successor Custodian..................................................................................... 16
15. Interpretive and Additional Provisions.................................................................. 17
16. Massachusetts Law to Apply.............................................................................. 17
17. Prior Contracts......................................................................................... 17
18. Shareholder Communications Election..................................................................... 18
</TABLE>
<PAGE> 4
This Contract between Merrill Lynch Convertible Fund, Inc., a
corporation organized and existing under the laws of Maryland , having its
principal place of business at 800 Scudders Mill Road, Plainsboro, New Jersey
08536 hereinafter called the "Fund", and State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian", in consideration of the mutual covenants and agreements hereinafter
contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of the assets of
the Fund, including securities which the Fund desires to be held in places
within the United States ("domestic securities") and securities it desires to be
held outside the United States ("foreign securities") pursuant to the provisions
of the Articles of Incorporation. The Fund agrees to deliver to the Custodian
all securities and cash of the Fund, and all payments of income, payments of
principal or capital distributions received by it with respect to all securities
owned by the Fund from time to time, and the cash consideration received by it
for such new or treasury shares of capital stock of the Fund ("Shares") as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of the Fund held or received by the Fund and not delivered to the
Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall on behalf of the Fund from time to time employ one or
more sub-custodians, located in the United States but only in accordance with an
applicable vote by the Board of Directors of the Fund. The Custodian covenants
with the Fund that each agreement whereby the Custodian employs any such
sub-custodian shall provide that the sub-custodian will be liable to the
Custodian for losses and liabilities caused by the negligence, misfeasance, or
willful misconduct of the sub-custodian. The Fund agrees that, so long as the
Custodian has complied with its obligation set forth in the preceding sentence,
the Custodian shall have no more or less responsibility or liability to the Fund
on account of any actions or omissions of any U.S. sub-custodian employed by it
on behalf of the Fund than any such sub-custodian has to the Custodian. The
Custodian may employ as sub-custodian for the Fund's foreign securities the
foreign banking institutions and foreign securities depositories designated in
Schedule A hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By
the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of the Fund all non-cash property, to be held by it in
the United States including all domestic securities owned by the Fund,
other than (a) securities which are maintained pursuant to Section 2.10
in a clearing agency which acts as a securities depository or in a
book-entry system authorized by the U.S. Department of the Treasury
(collectively referred to herein as "Securities System") and (b)
commercial paper of an issuer for which State Street Bank and Trust
Company acts as issuing and paying agent ("Direct Paper") which is
deposited and/or maintained in the Direct Paper System of the Custodian
(the "Direct Paper System") pursuant to Section 2.10A.
<PAGE> 5
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by the Fund held by the Custodian or in a
Securities System account of the Custodian or in the Custodian's Direct
Paper book entry system account ("Direct Paper System Account") only
upon receipt of Proper Instructions from the Fund, which may be
continuing instructions when deemed appropriate by the parties, and
only in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other
similar offers for securities of the Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominees
of the Custodian or into the name or nominee name of any agent
appointed pursuant to Section 2.9 or into the name or nominee
name of any sub-custodian appointed pursuant to Article 1; or
for exchange for a different number of bonds, certificates or
other evidence representing the same aggregate face amount or
number of units; provided that, in any such case, the new
securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom;
provided that in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's own
negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim
2
<PAGE> 6
receipts or temporary securities for definitive securities;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate collateral
as agreed upon from time to time by the Custodian and the
Fund, which may be in the form of cash or obligations issued
by the United States government, its agencies or
instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S.
Department of the Treasury, the Custodian will not be held
liable or responsible for the delivery of securities owned by
the Fund prior to the receipt of such collateral except as may
arise from the Custodian's own negligence or willful
misconduct;
11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the Commodity
Futures Trading Commission and/or any contract market, or any
similar organization or organizations, regarding account
deposits in connection with transactions by the Fund;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the currently effective prospectus and statement of
additional information of the Fund ("Prospectus"), in
satisfaction of requests by holders of Shares for repurchase
or redemption; and
15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions from the Fund, a
certified copy of a resolution of the Board of Directors or of
the Executive Committee signed by an officer of the Fund and
certified by the Secretary or an Assistant Secretary,
specifying the securities of the Fund to be delivered, setting
forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper corporate purpose, and
naming the person or persons to whom delivery of such
securities shall be made.
3
<PAGE> 7
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Fund or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund,
unless the Fund has authorized in writing the appointment of a nominee
to be used in common with other registered investment companies having
the same investment adviser as the Fund, or in the name or nominee name
of any agent appointed pursuant to Section 2.9 or in the name or
nominee name of any sub-custodian appointed pursuant to Article 1. All
securities accepted by the Custodian on behalf of the Fund under the
terms of this Contract shall be in "street name" or other good delivery
form. If, however, the Fund directs the Custodian to maintain
securities in "street name", the Custodian shall utilize all reasonable
efforts to timely collect income due the Fund on such securities and to
notify the Fund of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund,
subject only to draft or order by the Custodian acting pursuant to the
terms of this Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or for
the account of the Fund, other than cash maintained by the Fund in a
bank account established and used in accordance with Rule 17f-3 under
the Investment Company Act of 1940. Funds held by the Custodian for the
Fund may be deposited by it to its credit as Custodian in the Banking
Department of the Custodian or in such other banks or trust companies
as it may in its discretion deem necessary or desirable; provided,
however, that every such bank or trust company shall be qualified to
act as a custodian under the Investment Company Act of 1940 and that
each such bank or trust company and the funds to be deposited with each
such bank or trust company shall be approved by vote of a majority of
the Board of Directors of the Fund. Such funds shall be deposited by
the Custodian in its capacity as Custodian and shall be withdrawable by
the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund
and the Custodian, the Custodian shall, upon the receipt of Proper
Instructions from the Fund, make federal funds available to the Fund as
of specified times agreed upon from time to time by the Fund and the
Custodian in the amount of checks received in payment for Shares of the
Fund which are deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to registered domestic securities held hereunder to which
the Fund shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and
other payments with respect to bearer domestic securities if, on the
date of payment by the issuer, such securities are held by the
Custodian or its agent thereof and shall credit such income, as
collected, to such Fund's custodian account. Without limiting the
generality of the foregoing, the Custodian shall detach and present for
payment all coupons and other income items requiring presentation as
and when they become due and shall collect interest when due on
securities held hereunder. Income due the Fund on securities loaned
4
<PAGE> 8
pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to exercise
reasonable care in providing the Fund with such information or data as
may be necessary to assist the Fund in arranging for the timely
delivery to the Custodian of the income to which the Fund is properly
entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the
Fund, which may be continuing instructions when deemed appropriate by
the parties, the Custodian shall pay out monies of the Fund in the
following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the Fund but
only (a) against the delivery of such securities or evidence
of title to such options, futures contracts or options on
futures contracts to the Custodian (or any bank, banking firm
or trust company doing business in the United States or abroad
which is qualified under the Investment Company Act of 1940,
as amended, to act as a custodian and has been designated by
the Custodian as its agent for this purpose) registered in the
name of the Fund or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a
Securities System, in accordance with the conditions set forth
in Section 2.10 hereof; (c) in the case of a purchase
involving the Direct Paper System, in accordance with the
conditions set forth in Section 2.10A hereof; (d) in the case
of repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a
member of NASD, (i) against delivery of the securities either
in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing
purchase by the Fund of securities owned by the Custodian
along with written evidence of the agreement by the Custodian
to repurchase such securities from the Fund or (e) for
transfer to a time deposit account of the Fund in any bank,
whether domestic or foreign; such transfer may be effected
prior to receipt of a confirmation from a broker and/or the
applicable bank pursuant to Proper Instructions from the Fund
as defined in Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the Fund
as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;
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<PAGE> 9
5) For the payment of any dividends on Shares of the Fund
declared pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund, a certified
copy of a resolution of the Board of Directors or of the
Executive Committee of the Fund signed by an officer of the
Fund and certified by its Secretary or an Assistant Secretary,
specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such
purpose to be a proper purpose, and naming the person or
persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the
account of the Fund is made by the Custodian in advance of receipt of
the securities purchased in the absence of specific written
instructions from the Fund to so pay in advance, the Custodian shall be
absolutely liable to the Fund for such securities to the same extent as
if the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out such
of the provisions of this Article 2 as the Custodian may from time to
time direct; provided, however, that the appointment of any agent shall
not relieve the Custodian of its responsibilities or liabilities
hereunder.
2.10 Deposit of Fund Assets in Securities Systems. The Custodian may deposit
and/or maintain securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission under Section
17A of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies, collectively
referred to herein as "Securities System" in accordance with applicable
Federal Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may keep securities of the Fund in a Securities
System provided that such securities are represented in an
account ("Account") of the Custodian in the Securities System
which shall not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise for
customers;
2) The records of the Custodian with respect to securities of the
Fund which are maintained in a Securities System shall
identify by book-entry those securities belonging to the Fund;
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<PAGE> 10
3) The Custodian shall pay for securities purchased for the
account of the Fund upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall transfer securities
sold for the account of the Fund upon (i) receipt of advice
from the Securities System that payment for such securities
has been transferred to the Account, and (ii) the making of an
entry on the records of the Custodian to reflect such transfer
and payment for the account of the Fund. Copies of all advices
from the Securities System of transfers of securities for the
account of the Fund shall identify the Fund, be maintained for
the Fund by the Custodian and be provided to the Fund at its
request. Upon request, the Custodian shall furnish the Fund
confirmation of each transfer to or from the account of the
Fund in the form of a written advice or notice and shall
furnish to the Fund copies of daily transaction sheets
reflecting each day's transactions in the Securities System
for the account of the Fund.
4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
securities deposited in the Securities System;
5) The Custodian shall have received from the Fund the initial or
annual certificate, as the case may be, required by Article 14
hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage
to the Fund resulting from use of the Securities System by
reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
officers or employees or from failure of the Custodian or any
such agent to enforce effectively such rights as it may have
against the Securities System; at the election of the Fund, it
shall be entitled to be subrogated to the rights of the
Custodian with respect to any claim against the Securities
System or any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent
that the Fund has not been made whole for any such loss or
damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System. The Custodian
may deposit and/or maintain securities owned by the Fund in the Direct
Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions
from the Fund;
2) The Custodian may keep securities of the Fund in the Direct
Paper System only if such securities are represented in an
account ("Account") of the Custodian in the Direct Paper
System which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise
for customers;
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<PAGE> 11
3) The records of the Custodian with respect to securities of the
Fund which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the
account of the Fund upon the making of an entry on the records
of the Custodian to reflect such payment and transfer of
securities to the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund upon the
making of an entry on the records of the Custodian to reflect
such transfer and receipt of payment for the account of the
Fund;
5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the Fund, in the form of a written advice
or notice, of Direct Paper on the next business day following
such transfer and shall furnish to the Fund copies of daily
transaction sheets reflecting each day's transaction in the
Securities System for the account of the Fund;
6) The Custodian shall provide the Fund with any report on its
system of internal accounting control as the Fund may
reasonably request from time to time.
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund establish and maintain a segregated account
or accounts for and on behalf of the Fund, into which account or
accounts may be transferred cash and/or securities, including
securities maintained in an account by the Custodian pursuant to
Section 2.10 hereof, (i) in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer registered
under the Exchange Act and a member of the NASD (or any futures
commission merchant registered under the Commodity Exchange Act),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange (or the
Commodity Futures Trading Commission or any registered contract
market), or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Fund, (ii) for purposes of segregating cash or government securities in
connection with options purchased, sold or written by the Fund or
commodity futures contracts or options thereon purchased or sold by the
Fund, (iii) for the purposes of compliance by the Fund with the
procedures required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper corporate
purposes, but only, in the case of clause (iv), upon receipt of, in
addition to Proper Instructions from the Fund, a certified copy of a
resolution of the Board of Directors or of the Executive Committee
signed by an officer of the Fund and certified by the Secretary or an
Assistant Secretary, setting forth the purpose or purposes of such
segregated account and declaring such purposes to be proper corporate
purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to domestic securities of the Fund held
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<PAGE> 12
by it and in connection with transfers of securities.
2.13 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder
of such securities, if the securities are registered otherwise than in
the name of the Fund or a nominee of the Fund, all proxies, without
indication of the manner in which such proxies are to be voted, and
shall promptly deliver to the Fund such proxies, all proxy soliciting
materials and all notices relating to such securities.
2.14 Communications Relating to Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund all written information (including, without limitation, pendency
of calls and maturities of domestic securities and expirations of
rights in connection therewith and notices of exercise of call and put
options written by the Fund and the maturity of futures contracts
purchased or sold by the Fund) received by the Custodian from issuers
of the securities being held for the Fund. With respect to tender or
exchange offers, the Custodian shall transmit promptly to the Fund all
written information received by the Custodian from issuers of the
securities whose tender or exchange is sought and from the party (or
his agents) making the tender or exchange offer. If the Fund desires to
take action with respect to any tender offer, exchange offer or any
other similar transaction, the Fund shall notify the Custodian at least
three business days prior to the date on which the Custodian is to take
such action.
2.15 Reports to Fund by Independent Public Accountants. The Custodian shall
provide the Fund, at such times as the Fund may reasonably require,
with reports by independent public accountants on the accounting
system, internal accounting control and procedures for safeguarding
securities, futures contracts and options on futures contracts,
including securities deposited and/or maintained in a Securities
System, relating to the services provided by the Custodian under this
Contract; such reports, shall be of sufficient scope and in sufficient
detail, as may reasonably be required by the Fund to provide reasonable
assurance that any material inadequacies would be disclosed by such
examination, and, if there are no such inadequacies, the reports shall
so state.
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Fund's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories
designated on Schedule A hereto ("foreign sub-custodians"). Upon
receipt of "Proper Instructions", as defined in Section 5 of this
Contract, together with a certified resolution of the Fund's Board of
Directors, the Custodian and the Fund may agree to amend Schedule A
hereto from time to time to designate additional foreign banking
institutions and foreign securities depositories to act as
sub-custodian. Upon receipt of Proper Instructions, the Fund may
instruct the Custodian to cease the employment of any one or more such
sub-custodians for maintaining custody of the Fund's assets.
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<PAGE> 13
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5
under the Investment Company Act of 1940, and (b) cash and cash
equivalents in such amounts as the Custodian or the Fund may determine
to be reasonably necessary to effect the Fund's foreign securities
transactions. The Custodian shall identify on its books as belonging to
the Fund, the foreign securities of the Fund held by each foreign
sub-custodian.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon
in writing by the Custodian and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as
sub-custodians pursuant to the terms hereof. Where possible, such
arrangements shall include entry into agreements containing the
provisions set forth in Section 3.4 hereof.
3.4 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set
forth in Exhibit 1 hereto and shall provide that: (a) the assets of the
Fund will not be subject to any right, charge, security interest, lien
or claim of any kind in favor of the foreign banking institution or its
creditors or agent, except a claim of payment for their safe custody or
administration; (b) beneficial ownership for the assets of the Fund
will be freely transferable without the payment of money or value other
than for custody or administration; (c) adequate records will be
maintained identifying the assets as belonging to the Fund; (d)
officers of or auditors employed by, or other representatives of the
Custodian, including to the extent permitted under applicable law the
independent public accountants for the Fund, will be given access to
the books and records of the foreign banking institution relating to
its actions under its agreement with the Custodian; and (e) assets of
the Fund held by the foreign sub-custodian will be subject only to the
instructions of the Custodian or its agents.
3.5 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use all reasonable efforts to arrange for the
independent accountants of the Fund to be afforded access to the books
and records of any foreign banking institution employed as a foreign
sub-custodian insofar as such books and records relate to the
performance of such foreign banking institution under its agreement
with the Custodian.
3.6 Reports by Custodian. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Fund held by foreign sub-custodians,
including but not limited to an identification of entities having
possession of the Fund securities and other assets and advices or
notifications of any transfers of securities to or from each custodial
account maintained by a foreign banking institution for the Custodian
indicating, as to securities acquired for the Fund, the identity of the
entity having physical possession of such securities.
3.7 Transactions in Foreign Custody Account. (a) Except as otherwise
provided in paragraph (b) of this Section 3.7, the provision of
Sections 2.2 and 2.7 of this Contract shall apply, mutatis mutandis to
the foreign securities of the Fund held outside the United States by
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<PAGE> 14
foreign sub-custodians; (b) notwithstanding any provision of this
Contract to the contrary, settlement and payment for securities
received for the account of the Fund and delivery of securities
maintained for the account of the Fund may be effected in accordance
with the customary established securities trading or securities
processing practices and procedures in the jurisdiction or market in
which the transaction occurs, including, without limitation, delivering
securities to the purchaser thereof or to a dealer therefor (or an
agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from such
purchaser or dealer; and (c) Securities maintained in the custody of a
foreign sub-custodian may be maintained in the name of such entity's
nominee to the same extent as set forth in Section 2.3 of this
Contract, and the Fund agrees to hold any such nominee harmless from
any liability as a holder of record of such securities.
3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable care
in the performance of its duties and to indemnify, and hold harmless,
the Custodian and the Fund from and against any loss, damage, cost,
expense, liability or claim arising out of or in connection with the
institution's performance of such obligations. At the election of the
Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a foreign banking
institution as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made
whole for any such loss, damage, cost, expense, liability or claim.
3.9 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent if such
acts or omissions were those of the Custodian directly, provided that,
regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a
U.S. bank as contemplated by paragraph 3.12 hereof, the Custodian shall
not be liable for any loss, damage, cost, expense, liability or claim
resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism, acts of God, or other occurrences beyond
the sub-custodian's reasonable control. Notwithstanding the foregoing
provisions of this paragraph 3.9, in delegating custody duties to State
Street London Ltd., the Custodian shall not be relieved of any
responsibility to the Fund for any loss due to such delegation, except
such loss as may result from (a) political risk (including, but not
limited to, exchange control restrictions, confiscation, expropriation,
nationalization, insurrection, civil strife or armed hostilities) or
(b) other losses (excluding a bankruptcy or insolvency of State Street
London Ltd. not caused by political risk) due to acts of God, nuclear
incident or other losses under circumstances where the Custodian and
State Street London Ltd. have exercised reasonable care.
3.10 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose including the purchase or
sale of foreign exchange or of contracts for foreign exchange, or in
the event that the Custodian or its nominee shall incur or be assessed
any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may
arise from its or
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<PAGE> 15
its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund
shall be security therefor and should the Fund fail to repay the
Custodian promptly, the Custodian shall be entitled to utilize
available cash and to dispose of the Fund's assets to the extent
necessary to obtain reimbursement.
3.11 Monitoring Responsibilities. The Custodian shall furnish annually to
the Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection
with the initial approval of this Contract. In addition, the Custodian
will promptly inform the Fund in the event that the Custodian learns of
a material adverse change in the financial condition of a foreign
sub-custodian or any material loss of the assets of the Fund or in the
case of any foreign sub-custodian not the subject of an exemptive order
from the Securities and Exchange Commission is notified by such foreign
sub-custodian that there appears to be a substantial likelihood that
its shareholders' equity will decline below $200 million (U.S. dollars
or the equivalent thereof) or that its shareholders' equity has
declined below $200 million (in each case computed in accordance with
generally accepted U.S. accounting principles).
3.12 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of
the Fund's assets are maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2(a)(5) of the
Investment Company Act of 1940 meeting the qualification set forth in
Section 26(a) of said Act. The appointment of any such branch as a
sub-custodian shall be governed by paragraph 1 of this Contract. (b)
Cash held for the Fund in the United Kingdom shall be maintained in an
interest bearing account established for the Fund with the Custodian's
London branch, which account shall be subject to the direction of the
Custodian, State Street London Ltd. or both.
3.13 Tax Law. The Custodian shall have no responsibility or liability for
any obligations now or hereafter imposed on the Fund or the Custodian
as custodian of the Fund by the tax law of the United States of America
or any state or political subdivision thereof except for liabilities
arising from the Custodian's failure to exercise reasonable care in the
execution of any instructions received from the Fund with respect to
withholding or payment of taxes. It shall be the responsibility of the
Fund to notify the Custodian of the obligations imposed on the Fund or
the Custodian as custodian of the Fund by the tax law of jurisdictions
other than those mentioned in the above sentence, including
responsibility for withholding and other taxes, assessments or other
governmental charges, certifications and governmental reporting. The
sole responsibility of the Custodian with regard to such tax law shall
be to use reasonable efforts to assist the Fund with respect to any
claim for exemption or refund under the tax law of jurisdictions for
which the Fund has provided such information.
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund
From such funds as may be available for the purpose but subject to the
limitations of the
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<PAGE> 16
Articles of Incorporation and any applicable votes of the Board of Directors of
the Fund pursuant thereto, the Custodian shall, upon receipt of instructions
from the Transfer Agent, make funds available for payment to holders of Shares
who have delivered to the Transfer Agent a request for redemption or repurchase
of their Shares. In connection with the redemption or repurchase of Shares of
the Fund, the Custodian is authorized upon receipt of instructions from the
Transfer Agent to wire funds to or through a commercial bank designated by the
redeeming shareholders. In connection with the redemption or repurchase of
Shares of the Fund, the Custodian shall honor checks drawn on the Custodian by a
holder of Shares, which checks have been furnished by the Fund to the holder of
Shares, when presented to the Custodian in accordance with such procedures and
controls as are mutually agreed upon from time to time between the Fund and the
Custodian.
The Custodian shall receive from the distributor for the Shares or from
the Transfer Agent of the Fund and deposit into the account of the Fund such
payments as are received for Shares of the Fund issued or sold from time to time
by the Fund. The Custodian will provide timely notification to the Fund and the
Transfer Agent of any receipt by it of payments for Shares of such Fund.
5. Proper Instructions
Proper Instructions as used throughout this Contract means a writing
signed or initialed by one or more person or persons as the Board of Directors
shall have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes them
to have been given by a person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. Upon receipt of a certificate of the Secretary or an
Assistant Secretary as to the authorization by the Board of Directors of the
Fund accompanied by a detailed description of procedures approved by the Board
of Directors, Proper Instructions may include communications effected directly
between electro-mechanical or electronic devices provided that the Board of
Directors and the Custodian are satisfied that such procedures afford adequate
safeguards for the Fund's assets. For purposes of this Section, Proper
Instructions shall include instructions received by the Custodian pursuant to
any three-party agreement which requires a segregated asset account in
accordance with Section 2.11.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Fund and provided that the Fund
shall not object to such payments;
2) surrender securities in temporary form for securities in
definitive form;
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<PAGE> 17
3) endorse for collection checks, drafts and other negotiable
instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Fund except as otherwise directed by the Board of
Directors of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper reasonably
believed by it to be genuine and to have been properly executed by or on behalf
of the Fund. The Custodian may receive and accept a certified copy of a vote of
the Board of Directors of the Fund as conclusive evidence (a) of the authority
of any person to act in accordance with such vote or (b) of any determination or
of any action by the Board of Directors pursuant to the Articles of
Incorporation as described in such vote, and such vote may be considered as in
full force and effect until receipt by the Custodian of written notice to the
contrary.
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Directors of the Fund to keep
the books of account of the Fund and/or compute the net asset value per share of
the outstanding Shares of the Fund or, if directed in writing to do so by the
Fund, shall itself keep such books of account and/or compute such net asset
value per share. If so directed, the Custodian shall also calculate daily the
net income of the Fund as described in the Fund's currently effective prospectus
and shall advise the Fund and the Transfer Agent daily of the total amounts of
such net income and, if instructed in writing by an officer of the Fund to do
so, shall advise the Transfer Agent periodically of the division of such net
income among its various components. The calculations of the net asset value per
share and the daily income of the Fund shall be made at the time or times
described from time to time in the Fund's currently effective prospectus.
9. Records
The Custodian shall with respect to the Fund create and maintain all
records relating to its activities and obligations under this Contract in such
manner as will meet the obligations of the Fund under the Investment Company Act
of 1940, as amended, with particular attention to Section 31 thereof and Rules
31a-1 and 31a-2 thereunder. All such records shall be the property of the Fund
and shall at all times during the regular business hours of the Custodian be
open for inspection by duly authorized officers, employees or agents of the Fund
and employees and agents of the Securities and Exchange Commission. The
Custodian shall, at the Fund's request, supply the Fund with a tabulation of
securities owned by the Fund and held by the Custodian and shall, when requested
to do so by the Fund and for such compensation as shall be agreed upon between
the Fund and the Custodian, include certificate numbers in such tabulations.
14
<PAGE> 18
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-1A, and Form N-SAR or other
annual reports to the Securities and Exchange Commission and with respect to any
other requirements of such Commission.
11. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund and the Custodian.
12. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in good faith without negligence, misfeasance or
willful misconduct. It shall be entitled to rely on and may act upon advice of
counsel (who may be counsel for the Fund) on all matters, and shall be without
liability for any action reasonably taken or omitted pursuant to such advice.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 as
provided in Section 3.9 hereof and, regardless of whether assets are maintained
in the custody of a foreign banking institution, a foreign securities depository
or a branch of a U.S. bank as contemplated by paragraph 3.12 hereof, the
Custodian shall not be liable for any loss, damage, cost, expense, liability or
claim resulting from, or caused by nationalization, expropriation, currency
restrictions, or acts of war or terrorism, acts of God, or other occurrences
beyond the Custodian's or sub-custodian's reasonable control.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, foreign exchange contracts and assumed settlement)
for the benefit of the Fund including the purchase or sale of
15
<PAGE> 19
foreign exchange or of contracts for foreign exchange or in the event that the
Custodian or its nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the performance
of this Contract, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or willful misconduct, any property
at any time held for the account of the Fund shall be security therefor and
should the Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of the Fund's assets to the
extent necessary to obtain reimbursement.
13. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary of the Fund that the Board of Directors of the Fund has approved the
initial use of a particular Securities System by the Fund, as required by Rule
17f-4 under the Investment Company Act of 1940, as amended, and that the
Custodian shall not act under Section 2.10A hereof in the absence of receipt of
an initial certificate of the Secretary or an Assistant Secretary of the Fund
that the Board of Directors of the Fund has approved the initial use of the
Direct Paper System by the Fund; provided further, however, that the Fund shall
not amend or terminate this Contract in contravention of any applicable federal
or state regulations, or any provision of the Articles of Incorporation, and
further provided, that the Fund may at any time by action of its Board of
Directors (i) substitute another bank or trust company for the Custodian by
giving notice as described above to the Custodian, or (ii) immediately terminate
this Contract in the event of the appointment of a conservator or receiver for
the Custodian by the Comptroller of the Currency or upon the happening of a like
event at the direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its costs, expenses and disbursements.
14. Successor Custodian
If a successor custodian for the Fund shall be appointed by the Board
of Directors of the Fund, the Custodian shall, upon termination, deliver to such
successor custodian at the office of the Custodian, duly endorsed and in the
form for transfer, all securities of the Fund then held by it hereunder and
shall transfer to an account of the successor custodian all of the securities of
the Fund held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
16
<PAGE> 20
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors of the Fund shall have been
delivered to the Custodian on or before the date when such termination shall
become effective, then the Custodian shall have the right to deliver to a bank
or trust company, which is a "bank" as defined in the Investment Company Act of
1940, as amended, doing business in Boston, Massachusetts, of its own selection,
having an aggregate capital, surplus, and undivided profits, as shown by its
last published report, of not less than $25,000,000, all securities, funds and
other properties held by the Custodian on behalf of the Fund and all instruments
held by the Custodian relative thereto and all other property held by it under
this Contract on behalf of the Fund and to transfer to an account of such
successor custodian all of the securities of each the Fund held in any
Securities System. Thereafter, such bank or trust company shall be the successor
of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors of the Fund to appoint a successor custodian, the
Custodian shall be entitled to fair compensation for its services during such
period as the Custodian retains possession of such securities, funds and other
properties and the provisions of this Contract relating to the duties and
obligations of the Custodian shall remain in full force and effect.
15. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation of the Fund. No interpretive or additional
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Contract.
16. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
17. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund and the Custodian relating to the custody of
the Fund's assets.
17
<PAGE> 21
18. Shareholder Communications Election
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, this rule prohibits
the requesting company from using the Fund's name and address for any purpose
other than corporate communications. Please indicate below whether the Fund
consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions.
NO [ ] The Custodian is not authorized to release the Fund's name,
address, and share positions.
18
<PAGE> 22
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and on its behalf by its duly authorized representative
and its seal to be hereunder affixed as of the day of , 199 .
ATTEST MERRILL LYNCH CONVERTIBLE FUND,
INC.
______________________________ By:__________________________
Name: Name:___________________
Title:__________________
ATTEST STATE STREET BANK AND TRUST COMPANY
______________________________ By:__________________________
Name: Ronald E. Logue
Executive Vice President
<PAGE> 1
EXHIBIT 11
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
TELEPHONE (212) 839-5300
FACSIMILE (212) 839-5599
January 7, 1998
Merrill Lynch Convertible Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Ladies and Gentlemen:
We have acted as counsel for Merrill Lynch Convertible Fund, Inc.
(the "Fund") in connection with the proposed acquisition by the Fund of
substantially all of the assets and the assumption of substantially all of the
liabilities of Merrill Lynch Global Convertible Fund, Inc. ("Global
Convertible"), in exchange for newly-issued shares of common stock of the Fund
(the "Acquisition"). This opinion is furnished in connection with the Fund's
Registration Statement on Form N-14 under the Securities Act of 1933, as
amended (the "Registration Statement"), relating to shares of common stock, par
value $0.10 per share, of the Fund (the "Shares"), to be issued in the
Acquisition.
As counsel for the Fund, we are familiar with the proceedings taken
by it and to be taken by it in connection with the authorization, issuance and
sale of the Shares. In addition, we have examined and are familiar with the
Amended and Restated Articles of Incorporation of the Fund, the Articles
Supplementary to the Amended and Restated Articles of Incorporation of the
Fund, the By-Laws of the Fund, as amended, 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 subsequent to
the approval of the Agreement and Plan of Reorganization between the Fund and
Global Convertible set forth in the proxy statement and prospectus constituting
a part of the Registration Statement (the "Proxy Statement and Prospectus"),
the Shares, upon issuance in the manner referred to in the Registration
Statement, for consideration not less than the par value thereof, will be
legally issued, fully paid and non-assessable shares of common stock of the
Fund.
<PAGE> 2
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 Proxy Statement and
Prospectus constituting parts thereof.
Very truly yours,
/s/ Brown & Wood LLP
<PAGE> 1
EXHIBIT 14(a)
INDEPENDENT AUDITORS' CONSENT
MERRILL LYNCH CONVERTIBLE FUND, INC.:
We consent to the incorporation by reference in this Registration Statement on
Form N-14 of our report dated October 15, 1997 appearing in the Annual Report to
Shareholders of the Merrill Lynch Convertible Fund, Inc. for the year ended
August 31, 1997, and to the references to us under the captions "Comparison of
the Funds -- Financial Highlights" and "Experts" appearing in the Proxy
Statement and Prospectus, which is part of such Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
January 6, 1998
<PAGE> 1
EXHIBIT 14(b)
INDEPENDENT AUDITORS' CONSENT
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.:
We consent to the incorporation by reference in this Registration Statement on
Form N-14 of our report dated December 5, 1997 appearing in the Annual Report to
Shareholders of the Merrill Lynch Global Convertible Fund, Inc. for the year
ended October 31, 1997, and to the references to us under the captions
"Comparison of the Funds -- Financial Highlights" and "Experts" appearing in the
Proxy Statement and Prospectus, which is part of such Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
January 6, 1998
<PAGE> 1
PROSPECTUS
DECEMBER 29, 1997
MERRILL LYNCH CONVERTIBLE FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Convertible Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company that seeks to provide shareholders with
high total return by investing primarily in a portfolio of convertible debt
securities, convertible preferred stocks and synthetic convertible securities.
Total return is the combination of capital appreciation and investment income.
The investment philosophy of the Fund is based on the belief that the
characteristics of convertible securities make them appropriate investments for
an investment company seeking a high total return from capital appreciation and
investment income. The securities in which the Fund invests may be issued by
both United States and non-United States issuers. The Fund may employ a variety
of techniques to hedge against market or currency risk or to enhance total
return. There can be no assurance that the investment objective of the Fund will
be realized.
Investments on an international basis in foreign securities markets involve
risks and special considerations not typically associated with investments in
securities of United States issuers. See "Risk Factors and Special
Considerations."
------------------------
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing(SM) System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from securities dealers that have entered into selected dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000 and the
minimum subsequent purchase is $50, except that for retirement plans, the
minimum initial purchase is $100 and the minimum subsequent purchase is $1, and
for participants in certain fee-based programs, the minimum initial purchase is
$500 and the minimum subsequent purchase is $50. Merrill Lynch may charge its
customers a processing fee (presently $5.35) for confirming purchases and
repurchases. Purchases and redemptions made directly through Merrill Lynch
Financial Data Services, Inc. (the "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 NOR HAS THE 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, 1997 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing the
Fund at the above telephone number or address. The Commission maintains a Web
site (http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information regarding the Fund. The
Statement of Additional Information is hereby incorporated by reference into
this Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE> 2
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)...... 5.25%(c) None None 5.25%(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(f)
annually to 0.0% after
the fourth year(e)
Exchange Fee............................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Investment Advisory Fees(g)................ 0.60% 0.60% 0.60% 0.60%
12b-1 Fees (includes account maintenance
fees and distribution fees)(h)........... None 1.00% 1.00% 0.25%
(Class B shares convert
to Class D shares
automatically after
approximately eight
years and cease being
subject to distribution
fees)
Other Expenses:(i)
Shareholder Servicing Costs(j)........... .04% .07% .07% .04%
Other.................................... .26% .26% .26% .26%
------ ----- ----- -----
Total Other Expenses................... .30% .33% .33% .30%
------ ----- ----- -----
Total Fund Operating Expenses.............. .90% 1.93% 1.93% 1.15%
====== ===== ===== =====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain participants in
fee-based programs. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" on page 30 and "Shareholder
Services -- Fee-Based Programs" on page 42.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" on page 33.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A and Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" on page 30.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" on page 42.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" on page 42.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" on page 42.
(g) See "Management of the Fund -- Management and Advisory Arrangements" on
page 26.
(h) See "Purchase of Shares -- Distribution Plans" on page 36.
(i) "Other Expenses," as shown above for Class A shares, are based upon actual
expenses incurred on an annualized basis for the period January 1, 1997 to
August 31, 1997. "Other Expenses," as shown above for Class B, Class C and
Class D shares, are based upon estimated amounts of expenses expected to be
incurred for the fiscal year ended August 31, 1998.
(j) See "Management of the Fund -- Transfer Agency Services" on page 28.
2
<PAGE> 3
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 $52.50 initial sales charge
(Class A and Class D shares only) and assuming (1) the Total
Fund Operating Expenses for each class set forth on page 2,
(2) a 5% annual return throughout the periods and (3)
redemption at the end of the period (including any applicable
CDSC for Class B and Class C shares):
Class A................................................... $ 61 $ 80 $ 100 $157
Class B................................................... $ 60 $ 81 $ 104 $206*
Class C................................................... $ 30 $ 61 $ 104 $225
Class D................................................... $ 64 $ 87 $ 112 $185
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A................................................... $ 61 $ 80 $ 100 $157
Class B................................................... $ 20 $ 61 $ 104 $206*
Class C................................................... $ 20 $ 61 $ 104 $225
Class D................................................... $ 64 $ 87 $ 112 $185
</TABLE>
- ---------------
* Assumes conversion to Class D shares approximately eight years after purchase.
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 expenses set forth under "Other Expenses" are based on estimated
amounts through the end of the Fund's first fiscal year as an open-end
investment company on an annualized basis. 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 RATE OF RETURN,
AND ACTUAL EXPENSES OR ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN THOSE
ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C shareholders who hold
their shares for an extended period of time may pay more in Rule 12b-1
distribution fees than the economic equivalent of the maximum front-end sales
charge permitted under the Conduct Rules of the National Association of
Securities Dealers, Inc. ("NASD"). Merrill Lynch may charge its customers a
processing fee (presently $5.35) for confirming purchases and repurchases.
Purchases and redemptions made directly through the Fund's Transfer Agent are
not subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares."
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing(SM) System is used by more than
50 registered investment companies advised by Merrill Lynch Asset Management,
L.P. ("MLAM" or the "Manager") or Fund Asset Management, L.P. ("FAM"), an
affiliate of MLAM. Funds advised by
3
<PAGE> 4
MLAM or FAM that utilize the Merrill Lynch Select Pricing(SM) System are
referred to herein as "MLAM-advised mutual funds."
Each Class A, Class B, Class C or Class D share of the Fund 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
CDSCs, distribution fees and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, 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 CDSCs and distribution fees with respect to the Class B and Class C
shares in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is the 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>
CONVERSION
CLASS SALES CHARGE(1) ACCOUNT FEATURE
MAINTENANCE DISTRIBUTION
FEE FEE
----------------------------------------------------------------------------------------------------------
A Maximum 5.25% initial sales charge(2)(3) No No No
----------------------------------------------------------------------------------------------------------
B CSDC for a period of four years, at a B shares convert to
rate of 4.0% during the first year, D shares automatically
decreasing 1.0% annually to 0.0%(4) 0.25% 0.75% after approximately
eight years(5)
----------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
----------------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales charge(3) 0.25% 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 next page)
4
<PAGE> 5
(footnotes continued from preceding page)
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class A
shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but instead
may be subject to a 1.0% CDSC if redeemed within one year. Such CDSC may be
waived in connection with certain fee-based programs. A 0.75% sales charge
for 401(k) purchases over $1,000,000 will apply. See "Class A" and "Class D"
below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans was modified. Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made have a ten-year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A: Upon the conversion of the Fund to open-end status, the Fund's
outstanding Capital Shares were designated Class A shares. No sales
charge was due as a result of the conversion. Until September 4, 1997,
Class A shares are offered at net asset value to the former holders of
Income Shares of the Fund whose shares were redeemed on July 31, 1997,
prior to the Fund's conversion to open-end status. Class A shares incur
an initial sales charge when they are purchased and bear no ongoing
distribution or account maintenance fees. Class A shares are offered to
a limited group of investors and also will be issued upon reinvestment
of dividends on outstanding Class A shares. Investors who currently own
Class A shares of the Fund in a shareholder account are entitled to
purchase additional Class A shares of the Fund in that account. Other
eligible investors include participants in certain fee-based programs.
In addition, Class A shares will be offered at net asset value to
Merrill Lynch & Co., Inc. ("ML & Co.") and its subsidiaries (the term
"subsidiaries" when used herein with respect to ML & Co. includes the
Manager, FAM and certain other entities directly or indirectly wholly
owned and controlled by ML & Co.), and their directors and employees
and to members of the Boards of MLAM-advised mutual funds. The maximum
initial sales charge of 5.25% is reduced for purchases of $25,000 and
over and waived for purchases by certain retirement plans and
participants in connection with certain fee-based programs. Purchases
of $1,000,000 or more may not be subject to an initial sales charge,
but if the initial sales charge is waived such purchases may be subject
to a 1.0% CDSC if the shares are redeemed within one year after
purchase. Such CDSC may be waived in connection with certain fee-based
programs. Sales charges are also reduced under a right of accumulation
that 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 0.75% 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. Such CDSC may be modified in
connection with certain fee-based programs. Approximately eight years
after issuance, Class B shares will convert automatically into Class D
shares of the Fund, which are subject to an account maintenance fee but
no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten 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
5
<PAGE> 6
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 the conversion and holding periods 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 0.75% of the Fund's average net assets
attributable to the Class C shares. Class C shares are also subject to
a 1.0% CDSC if they are redeemed within one year of purchase. Such CDSC
may be waived in connection with certain fee-based programs. Although
Class C shares are subject to a CDSC for only one year (as compared to
four years for Class B), Class C shares have no conversion feature and,
accordingly, an investor who purchases Class C shares will be subject
to distribution fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Fund's Board of
Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. The maximum initial sales charge of 5.25% is reduced
for purchases of $25,000 or more. 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 1.0% CDSC if the
shares are redeemed within one year after purchase. Such CDSC may be
waived in connection with certain fee-based programs. The schedule of
initial sales charges and reductions for Class D shares is the same as
the schedule for Class A shares, except that there is no waiver for
purchases by retirement plans and participants in connection with
certain fee-based programs. Class D shares also will be issued upon
conversion of Class B shares as described above under "Class B." See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his or
her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the CDSCs imposed in connection with purchases of Class B 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 who previously purchased Class A shares
may no longer be eligible to purchase Class A shares of other MLAM-advised
mutual funds, those previously purchased Class A shares,
6
<PAGE> 7
together with Class B, Class C and Class D share holdings, will count toward a
right of accumulation that may qualify the investor for reduced initial sales
charges on new initial sales charge purchases. In addition, the ongoing Class B
and Class C account maintenance and distribution fees will cause Class B and
Class C shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class D account
maintenance fees will cause Class D shares to have a higher expense ratio, pay
lower dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately eight years, and thereafter investors will be
subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forego 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> 8
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements and the independent
auditors' report thereon for the period January 1, 1997 to August 31, 1997 are
included in the Statement of Additional Information. Further information about
the performance of the Fund is contained in the Fund's most recent annual report
to shareholders which may be obtained, without charge, by calling or by writing
the Fund at the telephone number or address on the front cover of this
Prospectus.
The following per share data and ratios have been derived from information
provided in the Fund's audited financial statements:
<TABLE>
<CAPTION>
CLASS A SHARES###(1)
--------------------------------------------------------------------------
FOR THE PERIOD
JAN. 1, 1997
TO AUG. 31, FOR THE YEAR ENDED DECEMBER 31,
-------------- --------------------------------------------------------
1997# 1996# 1995 1994 1993 1992
-------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:+++
Net asset value, beginning of period... $ 15.57 $ 13.43 $ 11.13 $ 13.21 $ 12.87 $ 10.91
-------- -------- -------- -------- -------- --------
Investment income -- net.............. .06 -- -- -- -- --
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net................. 1.75 2.78 2.66 (2.12) 1.43 2.03
-------- -------- -------- -------- -------- --------
Total from investment operations...... 1.81 2.78 2.66 (2.12) 1.43 2.03
-------- -------- -------- -------- -------- --------
Distributions of realized gain on
investments -- net.................. -- (.64) (.36) (.01) (1.17) (.12)
-------- -------- -------- -------- -------- --------
Effect of repurchase of Treasury
Stock............................... -- -- --+ .05 .08 .05
-------- -------- -------- -------- -------- --------
Capital charge resulting from issuance
of new classes of shares............ (.02) -- -- -- -- --
-------- -------- -------- -------- -------- --------
Net asset value, end of period......... $ 17.36 $ 15.57 $ 13.43 $ 11.13 $ 13.21 $ 12.87
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share..... 11.50%## 20.60% 24.44% (15.68)% 13.94% 19.48%
======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses***............................ .90%* .78% .79% .87% .80% .80%
======== ======== ======== ======== ======== ========
Investment income -- net............... 4.76%* 4.98% 5.40% 5.43% 5.10% 6.34%
======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period.............. $110,178 $289,993 $265,127 $238,466 $274,999 $289,366
======== ======== ======== ======== ======== ========
Portfolio turnover..................... 92.86% 129.06% 87.69% 69.37% 116.03% 76.54%
======== ======== ======== ======== ======== ========
Average commission rate paid++......... $ .0522 $ .0447 -- -- -- --
======== ======== ======== ======== ======== ========
<CAPTION>
FOR THE
YEAR ENDED
JUNE 30,
1991 1990 1989 1988 1987**** 1987
--------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:+++
Net asset value, beginning of period... $ 7.67 $ 10.12 $ 8.69 $ 8.49 $ 11.88 $ 12.26
-------- -------- -------- -------- -------- --------
Investment income -- net.............. -- -- -- -- -- --
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net................. 3.24 (2.45) 1.43 .20 (3.39) (.38)
-------- -------- -------- -------- -------- --------
Total from investment operations...... 3.24 (2.45) 1.43 .20 (3.39) (.38)
-------- -------- -------- -------- -------- --------
Distributions of realized gain on
investments -- net.................. -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Effect of repurchase of Treasury
Stock............................... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Capital charge resulting from issuance
of new classes of shares............ -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Net asset value, end of period......... $ 10.91 $ 7.67 $ 10.12 $ 8.69 $ 8.49 $ 11.88
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share..... 42.24% (24.21)% 16.46% 2.36% (28.54)% 3.16%
======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses***............................ .83% .86% .80% .79% .83% .75%
======== ======== ======== ======== ======== ========
Investment income -- net............... 7.24% 7.39% 7.15% 7.55% 6.37% 6.08%
======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period.............. $ 275,045 $230,851 $264,339 $245,077 $243,073 $292,704
======== ======== ======== ======== ======== ========
Portfolio turnover..................... 54.90% 40.28% 50.47% 48.72% 23.09% 62.35%
======== ======== ======== ======== ======== ========
Average commission rate paid++......... -- -- -- -- -- --
======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) The Fund converted to an open-end investment company on August 4, 1997. The
above financial information provided for periods prior to August 4, 1997
reflects the Fund's performance as a closed-end investment company and
therefore, may not be indicative of its performance as an open-end
investment company.
* Annualized.
** Total investment returns exclude the effects of sales loads. Performance
results prior to August 31, 1997 are for when the Fund was a dual-structure
closed-end management investment company and include only the returns for
the Capital Shares but exclude results from the Income Shares.
*** Excluding taxes on undistributed net realized long-term capital gains for
years prior to the period January 1, 1997 to August 31, 1997.
**** For the six months ended December 31, 1987.
+ Amount is less than $.01 per share.
++ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities.
+++ Excludes the effect of per share operating performance of the Fund's Income
Shares, which were redeemed on July 31, 1997. Per share operating
performance prior to the period January 1, 1997 to August 31, 1997 reflects
when the Fund was a dual-structure closed-end management investment
company. For the period January 1, 1997 to July 31, 1997, investment
income-net per Income Share was $0.73 and dividends of investment
income-net per Income Share were $0.70.
# Based on average shares outstanding during the period.
## Aggregate total investment return.
### Formerly Capital Shares.
8
<PAGE> 9
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE PERIOD
AUG. 4, 1997+ TO AUG. 31, 1997
-------------------------------------
CLASS B++ CLASS C++ CLASS D++
--------- --------- ---------
<S> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........... $ 16.91 $ 16.91 $ 16.91
------ ------ ------
Investment income -- net..................... .05 .05 .07
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net....................... .39 .40 .38
------ ------ ------
Total from investment operations............. .44 .45 .45
------ ------ ------
Net asset value, end of period................. $ 17.35 $ 17.36 $ 17.36
====== ====== ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............. 2.60%+++ 2.66%+++ 2.66%+++
====== ====== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses....................................... 2.66%* 2.74%* 1.92%*
====== ====== ======
Investment income -- net....................... 3.77%* 3.58%* 4.81%*
====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)....... $ 5,759 $ 1,014 $ 1,365
====== ====== ======
Portfolio turnover............................. 92.86% 92.86% 92.86%
====== ====== ======
Average commission rate paid................... $ .0522 $ .0522 $ .0522
====== ====== ======
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding during the period.
+++ Aggregate total investment return.
9
<PAGE> 10
RISK FACTORS AND SPECIAL CONSIDERATIONS
CONVERSION TO OPEN-END STATUS
On August 4, 1997, the Fund converted from a closed-end investment company
to an open-end investment company. Prior to the conversion of the Fund to
open-end status, the Fund was operated as a diversified, closed-end,
"dual-purpose" management investment company with different investment
objectives and policies from those described herein.
DERIVATIVE INVESTMENTS
The Fund may engage in transactions in certain instruments that may be
characterized as derivatives. These instruments include various types of
options, futures and options thereon, currency forwards and options thereon and
indexed securities, including inverse securities. The Fund may engage in these
transactions for hedging purposes or, in certain cases, to enhance total return.
Investments in indexed securities, including inverse securities, subject
the Fund to the risks associated with changes in the particular indices, which
risks may include the loss of amounts invested. Transactions involving options,
futures, options on futures or currency may involve the loss of an opportunity
to profit from a price movement in the underlying asset beyond certain levels or
a price increase on other portfolio assets (in the case of transactions for
hedging purposes) or expose the Fund to potential losses that exceed the amount
originally invested by the Fund in such instruments. For a further discussion of
the risks associated with these investments, see "Investment Objective and
Policies -- Description of Certain Investments," "-- Other Investment Policies
and Practices -- Portfolio Strategies Involving Options, Futures and Foreign
Exchange Transactions" and Appendix A to this Prospectus, "Investment Practices
Involving the Use of Options, Futures and Foreign Exchange."
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in securities that lack an
established secondary trading market or otherwise are considered illiquid.
Liquidity of a security relates to the ability to dispose easily of the security
and the price to be obtained upon disposition of the security, which may be less
than would be obtained for a comparable more liquid security. Investment of the
Fund's assets in illiquid securities may restrict the ability of the Fund to
dispose of its investments in a timely fashion and for a fair price as well as
its ability to take advantage of market opportunities. The risks associated with
illiquidity will be particularly acute in situations in which the Fund's
operations require cash, such as when the Fund redeems shares or pays dividends,
and could result in the Fund borrowing to meet short-term cash requirements or
incurring capital losses on the sale of illiquid investments. Further, issuers
whose securities are not publicly traded are not subject to the disclosure and
other investor protection requirements that would be applicable if their
securities were publicly traded. Illiquid securities may trade at a discount
from comparable, more liquid investments. In making investments in such
securities, the Fund may obtain access to material, non-public information which
may restrict the Fund's ability to conduct portfolio transactions in such
securities. In addition, the Fund may invest in privately placed securities that
may or may not be freely transferable under the laws of the applicable
jurisdiction or due to contractual restrictions on resale. See "Investment
Objective and Policies -- Description of Certain Investments -- Illiquid
Securities."
10
<PAGE> 11
NO RATING CRITERIA FOR DEBT SECURITIES
The Fund has not established any rating criteria for the debt securities in
which it may invest and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to low rating categories of
nationally recognized statistical rating organizations, such as Standard &
Poor's Ratings Services ("S&P") and Moody's Investors Service, Inc. ("Moody's"),
and unrated securities of comparable quality (such lower rated and unrated
securities are referred to herein as "high yield/high risk securities" or "junk
bonds") are 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. See
Appendix B to this Prospectus, "Ratings of Debt Securities and Preferred Stock."
In purchasing such securities, the Fund will rely on the Manager's judgment,
analysis and experience in evaluating the creditworthiness of an issuer of such
securities. The Manager will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and trends,
its operating history, the quality of the issuer's management and regulatory
matters. The Fund does not intend to purchase debt securities that are in
default.
The market values of high yield/high risk securities, or "junk bonds," tend
to reflect individual issuer developments to a greater extent than do higher
rated securities, which react primarily to fluctuations in the general level of
interest rates. Issuers of high yield/high risk securities may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is 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/high risk securities may be more likely to
experience financial stress, especially if such issuers are highly leveraged.
During such periods, service of debt obligations also may be adversely affected
by specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of high yield/high risk securities because such securities may be
unsecured and may be subordinated to other creditors of the issuer.
High yield/high risk securities may have call or redemption features which
would permit an issuer to repurchase the securities 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 securities with lower yielding
securities, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield/high risk
securities, or "junk bonds," because there may be a thin trading market for such
securities. To the extent that a secondary trading market for high yield/high
risk 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
high yield/high risk 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/high risk
securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales. The Fund's
Directors, or the Manager will consider carefully the factors affecting the
market for high yield/high risk, lower rated securities in determining whether
any particular security is liquid or illiquid and whether current market
quotations are readily available.
11
<PAGE> 12
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high
yield/high risk securities, particularly in a thinly traded market. Factors
adversely affecting the market value of high yield/high risk securities are
likely to affect adversely the Fund's net asset value. In addition, the Fund may
incur additional expenses to the extent it is required to seek recovery upon a
default on a portfolio holding or participate in the restructuring of the
obligations.
INVESTING ON AN INTERNATIONAL BASIS
Because a substantial portion of the Fund's assets may be invested in
securities of non-U.S. issuers, an investor in the Fund should be aware of
certain risk factors and special considerations relating to international
investing, which may involve risks that are not typically associated with
investments in securities of U.S. issuers.
Specific Risks. Investing on an international basis involves certain risks
not involved in domestic investments, including fluctuations in foreign exchange
rates, future political and economic developments, different legal systems and
the possible imposition of exchange controls or other foreign governmental laws
or restrictions. Securities prices in different countries are subject to
different economic, financial, political and social factors. Since the Fund
invests heavily in securities denominated or quoted in currencies other than the
U.S. dollar, changes in foreign currency exchange rates will affect the value of
securities in the Fund and the unrealized appreciation or depreciation of
investments. Currencies of certain countries may be volatile and, therefore, may
affect the value of securities denominated in such currencies. In addition, with
respect to certain foreign countries, there is the possibility of expropriation
of assets, confiscatory taxation, difficulty in obtaining or enforcing a court
judgment, economic, political or social instability or diplomatic developments
that could affect investments in those countries. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross domestic product, rates of inflation, capital
reinvestment, resources, self-sufficiency and balance of payments position.
Certain foreign investments also may be subject to foreign withholding taxes.
These risks often are heightened for investments in smaller, emerging capital
markets.
As a result of these potential risks, the Manager may determine that,
notwithstanding otherwise favorable investment criteria, it may not be
practicable or appropriate to invest in a particular country. The Fund may
invest in countries in which foreign investors, including the Manager, have had
no or limited prior experience.
Public Information. Many of the foreign securities held by the Fund will
not be registered with the Commission, nor will the issuers thereof be subject
to the reporting requirements of such agency. Accordingly, there may be less
publicly available information about a foreign issuer than about a U.S. issuer
and such foreign issuers may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to those of U.S.
issuers. As a result, traditional investment measurements, such as
price/earnings ratios, as used in the United States, may not be applicable to
certain smaller, emerging foreign capital markets. Foreign issuers, and issuers
in smaller, emerging capital markets in particular, may not be subject to
uniform accounting, auditing and financial reporting standards or to practices
and requirements comparable to those applicable to domestic issuers.
Trading Volume, Clearance and Settlement. Foreign financial markets, while
often growing in trading volume, have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices may be more volatile than securities of comparable
domestic companies. Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
failed to keep pace with the volume of securities transactions,
12
<PAGE> 13
making it difficult to conduct such transactions. Further, satisfactory
custodial services for investment securities may not be available in some
countries having smaller, emerging capital markets, which may result in the Fund
incurring additional costs and delays in transporting and custodying such
securities outside such countries. Delays in settlement could result in periods
when assets of the Fund are uninvested and no return is earned thereon. The
inability of the Fund to make intended security purchases due to settlement
problems or the risk of intermediary counterparty failures could cause the Fund
to miss attractive investment opportunities. The inability to dispose of a
portfolio security due to settlement problems could result either in losses to
the Fund due to subsequent declines in the value of such portfolio security or,
if the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser.
Government Supervision and Regulation. There generally is less governmental
supervision and regulation of exchanges, brokers and issuers in foreign
countries than there is in the United States. For example, there may be no
comparable provisions under certain foreign laws to insider trading and similar
investor protection securities laws that apply with respect to securities
transactions consummated in the United States. Further, brokerage commissions
and other transaction costs on foreign securities exchanges generally are higher
than in the United States.
Depositary Receipts. The Fund may purchase sponsored or unsponsored
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
Global Depositary Receipts ("GDRs") (collectively, "Depositary Receipts") or
other securities convertible into securities of foreign issuers. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. In addition, the issuers
of the securities underlying unsponsored Depositary Receipts are not obligated
to disclose material information in the United States, and, therefore, there may
be less information available regarding such issuers and there may not be a
correlation between such information and the market value of the Depositary
Receipts. Depositary Receipts also involve the risks associated with other
investments in foreign securities, as discussed above.
Restrictions on Foreign Investment. Some countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Fund. As illustrations,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investment by foreign persons in a company to only a
specific class of securities that may have less advantageous terms than
securities of the company available for purchase by nationals. Certain countries
may restrict investment opportunities in issuers or industries deemed important
to national interests.
A number of countries have authorized the formation of closed-end
investment companies to facilitate indirect foreign investment in their capital
markets. In accordance with the Investment Company Act of 1940, as amended (the
"Investment Company Act"), the Fund may invest up to 10% of its total assets in
securities of closed-end investment companies, not more than 5% of which may be
invested in any one such company. This restriction on investments in securities
of closed-end investment companies may limit opportunities for the Fund to
invest indirectly in certain smaller capital markets. Shares of certain
closed-end investment companies may at times be acquired only at market prices
representing premiums to their net asset values. If the Fund acquires shares in
closed-end investment companies, shareholders would bear both their
proportionate share of expenses in the Fund (including investment advisory fees)
and, indirectly, the expenses of such closed-end investment companies. The Fund
also may seek, at its own cost, to create its own investment entities under the
laws of certain countries.
13
<PAGE> 14
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or companies with the most actively
traded securities. The Investment Company Act limits the Fund's ability to
invest in any equity security of an issuer which, in its most recent fiscal
year, derived more than 15% of its revenues from "securities related
activities," as defined by the rules thereunder. These provisions may also
restrict the Fund's investments in certain foreign banks and other financial
institutions.
NON-DIVERSIFICATION
The Fund is classified as a non-diversified investment company under the
Investment Company Act, which means that the Fund is not limited by the
Investment Company Act in the proportion of its assets that may be invested in
the obligations of a single issuer. Thus, the Fund may invest a greater
proportion of its assets in the securities of a smaller number of issuers and,
as a result, will be subject to greater risk of loss with respect to its
portfolio securities. The Fund, however, intends to comply with the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company. See
"Taxes" and "Investment Objective and Policies -- Investment Restrictions."
BORROWING
The Fund may borrow up to 33 1/3% of its total assets, taken at market
value, but only from banks as a temporary measure for extraordinary or emergency
purposes, including to meet redemptions (so as not to force the Fund to
liquidate securities at a disadvantageous time) or to settle securities
transactions. The Fund will not purchase securities at any time when borrowings
exceed 5% of its total assets, except (a) to honor prior commitments or (b) to
exercise subscription rights when outstanding borrowings have been obtained
exclusively for settlements of other securities transactions. The purchase of
securities while borrowings are outstanding will have the effect of leveraging
the Fund. Such leveraging increases the Fund's exposure to capital risk, and
borrowed funds are subject to interest costs that will reduce net income.
WITHHOLDING AND OTHER TAXES
Income and capital gains on securities held by the Fund may be subject to
withholding and other taxes imposed by certain jurisdictions, which would reduce
the return to the Fund on those securities. The Fund intends, unless ineligible,
to elect to "pass-through" to the Fund's shareholders the amount of foreign
taxes paid by the Fund. The taxes passed through to shareholders will be
included in each shareholder's income and could potentially be offset by either
a deduction or a credit. However, certain shareholders, including non-U.S.
shareholders, will not be entitled to the benefit of a deduction or credit with
respect to foreign taxes paid by the Fund. Non-U.S. shareholders may
nevertheless be subject to withholding tax on the foreign taxes included in
their income. Other taxes, such as transfer taxes, may be imposed on the Fund,
but would not give rise to a credit or deduction for shareholders.
FEES AND EXPENSES
The investment advisory fee (at the annual rate of 0.60% of the Fund's
average daily net assets) and other operating expenses of the Fund may be higher
than the investment advisory fees and operating expenses of other mutual funds
managed by the Manager and other investment advisers or of investment companies
investing exclusively in the securities of U.S. issuers. The investment advisory
fees and operating expenses, however, are believed by the Manager to be
comparable to expenses of open-end management investment companies that invest
on a global basis with investment objectives similar to the investment objective
of the Fund.
14
<PAGE> 15
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek high total return from a
combination of capital appreciation and investment income. The Fund will seek to
achieve its objective by investing primarily in a portfolio of convertible debt
securities, convertible preferred stocks and synthetic convertible securities.
Under normal circumstances, the Fund will invest at least 65% of its total
assets in convertible securities and synthetic convertible securities. The
securities in which the Fund invests may be issued by both United States and
non-United States issuers. The investment objective described in this paragraph
is a fundamental policy of the Fund and may not be changed without the approval
of the holders of a majority of the Fund's outstanding voting securities. There
can be no assurance that the investment objective of the Fund will be realized.
The convertible securities to be held by the Fund include any corporate
debt security or preferred stock that may be converted into underlying shares of
common stock. The common stock underlying convertible securities may be issued
by a different entity than the issuer of the convertible securities. Convertible
securities entitle the holder to receive interest payments paid on corporate
debt securities or the dividend preference on a preferred stock until such time
as the convertible security matures or is redeemed or until the holder elects to
exercise the conversion privilege. Synthetic convertible securities, as such
term is used herein, may be either (i) a debt security or preferred stock that
may be convertible only under certain contingent circumstances or that may pay
the holder a cash amount based on the value of shares of underlying common stock
partly or wholly in lieu of a conversion right (a "Cash-Settled Convertible") or
(ii) a combination of separate securities chosen by the Manager in order to
create the economic characteristics of a convertible security, i.e., a fixed
income security paired with a security with equity conversion features, such as
an option or warrant (a "Manufactured Convertible"). See "Convertible
Securities" below for additional information concerning convertible securities
and synthetic convertible securities eligible for purchase by the Fund.
The Fund believes that the characteristics of convertible securities make
them appropriate investments for an investment company seeking a high total
return from capital appreciation and investment income. These characteristics
include the potential for capital appreciation as the value of the underlying
common stock increases, the relatively high yield received from dividend or
interest payments as compared to common stock dividends and decreased risks of
decline in value relative to the underlying common stock due to their
fixed-income nature. As a result of the conversion feature, however, the
interest rate or dividend preference on a convertible security is generally less
than would be the case if the securities were issued in nonconvertible form.
Although the Fund may invest in securities denominated in any currency, it
is expected that a majority of its assets will be invested in securities that
are denominated in United States dollars, currencies of Pacific Basin countries
(such as Japan, Australia, Hong Kong and Singapore), and currencies of Western
European countries (such as the United Kingdom, Germany, the Netherlands,
Switzerland, Sweden, France, Italy, Belgium, Norway, Denmark, Austria and Spain)
and that are convertible into equity securities of United States, Pacific Basin
or Western European corporations.
Under normal circumstances, the Fund may invest up to 35% of its assets in
other types of securities, including common stock, preferred stock, options,
warrants, Long-term Equity Appreciation Participation Securities ("LEAPS") and
nonconvertible debt securities of United States and non-United States issuers.
The Fund has established no rating criteria for the debt securities in
which it may invest and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and unrated securities of
comparable quality
15
<PAGE> 16
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. See Appendix B to this Prospectus for additional information
regarding ratings of debt securities. In purchasing such securities, the Fund
will rely on the Manager's judgment, analysis and experience in evaluating the
creditworthiness of an issuer of such securities. The Manager will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. The Fund does not
intend to purchase debt securities that are in default or that the Manager
believes will be in default. See "Risk Factors and Special Considerations -- No
Rating Criteria for Debt Securities."
The Fund reserves the right as a temporary defensive measure to hold money
market securities of United States and non-United States issuers, or cash
(foreign currencies or United States dollars), in such proportions as, in the
opinion of the Manager, prevailing market, economic or political conditions
warrant. The Fund has established no rating criteria for money market securities
that it may hold as a defensive measure. For this purpose, investments made for
defensive purposes will be maintained only during periods in which the Manager
determines that economic or financial conditions are adverse for holding or
being fully invested in convertible and synthetic convertible securities of
United States and non-United States issuers. A portion of the portfolio normally
will be held in U.S. dollars or dollar-denominated money market securities to
provide for possible redemptions.
In evaluating proposed investments, the Manager will seek to maximize the
total return on the Fund's portfolio in terms of United States dollars. In
analyzing convertible securities, the Manager will consider both the yield on
the convertible security and the potential capital appreciation that is offered
by the underlying common stock. There can be no assurance that the Fund will
achieve its investment objective.
The table below shows the market value, by S&P rating category, of the debt
securities held by the Fund at August 31, 1997:
<TABLE>
<CAPTION>
% TOTAL
RATING* ASSETS
-------------------------------------------------------------------- -------
<S> <C>
AAA................................................................. --
AA.................................................................. 1.3
A................................................................... 11.1
BBB................................................................. 13.6
BB.................................................................. 11.1
B................................................................... 16.2
CCC................................................................. .8
CC.................................................................. --
C................................................................... --
Not Rated**......................................................... 11.3
Commercial Paper & U.S. Gov't....................................... 20.2
-------
85.6%
======
</TABLE>
- ---------------
* This data was calculated on a dollar weighted basis, computed no less
frequently than monthly.
** Debt securities that are not rated by S&P. Such bonds may be rated by
nationally recognized statistical rating organizations other than S&P, or may
not be rated by any of such organizations. With respect to the percentage of
the Fund's assets invested in
(footnote continued on next page)
16
<PAGE> 17
such securities, the Fund's Manager believes that 5.8% are of comparable
quality to obligations rated BBB, 11.9% are of comparable quality to
obligations rated BB, 43.4% are of comparable quality to obligations rated
B, 37.7% are of comparable quality to obligations rated CCC, and 1.2% are of
comparable quality to obligations rated D. This determination is based on
the Manager's own internal evaluation and does not necessarily reflect how
such securities would be rated by S&P if it were to rate the securities.
For a description of the above referenced ratings, see Appendix B to this
Prospectus, "Ratings of Debt Securities and Preferred Stock." The Fund has
established no rating criteria for the securities in which it may invest and
such securities may not be rated at all for creditworthiness. The above
percentages are as of August 31, 1997; the rating composition of the portfolio
of the Fund may vary over time.
CONVERTIBLE SECURITIES
Set forth below is additional information concerning convertible
securities, including synthetic convertible securities.
Convertible securities are issued and traded in a number of securities
markets. For the past several years, the principal markets have been the United
States, the Euromarket and Japan. Issuers during this period have included major
corporations domiciled in the United States, Japan, France, Switzerland, Canada
and the United Kingdom. Since the Fund will invest a substantial portion of its
assets in the United States market and the Euromarket, where convertible bonds
have been primarily denominated in the United States dollar, it is expected that
ordinarily a substantial portion of the convertible securities held by the Fund
will be denominated in United States dollars. However, the underlying equity
securities typically will be quoted in the currency of the country where the
issuer is domiciled. With respect to convertible securities denominated in a
currency different from that of the underlying equity securities, the conversion
price may be based on a fixed exchange rate established at the time the security
is issued. As a result, fluctuations in the exchange rate between the currency
in which the debt security is denominated and the currency in which the share
price is quoted will affect the value of the convertible security. As described
below, the Fund is authorized to enter into foreign currency hedging
transactions in which it may seek to reduce the effect of such fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion value," which is the
market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock. If, because of a low price of the
common stock the conversion value is substantially below the investment value of
the convertible security, the price of the convertible security is governed
principally by its investment value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed-income security. The yield and conversion premium of
convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value.
17
<PAGE> 18
Holders of convertible securities generally have a claim on the assets of
the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by the Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the holder which
entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security under certain
circumstances.
As indicated above, synthetic convertible securities may include either
Cash-Settled Convertibles or Manufactured Convertibles. Cash-Settled
Convertibles are instruments that are created by the issuer and have the
economic characteristics of traditional convertible securities but may not
actually permit conversion into the underlying equity securities in all
circumstances. As an example, a private company may issue a Cash-Settled
Convertible that is convertible into common stock only if the company
successfully completes a public offering of its common stock prior to maturity
and otherwise pays a cash amount to reflect any equity appreciation.
Manufactured Convertibles are created by the Manager by combining separate
securities that possess one of the two principal characteristics of a
convertible security, i.e., fixed income ("fixed income component") or a right
to acquire equity securities ("convertibility component"). The fixed income
component is achieved by investing in nonconvertible fixed income securities,
such as nonconvertible bonds, preferred stocks and money market instruments. The
convertibility component is achieved by investing in call options, warrants,
LEAPS, or other securities with equity conversion features ("equity features")
granting the holder the right to purchase a specified quantity of the underlying
stocks within a specified period of time at a specified price or, in the case of
a stock index option, the right to receive a cash payment based on the value of
the underlying stock index.
A warrant is an instrument issued by a corporation that gives a holder the
right to subscribe to a specified amount of capital stock at a set price for a
specified period of time. Warrants involve the risk that the price of the
security underlying the warrant may not exceed the exercise price of the warrant
and the warrant may expire without any value. The Fund has not established any
limits on the purchase of warrants in connection with Manufactured Convertibles.
See "Other Investment Policies and Practices -- Portfolio Strategies Involving
Options, Futures and Foreign Exchange Transactions" for a discussion of call
options and stock index call options.
A Manufactured Convertible differs from traditional convertible securities
in several respects. Unlike a traditional convertible security, which is a
single security having a unitary market value, a Manufactured Convertible is
comprised of two or more separate securities, each with its own market value.
Therefore, the total "market value" of such a Manufactured Convertible is the
sum of the values of its fixed-income component and its convertibility
component.
More flexibility is possible in the creation of a Manufactured Convertible
than in the purchase of a traditional convertible security. Because many
corporations have not issued convertible securities, the Manager may combine a
fixed income instrument and an equity feature with respect to the stock of the
issuer of the fixed income instrument to create a synthetic convertible security
otherwise unavailable in the market. The Manager may also combine a fixed income
instrument of an issuer with an equity feature with respect to the stock of a
different issuer when the Manager believes such a Manufactured Convertible would
better promote the Fund's objective than alternative investments. For example,
the Manager may combine an equity
18
<PAGE> 19
feature with respect to an issuer's stock with a fixed income security of a
different issuer in the same industry to diversify the Fund's credit exposure,
or with a U.S. Treasury instrument to create a Manufactured Convertible with a
higher credit profile than a traditional convertible security issued by that
issuer. A Manufactured Convertible also is a more flexible investment in that
its two components may be purchased separately and, upon purchasing the separate
securities, "combined" to create a Manufactured Convertible. For example, the
Fund may purchase a warrant for eventual inclusion in a Manufactured Convertible
while postponing the purchase of a suitable bond to pair with the warrant
pending development of more favorable market conditions.
The value of a Manufactured Convertible may respond differently to certain
market fluctuations than would a traditional convertible security with similar
characteristics. For example, in the event the Fund created a Manufactured
Convertible by combining a short-term U.S. Treasury instrument and a call option
on a stock, the Manufactured Convertible would likely outperform a traditional
convertible of similar maturity and which is convertible into that stock during
periods when Treasury instruments outperform corporate fixed income securities
and underperform during periods when corporate fixed-income securities
outperform Treasury instruments.
DESCRIPTION OF CERTAIN INVESTMENTS
Depositary Receipts. The Fund may invest in the securities of foreign
issuers in the form of Depositary Receipts or other securities convertible into
securities of foreign issuers. Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. ADRs are receipts typically issued by an American bank or
trust company that evidence ownership of underlying securities issued by a
foreign corporation. EDRs are receipts issued in Europe that evidence a similar
ownership arrangement. GDRs are receipts issued throughout the world that
evidence a similar arrangement. Generally, ADRs, in registered form, are
designed for use in the U.S. securities markets, and EDRs, in bearer form, are
designed for use in European securities markets. GDRs are tradeable both in the
U.S. and in Europe and are designed for use throughout the world. The Fund may
invest in unsponsored Depositary Receipts. The issuers of unsponsored Depositary
Receipts are not obligated to disclose material information in the United
States, and, therefore, there may be less information available regarding such
issuers and there may not be a correlation between such information and the
market value of the Depositary Receipts.
Warrants. The Fund may invest in warrants, which are securities permitting,
but not obligating, their holder to subscribe for other securities. Warrants do
not carry with them the right to dividends or voting rights with respect to the
securities that they entitle their holders to purchase, and they do not
represent any rights in the assets of the issuer. As a result, an investment in
warrants may be considered more speculative than certain other types of
investments. In addition, the value of a warrant does not necessarily change
with the value of the underlying securities and a warrant ceases to have value
if it is not exercised prior to its expiration date.
Illiquid Securities. The Fund may invest up to 15% of its net assets in
securities that lack an established secondary trading market or otherwise are
considered illiquid. The Fund may invest in securities of issuers that are sold
in private placement transactions between the issuers and their purchasers and
that are neither listed on an exchange nor traded in other established markets.
In many cases, privately placed securities will be subject to contractual or
legal restrictions on transfer. As a result of the absence of a public trading
market, privately placed securities in turn may be less liquid or illiquid and
more difficult to value than publicly traded securities. To the extent that
privately placed securities may be resold in privately negotiated transactions,
the prices realized from the sales, due to illiquidity, could be less than those
originally paid by the Fund or less
19
<PAGE> 20
than their fair market value. In addition, issuers whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements that may be applicable if their securities were publicly
traded. If any privately placed securities held by the Fund are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expenses of registration. Certain
of the Fund's investments in private placements may consist of direct
investments and may include investments in smaller, less-seasoned issuers, which
may involve greater risks. These issuers may have limited product lines, markets
or financial resources, or they may be dependent on a limited management group.
In making investments in such securities, the Fund may obtain access to material
nonpublic information which may restrict the Fund's ability to conduct portfolio
transactions in such securities.
The Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"), but can be offered and sold to "qualified institutional buyers" under
Rule 144A under the Securities Act. The Board of Directors has determined to
treat as liquid Rule 144A securities that are either (i) freely tradeable in
their primary markets offshore or (ii) non-investment grade debt securities
which the Manager determines are as liquid as publicly-registered non-investment
grade debt securities. The Board of Directors has adopted guidelines and
delegated to the Manager the daily function of determining and monitoring
liquidity of restricted securities. The Board of Directors, however, will retain
sufficient oversight and be ultimately responsible for the determinations. Since
it is not possible to predict with assurance exactly how this market for
restricted securities sold and offered under Rule 144A will develop, the Board
of Directors will carefully monitor the Fund's investments in these securities.
This investment practice could have the effect of increasing the level of
illiquidity in the Fund to the extent that qualified institutional buyers become
for a time uninterested in purchasing these securities.
Indexed and Inverse Securities. The Fund may invest in securities the
potential return of which is based on the change in particular measurements of
value or rate (an "index"). As an illustration, the Fund may invest in a debt
security that pays interest and returns principal based on the change in the
value of a securities index or a basket of securities, or based on the relative
changes of two indices. In addition, the Fund may invest in securities the
potential return of which is based inversely on the change in an index. For
example, the Fund may invest in securities that pay a higher rate of interest
when a particular index decreases and pay a lower rate of interest (or do not
fully return principal) when the value of the index increases. If the Fund
invests in such securities, it may be subject to reduced or eliminated interest
payments or loss of principal in the event of an adverse movement in the
relevant index or indices.
Certain indexed and inverse securities may have the effect of providing
investment leverage because the rate of interest or amount of principal payable
increases or decreases at a rate that is a multiple of the changes in the
relevant index. As a consequence, the market value of such securities may be
substantially more volatile than the market values of other debt securities. The
Fund believes that indexed and inverse securities may provide portfolio
management flexibility that permits the Fund to seek enhanced returns, hedge
other portfolio positions or vary the degree of portfolio leverage with greater
efficiency than would otherwise be possible under certain market conditions.
OTHER INVESTMENT POLICIES AND PRACTICES
Portfolio Strategies Involving Options, Futures and Foreign Exchange
Transactions. The Fund is authorized to engage in certain investment practices
involving the use of options, futures and foreign exchange, which may expose the
Fund to certain risks. These investment practices and the associated risks are
described in detail in Appendix A attached to this Prospectus.
20
<PAGE> 21
Portfolio Transactions. Subject to policies established by the Board of
Directors of the Fund, the Manager is primarily responsible for the execution of
the Fund's portfolio transactions. Since portfolio transactions may be effected
on foreign securities exchanges, the Fund may incur settlement delays on certain
of such exchanges. See "Risk Factors and Special Considerations." In executing
portfolio transactions, the Manager seeks to obtain the best net results for the
Fund, taking into account such factors as price (including the applicable
brokerage commissions or dealer spread), size of order, difficulty of execution,
operational facilities of the firm involved and the firm's risk in positioning a
block of securities. While the Manager generally seeks reasonably competitive
fees, commissions or spreads, the Fund does not necessarily pay the lowest fee,
commission or spread available. The Fund may invest in certain securities traded
in the over-the-counter ("OTC") market and, where possible, will deal directly
with the dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. Such
dealers usually are acting as principal for their own account. On occasion,
securities may be purchased directly from the issuer. Such portfolio securities
are generally traded on a net basis and do not normally involve either brokerage
commissions or transfer taxes. The Fund contemplates that, consistent with its
policy of obtaining the best net results, it will place orders for transactions
with a number of brokers and dealers, including Merrill Lynch, an affiliate of
the Manager. Subject to obtaining the best price and execution, securities firms
that provide supplemental investment research to the Manager, including Merrill
Lynch, 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 and the expenses of the Manager will not necessarily be
reduced as a result of the receipt of such supplemental information. See
"Management of the Fund -- Management and Advisory Arrangements."
Under the Investment Company Act, persons affiliated with the Fund and
persons who are affiliated with such affiliated persons, including Merrill
Lynch, are prohibited from dealing with the Fund as a principal in the purchase
and sale of securities unless a permissive order allowing such transactions is
obtained from the Commission. Affiliated persons of the Fund, and affiliated
persons of such affiliated persons, may serve as the Fund's broker in
transactions conducted on an exchange and in OTC transactions conducted on an
agency basis and may receive brokerage commissions from the Fund. In addition,
the Fund may not purchase securities during the existence of any underwriting
syndicate for such securities of which Merrill Lynch is a member except pursuant
to procedures approved by the Board of Directors of the Fund that comply with
rules adopted by the Commission. To the extent Merrill Lynch is active in
distributions of securities of issuers in certain foreign countries, the Fund
may be disadvantaged in that it may not purchase securities in such
distributions or may be limited in the amount it may purchase. In addition,
consistent with the Conduct Rules of the NASD, 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. It is expected that the majority of the
shares of the Fund will be sold by Merrill Lynch. Costs associated with
transactions in foreign securities are generally higher than in the U.S.,
although the Fund will endeavor to achieve the best net results in effecting its
portfolio transactions.
The Fund anticipates that its brokerage transactions involving securities
of companies domiciled in countries other than the United States will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States, although the Fund will
endeavor to achieve the best net results in effecting such transactions. There
generally is less governmental supervision and regulation of foreign stock
exchanges and brokers than in the United States. See "Risk Factors and Special
Considerations."
21
<PAGE> 22
The Fund's ability and decisions to purchase and sell portfolio securities
may be affected by foreign laws and regulations relating to the convertibility
and repatriation of assets.
Portfolio Turnover. Generally, the Fund does not purchase securities for
short-term trading profits. However, the Fund may dispose of securities without
regard to the time they have been held when such actions, for defensive or other
reasons, appear advisable to the Manager in light of a change in circumstances
in general market, economic or financial conditions. As a result of its
investment policies, the Fund may engage in a substantial number of portfolio
transactions. Accordingly, while the Fund anticipates that its annual portfolio
turnover rate should not exceed 100% under normal conditions, it is impossible
to predict portfolio turnover rates. The portfolio turnover rate is calculated
by dividing the lesser of the Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of all securities whose maturities
at the time of acquisition were one year or less) by the monthly average value
of the securities in the portfolio during the year. A high portfolio turnover
rate involves certain tax consequences and correspondingly greater transaction
costs in the form of dealer spreads and brokerage commissions, which are borne
directly by the Fund.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Under a repurchase agreement, the seller agrees, upon
entering into the contract with the Fund, to repurchase a security (typically a
security issued or guaranteed by the U.S. Government) at a mutually agreed-upon
time and price, thereby determining the yield during the term of the agreement.
This results in a fixed yield for the Fund insulated from fluctuations in the
market value of the underlying security during such period although, to the
extent the repurchase agreement is not denominated in U.S. dollars, the Fund's
return may be affected by currency fluctuations. Repurchase agreements may be
entered into only with financial institutions that (i) have, in the opinion of
the Manager, substantial capital relative to the Fund's exposure, or (ii) have
provided the Fund with a third-party guaranty or other credit enhancement. The
Fund takes possession of the underlying securities when investing in repurchase
agreements. Nevertheless, if the seller were to default on its obligation to
repurchase a security under a repurchase agreement and the market value of the
underlying security at such time was less than the Fund had paid to the seller,
the Fund would realize a loss. The Fund may not invest more than 15% of its net
assets in repurchase agreements maturing in more than seven days, together with
all other illiquid securities.
When-Issued Securities and Forward Commitment Transactions. The Fund may
purchase or sell securities that it is entitled to receive on a when-issued
basis, and it may purchase or sell securities for delayed delivery. These
transactions occur when securities are purchased or sold by the Fund with
payment and delivery taking place in the future to secure what is considered an
advantageous yield and price to the Fund at the time of entering into the
transaction. Although the Fund has not established any limit on the percentage
of its assets that may be committed in connection with such transactions, the
Fund will maintain a segregated account with its custodian of cash, cash
equivalents, U.S. Government securities or other liquid securities denominated
in U.S. dollars or non-U.S. currencies in an aggregate amount equal to the
amount of its commitments in connection with such purchase transactions.
There can be no assurance that a security purchased on a when-issued basis
or purchased or sold for delayed delivery will be issued, and the value of the
security, if issued, on the delivery date may be more or less than its purchase
price. The Fund may bear the risk of a decline in the value of such security and
may not benefit from an appreciation in the value of the security during the
commitment period.
22
<PAGE> 23
Standby Commitment Agreements. The Fund, from time to time, may enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of equity securities that may be
issued and sold to the Fund at the option of the issuer. The price of the
security is fixed at the time of the commitment. At the time of entering into
the agreement, the Fund is paid a commitment fee, regardless of whether or not
the security is ultimately issued. The Fund will enter into such agreements only
for the purpose of investing in the security underlying the commitment at a
price that is considered advantageous to the Fund. The Fund will not enter into
a standby commitment with a remaining term in excess of 45 days and presently
will limit its investment in such commitments so that the aggregate purchase
price of the securities subject to such commitments, together with the value of
portfolio securities subject to legal restrictions on resale that affect their
marketability, will not exceed 15% of its net assets taken at the time of
acquisition of such a commitment. The Fund at all times will maintain a
segregated account with its custodian of cash, cash equivalents, U.S. Government
securities or other liquid securities denominated in U.S. dollars or non-U.S.
currencies in an aggregate amount equal to the purchase price of the securities
underlying a commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued, and the value of the security
thereafter will be reflected in the calculation of the Fund's net asset value.
The cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio with a value not exceeding 33 1/3% of its total
assets to banks, brokers and other financial institutions and receive collateral
in cash or securities issued or guaranteed by the United States Government. Such
collateral will be maintained at all times in an amount equal to at least 100%
of the current market value of the loaned securities. During the period of such
a loan, the Fund receives the income on the loaned securities and either
receives the income on the collateral or other compensation, i.e., negotiated
loan premium or fee, for entering into the loan and thereby increases its yield.
In the event that the borrower defaults on its obligation to return borrowed
securities, because of insolvency or otherwise, the Fund could experience delays
and costs in gaining access to the collateral and could suffer a loss to the
extent that the value of the collateral falls below the market value of the
borrowed securities.
Short Sales. The Fund may make short sales of securities. A short sale is a
transaction in which the Fund sells a security it does not own in anticipation
that the market price of that security may decline. The Fund expects to make
short sales both as a form of hedging to offset potential declines in long
positions in similar securities and in order to maintain portfolio flexibility.
When the Fund makes a short sale, it must borrow the security sold short
and deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
23
<PAGE> 24
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer. With respect to uncovered short
positions, the Fund will also be required to deposit similar collateral with its
custodian to the extent, if any, necessary so that the value of both collateral
deposits in the aggregate is at all times equal to at least 100% of the current
market value of the security sold short. Depending on arrangements made with the
broker-dealer from which it borrowed the security regarding payment over of any
payments received by the Fund on such security, the Fund may not receive any
payments (including interest) on its collateral deposited with such
broker-dealer.
If the price of the security sold short increases between the time of the
short sale and the time the Fund replaces the borrowed security, the Fund will
incur a loss; conversely, if the price declines, the Fund will realize a gain.
Any gain will be decreased, and any loss increased, by the transaction costs
described above. Although the Fund's gain is limited to the price at which it
sold the security short, its potential loss is theoretically unlimited.
The Fund will not make a short sale if, after giving effect to such sale,
the market value of all securities sold short exceeds 25% of the value of its
total assets or the Fund's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The Fund may
also make short sales "against the box" without respect to such limitations. In
this type of short sale, at the time of the sale, the Fund owns or has the
immediate and unconditional right to acquire at no additional cost the identical
security.
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 that are fundamental policies may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities (which for this purpose and under the Investment Company Act
means the lesser of (a) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (b) more than 50% of the
outstanding shares). Among its fundamental policies, the Fund may not invest
more than 25% of its total assets, taken at market value at the time of each
investment, in the securities of issuers in any particular industry (excluding
the U.S. Government and its agencies and instrumentalities). Investment
restrictions and policies that are non-fundamental policies may be changed by
the Board of Directors without shareholder approval. As a non-fundamental
policy, the Fund may not borrow money or pledge its assets, except that the Fund
(a) may borrow from a bank as a temporary measure for extraordinary or emergency
purposes or to meet redemptions in amounts not exceeding 33 1/3% (taken at
market value) of its total assets and pledge its assets to secure such
borrowings, (b) may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (c) may purchase
securities on margin to the extent permitted by applicable law. (However, at the
present time, applicable law prohibits the Fund from purchasing securities on
margin.) (The deposit or payment by the Fund of initial or variation margin in
connection with financial futures contracts or options transactions is not
considered to be the purchase of a security on margin.) The purchase of
securities while borrowings are outstanding will have the effect of leveraging
the Fund. Such leveraging or borrowing increases the Fund's exposure to capital
risk, and borrowed funds are subject to interest costs which will reduce net
income.
As a non-fundamental policy, the Fund will not invest in securities that
cannot readily be resold because of legal or contractual restrictions or that
are not otherwise readily marketable, including repurchase agreements maturing
in more than seven days, if, regarding all such securities, more than 15% of its
net assets taken at market value would be invested in such securities.
Notwithstanding the foregoing, the Fund may
24
<PAGE> 25
purchase without regard to this limitation securities that are not registered
under the Securities Act, but that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act, provided that
the Fund's Board of Directors continuously determines, based on the trading
markets for the specific Rule 144A security, that it is liquid. The Board of
Directors may adopt guidelines and delegate to the Manager the daily function of
determining and monitoring liquidity of restricted securities. The Board has
determined that securities which are freely tradeable in their primary market
outside of the United States should be deemed liquid. The Board, however, will
retain sufficient oversight and be ultimately responsible for the
determinations.
Non-Diversified Status. The Fund is classified as non-diversified within
the meaning of the Investment Company Act, which means that the Fund is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. The Fund's investments will be limited, however,
in order to qualify for the special treatment afforded "regulated investment
companies" under the Code. See "Taxes." To qualify, the Fund will comply with
certain requirements, including limiting its investments so that at the close of
each quarter of the taxable year (i) not more than 25% of the market value of
the Fund's total assets will be invested in the securities of a single issuer
and (ii) with respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets will be invested in the
securities of a single issuer, and the Fund will not own more than 10% of the
outstanding voting securities of a single issuer. A fund that elects to be
classified as "diversified" under the Investment Company 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 securities of a small
number of issuers, the Fund's net asset value 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, and the Fund may be more
susceptible to any single economic, political or regulatory occurrence than a
diversified company.
For purposes of the diversification requirements set forth above with
respect to regulated investment companies, and to the extent required by the
Commission, the Fund, as non-fundamental policy, will consider securities issued
or guaranteed by the government of any one foreign country as the obligations of
a single issuer.
MANAGEMENT OF THE FUND
DIRECTORS
The Directors of the Fund consist of six individuals, five of whom are not
"interested persons" of the Fund as defined in the Investment Company Act. The
Directors are responsible for the overall supervision of the operations of the
Fund and perform the various duties imposed on the directors or trustees of
investment companies by the Investment Company Act.
The Directors are:
ARTHUR ZEIKEL* -- Chairman of the Manager and its affiliate, FAM; President
and Director of Princeton Services, Inc. ("Princeton Services"); and Executive
Vice President of ML & Co.
JAMES H. BODURTHA -- Director and Executive Vice President, The China
Business Group, Inc.
HERBERT I. LONDON -- John M. Olin Professor of Humanities, New York
University.
ROBERT R. MARTIN -- Former Chairman, Kinnard Investments, Inc.
25
<PAGE> 26
JOSEPH L. MAY -- Attorney in private practice.
ANDRE F. PEROLD -- Professor, Harvard Business School.
- ---------------
* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager acts as the manager for the Fund and provides the Fund with
investment management services. The Manager is owned and controlled by ML & Co.,
a financial services holding company and the parent of Merrill Lynch. The
Manager or FAM acts as the investment adviser for more than 140 registered
investment companies. The Manager also offers portfolio management and portfolio
analysis services to individuals and institutions. As of November 30, 1997, the
Manager and FAM had a total of approximately $273.9 billion in investment
company and other portfolio assets under management, including accounts of
certain affiliates of the Manager. The principal business address of the Manager
is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
The Fund has entered into an investment advisory agreement with the Manager
(the "Management Agreement"). The Manager also served as the Fund's Manager
prior to the conversion of the Fund from a closed-end investment company to an
open-end investment company. The Management Agreement, which includes certain
provisions to accommodate the conversion of the Fund from a closed-end
investment company to an open-end investment company, was approved by the Fund's
Board of Directors on September 27, 1996 and by shareholders on January 16,
1997. Unless earlier terminated as described below, the Management Agreement
will remain in effect until July 31, 1999 and thereafter, if approved at least
annually (a) by the Directors or by a majority of the outstanding shares of the
Fund and (b) by a majority of the Directors who are not parties to such contract
or interested persons (as defined in the Investment Company Act) of any such
party. Such contract is not assignable and may be terminated without penalty on
60 days' written notice at the option of either party thereto or by the vote of
the shareholders of the Fund. The Management Agreement provides that, subject to
the direction of the Board of Directors of the Fund, the Manager is responsible
for the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Manager,
subject to review by the Board of Directors.
The Manager provides the portfolio manager for the Fund who considers
analyses from various sources (including brokerage firms with which the Fund
does business), makes the necessary decisions, and places orders for
transactions accordingly. The Manager is also obligated to perform certain
administrative and management services for the Fund and is obligated to provide
all of the office space, facilities, equipment and personnel necessary to
perform its duties under the Management Agreement.
Pursuant to the Management Agreement, Fund pays the Manager a monthly fee
at the annual rate of 0.60% of the average daily net assets of the Fund. For the
period January 1, 1997 to August 31, 1997, the investment advisory fee paid by
the Fund to the Manager aggregated $1,102,729 (based upon average daily net
assets of approximately $282.3 million). Until its conversion to open-end status
on August 4, 1997, the Fund operated as a closed-end investment company pursuant
to an Investment Advisory Agreement with the Manager. The Investment Advisory
Agreement provided that the Fund pay an advisory fee to the Manager at the
annual rate of .60% of the average weekly net assets of the Fund.
Daniel A. Luchansky has been the Portfolio Manager of the Fund since August
1995. Mr. Luchansky has been a Vice President of the Manager since 1991. Mr.
Luchansky is responsible for the day-to-day management of the Fund's investment
portfolio.
26
<PAGE> 27
The Manager has also entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K."), an indirect, wholly owned subsidiary of ML & Co. and an affiliate
of the Manager, pursuant to which the Manager pays MLAM U.K. a fee for providing
investment advisory services to the Manager with respect to the Fund in an
amount to be determined from time to time by the Manager and MLAM U.K. but in no
event in excess of the amount the Manager actually receives for providing
services to the Fund pursuant to the Management Agreement. The Sub-Advisory
Agreement was approved by the Fund's Board of Directors on September 27, 1996
and by shareholders on January 16, 1997. Unless earlier terminated as described
below, the Sub-Advisory Agreement will remain in effect until July 31, 1999 and
thereafter, if approved at least annually (a) by the Directors or by a majority
of the outstanding shares of the Fund and (b) by a majority of the Directors who
are not parties to such contract or interested persons (as defined in the
Investment Company Act) of any such party. Such contract is not assignable and
may be terminated without penalty on 60 days' written notice at the option of
either party thereto or by the vote of the shareholders of the Fund. MLAM U.K.
has offices at Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
The Management Agreement obligates the Fund to pay certain expenses
incurred in its operations including, among other things, the investment
advisory fees, legal and audit fees, registration fees, unaffiliated Directors'
fees and expenses, custodian and transfer fees, accounting and pricing costs and
certain of the costs of printing proxies, shareholder reports, prospectuses and
statements of additional information distributed to shareholders. 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 period January
1, 1997 to August 31, 1997, the Fund reimbursed the Manager $63,816 for
accounting services. For the period January 1, 1997 to August 31, 1997, the
annualized ratio of total expenses to average net assets for Class A shares was
.90%. During such period (until August 4, 1997 when the Fund converted to
open-end status), however, the Fund was operated as a closed-end investment
company and, consequently, such reimbursement and such ratio may not necessarily
be indicative of the amounts of future expenses of the Fund. For the period
August 4, 1997 (commencement of operations as an open-end investment company) to
August 31, 1997, the annualized ratio of total expenses to average net assets
for Class B, Class C and Class D shares was 2.66%, 2.74% and 1.92%,
respectively.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-l of the Investment Company 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 that 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
27
<PAGE> 28
personnel of the Fund within periods of trading by the Fund in the same (or
equivalent) security (15 or 30 days depending upon the transaction).
TRANSFER AGENCY SERVICES
The Transfer Agent, a subsidiary of ML & Co., acts as the Fund's Transfer
Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Transfer Agent receives
an annual fee of up to $11.00 per Class A or Class D account and up to $14.00
per Class B or Class C account and is entitled to reimbursement for certain
transaction charges and out-of-pocket expenses incurred by the Transfer Agent
under the Transfer Agency Agreement. Additionally, a $.20 monthly closed account
charge will be assessed on all accounts which close during the calendar year.
Application of this fee will commence the month following the month the account
is closed. At the end of the calendar year, no further fees will be due. For
purposes of the Transfer Agency Agreement, the term "account" includes a
shareholder account maintained directly by the Transfer Agent and any other
account representing the beneficial interest of a person in the relevant share
class on a recordkeeping system, provided the recordkeeping system is maintained
by a subsidiary of ML & Co. For the period January 1, 1997 to August 31, 1997,
the total fee paid by the Fund to the Transfer Agent was $65,741 pursuant to the
Transfer Agency Agreement.
PURCHASE OF SHARES
The Distributor, an affiliate of each of the Manager, FAM and Merrill
Lynch, acts as the distributor of the shares of the Fund. Shares of the Fund are
offered continuously for sale by the Distributor and other eligible securities
dealers (including Merrill Lynch). Shares of the Fund may be purchased from
securities dealers or by mailing a purchase order directly to the Transfer
Agent. The minimum initial purchase is $1,000 and the minimum subsequent
purchase is $50, except that for retirement plans, the minimum initial purchase
is $100 and the minimum subsequent purchase is $1, and for participants in
certain fee-based programs, the minimum initial purchase is $500 and the minimum
subsequent purchase is $50. Different minimums may apply to purchases made
through the Merrill Lynch Blueprint(SM) Program. See "Purchase of
Shares -- Merrill Lynch Blueprint(SM) Program" in the Statement of Additional
Information.
The Fund offers its shares in four classes, at a public offering price
equal to the next determined net asset value per share plus sales charges that
are 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 Fund next determined
after receipt of the purchase order by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange ("NYSE") (generally, 4:00 p.m., New York time), which includes
orders received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined as of 15 minutes
after the close of business on the NYSE on that day, provided the Distributor in
turn receives the order from the securities dealer prior to 30 minutes after the
close of business on the NYSE on that day. If the purchase orders are not
received by the Distributor prior to 30 minutes after the close of business on
the NYSE on that day, such orders shall be deemed received on the next business
day. The Fund or the Distributor may suspend the
28
<PAGE> 29
continuous offering of the Fund's shares of any class at any time in response to
conditions in the securities markets or otherwise and may thereafter resume such
offering from time to time. Any order may be rejected by the Distributor or the
Fund. Neither the Distributor nor the dealers are permitted to withhold placing
orders to benefit themselves by a price change. Merrill Lynch may charge its
customers a processing fee (presently $5.35) to confirm a sale of shares to such
customers. Purchases made 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. 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
CDSCs, distribution fees and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, will be imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by 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 (except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). See "Distribution Plans"
below. Each class has different exchange privileges. See "Shareholder
Services -- Exchange 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 and distribution fees with respect to Class B and
Class C shares in that the sales charges and distribution fees, if any,
applicable to each class provide for the financing of the distribution of the
shares of the Fund. The distribution-related revenues paid with respect to a
class will not be used to finance the distribution expenditures of another
class. Sales personnel may receive different compensation for selling different
classes of shares. Investors are advised that only Class A and Class D shares
may be available for purchase through securities dealers, other than Merrill
Lynch, that are eligible to sell shares.
29
<PAGE> 30
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
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
----------------------------------------------------------------------------------------------------------
A Maximum 5.25% initial sales
charge(2)(3) No No No
----------------------------------------------------------------------------------------------------------
B CDSC for a period of four years,
at a rate of 4.0% during the
first year, decreasing 1.0% B shares convert to
annually to 0.0%(4) 0.25% 0.75% D shares automatically
after approximately
eight years(5)
----------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
----------------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales
charge(3) 0.25% 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 and waived for purchases of Class A
shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but instead
may be subject to a 1.0% CDSC if redeemed within one year. Such CDSC may be
waived in connection with certain fee-based programs. A 0.75% sales charge
for 401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans are modified. Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made have a ten-year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
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.
30
<PAGE> 31
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternative is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below:
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE
AS PERCENTAGE AS PERCENTAGE* DISCOUNT TO
OF THE OF THE NET SELECTED DEALERS
OFFERING AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED THE OFFERING PRICE
- ------------------------------------------------- ------------- -------------- ------------------
<S> <C> <C> <C>
Less than $25,000................................ 5.25% 5.54% 5.00%
$25,000 but less than $50,000.................... 4.75 4.99 4.50
$50,000 but less than $100,000................... 4.00 4.16 3.75
$100,000 but less than $250,000.................. 3.00 3.09 2.75
$250,000 but less than $1,000,000................ 2.00 2.04 1.80
$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 and on Class A share purchases by certain retirement plan
investors and participants in connection with certain fee-based programs. If
the sales charge is waived in connection with a purchase of $1,000,000 or
more, such purchases may be subject to a 1.0% CDSC if the shares are redeemed
within one year after purchase. Such CDSC may be waived in connection with
certain fee-based programs. The charge will be assessed on an amount equal to
the lesser of the proceeds of redemption or the cost of the shares being
redeemed. A sales charge of 0.75% will be charged on purchases of $1 million
or more of Class A or Class D shares by certain employer-sponsored retirement
or savings plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act. For the
period August 4, 1997 (commencement of operations as an open-end investment
company) to August 31, 1997, the Fund sold 45,211 Class A shares for aggregate
net proceeds of $774,119. The gross sales charges for the sale of Class A shares
of Fund for the period were $5,238, of which $3,996 and $1,242 were received by
the Distributor and Merrill Lynch, respectively. For the period August 4, 1997
(commencement of operations as an open-end investment company) to August 31,
1997, the Distributor received no CDSCs with respect to redemption within one
year after purchase of Class A shares purchased subject to a front-end sales
charge waiver. For the period August 4, 1997 (commencement of operations as an
open-end investment company) to August 31, 1997, the Fund sold 96,058 Class D
shares for aggregate net proceeds of $1,653,202. The gross sales charges for the
sale of Class D shares of the Fund for the period were $28,654 of which $2,306
and $26,348 were received by the Distributor and Merrill Lynch, respectively.
For the period August 4, 1997 (commencement of operations as an open-end
investment company) to August 31, 1997, 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, including participants in the Merrill Lynch
Blueprint(SM) program, are entitled to purchase additional Class A shares of the
Fund in that account. Certain employer-sponsored retirement or savings plans,
including eligible 401(k) plans, may purchase Class A shares at net asset value
provided such plans meet the required minimum number of eligible employees or
required amount of assets
31
<PAGE> 32
advised by MLAM or any of its affiliates. Class A shares are available at net
asset value to corporate warranty insurance reserve fund programs and U.S.
branches of foreign banking institutions provided that the program or branch has
$3 million or more initially invested in MLAM-advised mutual funds. Also
eligible to purchase Class A shares at net asset value are participants in
certain investment programs including TMA(SM) Managed Trusts to which Merrill
Lynch Trust Company provides discretionary trustee services, collective
investment trusts for which Merrill Lynch Trust Company serves as trustee and
purchases made in connection with certain fee-based programs. In addition, Class
A shares are offered at net asset value to ML & Co. and its subsidiaries and
their directors and employees and to members of the Boards of MLAM-advised
investment companies, including the Fund. Certain persons who acquired shares of
certain MLAM-advised closed-end funds in their initial offerings who wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in shares of the Fund also may purchase Class A shares of the Fund if
certain conditions set forth in the Statement of Additional Information are met
(for closed-end funds that commenced operations prior to October 21, 1994). In
addition, Class A shares of the Fund and certain other MLAM-advised mutual funds
are offered at net asset value to shareholders of Merrill Lynch Senior Floating
Rate Fund, Inc. and, if certain conditions set forth in the Statement of
Additional Information are met, to shareholders of Merrill Lynch Municipal
Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who
wish to reinvest the net proceeds from a sale of certain of their shares of
common stock pursuant to a tender offer conducted by such funds in shares of the
Fund and certain other MLAM-advised mutual funds.
Reduced Initial Sales Charges. No sales charges are imposed upon Class A
and Class D shares issued as a result of the automatic reinvestment of dividends
or capital gains distributions. Class A and Class D sales charges also may be
reduced under a Right of Accumulation and a Letter of Intention. Class A shares
are offered at net asset value to certain eligible Class A investors as set
forth above under "Eligible Class A Investors." See "Shareholder
Services -- Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access(SM) Accounts
available through authorized employers. Class A shares are offered at net asset
value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc., and
subject to certain conditions, Class A and Class D shares are offered at net
asset value to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch High Income Municipal Bond Fund, Inc., who wish to reinvest in
shares of the Fund the net proceeds from a sale of certain of their shares of
common stock pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value, without a sales charge, to
an investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint(SM) Program.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
32
<PAGE> 33
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
which declines each year, while Class C shares are subject only to a one year
1.0% CDSC. On the other hand, approximately eight 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 distribution fees of 0.75% of net assets as discussed below under
"Distribution Plans."
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares from the dealers' 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. The proceeds from the account maintenance fees are used to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) for
providing continuing account maintenance activities. Approximately eight years
after issuance, Class B shares will convert automatically into Class D shares of
the Fund, which are subject to an account maintenance fee but no distribution
fee; Class B shares of certain other MLAM-advised mutual funds into which
exchanges may be made convert into Class D shares automatically after
approximately ten years. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable to
the Class B shares acquired in the exchange will apply, and the holding period
for the shares exchanged will be tacked onto the holding period for the shares
acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges" below. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services --
Exchange 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 that
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 charge will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
33
<PAGE> 34
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B
CDSC AS A
YEAR SINCE PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------------------------------------------------------- -----------------
<S> <C>
0-1.......................................................... 4.0%
1-2.......................................................... 3.0%
2-3.......................................................... 2.0%
3-4.......................................................... 1.0%
4 and thereafter............................................. None
</TABLE>
For the period August 4, 1997 (commencement of operations as an open-end
investment company) to August 31, 1997, the Distributor received no CDSCs, with
respect to redemptions of Class B shares. CDSCs payable to the Distributor may
be waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
applicable rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over four years or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the four-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
To provide an example, assume an investor purchased 100 Class B 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).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following death or disability (as defined in
the Code) of a shareholder. The Class B CDSC also is waived on redemptions of
shares by certain eligible 401(a) and eligible 401(k) plans and in connection
with certain group plans placing orders through the Merrill Lynch Blueprint(SM)
Program. The CDSC is also waived for any Class B shares that are purchased by
eligible 401(a) or eligible 401(k) plans that are rolled over into a Merrill
Lynch or Merrill Lynch Trust Company custodied IRA and held in such account at
the time of redemption. The Class B CDSC is also waived for any Class B shares
purchased within qualifying Employee Access(SM) Accounts. The Class B CDSC is
also waived for any Class B shares purchased within eligible Employee Access(SM)
Accounts. The Class B CDSC is also waived for any Class B shares that are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. Additional information concerning the
waiver of the Class B CDSC is set forth in the Statement of Additional
Information. The terms of the CDSC may be modified in connection with certain
fee-based programs. See "Shareholder Services -- Fee-Based Programs."
34
<PAGE> 35
Contingent Deferred Sales Charges -- Class C Shares. Class C shares that
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 August 4, 1997
(commencement of operations as an open-end investment company) to August 31,
1997, the Distributor received no CDSCs with respect to redemptions of Class C
shares. The Class C CDSC may be waived in connection with certain fee-based
programs. See "Shareholder Services -- Fee-Based Programs."
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 eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
35
<PAGE> 36
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans that qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value per
share.
The Conversion Period also may be modified for retirement plan investors
who participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% 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 period August 4, 1997 (commencement of operations as an open-end
investment company) to August 31, 1997, the Fund paid the Distributor $2,343
pursuant to the Class B Distribution Plan (based on average daily net assets
subject to such Class B Distribution Plan of approximately $3.3 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.
For the period August 4, 1997 (commencement of operations as an open-end
investment company) to August 31, 1997, the Fund paid the Distributor $369
pursuant to the Class C Distribution Plan (based on average daily net assets
subject to such Class C Distribution Plan of approximately $518,000), all of
which was paid to Merrill Lynch for providing account maintenance and
36
<PAGE> 37
distribution-related activities and services in connection with Class C shares.
For the period August 4, 1997 (commencement of operations as an open-end
investment company) to August 31, 1997, the Fund paid the Distributor $136
pursuant to the Class D Distribution Plan (based on average daily net assets
subject to such Class D Distribution Plan of approximately $767,000), all of
which was paid to Merrill Lynch for providing account maintenance activities in
connection with Class D shares.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the 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 quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs
and the expenses consist of financial consultant compensation. Fully allocated
accrual data is not yet available with respect to Class B or Class C shares
which the Fund commenced offering to the public on August 4, 1997. As of August
31, 1997, for Class B shares, direct cash expenses for the period since August
4, 1997 (commencement of operations as an open-end investment company) exceeded
direct cash revenues by $72,601 (1.26% of Class B net assets at that date). As
of August 31, 1997, for Class C shares, direct cash expenses for the period
since August 4, 1997 (commencement of operations as an open-end investment
company) exceeded direct cash revenues by $2,465 (.24% 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 the Class B, Class C and Class D shares, and there is no
assurance that the Directors of the Fund will approve the continuance of the
Distribution Plans from year to year. However, the Distributor intends to seek
annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Directors will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or distribution
of each class of shares separately. The initial sales charges, the account
maintenance fee, the distribution fee and/or the CDSCs received with respect to
one class will not be used to subsidize the sale of shares of another class.
Payments of the distribution fee on Class B shares will terminate upon
conversion of those Class B shares into Class D shares as set forth under
"Deferred Sales Charge Alternatives -- Class B and Class C Shares -- Conversion
of Class B Shares to Class D Shares."
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee and
the CDSC borne by the Class B 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)
37
<PAGE> 38
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 payments in excess of the amount
payable under the NASD formula will not be made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund on 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 that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive on redemption all dividends
declared through the date of redemption. The value of shares at the time of
redemption may be more or less than the shareholder's cost, depending on the
market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Fund's Transfer Agent, Merrill Lynch Financial Data Services,
Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests
delivered other than by mail should be delivered to Merrill Lynch Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Proper notice of redemption in the case of shares deposited with the Transfer
Agent may be accomplished by a written letter requesting redemption. Proper
notice of redemption in the case of shares for which certificates have been
issued may be accomplished by a written letter as noted above accompanied by
certificates for the shares to be redeemed. Redemption requests should not be
sent to the Fund. The redemption request 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 or on the
certificate, as the case may be. The signature(s) on the redemption request must
be guaranteed by an "eligible guarantor institution" (including, for example,
Merrill Lynch branches and certain other financial institutions) 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 Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it
38
<PAGE> 39
has assured itself that good payment (e.g., cash, or certified check drawn on a
United States bank) has been collected for the purchase of such shares.
Normally, this delay will not exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund will normally accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the regular close of business on
the NYSE (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 NYSE on the same day. Dealers have the responsibility of
submitting such repurchase requests to the Fund not later than 30 minutes after
the close of business on the NYSE in order to obtain that day's closing price.
These repurchase arrangements are for the convenience of shareholders and
do not involve a charge by the Fund (other than any applicable CDSC in the case
of Class B or Class C shares). However, securities firms which do not have
selected dealer agreements with the Distributor may impose a charge on the
shareholder for transmitting the notice of repurchase to the Fund. Merrill Lynch
may charge its customers a processing fee (presently $5.35) to confirm a
repurchase of shares. Repurchases made directly through the Fund's Transfer
Agent are not subject to the processing fee. The Fund reserves the right to
reject any order for repurchase, which right of rejection might affect adversely
shareholders seeking redemption through the repurchase procedure. However, a
shareholder whose order for repurchase is rejected by the Fund may redeem shares
as set forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
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. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request 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.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below, that are designed to facilitate investment in shares of the
Fund. Certain of such services are not available to investors who place orders
for the Fund through the Merrill Lynch Blueprint(SM) Program. Full details as to
each of such services, copies of the various plans described below and
instructions as to how to participate in the various plans and services, or to
change options with respect thereto, can be obtained from the Fund by calling
the telephone number on the cover page hereof or from the Distributor or Merrill
Lynch. Certain of these services are available only to U.S. investors.
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INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
"Investment Account" and will receive statements, at least quarterly, from the
Transfer Agent. These quarterly statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. These
statements will also show any other activity in the account since the preceding
statement. Shareholders will receive separate transaction confirmations for each
purchase or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gains
distributions. Shareholders may make additions to their Investment Accounts at
any time by mailing a check directly to the Transfer Agent. Shareholders may
also maintain their accounts through Merrill Lynch. Upon the transfer of shares
out of a Merrill Lynch brokerage account, an Investment Account in the
transferring shareholder's name may be opened automatically at the Transfer
Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the Transfer Agent for those
Class A or Class D shares. Shareholders interested in transferring their Class B
or Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent. 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 such
shares and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence. Shareholders considering
transferring a tax-deferred retirement account such as an IRA from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the retirement account is to be transferred will not take delivery
of shares of the Fund, a shareholder either must redeem the shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm, or such shareholder must continue to maintain a retirement account
at Merrill Lynch for those shares.
AUTOMATIC 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 next determined after the close of business on the NYSE on
the ex-dividend date of such dividend or distribution. A shareholder may at any
time, by written notification to Merrill Lynch if the shareholder's account is
maintained with Merrill Lynch or by written notification or by telephone
(1-800-MER-FUND) to the Transfer Agent if the shareholder's account is
maintained with the Transfer Agent, elect to have subsequent dividends or
capital gains distributions, or both, paid in cash, rather than reinvested, in
which event payment will be mailed on or about the payment date. The Fund is not
responsible for any failure of delivery to the shareholder's address of record
and no interest will accrue on amounts represented by uncashed distribution or
redemption checks. 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.
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SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his or her Investment Account in the form of payments by check or
through automatic payment by direct deposit to his or her bank account on either
a monthly or quarterly basis. Alternatively, a Class A or Class D shareholder
whose shares are held within a CMA(R), CBA(R) or Retirement Account may elect to
have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual
basis through the Systematic Redemption Program, subject to certain conditions.
With respect to redemptions of Class B or Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Contingent Deferred Sales Charges -- Class B Shares" and
"-- Contingent Deferred Sales Charges -- Class C Shares." Where the systematic
withdrawal plan is applied to Class B shares, upon conversion of the last Class
B shares in an account to Class D shares, the systematic withdrawal plan will
automatically be applied thereafter to Class D shares. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares --
Conversion of Class B Shares to Class D Shares."
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C and Class D shares may be
made to an investor's Investment Account by pre-arranged charges of $50 or more
to his or her regular bank account. Investors who maintain CMA(R) or CBA(R)
accounts may arrange to have periodic investments made in the Fund in their
CMA(R) or CBA(R) accounts or in certain related accounts in amounts of $100 or
more through the CMA(R) or CBA(R) Automated Investment Program.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund each have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated in accordance
with the rules of the Commission.
Under the Merrill Lynch Select Pricing(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
the account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of 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.
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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 that 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 for the newly acquired shares of the other
fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of 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 of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services -- Exchange Privilege" in the
Statement of Additional Information.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares that will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such
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Program) is available in such Program's client agreement and from the Transfer
Agent at (800) MER-FUND or (800) 637-3863.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital gains
which it distributes to Class A, Class B, Class C and Class D shareholders
(together, the "shareholders"). The Fund intends to distribute substantially all
of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in warrants, futures and options) ("capital
gain dividends") are taxable to shareholders as long-term capital gains,
regardless of the length of time the shareholder has owned Fund shares. Any loss
upon the sale or exchange of Fund shares held for six months or less will be
treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming the shares are held as a capital asset). Recent
legislation creates additional categories of capital gains taxable at different
rates. Generally, not later than 60 days after the close of its taxable year,
the Fund will provide its shareholders with a written notice designating the
amounts of any ordinary income dividends or capital gain dividends, as well as
the amounts of capital gain dividends in the different categories of capital
gain referred to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. A portion of the Fund's ordinary income dividends
may be eligible for the dividends received deduction allowed to corporations
under the Code if certain requirements are met. 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.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Shareholders
may be able to claim U.S. foreign tax credits with respect to such taxes,
subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. In addition, recent
legislation permits a foreign tax credit to be claimed with respect to
withholding tax on a dividend only if the shareholder meets certain holding
period requirements. If more than 50% in value of the Fund's total assets at the
close of its taxable year consists of securities of foreign corporations, the
Fund will be eligible, and intends, to file an
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election with the Internal Revenue Service pursuant to which shareholders of the
Fund will be required to include their proportionate shares of such withholding
taxes in their U.S. income tax returns as gross income, treat such proportionate
shares as taxes paid by them, and deduct such proportionate shares in computing
their taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. In the case of foreign taxes passed through by a RIC,
the holding period requirements referred to above must be met by both the
shareholder and the RIC. No deductions for foreign taxes, moreover, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes and other information needed to claim
the foreign tax credit.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
The Fund may invest up to 10% of its total assets in securities of other
investment companies. If the Fund purchases shares of an investment company (or
similar investment entity) organized under foreign law, the Fund will be treated
as owning shares in a passive foreign investment company ("PFIC") for U.S.
Federal income tax purposes. The Fund may be subject to U.S. Federal income tax,
and additional tax in the nature of interest (the "interest charge"), on a
portion of the distributions from such a company and on gain from the
disposition of the shares of such a company (collectively referred to as "excess
distributions"), even if such excess distributions are paid by the Fund as a
dividend to its shareholders. The Fund may be eligible to make an election with
respect to certain PFICs in which it owns shares that will allow it to avoid the
taxes on excess distributions. However, such election may cause the Fund to
recognize income in a particular year in excess of the distributions received
from such PFICs. Alternatively, under recent legislation the Fund could elect to
"mark to market" at the end of each taxable year all shares that it holds in
PFICs. If it made this election, the Fund would recognize as ordinary income any
increase in the value of such shares over their adjusted basis and as ordinary
loss any decrease in such value to the extent it did not exceed prior increases.
By making the mark-to-market election, the Fund could avoid imposition of the
interest charge with respect to its distributions from PFICs, but in any
particular year might be required to recognize income in excess of the
distributions it received from PFICs and its proceeds from dispositions of PFIC
stock.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are not
"regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
income dividend distributions, and all or a portion of distributions made before
the losses were realized but in the same taxable year would be recharacterized
as a return of capital to shareholders, thereby reducing the basis of each
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shareholder's Fund shares and resulting in a capital gain for any shareholder
who received a distribution greater than such shareholder's tax basis in Fund
shares (assuming the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon the purchase of the new shares in the absence
of the exchange privilege. Instead, such sales charge will be treated as an
amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Upon conversion of the Fund to open-end status, Capital Shares were
designated Class A shares. Holders of Class A shares should be aware that they
will receive their proportionate share of both the Fund's taxable ordinary
income and capital gains. The highest marginal tax rate currently applicable to
ordinary income is 39.6% while the highest marginal tax rate currently
applicable to capital gains is 28%.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
that are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
yield for various specified time periods in advertisements or information
furnished to present or prospective shareholders. Average annual total return is
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
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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 in the case of Class B and
Class C shares and the maximum front-end sales charge in the case of Class A and
Class D shares. Dividends paid by the Fund with respect to all shares, to the
extent any dividends are paid, will be calculated in the same manner at the same
time on the same day and will be in the same amount, except that account
maintenance 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 annual total return and aggregate total return
performance data for various specified time periods. Such data will be
calculated substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charges will not be included with respect to actual annual or annualized rates
of return calculations. Aside from the impact on the performance data
calculations of including or excluding the maximum applicable sales charges,
actual annual or annualized total return data generally will be lower than
average annual total return data since the average annual rates of return
reflect compounding; aggregate total return data generally will be higher than
average annual total return data since the aggregate rates of return reflect
compounding over a longer period of time. In advertisements distributed to
investors whose purchases are subject to waiver of the CDSC in the case of Class
B and Class C shares (such as investors in certain retirement plans) or to
reduced sales loads in the case of Class A and Class D shares, the performance
data may take into account the reduced, and not the maximum, sales charge or may
not take into account the CDSC and therefore may reflect greater total return
since, due to the reduced sales charges or waiver of the CDSC, a lower amount of
expenses is deducted. See "Purchase of Shares." The Fund's total return may be
expressed either as a percentage or as a dollar amount in order to illustrate
such total return on a hypothetical $1,000 investment in the Fund at the
beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return 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 that of the Standard &
Poor's 500 Index, The Financial Times/Standard & Poor's Actuarial World Indices,
the Morgan Stanley Capital International Indices, the Dow Jones Industrial
Average or performance data published by Lipper Analytical Services, Inc. and
Morningstar Publications, Inc., Money Magazine, U.S. News & World Report,
Business Week, CDA Investment Technology, Inc., Forbes Magazine, Fortune
Magazine or other industry publications. From time to time, the Fund may include
the Fund's risk-adjusted performance ratings assigned by Morningstar
Publications, Inc. in advertisements or supplemental sales literature. As with
other performance data, performance comparisons should not be considered
representative of the Fund's relative performance for any future period.
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ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute substantially all of its net
investment income, if any. Dividends from such net investment income will be
paid at least annually. All net realized capital gains, if any, will be
distributed as dividends to the Fund's shareholders at least annually. The per
share dividends 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."
Dividends will be reinvested automatically in shares of the Fund at net asset
value without a sales charge. However, a shareholder whose account is maintained
at the Transfer Agent or whose account is maintained through Merrill Lynch may
elect in writing to receive any such dividends or distributions or both in cash.
Dividends and distributions are taxable to shareholders as discussed above
whether they are reinvested in shares of the Fund or received in cash. From time
to time, the Fund may declare a special distribution at or about the end of the
calendar year in order to comply with Federal tax requirements that certain
percentages of its ordinary income and capital gains be distributed during the
calendar year.
Gains or losses attributable to certain foreign currency transactions may
increase or decrease the amount of the Fund's income available for distribution
to shareholders. If such losses exceed other ordinary income during a taxable
year, (a) the Fund would not be able to make any ordinary income dividend
distributions and (b) all or a portion of distributions made before the losses
were realized but in the same taxable year would be recharacterized as returns
of capital to shareholders, rather than as ordinary income dividends, thereby
reducing each shareholder's tax basis in his or her Fund shares for Federal
income tax purposes and resulting in a capital gain for any shareholder who
received a distribution greater than the shareholder's tax basis in Fund shares
(assuming that the shares were held as a capital asset). For a detailed
discussion of the Federal tax considerations relevant to foreign currency
transactions, see "Taxes."
DETERMINATION OF NET ASSET VALUE
The net asset value of shares of all classes of the Fund is determined by
the Manager once daily, 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m. New York time), on each day during which the NYSE is open
for trading or on such other day that there is sufficient trading in portfolio
securities that the net asset value of the Fund's shares may be materially
affected. Any assets or liabilities initially expressed in terms of non-U.S.
dollar currencies are translated into U.S. dollars at the prevailing market
rates as quoted by one or more banks or dealers on the day of valuation. 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 (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time,
rounded to the nearest cent. Expenses, including the investment advisory fees
payable to the Manager and any account maintenance and/or distribution fees
payable to the Distributor, are accrued daily.
The per share net asset value of Class A shares generally will be higher
than the per share net asset value of shares of other classes, reflecting the
daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to the Class B and Class C shares
and the daily expense accruals of the account maintenance fees applicable with
respect to 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
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applicable with respect to Class B and Class C shares. It is expected, however,
that the per share net asset value of the four classes will tend to converge
(although not necessarily meet) immediately after the payment of dividends or
distributions, which will differ by approximately the amount of the expense
accrual differentials between the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Securities
that are traded both in the OTC market and on a stock exchange are valued
according to the broadest and most representative market. When the Fund writes
an option, the amount of the premium received is recorded on the books of the
Fund as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based upon the last sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last asked price. Options
purchased by the Fund are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Any assets or liabilities expressed in terms of foreign
currencies are translated into U.S. dollars at the prevailing market rates as
obtained from one or more dealers. Other investments, including futures
contracts and related options, are stated at market value. Securities and assets
for which market quotations are not readily available are valued at fair value
as determined in good faith by or under the direction of the Board of Directors
of the Fund. Such valuations and procedures will be reviewed periodically by the
Board of Directors.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on May 24, 1985 as a
closed-end investment company. On February 13, 1997, the shareholders of the
Fund voted to convert the Fund to an open-end investment company. Amended and
Restated Articles of Incorporation, effective as of August 4, 1997, (i)
converted the Fund to an open-end investment company, (ii) renamed the Fund
"Merrill Lynch Convertible Fund, Inc." and (iii) increased the authorized
capital stock from 30,000,000 shares, par value $.10 per share, to 400,000,000
shares of Common Stock, par value $.10 per share. The shares of Common Stock are
divided into four classes designated Class A, Class B, Class C and Class D
Common Stock, each consisting of 100,000,000 shares. Shares of Class A, Class B,
Class C and Class D Common Stock represent an interest in the same assets of the
Fund and are identical in all respects except that Class B, Class C and Class D
shares bear certain expenses related to the account maintenance associated with
such shares, and Class B and Class C shares bear certain expenses related to
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 Directors of the Fund may classify and
reclassify the unissued shares of the Fund into additional classes of Common
Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act upon any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
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independent accountants. Also, the by-laws of the Fund require that a special
meeting of shareholders be held upon the written request of at least 25% of the
outstanding shares of the Fund entitled to vote at such meeting, if they comply
with applicable Maryland law. Voting rights for Directors are not cumulative.
Shares issued are fully paid and non-assessable and have no preemptive rights.
Shares have the conversion rights described in this Prospectus. Each share of
Common Stock is entitled to participate equally in dividends and distributions
declared by the Fund and in the net assets of the Fund upon liquidation or
dissolution after satisfaction of outstanding liabilities except, as noted
above, the Class B, Class C and Class D shares bear certain additional expenses.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch and/or mutual fund account numbers.
If you have any questions regarding this, please call your Merrill Lynch
Financial Consultant or Merrill Lynch Financial Data Services, Inc. at
800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
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APPENDIX A
INVESTMENT PRACTICES INVOLVING THE USE OF OPTIONS,
FUTURES AND FOREIGN EXCHANGE
The Fund is authorized to engage in certain investment practices involving
the use of options, futures and foreign exchange, as described below. Such
instruments, which may be regarded as derivatives, are referred to collectively
herein as "Strategic Instruments."
OPTIONS ON SECURITIES AND SECURITIES INDICES
Purchasing Options. The Fund is authorized to purchase put options on
securities held in its portfolio or securities indices the performance of which
is substantially correlated with securities held in its portfolio. When the Fund
purchases a put option, in consideration for an upfront payment (the "option
premium"), the Fund acquires a right to sell to another party specified
securities owned by the Fund at a specified price (the "exercise price") on or
before a specified date (the "expiration date"), in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index declines below a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase of
a put option limits the Fund's risk of loss in the event of a decline in the
market value of the portfolio holdings underlying the put option prior to the
option's expiration date. In the event the market value of the portfolio
holdings underlying the put option increases rather than decreases, however, the
Fund will lose the option premium and will consequently realize a lower return
on the portfolio holdings than would have been realized without the purchase of
the put.
The Fund is also authorized to purchase call options on securities it
intends to purchase or securities indices the performance of which substantially
correlates with the performance of the types of securities it intends to
purchase. When the Fund purchases a call option, in consideration for the option
premium, the Fund acquires a right to purchase from another party specified
securities at the exercise price on or before the expiration date, in the case
of an option on securities, or to receive from another party a payment based on
the amount a specified securities index increases beyond a specified level on or
before the expiration date, in the case of an option on a securities index. The
purchase of a call option may protect the Fund from having to pay more for a
security as a consequence of increases in the market value for the security
during a period when the Fund is contemplating its purchase, in the case of an
option on a security, or attempting to identify specific securities in which to
invest in a market the Fund believes to be attractive, in the case of an option
on an index (an "anticipatory hedge"). In the event the Fund determines not to
purchase a security underlying a call option, however, the Fund may lose the
entire option premium.
The Fund may also purchase call options in connection with the creation of
Manufactured Convertibles and is also authorized to purchase put or call options
in connection with closing out put or call options it has previously sold.
Writing Options. The Fund is authorized to write (i.e., sell) call options
on securities held in its portfolio or securities indices the performance of
which is substantially correlated with securities held in its portfolio. When
the Fund writes a call option, in return for an option premium, the Fund gives
another party the right to buy specified securities owned by the Fund at the
exercise price on or before the expiration date, in the case of an option on
securities, or agrees to pay to another party an amount based on any gain in a
specified securities index beyond a specified level on or before the expiration
date, in the case of an option on a securities index.
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The Fund may write call options to earn income, through the receipt of option
premiums. In the event the party to which the Fund has written an option fails
to exercise its rights under the option because the value of the underlying
securities is less than the exercise price, the Fund will partially offset any
decline in the value of the underlying securities through the receipt of the
option premium and will realize a greater return than would have been realized
on the underlying securities alone. By writing a call option, however, the Fund
limits its ability to sell the underlying securities, and gives up the
opportunity to profit from any increase in the value of the underlying
securities beyond the exercise price, while the option remains outstanding.
The Fund may also write put options on securities or securities indices.
When the Fund writes a put option, in return for an option premium, the Fund
gives another party the right to sell to the Fund a specified security at the
exercise price on or before the expiration date, in the case of an option on a
security, or agrees to pay to another party an amount on any decline in a
specified securities index below a specified level on or before the expiration
date, in the case of an option on a securities index. The Fund may write put
options to earn income, through the receipt of option premiums. In the event the
party to which the Fund has written an option fails to exercise its right under
the option because the value of the underlying securities is greater than the
exercise price, the Fund will profit by the amount of the option premium. By
writing a put option, however, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of the
security at the time of exercise as long as the put option is outstanding.
Accordingly, when the Fund writes a put option it is exposed to a risk of loss
in the event the value of the underlying securities falls below the exercise
price, which loss potentially may substantially exceed the amount of option
premium received by the Fund for writing the put option. The Fund will write a
put option on a security or a securities index only if the Fund is using the put
as an anticipatory hedge or is writing the put in connection with trading
strategies involving combinations of options, for example, the sale and purchase
of options with identical expiration dates on the same security or index but
different exercise prices (a technique called a "spread").
The Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
Other than with respect to closing transactions, the Fund will only write
call or put options that are "covered." A put option will be considered covered
if the Fund has segregated assets with respect to such option in the manner
described in "Risk Factors in Options, Futures and Currency Instruments" below.
A call option will be considered covered if the Fund owns the securities it
would be required to deliver upon exercise of the option (or, in the case of an
option on a securities index, securities which substantially replicate the
performance of such index) or owns a call option, warrant or convertible
instrument which is immediately exercisable for, or convertible into, such
security.
Types of Options. The Fund may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin against their
obligations, and the performance of the parties' obligations in connection with
such options is guaranteed by the exchange or a related clearing corporation.
OTC options have more flexible terms negotiated between the buyer and the
seller, but generally do not require the parties to post margin and are subject
to greater risk of counterparty default. See "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Strategic Investments" below.
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FUTURES
The Fund may engage in transactions in futures and options thereon. Futures
are standardized, exchange-traded contracts which obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of a commodity at
a specified future date at a specified price. No price is paid upon entering
into a futures contract. Rather, upon purchasing or selling a futures contract
the Fund is required to deposit collateral ("margin") equal to a percentage
(generally less than 10%) of the contract value. Each day thereafter until the
futures position is closed, the Fund will pay additional margin representing any
loss experienced as a result of the futures position the prior day or be
entitled to a payment representing any profit experienced as a result of the
futures position the prior day.
The sale of a futures contract for hedging purposes limits the Fund's risk
of loss through a decline in the market value of portfolio holdings correlated
with the futures contract prior to the futures contract's expiration date. In
the event the market value of the portfolio holdings correlated with the futures
contract increases rather than decreases, however, the Fund will realize a loss
on the futures position and a lower return on the portfolio holdings than would
have been realized without the purchase of the futures contract.
The purchase of a futures contract as an anticipatory hedge may protect the
Fund from having to pay more for securities as a consequence of increases in the
market value for such securities during a period when the Fund was attempting to
identify specific securities in which to invest in a market the Fund believes to
be attractive. In the event that such securities decline in value or the Fund
determines not to complete an anticipatory hedge transaction in a futures
contract, however, the Fund may realize a loss relating to the futures position.
The Fund will limit transactions in futures and options on futures to the
extent necessary to prevent the Fund from being deemed a "commodity pool" under
regulations of the Commodity Futures Trading Commission.
FOREIGN EXCHANGE TRANSACTIONS
The Fund may engage in spot and forward foreign exchange transactions and
currency swaps, purchase and sell options on currencies and purchase and sell
currency futures and related options thereon (collectively, "Currency
Instruments") predominantly for purposes of hedging against the decline in the
value of currencies in which its portfolio holdings are denominated against the
United States dollar.
Forward foreign exchange transactions are OTC contracts to purchase or sell
a specified amount of a specified currency or multinational currency unit at a
price and future date set at the time of the contract. Spot foreign exchange
transactions are similar but require current, rather than future, settlement.
The Fund will enter into foreign exchange transactions predominantly for
purposes of hedging either a specific transaction or a portfolio position. The
Fund may enter into a foreign exchange transaction for purposes of hedging a
specific transaction by, for example, purchasing a currency needed to settle a
security transaction or selling a currency in which the Fund has received or
anticipates receiving a dividend or distribution. The Fund may enter into a
foreign exchange transaction for purposes of hedging a portfolio position by
selling forward a currency in which a portfolio position of the Fund is
denominated or by purchasing a currency in which the Fund anticipates acquiring
a portfolio position in the near future. The Fund may also hedge portfolio
positions through currency swaps, which are transactions in which one currency
is simultaneously bought for a second currency on a spot basis and sold for the
second currency on a forward basis.
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The Fund may also hedge against the decline in the value of a currency
against the United States dollar through use of currency futures or options
thereon. Currency futures are similar to forward foreign exchange transactions
except that futures are standardized, exchange-traded contracts. See "Futures"
above.
The Fund may also hedge against the decline in the value of a currency
against the United States dollar through the use of currency options. Currency
options are similar to options on securities, but in consideration for an option
premium the writer of a currency option is obligated to sell (in the case of a
call option) or purchase (in the case of a put option) a specified amount of a
specified currency on or before the expiration date for a specified amount of
another currency. The Fund may engage in transactions in options on currencies
either on exchanges or OTC markets. See "Types of Options" above and "Additional
Risk Factors of OTC Transactions; Limitations on the Use of OTC Strategic
Instruments" below.
Although it is expected that the Fund will engage in transactions in
Currency Instruments predominantly for hedging purposes, the Fund may also
speculate in Currency Instruments in order to seek to enhance its total return.
To the extent that the Fund enters into a transaction in a Currency Instrument
for hedging purposes, the Fund will not hedge a currency in excess of the
aggregate market value of the securities which it owns (including receivables
for unsettled securities sales), or has committed to or anticipates purchasing,
which are denominated in such currency. The Fund may, however, hedge a currency
by entering into a transaction in a Currency Instrument denominated in a
currency other than the currency being hedged (a "cross-hedge"). The Fund will
only enter into a cross-hedge if the Manager believes that (i) there is a
demonstrable high correlation between the currency in which the cross-hedge is
denominated and the currency being hedged and (ii) executing a cross-hedge
through the currency in which the cross-hedge is denominated will be
significantly more cost-effective or provide substantially greater liquidity
than executing a similar hedging transaction by means of the currency being
hedged. To the extent that the Fund enters into a transaction in a Currency
Instrument for speculative purposes, the Fund may lose its entire investment or,
under certain circumstances, may be exposed to potential losses which
substantially exceed its original investment.
Risk Factors in Hedging Foreign Currency Risks. While the Fund's use of
Currency Instruments to effect hedging strategies is intended to reduce the
volatility of the net asset value of the Fund's shares, the net asset value of
the Fund's shares will fluctuate. Moreover, although Currency Instruments will
be used with the intention of hedging against adverse currency movements,
transactions in Currency Instruments involve the risk that anticipated currency
movements will not be accurately predicted and that the Fund's hedging
strategies will be ineffective. To the extent that the Fund hedges against
anticipated currency movements which do not occur, the Fund may realize losses,
and lower its total return, as the result of its hedging transactions.
Furthermore, the Fund will only engage in hedging activities from time to time
and may not be engaging in hedging activities when movements in currency
exchange rates occur. It may not be possible for the Fund to hedge against
currency exchange rate movements, even if correctly anticipated, in the event
that (i) the currency exchange rate movement is so generally anticipated that
the Fund is not able to enter into a hedging transaction at an effective price
or (ii) the currency exchange rate movement relates to a market with respect to
which Currency Instruments are not available (such as certain developing
markets) and it is not possible to engage in effective foreign currency hedging.
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RISK FACTORS IN OPTIONS, FUTURES AND CURRENCY INSTRUMENTS
Use of Strategic Instruments for hedging purposes involves the risk of
imperfect correlation in movements in the value of the Strategic Instruments and
the value of the instruments being hedged. If the value of the Strategic
Instruments moves more or less than the value of the hedged instruments the Fund
will experience a gain or loss which will not be completely offset by movements
in the value of the hedged instruments.
The Fund intends to enter transactions involving Strategic Instruments only
if there appears to be a liquid secondary market for such instruments or, in the
case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Strategic Instruments." However,
there can be no assurance that, at any specific time, either a liquid secondary
market will exist for a Strategic Instrument or the Fund will otherwise be able
to sell such instrument at an acceptable price. It may therefore not be possible
to close a position in a Strategic Instrument without incurring substantial
losses, if at all.
Certain transactions in Strategic Instruments (e.g., forward foreign
exchange transactions, futures transactions, sales of put options) may expose
the Fund to potential losses which exceed the amount originally invested by the
Fund in such instruments. When the Fund engages in such a transaction, the Fund
will deposit in a segregated account at its custodian liquid securities with a
value at least equal to the Fund's exposure, on a mark-to-market basis, to the
transaction (as calculated pursuant to requirements of the Securities and
Exchange Commission). Such segregation will ensure that the Fund has assets
available to satisfy its obligations with respect to the transaction, but will
not limit the Fund's exposure to loss.
ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS; LIMITATIONS ON THE USE OF OTC
STRATEGIC INSTRUMENTS
Certain Strategic Instruments traded in OTC markets, including OTC options,
may be substantially less liquid than other instruments in which the Fund may
invest. The absence of liquidity may make it difficult or impossible for the
Fund to sell such instruments promptly at an acceptable price. The absence of
liquidity may also make it more difficult for the Fund to ascertain a market
value for such instruments. The Fund will therefore acquire illiquid OTC
instruments (i) if the agreement pursuant to which the instrument is purchased
contains a formula price at which the instrument may be terminated or sold or
(ii) for which the Manager anticipates the Fund can receive on each business day
at least two independent bids or offers, unless a quotation from only one dealer
is available, in which case that dealer's quotation may be used.
The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets underlying written OTC options are
illiquid securities. The Fund has therefore adopted an investment policy
pursuant to which it will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such transactions, the sum of
the market value of OTC options currently outstanding which are held by the
Fund, the market value of the securities underlying OTC call options currently
outstanding which have been sold by the Fund and margin deposits on the Fund's
outstanding OTC options exceeds 15% of the total assets of the Fund, taken at
market value, together with all other assets of the Fund which are deemed to be
illiquid or are otherwise not readily marketable. However, if an OTC option is
sold by the Fund to a dealer in U.S. government securities recognized as a
"primary dealer" by the Federal Reserve Bank of New York and the Fund has the
unconditional contractual right to repurchase such OTC option at a predetermined
price, then the Fund will treat as illiquid such amount of the underlying
securities as
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is equal to the repurchase price less the amount by which the option is
"in-the-money" (i.e., current market value of the underlying security minus the
option's exercise price).
Because Strategic Instruments traded in OTC markets are not guaranteed by
an exchange or clearing corporation and generally do not require payment of
margin, to the extent that the Fund has unrealized gains in such instruments or
has deposited collateral with its counterparty the Fund is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations.
The Fund will attempt to minimize the risk that a counterparty will become
bankrupt or otherwise fail to honor its obligations by engaging in transactions
in Strategic Instruments traded in OTC markets only with financial institutions
which have substantial capital or which have provided the Fund with a
third-party guaranty or other credit enhancement.
ADDITIONAL LIMITATIONS ON THE USE OF STRATEGIC INSTRUMENTS
The Fund may not use any Strategic Instrument to gain exposure to an asset
or class of assets that it would be prohibited from purchasing directly by its
investment restrictions, except that the Fund may use Strategic Instruments to
gain investment exposure to natural resources-based commodities indices.
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APPENDIX B
RATINGS OF DEBT SECURITIES AND PREFERRED STOCK
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE RATINGS
AAA Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
AA Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
BAA Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore 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 desirable
investments. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
CA Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic
rating classification from AA through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher
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end of its generic rating categories, the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
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 makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. PRIME-1 repayment
capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well established industries
-- High rates of return on funds employed
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation
-- 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.
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, then the name or
names of such supporting entity or entities are listed within parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the indicated affiliated corporations, commercial banks, insurance companies,
foreign
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governments or other entities, but only as one factor in the total rating
assessment. Moody's makes no representation and gives no opinion on the legal
validity or enforceability of any support arrangement. You are cautioned to
review with your counsel any questions regarding particular support
arrangements.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds,
a variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols, presented below, are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stocks occupy a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
Preferred stock rating symbols and their definitions are as follows:
AAA An issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
AA An issue which is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings and
asset protection will remain relatively well maintained in the foreseeable
future.
A An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
BAA An issue which is rated "baa" is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
BA An issue which is rated "ba" is considered to have speculative elements and
its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
B An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
CAA An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
CA An issue which is rated "ca" is speculative in a high degree and is likely
to be in arrears on dividends with little likelihood of eventual payment.
C This is the lowest rated class of preferred or preference stock. Issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category, the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
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DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES ("STANDARD & POOR'S")
CORPORATE DEBT RATINGS
A Standard & Poor's corporate or municipal rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
(1) 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, (2) nature of and provisions of the obligation; and (3)
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.
Debt rated BB, B, CCC, CC and C is regarded, on balance, as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The BB rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB- rating.
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B Debt rated B has a greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BB or BB- rating.
CCC Debt rated CCC has a current identifiable vulnerability to default, and is
dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayment of principal. In the event
of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal.
The CCC rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied B or B- rating.
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC-debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed
but debt service payments are continued.
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 also used
when interest payments or principal repayments are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period.
The D rating also will be used upon the filing of a bankruptcy petition if
debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing with the major
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal amount
of those bonds to the extent that the underlying deposit collateral is
insured by the Federal Savings & Loan Insurance Corp. or the Federal
Deposit Insurance Corp. and interest is adequately collateralized.
* Continuance of the rating is contingent upon Standard & Poor's receipt of
an executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.
NR Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
60
<PAGE> 61
Debt Obligations of Issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments may impose certain
ratings or other standards for obligations eligible for investment by savings
banks, trust companies, insurance companies and fiduciaries generally.
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-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be higher than
the bond rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer.
61
<PAGE> 62
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment-capacity and willingness of the issuer to
meet the timely payment of preferred stock dividends and any applicable
sinking fund requirements in accordance with the terms of the obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay
the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the "A"
category.
BB B
CCC
Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay
preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such
issues will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
PLUS (+) or MINUS (-): To provide more detailed indications of preferred
stock quality, 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.
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the rating.
Preferred stock ratings are wholly unrelated to Standard & Poor's earnings and
dividend rankings for common stocks.
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.
62
<PAGE> 63
MERRILL LYNCH CONVERTIBLE FUND, INC. -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT(SM) PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT(SM)
PROGRAM APPLICATION BY CALLING TOLL FREE (800) 637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ] Class C shares [ ] Class D
shares
of Merrill Lynch Convertible Fund, Inc., and establish an Investment Account as
described in the Prospectus. In the event that I am not eligible to purchase
Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $________ payable to Merrill Lynch Financial
Data Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: Please list all funds. (Use a separate sheet of
paper if necessary.)
1. 4.
- -------------------------------------- ----------------------------------------
2. 5.
- -------------------------------------- ----------------------------------------
3. 6.
- -------------------------------------- ----------------------------------------
Name
---------------------------------------------------------------------------
First Name Initial Last Name
Name of Co-Owner (if any)
-------------------------------------------------------
First Name Initial Last Name
Address
-------------------------------------------------------------------------
Date
- -------------------------------------- ------------------------------------
(Zip Code)
Occupation Name and Address of Employer
--------------------------- ------------
- -------------------------------------- ----------------------------------------
- -------------------------------------- ----------------------------------------
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital Gains
- ------------------------------------- ---------------------------------------
Select [ ] Reinvest Select [ ] Reinvest
One: [ ] Cash One: [ ] Cash
- ------------------------------------- ---------------------------------------
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [ ] Check
or [ ] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Convertible Fund, Inc.
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.
- --------------------------------------------------------------------------------
63
<PAGE> 64
MERRILL LYNCH CONVERTIBLE FUND, INC.--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
"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 LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<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)
Dear Sir/Madam:
--------------------------------------, 19 __
Date of Initial Purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Convertible Fund, Inc. 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 Convertible Fund,
Inc. 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 Convertible Fund, Inc. held as security.
<TABLE>
<S> <C>
By ----------------------------------------------------- --------------------------------------------------------------------
Signature of Owner Signature of Co-Owner (if registered in joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ----------------------------------------------- (2) Name -----------------------------------------------
Account Number ----------------------------------------- Account Number -----------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp.
This form when completed should be mailed to:
Merrill Lynch Convertible Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
shareholder's signature.
- ---------------------------------------------------------
Dealer Name and Address
By-------------------------------------------------------
Authorized Signature of Dealer
- ----------- ---------- ----------------------------
Branch-Code F/C No. F/C Last Name
- ----------- ----------
Dealer's Customer A/C No.
64
<PAGE> 65
MERRILL LYNCH CONVERTIBLE FUND, INC. -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
LAST NAME
/ /
<TABLE>
<S> <C>
1. ACCOUNT REGISTRATION Social Security No.
(Please Print) or Taxpayer Identification No.
Name of Owner ---------------------------------------------
First Name Initial Last Name
Name of Co-Owner (if any) Account number --------------------------
----------------------------------
First Name Initial Last (if existing account)
Name
Address ------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
(Zip Code)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN (See terms and conditions in the Statement of
Additional Information)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [ ] Class A, [ ] Class B*, [ ] Class C* or [ ] Class D shares in
Merrill Lynch Convertible Fund, Inc. at cost or current offering price.
Withdrawals to be made either (check one) [ ] Monthly on the 24th day of each
month, or [ ] Quarterly on the 24th day of March, June, September and December.
If the 24th falls on a weekend or holiday, the next succeeding business day will
be utilized. Begin systematic withdrawal on ________(month), or as soon as
possible thereafter.
SPECIFY THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU $ of
(check one): [ ] Class A, [ ] Class B*, [ ] Class C* or [ ] Class D shares in
the account.
SPECIFY WITHDRAWAL METHOD: [ ] check or [ ] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
[ ] as indicated in Item 1.
[ ] to the order of
----------------------------------------------------------------------------
Mail to (check one)
[ ] the address indicated in Item 1.
[ ] Name (Please Print)
----------------------------------------------------------------------------
Address
----------------------------------------------------------------------------
Signature of Owner
---------------------------------------- Date ----------------------------
Signature of Co-Owner (if any)
----------------------------------------------------------------------------
(b) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of account (check one): [ ] checking [ ] savings
Name on your Account
- --------------------------------------------------------------------------------
Bank Name
- --------------------------------------------------------------------------------
Bank Number
- ------------------------------ Account Number ------------------------------
Bank Address
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Signature of Owner
- --------------------------------------------------------------------------------
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.
* ANNUAL WITHDRAWAL CANNOT EXCEED 10% OF THE VALUE OF SHARES OF SUCH CLASS HELD
IN THE ACCOUNT AT THE TIME THE ELECTION TO JOIN THE SYSTEMATIC WITHDRAWAL PLAN
IS MADE.
65
<PAGE> 66
MERRILL LYNCH CONVERTIBLE FUND, INC. -- 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 described below
each month to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ] Class C shares [ ] Class D
shares
of Merrill Lynch Convertible Fund, Inc., 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 Convertible Fund, Inc. as
indicated below:
Amount of each check or ACH debit $__________
Account Number_______________________________
Please date and invest ACH debits on the 20th of
each month beginning _______________ or as soon
(month)
as possible thereafter.
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 debit. If I change banks or
desire to terminate or suspend this
program, I agree to notify you
promptly in writing. I hereby
authorize you to take any action to
correct erroneous ACH debits of my
bank account or purchases of Fund
shares including liquidating shares of
the Fund and crediting my bank
account. I further agree that if a
debit is not honored upon
presentation, Merrill Lynch Financial
Data Services, Inc. is authorized to
discontinue immediately the Automatic
Investment Plan and to liquidate
sufficient shares held in my account
to offset the purchase made with the
returned 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.
66
<PAGE> 67
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08536-9081
CUSTODIAN
The Chase Manhattan Bank
Global Securities Services
Chase MetroTech Center
Brooklyn, New York 11245
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE> 68
- ------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table................................. 2
Merrill Lynch Select Pricing(SM) System... 3
Financial Highlights...................... 8
Risk Factors and Special Considerations... 10
Investment Objective and Policies......... 15
Convertible Securities.................. 17
Description of Certain Investments...... 19
Other Investment Policies and
Practices............................. 20
Investment Restrictions................. 24
Management of the Fund.................... 25
Directors............................... 25
Management and Advisory Arrangements.... 26
Code of Ethics.......................... 27
Transfer Agency Services................ 28
Purchase of Shares........................ 28
Initial Sales Charge
Alternatives -- Class A and Class D
Shares................................ 30
Deferred Sales Charge Alternatives --
Class B and Class C Shares............ 33
Distribution Plans...................... 36
Limitations on the Payment of Deferred
Sales Charges......................... 37
Redemption of Shares...................... 38
Redemption.............................. 38
Repurchase.............................. 39
Reinstatement Privilege -- Class A and
Class D Shares........................ 39
Shareholder Services...................... 39
Investment Account...................... 40
Automatic Reinvestment of Dividends and
Capital Gains Distributions........... 40
Systematic Withdrawal Plans............. 41
Automatic Investment Plans.............. 41
Exchange Privilege...................... 41
Fee-Based Programs...................... 42
Taxes..................................... 43
Performance Data.......................... 45
Additional Information.................... 47
Dividends and Distributions............. 47
Determination of Net Asset Value........ 47
Organization of the Fund................ 48
Shareholder Reports..................... 49
Shareholder Inquiries................... 49
Appendix A................................ 50
Appendix B................................ 56
Authorization Form........................ 63
Code #19010-1297
</TABLE>
(Merrill Lynch Logo)
MERRILL LYNCH
CONVERTIBLE FUND, INC.
[MLYNCH COMPASS GRAPHIC]
PROSPECTUS
December 29, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 69
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH CONVERTIBLE FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Convertible Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company that seeks to provide shareholders with
high total return by investing primarily in a portfolio of convertible debt
securities, convertible preferred stocks and synthetic convertible securities.
Total return is the combination of capital appreciation and investment income.
The investment philosophy of the Fund is based on the belief that the
characteristics of convertible securities make them appropriate investments for
an investment company seeking a high total return from capital appreciation and
investment income. The securities in which the Fund invests may be issued by
both United States and non-United States issuers. The Fund may employ a variety
of techniques to hedge against market or currency risk or to enhance total
return. There can be no assurance that the investment objective of the Fund will
be realized.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances.
------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated
December 29, 1997 (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.
------------------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-- DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is December 29, 1997.
<PAGE> 70
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek high total return from a
combination of capital appreciation and investment income. The Fund will seek to
achieve its objective by investing primarily in a portfolio of convertible debt
securities, convertible preferred stocks and synthetic convertible securities.
The securities in which the Fund invests may be issued by both United States and
non-United States issuers. Reference is made to "Investment Objective and
Policies" in the Prospectus for a discussion of the investment objective and
policies of the Fund.
For purposes of the Fund's investment objective, an issuer ordinarily would
be considered to be located in the country under the laws of which it is
organized or where the primary trading market of its securities is located. The
Fund, however, may consider an issuer to be located in a country, without
reference to its domicile or to the primary trading market of its securities,
when at least 50% of its non-current assets, capitalization, gross revenues or
profits in any one of the two most recent fiscal years represents (directly or
indirectly through subsidiaries) assets or activities located in such country.
The Fund also may consider a security that is denominated in a particular
country's currency to be a security of an issuer in such country without
reference to the principal trading market of the security or to the location of
its issuer. Additionally, the Fund may consider a derivative product tied to
securities of issuers located in a particular country to be the security of an
issuer in that country. The Fund also may consider investment companies to be
located in the country or countries in which they primarily make their portfolio
investments.
The securities markets of many countries at times in the past have moved
relatively independently of one another due to different economic, financial,
political and social factors. When such lack of correlation, or negative
correlation, in movements of these securities markets occurs, it may reduce risk
for the Fund's portfolio as a whole. This negative correlation also may offset
unrealized gains the Fund has derived from movements in a particular market. To
the extent the various markets move independently, total portfolio volatility is
reduced when the various markets are combined into a single portfolio. Of
course, movements in the various securities markets may be offset by changes in
foreign currency exchange rates. Exchange rates frequently move independently of
securities markets in a particular country. As a result, gains in a particular
securities market may be affected by changes in exchange rates.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, the Manager will effect portfolio transactions without regard
to holding period, if, in its judgment, such transactions are advisable in light
of a change in circumstances of a particular company or within a particular
industry or in the general market, economic or financial conditions. The
portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of all securities whose maturities at the time of acquisition were one
year or less) by the monthly average value of the securities in the portfolio
during the year. For the fiscal year ended December 31, 1996, the portfolio
turnover rate was 129.06%. For the period January 1, 1997 to August 31, 1997,
the portfolio turnover rate was 92.86%. The Fund operated as a closed-end
investment company until August 4, 1997. The variation in portfolio turnover
rates is a result of sales of securities to enhance the Fund's liquidity in
anticipation of the redemption of Income Shares and the conversion to open-end
status, as well as strategies undertaken by the Fund to reduce its tax liability
for long-term capital gains. Higher portfolio turnover may contribute to higher
transactional costs and negative tax consequences, such as an increase in
capital gain dividends or in ordinary income dividends of accrued market
discount. See "Dividends, Distributions and Taxes."
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<PAGE> 71
The Fund's ability and decisions to purchase or sell foreign portfolio
securities may be affected by laws or regulations relating to the convertibility
and repatriation of assets. Because the shares of the Fund are redeemable in
U.S. dollars on a daily basis on each day the Fund determines its net asset
value, the Fund intends to manage its portfolio so as to give reasonable
assurance that it will be able to obtain U.S. dollars to the extent necessary to
meet anticipated redemptions. See "Redemption of Shares." Under present
conditions, the Manager does not believe that these considerations will have any
significant effect on its portfolio strategy, although there can be no assurance
in this regard.
PORTFOLIO STRATEGIES INVOLVING OPTIONS, FUTURES AND FOREIGN EXCHANGE
TRANSACTIONS
The Fund is authorized to engage in certain investment practices involving
the use of options, futures and foreign exchange, which may expose the Fund to
certain risks. These investment practices and the associated risks are described
in detail in the Prospectus.
OTHER INVESTMENT POLICIES AND PRACTICES
Non-Diversified Status. The Fund is classified as non-diversified within
the meaning of the Investment Company Act of 1940, as amended (the "Investment
Company Act"), which means that the Fund is not limited by such Act in the
proportion of its assets that it may invest in securities of a single issuer.
The Fund's investments are limited, however, in order for the Fund to qualify as
a "regulated investment company" under the Code. See "Taxes." To qualify, the
Fund must comply with certain requirements, including limiting its investments
so that at the close of each quarter of the taxable year (i) not more than 25%
of the market value of the Fund's total assets will be invested in the
securities of a single issuer and (ii) with respect to 50% of the market value
of its total assets, not more than 5% of the market value of its total assets
will be invested in the securities of a single issuer. A fund that elects to be
classified as "diversified" under the Investment Company 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 securities of a small
number of issuers, the Fund's net asset value 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, and the Fund may be more
susceptible to any single economic, political or regulatory occurrence than a
diversified company.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other liquid securities denominated in U.S. dollars or non-U.S. currencies in an
aggregate amount equal to the amount of its commitment in connection with such
purchase transactions.
There can be no assurance that a security purchased on a when-issued basis
or purchased or sold through a forward commitment will be issued, and the value
of the security, if issued, on the delivery date may be more or less than its
purchase price. The Fund may bear the risk of a decline in the value of such
security and may not benefit from an appreciation in the value of the security
during the commitment period.
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<PAGE> 72
Standby Commitment Agreement. The Fund, from time to time, may enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of equity securities which may be
issued and sold to the Fund at the option of the issuer. The price of the
security is fixed at the time of the commitment. At the time of entering into
the agreement the Fund is paid a commitment fee, regardless of whether or not
the security is ultimately issued, which is typically approximately 0.50% of the
aggregate purchase price of the security that the Fund has committed to
purchase. The Fund will enter into such agreements only for the purpose of
investing in the security underlying the commitment at a price that is
considered advantageous to the Fund. The Fund will not enter into a standby
commitment with a remaining term in excess of 45 days and presently will limit
its investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale that affect their
marketability, will not exceed 15% of its net assets taken at the time of
acquisition of such a commitment. The Fund at all times will maintain a
segregated account with its custodian of cash, cash equivalents, U.S. Government
securities or other liquid securities denominated in U.S. dollars or non-U.S.
currencies in an aggregate amount equal to the purchase price of the securities
underlying a commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued, and the value of the security
thereafter will be reflected in the calculation of the Fund's net asset value.
The cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with
financial institutions which (i) have, in the opinion of the Manager,
substantial capital relative to the Fund's exposure, or (ii) have provided the
Fund with a third-party guaranty or other credit enhancement. Under such
agreements, the seller agrees, upon entering into the contract with the Fund, to
repurchase the security at a mutually agreed-upon time and price in a specified
currency, 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 although it may be affected by currency fluctuations. In repurchase
agreements, the prices at which the trades are conducted do not reflect accrued
interest on the underlying obligation. Such agreements usually cover short
periods, such as under one week. Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. In a repurchase agreement, as a purchaser, 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. ln the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of a default under such a repurchase
agreement, instead of the contractual fixed rate, the rate of return to the Fund
4
<PAGE> 73
shall be dependent upon intervening fluctuations of the market value of such
securities and the accrued interest on the securities. 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 more than 15% of its net assets in repurchase
agreements maturing in more than seven days together with all other illiquid
investments.
Lending of Portfolio Securities. Subject to the investment restrictions set
forth in the Prospectus and herein, the Fund may from time to time lend
securities from its portfolio to approved borrowers and receive therefor
collateral in cash or securities issued or guaranteed by the United States
Government. Such collateral will be maintained at all times in an amount equal
to at least 100% of the current market value of the loaned securities. The
purpose of such loans is to permit the borrower to use such securities for
delivery to purchasers when such borrower has sold short. If cash collateral is
received by the Fund, it is invested in short-term money market securities, and
a portion of the yield received in respect of such investment is retained by the
Fund. Alternatively, if securities are delivered to the Fund as collateral, the
Fund and the borrower negotiate a rate for the loaned premium to be received by
the Fund for lending its portfolio securities. In either event, the total yield
on the Fund's portfolio is increased by loans of its portfolio securities. The
Fund will have the right to regain record ownership of loaned securities to
exercise beneficial rights such as voting rights, subscription rights and rights
to dividends, interest or other distributions. Such loans are terminable at any
time, and the borrower, after notice, will be required to return borrowed
securities within five business days. The Fund may pay reasonable finder's,
administrative and custodial fees in connection with such loans. With respect to
the lending of portfolio securities, there is the risk of failure by the
borrower to return the securities involved in such transactions.
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 Investment Company Act means
the lesser of (i) 67% of the Fund's shares represented 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. Investments by the Fund in wholly-owned investment entities
created under the laws of certain countries will not be deemed to be the
making of 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,
5
<PAGE> 74
certificates of deposit, bankers' acceptances and repurchase agreements and
purchase and sale contracts 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 this 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 Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
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 permitted by applicable law. As a matter of policy, however, the
Fund will not purchase shares of any registered open-end investment company
or registered unit investment trust in reliance on Section 12(d)(1)(F) or
(G) (the "fund of funds" provisions) of the Investment Company Act, at any
time its shares are owned by another investment company that is part of the
same group of investment companies as the Fund.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law.
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its net assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Securities purchased in accordance with Rule 144A under the Securities Act
and determined to be liquid by the Board of Directors are not subject to
the limitations set forth in this investment restriction.
d. Notwithstanding fundamental investment restriction (6) above,
borrow money or pledge its assets, except that the Fund (a) may borrow from
a bank as a temporary measure for extraordinary or
6
<PAGE> 75
emergency purposes or to meet redemptions in amounts not exceeding 33 1/3%
(taken at market value) of its total assets and pledge its assets to secure
such borrowings, (b) may obtain such short-term credit as may be necessary
for the clearance of purchases and sales of portfolio securities and (c)
may purchase securities on margin to the extent permitted by applicable
law. However, at the present time, applicable law prohibits the Fund from
purchasing securities on margin. The deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
or options transactions is not considered to be the purchase of a security
on margin. The purchase of securities while borrowings are outstanding will
have the effect of leveraging the Fund. Such leveraging or borrowing
increases the Fund's exposure to capital risk, and borrowed funds are
subject to interest costs which will reduce net income. The Fund will not
purchase securities while borrowings exceed 5% of its total assets.
Portfolio securities of the Fund generally may not be purchased from, sold
or loaned to the Manager or its affiliates or any of their directors, officers
or employees, acting as principal, unless pursuant to a rule or exemptive order
under the Investment Company Act.
The staff of the Commission has taken the position that purchased
over-the-counter ("OTC") options and the assets used as cover for written OTC
options are illiquid securities. Therefore, the Fund has adopted an investment
policy pursuant to which it will not purchase or sell OTC options if, as a
result of any such transaction, the sum of the market value of OTC options
currently outstanding that are held by the Fund, the market value of the
underlying securities covered by OTC call options currently outstanding that
were sold by the Fund and margin deposits on the Fund's existing OTC options on
financial futures contracts exceeds 15% of the net assets of the Fund, taken at
market value, together with all other assets of the Fund that are illiquid or
are not otherwise readily marketable. However, if the OTC option is sold by the
Fund to a primary U.S. Government securities dealer recognized by the Federal
Reserve Bank of New York and if the Fund has the unconditional contractual right
to repurchase such OTC option from the dealer at a predetermined price, then the
Fund will treat as illiquid such amount of the underlying securities as is equal
to the repurchase price less the amount by which the option is "in-the-money"
(i.e., current market value of the underlying securities minus the option's
strike price). The repurchase price with the primary dealers is typically a
formula price which is generally based on a multiple of the premium received for
the option, plus the amount by which the option is "in-the-money." This policy
as to OTC options is not a fundamental policy of the Fund and may be amended by
the Board of Directors of the Fund without the approval of the Fund's
shareholders. However, the Fund will not change or modify this policy prior to
the change or modification by the Commission staff of its position.
In addition, as a non-fundamental policy which may be changed by the Board
of Directors and to the extent required by the Commission or its staff, the Fund
will, for purposes of investment restriction (1), treat securities issued or
guaranteed by the government of any one foreign country as the obligations of a
single issuer.
As another non-fundamental policy, the Fund will not invest in securities
that are (a) subject to material legal restrictions on repatriation of assets or
(b) cannot be readily resold because of legal or contractual restrictions or
which are not otherwise readily marketable, including repurchase agreements and
purchase and sale contracts maturing in more than seven days, if, regarding all
such securities, more than 15% of its net assets taken at market value would be
invested in cash securities.
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<PAGE> 76
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act involving
only usual and customary commissions or transactions permitted pursuant to an
exemptive order under the Investment Company Act. See "Portfolio Transactions
and Brokerage." Without such an exemptive order, the Fund is prohibited from
engaging in portfolio transactions with Merrill Lynch or its affiliates acting
as principal and from purchasing securities in public offerings that are not
registered under the Securities Act in which such firms or any of its affiliates
participate as an underwriter or dealer.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and the portfolio
manager of the Fund, including their ages and their principal occupations for at
least the last five years, is set forth below. Unless otherwise noted, the
address of the portfolio manager and of each executive officer and Director is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (65) -- President and Director(1)(2) -- Chairman of the
Manager (which term as used herein includes its corporate predecessors) and Fund
Asset Management L.P. ("FAM") (which term as used herein includes its corporate
predecessors) since 1997; President of the Manager from 1977 to 1997; President
of FAM from 1977 to 1997; President and Director of Princeton Services, Inc.
("Princeton Services") from 1993 to 1997; Executive Vice President of Merrill
Lynch & Co., Inc. ("ML & Co.") since 1990.
JAMES H. BODURTHA (53) -- Director(2) -- 36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
HERBERT I. LONDON (58) -- Director(2) -- 113-115 University Place, New
York, New York 10003. John M. Olin Professor of Humanities, New York University
since 1993 and Professor thereof since 1980; President, Hudson Institute since
1997 and Trustee since 1980; Dean, Gallatin Division of New York University from
1976 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson Institute from
1984 to 1985; Director, Damon Corporation from 1991 to 1995; Overseer, Center
for Naval Analyses from 1983 to 1993; Limited Partner, Hypertech L.P. since
1996.
ROBERT R. MARTIN (70) -- Director(2) -- 513 Grand Hill, St. Paul, Minnesota
55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc. from 1990
to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989; Director,
Carnegie Capital Management from 1977 to 1985 and Chairman thereof in 1979;
Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Chairman of the Board, WTC Industries
Inc. in 1994; Trustee, Northland College since 1992.
JOSEPH L. MAY (68) -- Director(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.
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<PAGE> 77
ANDRE F. PEROLD (45) -- Director(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 TIBCO from 1994 to 1996.
TERRY K. GLENN (57) -- Executive Vice President(1)(2) -- Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of Merrill Lynch Funds
Distributor, Inc. ("MLFD" or the "Distributor") since 1986 and Director thereof
since 1991; President of Princeton Administrators, L.P. since 1988.
JOSEPH T. MONAGLE (49) -- Senior Vice President(1)(2) -- Senior Vice
President and Department Head of the Global Fixed Income Division of the Manager
and FAM since 1983; Vice President of the Manager from 1978 to 1990; Senior Vice
President of Princeton Services since 1993.
VINCENT T. LATHBURY III (57) -- Vice President(1)(2) -- First Vice
President of MLAM since 1997; Vice President and Portfolio Manager of the
Manager and FAM from 1982 to 1997; Vice President and Manager of the Bond
Department of INA Capital Management, Inc. from 1979 to 1982.
DANIEL A. LUCHANSKY (38) -- Vice President and Portfolio
Manager(1)(2) -- Vice President of the Manager since 1991.
BARTON A. VOGEL (62) -- Vice President(1)(2) -- Vice President of the
Manager since 1985.
DONALD C. BURKE (37) -- Vice President(1)(2) -- First Vice President of the
Manager since 1997; Vice President of the Manager from 1990 to 1997; Director of
Taxation of the Manager since 1990.
GERALD M. RICHARD (48) -- Treasurer(1)(2) -- Senior Vice President and
Treasurer of the Manager and FAM since 1984; Vice President of the Distributor
since 1981 and Treasurer thereof since 1984; Senior Vice President and Treasurer
of Princeton Services since 1993.
IRA P. SHAPIRO (34) -- Secretary(1)(2) -- Director (Legal Advisory) of the
Manager since 1997; Attorney with the Manager and FAM from 1993 to 1997;
attorney in private practice prior to 1993.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a trustee, director or officer of certain other
investment companies for which the Manager or FAM acts as investment adviser
or manager.
At December 1, 1997, the officers and Directors of the Fund as a group (14
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director and officer of the Fund, and the
other officers of the Fund, owned less than 1% of the outstanding shares of
Common Stock of ML & Co.
COMPENSATION OF DIRECTORS
The Fund pays each Director who is not affiliated with the Manager (each, a
"non-affiliated Director") a fee of $5,000 per year plus $500 per Board meeting
attended, together with such Director's actual out-of-pocket expenses relating
to attendance at meetings. The Fund also compensates each member of the Audit
and Nominating Committee (the "Committee"), which consists of the non-affiliated
Directors, a fee of $1,000 per year plus $250 per Committee meeting attended.
For the period January 1, 1997 to August 31, 1997, fees and expenses paid to the
non-affiliated Directors aggregated $29,582.
The following table sets forth for the period January 1, 1997 to August 31,
1997 (during which period the Fund operated as a closed-end investment company
until August 4, 1997), compensation paid by the Fund to the non-affiliated
Directors and, for the calendar year ended December 31, 1996, the aggregate
compensation
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<PAGE> 78
paid by all registered investment companies advised by MLAM or its affiliate,
FAM ("MLAM/FAM-Advised Funds"), to the non-affiliated Directors.
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
PENSION OR FROM FUND AND
RETIREMENT BENEFITS MLAM/FAM-ADVISED
COMPENSATION ACCRUED AS PART FUNDS PAID TO
NAME OF DIRECTOR FROM FUND OF FUND EXPENSES DIRECTORS(1)
------------------------------- ------------ ------------------- ----------------
<S> <C> <C> <C>
James H. Bodurtha.............. $7,500 None $148,500
Herbert I. London.............. 7,500 None 148,500
Robert R. Martin............... 7,500 None 148,500
Joseph L. May.................. 7,500 None 148,500
Andre F. Perold................ 7,500 None 148,500
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM-Advised Funds as follows: Mr.
Bodurtha (22 registered investment companies consisting of 46 portfolios);
Mr. London (22 registered investment companies consisting of 46 portfolios);
Mr. Martin (22 registered investment companies consisting of 46 portfolios);
Mr. May (22 registered investment companies consisting of 46 portfolios);
and Mr. Perold (22 registered investment companies consisting of 46
portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund -- Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients for which the Manager or its
affiliates act as an adviser. Because of different objectives or other factors,
a particular security may be bought for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities by
the Manager for the Fund or other funds for which it acts as investment adviser
or for its 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.
The Fund has entered into an investment advisory agreement with the Manager
(the "Management Agreement"). The Manager also served as the Fund's Manager
prior to the conversion of the Fund from a closed-end investment company to an
open-end investment company. As discussed in the Prospectus, the Manager
receives for its services to the Fund monthly compensation at the annual rate of
0.60% of the average daily net assets of the Fund. For the fiscal years ended
December 31, 1995 and 1996 (during which periods the Fund operated as a
closed-end investment company), the fees paid by the Fund to the Manager
aggregated $1,570,010 and $1,695,738, respectively. For the period January 1,
1997 to August 31, 1997, the fees paid by the Fund to the Manager aggregated
$1,102,729.
As described in the Prospectus, the Manager has also entered into a
sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited ("MLAM
U.K.") pursuant to which MLAM U.K. provides investment advisory services to the
Manager with respect to the Fund.
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<PAGE> 79
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the fees of
all Directors of the Fund who are affiliated persons of the Manager. The Fund
pays all other expenses incurred in the operation of the Fund, including, among
other things, taxes, expenses for legal and auditing services, costs of printing
proxies, stock certificates, shareholder reports and prospectuses and statements
of additional information (except to the extent paid by the Distributor),
charges of the custodian, any sub-custodian and transfer agent, expenses of
redemption of shares, Commission fees, expenses of registering the shares under
Federal, state or foreign laws, fees and expenses of non-affiliated Directors,
accounting and pricing costs (including the daily calculation of net asset
value), insurance, interest, brokerage costs, litigation and other extraordinary
or nonrecurring expenses, and other expenses properly payable by the Fund.
Accounting services are provided to the Fund by the Manager, and the Fund
reimburses the Manager for its costs in connection with such services. For the
fiscal years ended December 31, 1995 and 1996 and for the period January 1, 1997
to August 31, 1997, the amounts of such reimbursement were $110,397, $99,274 and
$63,816, respectively (includes operations of the Fund as a closed-end
investment company prior to August 4, 1997). The Distributor will pay certain
promotional expenses of the Fund incurred in connection with the offering of
shares of the Fund. Certain expenses will be financed by the Fund pursuant to
distribution plans in compliance with Rule 12b-1 under the Investment Company
Act. See "Purchase of Shares -- Distribution Plans."
The Manager is a limited partnership, the partners of which are ML & Co.
and Princeton Services. ML & Co. and Princeton Services are "controlling
persons" of the Manager as defined under the Investment Company Act because of
their ownership of its voting securities or their power to exercise a
controlling influence over its management or policies.
Duration and Termination. Unless earlier terminated as described herein,
the Management Agreement will continue in effect for a period of two years from
the date of execution and will remain in effect from year to year thereafter if
approved annually (a) by the Board of Directors or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or "interested persons" (as defined in the
Investment Company Act) of any such party. Such contracts are not assignable and
may be terminated without penalty on 60 days' written notice at the option of
either party thereto or by the vote of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
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
11
<PAGE> 80
distribution plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid (except that Class B shareholders
may vote upon any material changes to expenses charged under the Class D
Distribution Plan). Each class has different exchange privileges. See
"Shareholder Services -- Exchange Privilege."
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by the Manager or its affiliate, FAM.
Funds advised by the Manager or FAM that utilize the Merrill Lynch Select
Pricing(SM) System are referred to herein as "MLAM-advised mutual funds."
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have 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 under "Management of the Fund -- Management and Advisory
Arrangements."
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
For the period August 4, 1997 (commencement of operations as an open-end
investment company) to August 31, 1997, the Fund sold its Class A and Class D
shares through the Distributor and Merrill Lynch, as a dealer. The gross sales
charges for the sale of Class A shares for that period were $5,238, of which the
Distributor received $3,996 and Merrill Lynch received $1,242. During such
period, the Distributor received no contingent deferred sales charges ("CDSCs")
with respect to redemption within one year after purchase of Class A shares
purchased subject to a front-end sales charge waiver. The gross sales charges
for the sale of Class D shares for that period were $28,654, of which the
Distributor received $2,306 and Merrill Lynch received $26,348. 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.
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 that, 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, her or their own account and
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 Investment Company Act, but does not include purchases by
any such company that has not been in existence for at least six months or that
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 or an investment adviser. The term "purchase" also
includes purchases by employee benefit plans not qualified under Section 401 of
the Code, including purchases of shares of the Fund by employees or by employers
on behalf of employees, by means of a payroll deduction plan or otherwise.
Purchases by such a company or non-qualified employee benefit plan
12
<PAGE> 81
will qualify for the quantity discounts discussed above only if the Fund and the
Distributor are able to realize economies of scale in sales effort and sales
related expense by means of the company, employer or plan making the Fund's
Prospectus available to individual investors or employees and forwarding
investments by such persons to the Fund and by any such employer or plan bearing
the expense of any payroll deduction plan.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or FAM
who purchased such closed-end fund shares prior to October 21, 1994 (the date
the Merrill Lynch Select Pricing(SM) System commenced operations) and wish to
reinvest the net proceeds of a sale of their closed-end fund shares of common
stock in Eligible Class A shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such shares
on or after October 21, 1994 and wish to reinvest the net proceeds from a sale
of their closed-end fund shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund and other MLAM-advised mutual
funds ("Eligible Class D shares"), if the following conditions are met. First,
the sale of closed-end fund shares must be made through Merrill Lynch and the
net proceeds therefrom must be reinvested immediately in Eligible Class A or
Class D shares. Second, the closed-end fund shares must either have been
acquired in the initial public offering or be shares representing dividends from
shares of common stock acquired in such offering. Third, the closed-end fund
shares must have been continuously maintained in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the eligible
fund in connection with a tender offer conducted by the eligible fund and
reinvest the proceeds immediately in the designated class of shares of the Fund.
This investment option is available only with respect to eligible shares as to
which no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designated class of the Fund on such day.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase shares
of 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
13
<PAGE> 82
such right of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or the purchaser's securities
dealer, with sufficient information to permit confirmation of qualification.
Acceptance of the purchase order is subject to such confirmation. The right of
accumulation may be amended or terminated at any time. Shares held in the name
of a nominee or custodian under pension, profit-sharing, or other employee
benefit plans may not be combined with other shares to qualify for the right of
accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or of
any other MLAM-advised mutual funds made within a 13-month period starting with
the first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at Merrill Lynch Financial Data Services, Inc., the
Fund's transfer agent (the "Transfer Agent"). The Letter of Intention is not
available to employee benefit plans for which Merrill Lynch provides plan
participant recordkeeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares but 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
purchased does not equal the amount stated in the Letter of Intention (minimum
of $25,000), the investor will be notified and must pay, within 20 days of the
expiration of such Letter, the difference between the sales charge on the Class
A or Class D shares purchased at the reduced rate and the sales charge
applicable to the sales actually purchased through the Letter. Class A or Class
D shares equal to five percent of the intended amount will be held in escrow
during the 13-month period (while remaining registered in the name of the
purchaser) for this purpose. The first purchase under the Letter of Intention
must be at least five percent of the dollar amount of such Letter. If a purchase
during the term of such Letter otherwise would be subject to a further reduced
sales charge based on the right of accumulation, the purchaser will be entitled
on that purchase and subsequent purchases to 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.
Merrill Lynch Blueprint(SM) Program. Class D shares of the Fund are offered
to participants in the Merrill Lynch Blueprint(SM) Program ("Blueprint"). In
addition, participants in Blueprint who own Class A shares of the Fund may
purchase additional Class A shares of the Fund through Blueprint. Blueprint is
directed to small investors, group Individual Retirement Accounts ("IRAs") and
participants in certain affinity groups such as credit unions, trade
associations and benefit plans. Investors placing orders to purchase Class A or
Class D shares of the Fund through Blueprint will acquire the Class A or Class D
shares at net asset value plus a sales charge calculated in accordance with the
Blueprint sales charge schedule (i.e., up to $5,000 at 3.50% and
14
<PAGE> 83
$5,000.01 or more at the standard sales charge rates disclosed in the
Prospectus). In addition, Class A and Class D shares of the Fund are being
offered at net asset value plus a sales charge of .50% for corporate or group
IRA programs placing orders to purchase their Class A or Class D shares through
Blueprint. Services available to Class A and Class D investors through
Blueprint, including exchange privileges, may differ from those available to
other investors in Class A or Class D shares.
Class A and Class D shares are offered at net asset value to Blueprint
participants through the Merrill Lynch Directed IRA Rollover Program ("IRA
Rollover Program") available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from Employee Sponsored Retirement and Savings Plans
(as defined below) whose trustee and/or plan sponsor has entered into the
Merrill Lynch Directed IRA Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum initial
or subsequent purchase requirements for participants who are part of an
automatic investment plan. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Employee Access(SM) Accounts. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized employers. 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.
Purchase Privilege of Certain Persons. Directors of the Fund, directors and
trustees of other MLAM-advised mutual funds, ML & Co. and its subsidiaries (the
term "subsidiaries," when used herein with respect to ML & Co., includes FAM,
the Manager and certain other entities directly or indirectly wholly owned and
controlled by ML & Co.) and their directors and employees, and any trust,
pension, profit-sharing or other benefit plan for such persons, may purchase
Class A shares of the Fund at net asset value.
Class D shares of the Fund 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 had
been made within 60 days prior to the investment in the Fund, and the proceeds
from the redemption had been maintained in the interim in cash or a money market
fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares of
such other fund were subject to a
15
<PAGE> 84
sales charge either at the time of purchase or on a deferred basis; and second,
such purchase of Class D shares must be made within 90 days after such notice.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: first, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from the redemption of shares
of such other mutual fund and that such shares have been outstanding for a
period of no less than six months; and second, such purchase of Class D shares
must be made within 60 days after the redemption and the proceeds from the
redemption must be maintained in the interim in cash or a money market fund.
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.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares of the Fund may be reduced to the net asset value per Class D
share in connection with the acquisition of the assets of or merger or
consolidation with a 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 that
might result from an acquisition of assets having net unrealized appreciation
that is disproportionately higher at the time of acquisition than the realized
or unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities that (i) meet the
investment objective 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, that
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.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based on
the number of employees or number of employees eligible to participate in the
plan, the aggregate amount invested by the plan in specified investments and/or
the services provided by Merrill Lynch to the plan. Certain other plans may
purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any
MLAM-advised mutual fund. Minimum purchase requirements may be waived or varied
for such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
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<PAGE> 85
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares -- Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance fees and/or distribution fees paid to the Distributor. In
their consideration of each Distribution Plan, the Directors must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholders. Each
Distribution Plan further provides that so long as the Distribution Plan remains
in effect, the selection and nomination of Directors who are not "interested
persons" of the Fund, as defined in the Investment Company Act (the "Independent
Directors"), shall be committed to the discretion of the Independent Directors
then in office. In approving each Distribution Plan in accordance with Rule
12b-1, the Independent Directors concluded that there is a reasonable likelihood
that such Distribution Plan will benefit the Fund and its related class of
shareholders. Each Distribution Plan can be terminated at any time, without
penalty, by the vote of a majority of the Independent Directors or by the vote
of the holders of a majority of the outstanding related class of voting
securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders, and all material amendments are required to be
approved by the vote of Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in such Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of each Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of such Distribution Plan or such report, the first two years in an easily
accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. 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
17
<PAGE> 86
Fund will continue to make payments of the account maintenance fee. In certain
circumstances the amount payable pursuant to the voluntary maximum may exceed
the amount payable under the NASD formula. In such circumstances payment in
excess of the amount payable under the NASD formula will not be made.
The following table sets forth comparative information as of August 31,
1997 with respect to Class B and Class C shares of the Fund, indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to Class B shares, the Distributor's voluntary maximum
for the period indicated.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF AUGUST 31, 1997
---------------------------------------------------------------------------------------
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ---------- ------- -------------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE PERIOD
AUGUST 4, 1997 (COMMENCEMENT
OF OPERATIONS AS AN OPEN-END
INVESTMENT COMPANY) TO AUGUST
31, 1997:
Under NASD Rule as Adopted...... $ 5,405 $ 338 $ 1 $ 339 $ 2 $ 337 $ 43
Under Distributor's Voluntary
Waiver........................ $ 5,405 $ 338 $ 27 $ 365 $ 2 $ 363 $ 43
(NOT IN THOUSANDS)
CLASS C SHARES, FOR THE PERIOD
AUGUST 4, 1997 (COMMENCEMENT
OF OPERATIONS AS AN OPEN-END
INVESTMENT COMPANY) TO AUGUST
31, 1997:
Under NASD Rule as Adopted...... $956,620 $59,789 $225 $60,014 $277 $59,737 $7,603
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B or Class C shares sold during the
period indicated 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%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. This
figure may include CDSCs that were deferred when a shareholder redeemed
shares prior to the expiration of the applicable CDSC period and invested
the proceeds, without the imposition of a sales charge, in Class A shares in
conjunction with the shareholder's participation in the Merrill Lynch Mutual
Fund Advisor (Merrill Lynch MFA(SM)) Program (the "MFA Program"). The CDSC
is booked as a contingent obligation that may be payable if the shareholder
terminates participation in the MFA Program.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the NASD maximum or, with respect to Class B shares, the
voluntary maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days after the tender of such
shares only for periods during which trading on the New
18
<PAGE> 87
York Stock Exchange ("NYSE") is restricted as determined by the Commission or
such Exchange is closed (other than customary weekend and holiday closings), for
any period during which an emergency exists, as defined by the Commission, as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of shareholders
of the Fund.
The value of shares at the time of the redemption may be more or less than
the shareholder's cost, depending in part on the market value of the securities
held by the Fund at such time.
DEFERRED SALES CHARGES -- CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares," while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived (i) on redemptions of Class B shares in
certain instances, including in connection with certain post-retirement
withdrawals from an IRA or other retirement plan or (ii) on redemptions of Class
B shares following the death or disability of a Class B shareholder. Redemptions
for which the waiver applies in the case of such withdrawals are: (a) any
partial or complete redemption in connection with a tax-free distribution
following retirement under a tax-deferred retirement plan or attaining age
59 1/2 in the case of an IRA or other retirement plan, or part of a series of
equal periodic payments (not less frequently than annually) made for the life
(or life expectancy) or any redemption resulting from the tax-free return of an
excess contribution to an IRA; or (b) any partial or complete redemption
following the death or disability (as defined in the Code) of a Class B
shareholder (including one who owns the Class B shares as joint tenant with his
or her spouse), provided the redemption is requested within one year of the
death or initial determination of disability. For the period August 4, 1997
(commencement of operations as an open-end investment company) to August 31,
1997 the Distributor received no CDSCs with respect to redemptions of Class B or
Class C shares.
Merrill Lynch Blueprint(SM) Program. Class B shares are offered to certain
participants in the Blueprint(SM) Program. Blueprint is directed to small
investors, group IRAs and participants in certain affinity groups such as trade
associations and credit unions. Class B shares of the Fund are offered through
Blueprint only to members of certain affinity groups. The CDSC is waived in
connection with purchase orders placed through Blueprint. Services, including
the exchange privilege, available to Class B investors through Blueprint,
however, may differ from those available to other Class B investors. Orders for
purchases and redemptions of Class B shares of the Fund will be grouped for
execution purposes which, in some circumstances, may involve the execution of
such orders two business days following the day such orders are placed. The
minimum initial purchase price is $100, with a $50 minimum for subsequent
purchases through Blueprint. There is no minimum initial or subsequent purchase
requirement for investors who are part of a Blueprint automatic investment plan.
Additional information concerning these Blueprint programs, including any annual
fees or transaction charges, is available from Merrill Lynch, Pierce, Fenner &
Smith Incorporated, The Blueprint(SM) Program, P.O. Box 30441, New Brunswick,
New Jersey 08989-0441.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Manager is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. In executing
19
<PAGE> 88
such transactions, the Manager seeks to obtain the best net results for the
Fund, taking into account such factors as price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution
and operational facilities of the firm involved and the firm's risk in
positioning a block of securities. While the Manager generally seeks reasonably
competitive commission rates, the Fund does not necessarily pay the lowest
commission or spread available. The Fund has no obligation to deal with any
broker or group of brokers in execution of transactions in portfolio securities.
Subject to obtaining the best price and execution, brokers who provide
supplemental investment research 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 the
Management Agreement and the expenses of the Manager will not necessarily be
reduced as a result of the receipt of such supplemental information. It is
possible that certain supplementary investment research so received will
primarily benefit one or more other investment companies or other accounts for
which investment discretion is exercised. Conversely, the Fund may be the
primary beneficiary of the research or services received as a result of
portfolio transactions effected for such other accounts or investment companies.
In addition, consistent with the Conduct Rules of the NASD and policies
established by the Board of Directors of the Fund, the Manager may consider
sales of shares of the Fund as a factor in the selection of brokers or dealers
to execute portfolio transactions for the Fund.
The Fund does not use any particular broker or dealer, and brokers who
provide supplemental investment research to the Manager may receive orders for
transactions by the Fund. Such supplemental research services ordinarily consist
of assessments and analyses of the business or prospects of a company, industry
or economic sector. Information so received will be in addition to and not in
lieu of the services required to be performed by the Manager under the
Management Agreement. If in the judgment of the Manager the Fund will benefit
from supplemental research services, the Manager is authorized to pay brokerage
commissions to a broker furnishing such services that are in excess of
commissions that another broker may have charged for effecting the same
transaction. The expenses of the Manager will not necessarily be reduced as a
result of the receipt of such supplemental information, and the Manager may use
such information in servicing its other accounts. Whether or not a particular
broker-dealer sells shares of the Fund neither qualifies nor disqualifies such
broker-dealer to execute transactions for the Fund.
The Fund anticipates that its brokerage transactions involving securities
of companies domiciled in countries other than the United States will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions are generally higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less governmental supervision and regulation of
foreign stock exchanges and brokers than in the United States.
Foreign equity securities may be held by the Fund in the form of American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global
Depositary Receipts ("GDRs") or other securities convertible into foreign equity
securities. ADRs, EDRs and GDRs may be listed on stock exchanges, or traded in
OTC markets in the United States or Europe, as the case may be. ADRs, like other
securities traded in the United States, will be subject to negotiated commission
rates.
The Fund may invest in certain securities traded in the OTC market and
intends to deal directly with the dealers who make a market in the securities
involved, except in those circumstances in which better prices and execution are
available elsewhere. Under the Investment Company Act, persons affiliated with
the Fund and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Fund as principal in
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the purchase and sale of securities unless a permissive order allowing such
transactions is obtained from the Commission. Since transactions in the OTC
market usually involve transactions with dealers acting as principal for their
own accounts, the Fund will not deal with affiliated persons, including Merrill
Lynch and its affiliates, in connection with such transactions. However, an
affiliated person of the Fund may serve as its broker in OTC transactions
conducted on an agency basis provided that, among other things, the fee or
commission received by such affiliated broker is reasonable and fair compared to
the fee or commission received by non-affiliated brokers in connection with
comparable transactions. See "Investment Objective and Policies -- Investment
Restrictions." For the fiscal year ended December 31, 1995, the Fund paid
aggregate commissions of $186,888, of which $78,106 or 41.8% was paid to Merrill
Lynch for effecting 37.6% of the aggregate dollar amount of transactions in
which the Fund paid brokerage commissions. For the fiscal year ended December
31, 1996, the Fund paid aggregate commissions of $548,586, of which $177,752 or
32.4% was paid to Merrill Lynch for effecting 33.9% of the aggregate dollar
amount of transactions in which the Fund paid brokerage commissions. For the
period January 1, 1997 to August 31, 1997, the Fund paid aggregate commissions
of $413,575, of which $169,405 or 40.96% was paid to Merrill Lynch for effecting
47.21% of the aggregate dollar amount of transactions in which the Fund paid
brokerage commissions. During such periods, however, the Fund (until August 4,
1997 when the Fund converted to open-end status) operated as a closed-end
investment company and, consequently, such amounts may not necessarily be
indicative of the costs of future brokerage commissions for the Fund.
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a daily
basis in United States dollars, the Fund intends to manage its portfolio so as
to give reasonable assurance that it will be able to obtain United States
dollars to the extent necessary to meet anticipated redemptions. Under present
conditions, it is not believed that these considerations will have any
significant effect on its portfolio strategy.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the United States national securities exchanges from
executing exchange transactions for their affiliates and institutional accounts
which they manage unless the member (i) has obtained prior express authorization
from the account to effect such transactions, (ii) at least annually furnishes
the account with the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any rules the Commission has
prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch acting as a broker for the
Fund in any of its portfolio transactions executed on any such securities
exchange of which it is a member, appropriate consents have been obtained from
the Fund and annual statements as to aggregate compensation will be provided to
the Fund.
The Board of Directors of the Fund has considered the possibility of
seeking to recapture for the benefit of the Fund brokerage commissions and other
expenses of possible portfolio transactions by conducting portfolio transactions
through affiliated entities. For example, brokerage commissions received by
affiliated brokers could be offset against the advisory fee paid by the Fund to
the Manager. After considering all factors deemed relevant, the Board of
Directors made a determination not to seek such recapture. The Board will
reconsider this matter from time to time.
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<PAGE> 90
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information -- Determination of Net Asset
Value" in the Prospectus for information concerning the determination of net
asset value.
The net asset value of the shares of the Fund is determined by the Manager
once daily Monday through Friday, as of 15 minutes after the close of business
on the NYSE (generally, 4:00 p.m., New York time), on each day during which the
NYSE is open for trading. The NYSE is not open on New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. Any assets or liabilities
initially expressed in terms of non-U.S. dollar currencies are translated into
U.S. dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. The Fund also will determine its net asset
value on any day in which there is sufficient trading in its portfolio
securities that the net asset value might be affected materially, but only if on
any such day the Fund is required to sell or redeem shares. Net asset value is
computed by dividing the value of the securities held by the Fund plus any cash
or other assets (including interest and dividends accrued but not yet received)
minus all liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses, including the investment advisory fees and
any account maintenance and/or distribution fees, are accrued daily. The per
share net asset value of Class B, Class C and Class D shares generally will be
lower than the per share net asset value of Class A shares, reflecting the daily
expense accruals of the account maintenance, distribution and higher transfer
agency fees applicable with respect to Class B and Class C shares 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 B and Class C
shares generally will be lower than the per share net asset value of Class D
shares, reflecting the daily expense accruals of the distribution fees and
higher transfer agency fees applicable with respect to Class B and Class C
shares of the Fund. It is expected, however, that the per share net asset value
of the four classes will tend to converge (although not necessarily meet)
immediately after the payment of dividends or distributions, which will differ
by approximately the amount of the expense accrual differentials between the
classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Portfolio
securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. When the Fund
writes an option, the amount of the premium received is recorded on the books of
the Fund as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based upon the last sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last asked price. Options
purchased by the Fund are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Other investments, including financial futures contracts and
related options, are stated at market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Fund. Such valuations and procedures will be reviewed periodically by the
Board of Directors.
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<PAGE> 91
Generally, trading in foreign securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of business on the NYSE. The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE that will not be reflected in the computation of the Fund's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities will be valued at their fair value as
determined in good faith by the Directors.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of such
services and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. The statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and capital gain distributions. The statements also will show any other activity
in the account since the preceding statement. Shareholders will receive separate
transaction confirmations for each purchase or sale transaction other than
automatic investment purchases, 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
Fund's Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by
shareholders directly from the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares so that the cash proceeds can be transferred to
the account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that he
or she be issued certificates for the shares and then must turn the certificates
over to the new firm for re-registration as described in the preceding sentence.
Shareholders considering transferring a tax-deferred retirement account such as
an IRA from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the
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<PAGE> 92
Fund, a shareholder must either redeem the shares (paying any applicable CDSC)
so that the cash proceeds can be transferred to the account at the new firm, or
such shareholder must continue to maintain a retirement account at Merrill Lynch
for those shares. A shareholder may make additions to his or her Investment
Account at any time by mailing a check directly to the Transfer Agent.
AUTOMATIC INVESTMENT PLANS
A U.S. shareholder may make additions to an Investment Account at any time
by purchasing Class A shares (if an eligible Class A investor as described in
the Prospectus) or Class B, Class C or Class D shares at the applicable public
offering price either through the shareholder's securities dealer, or by mail
directly to the Transfer Agent, acting as agent for such securities dealer.
Voluntary accumulation also can be made through a service known as the Fund's
Automatic Investment Plan whereby the Fund is authorized through pre-authorized
checks or automated clearing house debits of $50 or more to charge the regular
bank account of the shareholder on a regular basis to provide systematic
additions to the Investment Account of such shareholder. An investor whose
shares of the Fund are held within a CMA(R) or CBA(R) account may arrange to
have periodic investments made in the Fund in amounts of $100 or more ($1 for
retirement accounts) through the CMA(R) or CBA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be automatically reinvested in additional shares of the Fund.
Such reinvestment will be at the net asset value of shares of the Fund, without
a sales charge, as of the close of business on the NYSE on the ex-dividend date
of the dividend or distribution. Shareholders may elect in writing to receive
either their dividends or capital gains distributions, or both, in cash, in
which event payment will be mailed on or about the payment date. Cash payments
also can be directly deposited to the shareholder's bank account.
Shareholders may, at any time, notify Merrill Lynch in writing if their
account is maintained with Merrill Lynch or notify the Transfer Agent in writing
or by telephone (1-800-MER-FUND) if their account is maintained with the
Transfer Agent 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,
those instructions will be effected. The Fund is not responsible for any failure
of delivery to the shareholder's address of record and no interest will accrue
on amounts represented by uncashed distribution or redemption checks.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to make systematic withdrawals from an Investment
Account on either a monthly or quarterly basis as provided below. Quarterly
withdrawals are available for shareholders who have acquired shares of the Fund
having a value, based on cost or the current offering price, of $5,000 or more,
and monthly withdrawals are available for shareholders with shares having a
value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
class of shares to be redeemed. Redemptions will be made at net asset value as
determined at the close of business on the NYSE (generally, 4:00 p.m., New York
time) on the 24th day of
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<PAGE> 93
each month or the 24th day of the last month of each quarter, whichever is
applicable. If the NYSE is not open for business on such date, the 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 on all shares in
the Investment Account are reinvested automatically in Fund shares. A
shareholder's Systematic Withdrawal Plan may be terminated at any time, without
charge or penalty, by the shareholder, the Fund, the Transfer Agent or the
Distributor.
With respect to redemptions of Class B or Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Contingent Deferred Sales Charges -- Class B Shares" and
"-- Contingent Deferred Sales Charges -- Class C Shares." Where the systematic
withdrawal plan is applied to Class B shares, upon conversion of the last Class
B shares in an account to Class D shares, the systematic withdrawal plan will
automatically be applied thereafter to Class D shares. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Conversion of Class B Shares to Class D Shares" in the Prospectus; if
an investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her Financial Consultant.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional shares concurrent with withdrawals are
ordinarily disadvantageous to the shareholder because of sales charges and tax
liabilities. The Fund will not knowingly accept purchase orders for shares of
the Fund from investors who maintain a Systematic Withdrawal Plan unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a CMA(R), CBA(R)
or Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R) or CBA(R) Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $50. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. All redemptions will
be made at net asset value. A shareholder may elect to have his or her shares
redeemed on the first, second, third or fourth Monday of each month, in the case
of monthly redemptions, or every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R) or CBA(R) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automatic Investment
Program. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Financial Consultant.
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EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. Under the Merrill Lynch
Select Pricing(SM) System, Class A shareholders may exchange Class A shares of
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 the account in which
the exchange is made at the time of the exchange or is otherwise eligible to
purchase Class A shares of the second fund. If the Class A shareholder wants to
exchange Class A shares for shares of a second MLAM-advised mutual fund, but
does not hold Class A shares of the second fund in his or her account at the
time of the exchange and is not otherwise eligible to acquire Class A shares of
the second fund, the shareholder will receive Class D shares of the second fund
as a result of the exchange. Class D shares also may be exchanged for Class A
shares of a second MLAM-advised mutual fund at any time as long as, at the time
of the exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase Class
A shares of the second fund. Class B, Class C and Class D shares are
exchangeable with shares of the same class of other MLAM-advised mutual funds.
For purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is "tacked" to the holding period of the newly acquired
shares of the other fund as more fully described below. Class A, Class B, Class
C and Class D shares also are exchangeable for shares of certain MLAM-advised
money market funds as follows: Class A shares may be exchanged for shares of
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund
(available only for exchanges within certain retirement plans), Merrill Lynch
U.S.A. Government Reserves and Merrill Lynch U.S. Treasury Money Fund; Class B,
Class C and Class D shares may be exchanged for shares of Merrill Lynch
Government Fund, Merrill Lynch Institutional Fund, Merrill Lynch Institutional
Tax-Exempt Fund and Merrill Lynch Treasury Fund. Shares with a net asset value
of at least $100 are required to qualify for the exchange privilege, and any
shares utilized in an exchange must have been held by the shareholder for at
least 15 days. It is contemplated that the exchange privilege may be applicable
to other new mutual funds whose shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales 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 and Class D shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was paid.
Based on this formula, Class A and Class D shares of the Fund generally will be
exchanged into the Class A or Class D shares of the other funds or into shares
of certain money market funds with a reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively,
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<PAGE> 95
of another MLAM-advised mutual fund ("new Class B or Class C shares") on the
basis of relative net asset value per Class B or Class C share, without the
payment of any CDSC that might otherwise be due on redemption of the outstanding
Class B or Class C shares. Class B shareholders of the Fund exercising the
exchange privilege will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the new Class B
shares acquired through use of the exchange privilege. In addition, Class B or
Class C 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 or Class C 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 or Class C shares, the holding
period for the outstanding Class B or Class C shares is "tacked" to the holding
period of the new Class B or Class C shares. For example, an investor may
exchange Class B or Class C shares of the Fund for those of Merrill Lynch
Special Value Fund, Inc. ("Special Value Fund") after having held the Fund's
Class B shares for two and a half years. The 2% CDSC that generally would apply
to a redemption would not apply to the exchange. Three years later the investor
may decide to redeem the Class B shares of Special Value Fund and receive cash.
There will be no CDSC due on this redemption, since by "tacking" the two and a
half year holding period of the Fund Class B shares to the three year holding
period for the Special Value Fund Class B shares, the investor will be deemed to
have held the Special Value Fund Class B shares for more than five years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Manager or its affiliates, but the period of
time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the CDSC or, with respect to Class B shares, towards satisfaction of
the conversion period. However, shares of a money market fund that 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 newly acquired fund will be aggregated with previous
holding periods for purposes of reducing the CDSC. Thus, for example, an
investor may exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund ("Institutional Fund") after having held the Fund Class B
shares for two and a half years and three years later decide to redeem the
shares of Institutional Fund for cash. At the time of this redemption, the 2%
CDSC that would have been due had the Class B shares of the Fund been redeemed
for cash rather than exchanged for shares of Institutional Fund will be payable.
If, instead of such redemption the shareholder exchanged such shares for Class B
shares of a fund that the shareholder continued to hold for an additional two
and a half years, any subsequent redemption would not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, a shareholder should contact his or her
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of other MLAM-advised mutual funds
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an investor
may exercise the exchange privilege. Certain funds may suspend the offering of
their shares to the general public at
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<PAGE> 96
any time and thereafter may resume such offering from time to time. The exchange
privilege is available only to U.S. shareholders in states where the exchange
legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute substantially all its net investment income,
if any. Dividends from such net investment income will be paid at least
annually. All net realized capital gains, if any, will be distributed to the
Fund's shareholders at least annually. From time to time, the Fund may declare a
special distribution at or about the end of the calendar year in order to comply
with Federal tax requirements that certain percentages of its ordinary income
and capital gains be distributed during the calendar year. If in any fiscal
year, the Fund has net income from certain foreign currency transactions, such
income will be distributed at least annually.
See "Shareholder Services -- Automatic Reinvestment of Dividends and
Capital Gains Distributions" for information concerning the manner in which
dividends and distributions may be reinvested automatically in shares of the
Fund. A shareholder whose account is maintained at the Transfer Agent or whose
account is maintained through Merrill Lynch may elect in writing to receive any
such dividends or distributions, or both, in cash. Dividends and distributions
are taxable to shareholders, as discussed below, whether they are reinvested in
shares of the Fund or received in cash. The per share dividends on each class of
shares will be reduced as a result of any account maintenance, distribution and
transfer agency fees applicable with respect to such class of shares. See
"Determination of Net Asset Value."
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital gains
that it distributes to Class A, Class B, Class C and Class D shareholders
(together, the "shareholders"). The Fund intends to distribute substantially all
of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in warrants, futures and options) ("capital
gain dividends") are taxable to shareholders as long-term capital gains,
regardless of the length of time the shareholder has owned Fund shares. Any loss
upon the sale or exchange of Fund shares held for six months or less will be
treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming the shares are held as a capital asset). Recent
legislation creates additional categories of capital gains taxable at different
rates. Generally, not later than 60 days after the close of its taxable year,
the Fund will provide its shareholders with a written notice designating the
amounts of any ordinary income dividends or capital gain dividends, as well as
the amounts of capital gain dividends in the different categories of capital
gain referred to above.
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Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. A portion of the Fund's ordinary income dividends
may be eligible for the dividends received deduction allowed to corporations
under the Code, if certain requirements are met. For this purpose, the Fund will
allocate dividends eligible for the dividends received deduction among the Class
A, Class B, Class C and Class D shareholders according to a method (which it
believes is consistent with the Commission rule permitting the issuance and sale
of multiple classes of stock) 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. If the Fund
pays a dividend in January that 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.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Shareholders
may be able to claim United States foreign tax credits with respect to such
taxes, subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. In addition, recent
legislation permits a foreign tax credit to be claimed with respect to
withholding tax on a dividend only if the shareholder meets certain holding
period requirements. If more than 50% in value of the Fund's total assets at the
close of its taxable year consists of securities of foreign corporations, the
Fund will be eligible, and intends, to file an election with the Internal
Revenue Service pursuant to which shareholders of the Fund will be required to
include their proportionate shares of such withholding taxes in their United
States income tax returns as gross income, treat such proportionate shares as
taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against their
United States income taxes. In the case of foreign taxes passed through by a
RIC, the holding period requirements referred to above must be met by both the
shareholder and the RIC. No deductions for foreign taxes, moreover, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes and other information needed to claim
the foreign tax credit. For this purpose, the Fund will allocate foreign taxes
and
29
<PAGE> 98
foreign source income among the Class A, Class B, Class C and Class D
shareholders according to a method similar to that described above for the
allocation of dividends eligible for the dividends received deduction.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon the purchase of the new shares in the absence
of the exchange privilege. Instead, such sales charge will be treated as an
amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to minimize imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition of
the tax. In such event, the Fund will be liable for the tax only on the amount
by which it does not meet the foregoing distribution requirements.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield/high risk securities"), as described in the Prospectus.
Some of these high yield/high risk securities may be purchased at a discount and
may therefore cause the Fund to accrue and distribute income before amounts due
under the obligations are paid. In addition, a portion of the interest payments
on such high yield/high risk securities may be treated as dividends for Federal
income tax purposes; in such case, if the issuer of such high yield/high risk
securities is a domestic corporation, dividend payments by the Fund will be
eligible for the dividends received deduction to the extent of the deemed
dividend portion of such interest payments.
The Fund may invest up to 10% of its total assets in securities of other
investment companies. If the Fund purchases shares of an investment company (or
similar investment entity) organized under foreign law, the Fund will be treated
as owning shares in a passive foreign investment company ("PFIC") for U.S.
Federal income tax purposes. The Fund may be subject to U.S. Federal income tax,
and an additional tax in the nature of interest (the "interest charge"), on a
portion of the distributions from such a company and on gain from the
disposition of the shares of such a company (collectively referred to as "excess
distributions"), even if such excess distributions are paid by the Fund as a
dividend to its shareholders. The Fund may be eligible to make an election with
respect to certain PFICs in which it owns shares that will allow it to avoid the
taxes on excess distributions. However, such election may cause the Fund to
recognize income in a particular year in excess of the distributions received
from such PFICs. Alternatively, under recent legislation the Fund would be able
to
30
<PAGE> 99
elect to "mark to market" at the end of each taxable year all shares that it
holds in PFICs. If it made this election, the Fund would recognize as ordinary
income any increase in the value of such shares over their adjusted basis and as
ordinary loss any decrease in such value to the extent it did not exceed prior
increases. By making the mark-to-market election, the Fund could avoid
imposition of the interest charge with respect to its distributions from PFICs,
but in any particular year might be required to recognize income in excess of
the distributions it received from PFICs and its proceeds from dispositions of
PFIC stock.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may write (i.e., sell), purchase or sell options, futures and
forward foreign exchange contracts. Options and futures contracts that are
"Section 1256 contracts" will be "marked to market" for Federal income tax
purposes at the end of each taxable year, i.e., each such option or futures
contract will be treated as sold for its fair market value on the last day of
the taxable year. Unless such contract is a forward foreign exchange contract,
or is a non-equity option or a regulated futures contract for a non-U.S.
currency for which the Fund elects to have gain or loss treated as ordinary gain
or loss under Code Section 988 (as described below), gain or loss from 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 or
currency exchange rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in options, futures
and forward foreign exchange contracts and its short sales of securities. Under
Section 1092, the Fund may be required to postpone recognition for tax purposes
of losses incurred in certain sales of securities and certain closing
transactions in options, futures and forward foreign exchange contracts and
short sales of securities.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stocks, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, futures, or forward
foreign exchange contracts will be valued for purposes of the RIC
diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward
31
<PAGE> 100
contracts, from futures contracts that are not "regulated futures contracts" and
from unlisted options will be treated as ordinary income or loss under Code
Section 988. In certain circumstances, the Fund may elect capital gain or loss
treatment for such transactions. Regulated futures contracts, as described
above, will be taxed under Code Section 1256 unless application of Section 988
is elected by the Fund. In general, however, Code Section 988 gains or losses
will increase or decrease the amount of the Fund's investment company taxable
income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
income dividend distributions, and all or a portion of distributions made before
the losses were realized but in the same taxable year would be recharacterized
as a return of capital to shareholders, thereby reducing the basis of each
shareholder's Fund shares and resulting in a capital gain for any shareholder
who received a distribution greater than such shareholder's basis in Fund shares
(assuming the shares were held as a capital asset). These rules and the
mark-to-market rules described above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of currency
fluctuations with respect to its investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is 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 front-end sales charge in the case of Class A
and Class D
32
<PAGE> 101
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual 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 (i) as
required by the periods of the quotations, actual annual, annualized or
aggregate data, rather than average annual data, may be quoted and (ii) the
maximum applicable sales charges will not be included with respect to actual
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.
33
<PAGE> 102
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
periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES* CLASS B SHARES CLASS C SHARES
--------------------------- -------------------------- --------------------------
REDEEMABLE REDEEMABLE REDEEMABLE
EXPRESSED VALUE OF A EXPRESSED VALUE OF A EXPRESSED VALUE OF A
AS A HYPOTHETICAL AS A HYPOTHETICAL AS A HYPOTHETICAL
PERCENTAGE $1,000 PERCENTAGE $1,000 PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
$1,000 OF THE $1,000 OF THE $1,000 OF THE
PERIOD INVESTMENT PERIOD INVESTMENT PERIOD INVESTMENT PERIOD
- -------------------------------------------- ------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
One year ended August 31, 1997.............. 20.08% $1,200.80 -- -- -- --
Five years ended August 31, 1997............ 10.99% $1,684.10 -- -- -- --
Ten years ended August 31, 1997............. 4.71% $1,584.60 -- -- -- --
Inception (August 4, 1997) to August 31,
1997....................................... -- -- (18.58)% $ 986.00 27.19% $ 1,016.60
ANNUAL TOTAL RETURN (EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
For the period January 1, 1997 to August 31,
1997....................................... 11.50% $1,115.00 -- -- -- --
Year ended December 31, 1996................ 20.60% $1,206.00 -- -- -- --
Year ended December 31, 1995................ 24.44% $1,244.40 -- -- -- --
Year ended December 31, 1994................ (15.68)% $ 843.20 -- -- -- --
Year ended December 31, 1993................ 13.94% $1,139.40 -- -- -- --
Year ended December 31, 1992................ 19.48% $1,194.80 -- -- -- --
Year ended December 31, 1991................ 42.24% $1,422.40 -- -- -- --
Year ended December 31, 1990................ (24.21)% $ 757.90 -- -- -- --
Year ended December 31, 1989................ 16.46% $1,164.60 -- -- -- --
Year ended December 31, 1988................ 2.36% $1,023.60 -- -- -- --
Year ended December 31, 1987................ (21.34)% $ 786.60 -- -- -- --
Year ended December 31, 1986................ 14.13% $1,141.30 -- -- -- --
Inception (August 4, 1997) to August 31,
1997....................................... -- -- 2.60% $ 1,026.00 2.66% $ 1,026.60
AGGREGATE TOTAL RETURN (INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (April 2, 1985) to August 31,
1997....................................... 133.43% $2,334.30 -- -- -- --
Inception (August 4, 1997) to August 31,
1997....................................... -- -- (1.40)% $ 986.00 1.66% $ 1,016.60
<CAPTION>
CLASS D SHARES
--------------------------
REDEEMABLE
EXPRESSED VALUE OF A
AS A HYPOTHETICAL
PERCENTAGE $1,000
BASED ON A INVESTMENT
HYPOTHETICAL AT THE END
$1,000 OF THE
PERIOD INVESTMENT PERIOD
- -------------------------------------------- ------------ ------------
<S> <C> <C>
One year ended August 31, 1997.............. -- --
Five years ended August 31, 1997............ -- --
Ten years ended August 31, 1997............. -- --
Inception (August 4, 1997) to August 31,
1997....................................... (33.23)% $ 972.70
For the period January 1, 1997 to August 31,
1997....................................... -- --
Year ended December 31, 1996................ -- --
Year ended December 31, 1995................ -- --
Year ended December 31, 1994................ -- --
Year ended December 31, 1993................ -- --
Year ended December 31, 1992................ -- --
Year ended December 31, 1991................ -- --
Year ended December 31, 1990................ -- --
Year ended December 31, 1989................ -- --
Year ended December 31, 1988................ -- --
Year ended December 31, 1987................ -- --
Year ended December 31, 1986................ -- --
Inception (August 4, 1997) to August 31,
1997....................................... 2.66% $ 1,026.60
Inception (April 2, 1985) to August 31,
1997....................................... -- --
Inception (August 4, 1997) to August 31,
1997....................................... (2.73)% $ 972.70
</TABLE>
- ---------------
* Prior to August 4, 1997, the Fund operated as a closed-end investment company.
On August 4, 1997, the Fund converted to an open-end investment company and
Capital Shares outstanding as of that date were designated Class A Shares.
34
<PAGE> 103
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 not take into account the CDSC
and therefore may reflect greater total return since, due to the reduced sales
charges or the waiver of sales charges, a lower amount of expenses is deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on May 24, 1985 as a
closed-end investment company. On February 13, 1997, the shareholders of the
Fund voted to convert the Fund to an open-end investment company. Amended and
Restated Articles of Incorporation, effective as of August 4, 1997, (i) convert
the Fund to an open-end investment company, (ii) rename the Fund "Merrill Lynch
Convertible Fund, Inc." and (iii) increase the authorized capital stock from
30,000,000 shares, par value $.10 per share, to 400,000,000 shares of Common
Stock, par value $.10 per share. The shares of Common Stock are divided into
four classes designated Class A, Class B, Class C and Class D Common Stock, each
consisting of 100,000,000 shares. Shares of Class A, Class B, Class C and Class
D Common Stock represent an interest 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 expenditures. At the time of conversion of the Fund into an open-end
investment company, the Fund had approximately 11,653,700 Capital Shares
outstanding, all of which were reclassified into shares of Class A Common Stock
upon such conversion. The Board of Directors of the Fund may classify and
reclassify the unissued shares of the Fund into additional or other classes of
Common Stock at a future date.
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held in the election of Directors and any
other matter submitted to a shareholder vote. The Fund does not intend to hold
annual meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act upon any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent accountants. Also, the by-laws of the Fund require that a special
meeting of shareholders be held upon the written request of at least 25% of the
outstanding shares of the Fund entitled to vote at such meeting, if they comply
with applicable Maryland law. Voting rights for Directors are not cumulative.
Shares issued are fully paid and non-assessable and have no preemptive rights.
Redemption and conversion rights are discussed elsewhere herein and in the
Prospectus. Each share of Class B, Class C and Class D Common Stock is entitled
to participate equally in dividends and distributions declared by the Fund and
in the net assets of the Fund upon liquidation or dissolution after satisfaction
of outstanding liabilities. Stock certificates will be issued by the Transfer
Agent only on specific request. Certificates for fractional shares are not
issued in any case. Shareholders may, in accordance with Maryland law, cause a
meeting of shareholders to be held for the purpose of voting on the removal of
Directors at the request of 25% of the outstanding shares of the Fund. A
Director may be removed at a special meeting of shareholders by a vote of a
majority of the votes entitled to be cast for the election of Directors.
35
<PAGE> 104
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 on August 31, 1997, and its shares outstanding on that date is as
follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Assets............................ $110,178,412 $5,758,869 $1,103,763 $1,364,971
============ ========== ========== ==========
Number of Shares Outstanding.......... 6,346,421 331,864 58,412 78,624
============ ========== ========== ==========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)........................ $ 17.36 $ 17.35 $ 17.36 $ 17.36
Shares Charge (5.25% of offering price
(5.54% of net asset value per
share))*............................ .96 ** ** .96
------------ ---------- ---------- ----------
Offering Price........................ $ 18.32 $ 17.35 $ 17.36 $ 18.32
============ ========== ========== ==========
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption of shares. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares"
in the Prospectus and "Redemption of Shares -- Deferred Sales
Charges -- Class B and Class C Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the Independent Directors of the
Fund. The independent auditors are responsible for auditing the annual financial
statements of the Fund.
CUSTODIAN
The Chase Manhattan Bank, Global Securities Services, Chase MetroTech
Center, Brooklyn, New York 11245, acts as the Custodian of the Fund's assets.
Under its contract with the Fund, the Custodian is authorized, among other
things, to establish separate accounts in foreign currencies and to cause
foreign securities owned by the Fund to be held in its offices outside of the
United States and with certain foreign banks and securities depositories. The
Custodian is responsible for safeguarding and controlling the Fund's cash and
securities, handling the receipt and delivery of securities and collecting
interest and dividends on the Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's Transfer Agent. The
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts. See
"Management of the Fund -- Transfer Agency Services" in the Prospectus.
36
<PAGE> 105
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on December 31 of each year. The Fund
sends to its shareholders at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year, shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.
Under a separate agreement, ML & Co. has granted the Fund the right to use
the "Merrill Lynch" name and has reserved the right to withdraw its consent to
the use of such name by the Fund at any time or to grant the use of such name to
any other company, and the Fund has granted ML & Co., under certain conditions,
the use of any other name it might assume in the future, with respect to any
corporation organized by ML & Co.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the Fund, the following persons owned beneficially 5%
or more of the Fund's shares on December 1, 1997.
<TABLE>
<CAPTION>
NAME ADDRESS PERCENT OF CLASS
- ---------------------------------- -------------------------- ----------------
<S> <C> <C>
National Financial Services Corp. P.O. Box 3908 6.37%
For the exclusive benefit of our New York, N.Y. 10008-3908
customers
Charles Schwab & Co. Inc. 101 Montgomery St. 7.26%
San Francisco, CA 94104
</TABLE>
37
<PAGE> 106
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Convertible Fund, Inc.
(Formerly Convertible Holdings, Inc.):
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Convertible Fund, Inc. as of
August 31, 1997, the related statements of operations for the period January 1,
1997 to August 31, 1997 and for the year ended December 31, 1996, the statements
of changes in net assets for the period January 1, 1997 to August 31, 1997 and
each of the years in the two-year period ended December 31, 1996 and the
financial highlights for the period January 1, 1997 to August 31, 1997 and for
each of the years in the five-year period ended December 31, 1996. 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, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Convertible Fund, Inc. as of August 31, 1997, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
October 15, 1997
38
<PAGE> 107
<TABLE>
<CAPTION>
Merrill Lynch Convertible Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Debentures Cost (Note 1a)
<S> <C> <C> <C> <C> <C>
Automotive NR* Baa1 $900,000 Magna International Inc., 7.25% due
Parts -- 5.9% 7/05/2005 $772,368 $1,024,496
BB- B1 2,000,000 Mascotech, Inc., 4.50% due 12/15/2003 1,840,000 1,855,000
Pep Boys -- Manny, Moe & Jack (The):
BBB Baa3 2,500,000 4% due 9/15/1999 2,575,000 2,487,500
BBB Baa3 1,500,000 4.089% due 9/20/2011 (d) 854,172 791,250
NR* NR* 750,000 Tower Automotive, Inc., 5% due
8/01/2004 (b) 750,000 803,438
------------ ------------
6,791,540 6,961,684
Banking & NR* NR* 500,000 BankAtlantic Bancorp, Inc., 6.75%
Financial -- 0.7% due 7/01/2006+ 830,955 790,000
Conglomerates -- 2.0% Polyphase Corporation+:
AAA Aaa 1,000,000 12% due 12/01/1997 (b) 1,000,000 185,000
NR* NR* 2,000,000 12% due 7/01/1999++ 2,000,000 370,000
A- Ba2 1,500,000 Thermo Electron Corporation, 4.25% due
1/01/2003 1,732,500 1,788,750
------------ ------------
4,732,500 2,343,750
Dental Supplies -- NR* NR* 550,000 Phoenix Shannon PLC, 9.50% due
0.1% 11/01/2000 (b)(c) 550,000 165,000
Environmental -- A- NR* 1,250,000 Thermo Ecotek Corp., 4.875% due
2.2% 4/15/2004 (b) 1,251,563 1,281,250
NR* NR* 750,000 Thermo Fibertek Inc., 4.50% due
7/15/2004 (b) 750,000 773,438
BBB- Ba2 500,000 USA Waste Services, Inc., 4%
due 2/01/2002 500,000 566,875
------------ ------------
2,501,563 2,621,563
Financial NR* NR* 2,750,000 Nal Acceptance Corp., 10% due
Services -- 1.7% 9/11/1998++ 2,750,000 2,035,000
Healthcare B B3 2,000,000 Integrated Health Services Inc.,
Services -- 6.6% 6% due 1/01/2003 1,880,000 2,195,000
BB- B1 1,250,000 PhyCor, Inc., 4.50% due 2/15/2003 1,353,750 1,237,500
BBB+ Ba1 3,122,000 Quantum Health Resources, Inc., 4.75%
due 10/01/2000 2,735,097 2,934,680
NR* NR* 1,500,000 RoTech Medical Corporation, 5.25%
due 6/01/2003 1,497,277 1,492,500
------------ ------------
7,466,124 7,859,680
Home Builders -- 3.0% B- B2 1,000,000 Continental Homes Holding Corp.,
6.875% due 11/01/2002 1,000,000 1,113,750
BB++ Ba3 751,000 Toll Brothers Inc., 4.75% due 1/15/2004 627,190 803,570
BB- B1 1,500,000 US Home Corp., 4.875% due 11/01/2005 1,316,875 1,601,250
------------ ------------
2,944,065 3,518,570
Metals & Mining -- BBB- Baa2 1,500,000 Inco, Limited, 5.75% due 7/01/2004 1,781,150 1,717,500
1.4%
Oil Services -- 0.7% NR* NR* 330,000 Key Energy Group Inc., 7% due
7/01/2003 (b) 520,575 884,813
Pharmaceuticals -- BBB- Baa3 1,500,000 Alza Corporation, 5% due 5/01/2006 1,595,625 1,522,500
1.3%
</TABLE>
39
<PAGE> 108
<TABLE>
Merrill Lynch Convertible Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Debentures Cost (Note 1a)
<S> <C> <C> <C> <C> <C>
Real Estate Investment NR* B3 1,500,000 Capstone Capital Trust, Inc., 6.55%
Trusts -- 1.2% due 3/14/2002 1,365,290 1,445,625
Restaurants -- 2.4% B- B2 1,500,000 Boston Market, 7.75% due 5/01/2004 1,381,250 1,286,250
B B3 1,425,000 Hometown Buffet Inc., 7% due
12/01/2002 1,452,750 1,583,531
------------ ------------
2,834,000 2,869,781
Retail -- BB- Baa3 5,000,000 Office Depot, Inc., 4.891% due
Office Products -- 4.5% 11/01/2008 (d) 2,914,081 3,018,750
US Office Products Co.:
B- B3 1,000,000 5.50% due 5/15/2003 842,500 922,500
B- B3 1,500,000 5.50% due 5/15/2003 (b) 1,413,750 1,389,375
------------ ------------
5,170,331 5,330,625
Retail Stores -- 2.4% A+ A1 2,500,000 Home Depot, Inc. (The), 3.25%
due 10/01/2001 2,500,000 2,800,000
Scientific A- NR* 2,000,000 Thermo Cardiosystems, Inc., 4.75%
Equipment -- 3.9% due 5/15/2004 (b) 2,000,000 2,090,000
A Baa2 1,250,000 Thermo Instrument Systems Inc.,
4.50% due 10/15/2003 (b) 1,280,000 1,387,500
A- Baa3 1,000,000 Thermo Optek Corp., 5% due
10/15/2000 (b) 1,035,000 1,160,000
------------ ------------
4,315,000 4,637,500
Software Application NR* NR* 1,000,000 Wind River Systems Inc., 5% due
Development -- 1.0% 8/01/2002 (b) 1,000,000 1,126,250
Technology -- 2.8% NR* NR* 1,000,000 Apple Computer, Inc., 6% due
6/01/2001 950,000 1,000,000
B- B3 750,000 Data General Corporation, 6%
due 5/15/2004 (b) 750,000 1,181,250
NR* NR* 1,000,000 Premiere Technologies, Inc.,
5.75% due 7/01/2004 (b) 1,000,000 1,123,750
------------ ------------
2,700,000 3,305,000
Textiles -- 0.9% B+ B1 1,100,000 Fieldcrest Cannon, Inc., 6% due
3/15/2012 753,500 1,006,500
Water Treatment BB+ B2 1,750,000 US Filter Corporation, 4.50%
Systems -- 1.7% due 12/15/2001 1,750,000 1,964,375
------------ ------------
Total Convertible Debentures -- 46.4% 54,852,218 54,905,716
============ ============
<CAPTION>
Shares
Held Convertible Preferred Stocks
<S> <C> <C> <C> <C> <C>
Banking & NR* A1 10,000 Jefferson Pilot Corp. (ACESSM)
Financial -- 0.9% (into Nations Bank Corp.) (e) 725,000 1,051,250
Energy -- 1.7% BB- Ba3 40,000 CalEnergy Capital Trust II, 6.25% (b) 2,000,000 1,995,000
Minerals -- 2.0% NR* Ba1 43,150 Cyprus Amax Minerals Co., $4.00,
Series A 2,312,840 2,324,706
Paper -- 1.9% BBB+ Baa1 40,000 International Paper Co., $5.25 (b) 1,902,000 2,225,000
</TABLE>
40
<PAGE> 109
<TABLE>
Merrill Lynch Convertible Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Debentures Cost (Note 1a)
<S> <C> <C> <C> <C> <C>
Precious Metals -- NR* B2 59,900 Coeur d'Alene Mines Corporation 1,080,136 1,059,481
0.9%
Real Estate BBB+ Baa2 30,000 Public Storage Inc., $2.062 759,300 1,380,000
Investment
Trusts -- 1.1%
Restaurants -- 1.7% BBB Baa2 35,000 Wendy's International, Inc.,
Series A 1,750,000 1,977,500
Retail -- 1.0% NR* NR* 19,500 Kmart Financing I 1,024,920 1,149,281
Steel -- 4.6% B B1 52,000 AK Steel Holding Corp. 1,348,342 2,054,000
B NR* 40,000 WHX Corporation, Series A 1,590,840 1,775,000
A- A3 103,610 Worthington Industries, Inc. 1,751,527 1,683,663
------------ ------------
4,690,709 5,512,663
Transportation -- 0.5% BBB+ Ba2 10,000 CNF Transportation Inc., Series A 500,000 580,000
Utilities -- 1.3% AA Aa3 35,500 Citizens Utilities Trust 1,519,755 1,584,187
------------ ------------
Total Convertible Preferred
Stocks -- 17.6% 18,264,660 20,839,068
============ ============
<CAPTION>
Common Stocks
<S> <C> <C> <C> <C>
Drug Distribution -- 0.6% 27,400 Bindley Western Industries Inc. 526,144 690,138
Environmental -- 0.2% 16,918 Allied Waste Industries, Inc. (c) 80,883 253,770
Financial Services -- 0.0% 1 Nal Acceptance Corp. (Warrants)(a)++ 0 8,594
Food & Beverage -- 0.7% 25,000 RJR Nabisco, Inc. 821,875 870,312
Funeral Services -- 0.5% 20,000 Service Corporation International 366,079 640,000
Paper -- 0.6% 17,700 Boise Cascade Corporation 585,162 700,256
Paper/Machine -- 0.5% 20,000 Albany International Corp., Class A 448,262 541,250
Railcar Production -- 0.5% 15,479 Trinity Industries Leasing Co. 293,789 615,290
Semiconductors -- 1.6% 58,800 Cypress Semiconductor Corporation (c) 706,253 1,043,700
60,000 Integrated Device Technology, Inc. (c) 788,465 813,750
------------ ------------
1,494,718 1,857,450
------------ ------------
Total Common Stocks -- 5.2% 4,616,912 6,177,060
============ ============
</TABLE>
41
<PAGE> 110
<TABLE>
<CAPTION>
Merrill Lynch Convertible Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS (concluded)
Face Value
Amount Short-Term Securities Cost (Note 1a)
<S> <C> <C> <C> <C>
Commercial $6,000,000 Countrywide Home Loans, Inc.,
Paper** -- 20.3% 5.52% due 9/16/1997 $5,983,440 $5,983,440
4,000,000 Finova Capital Corp., 5.54% due
10/21/1997 3,967,375 3,967,375
3,036,000 General Motors Acceptance Corp.,
5.69% due 9/02/1997 3,034,081 3,034,081
6,000,000 Lexington Parker Capital Company LLC,
5.52% due 9/02/1997 5,996,320 5,996,320
5,000,000 WCP Funding Inc., 5.52%
due 10/02/1997 4,973,933 4,973,933
------------ ------------
Total Short-Term Securities -- 20.3% 23,955,149 23,955,149
============ ============
Total Investments -- 89.5% $101,688,939 105,876,993
============
Short Sales (Proceeds -- $736,673) -- (0.6%) (723,594)
Other Assets Less Liabilities -- 11.1% 13,162,616
------------
Net Assets --100.0% $118,316,015
============
</TABLE>
(a) Warrants entitle the Fund to purchase a predetermined number
of shares of Common Stock. The purchase price and number
of shares are subject to adjustment under certain conditions
until the expiration date.
(b) The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
(c) Non-income producing security.
(d) Represents a zero coupon or step bond; the interest rate shown
is the effective yield at the time of purchase by the Fund.
(e) Adjustable Convertible Extendable Securities.
* Not Rated.
** Commercial Paper is traded on a discount basis; the interest
rates shown are the discount rates paid at the time of
purchase by the Fund.
+ Covered Short Sales entered into as of August 31, 1997 were as follows:
Value
Shares Issue (Notes 1a & 1h)
55,000 BankAtlantic Bancorp. $(715,000)
5,500 Polyphase Corporation (8,594)
----------
Total (Proceeds -- $736,673) $(723,594)
==========
++ Restricted securities as to resale. The value of the Fund's investment
in restricted securities was approximately $2,414,000, representing 2.0%
of net assets.
Acquisition Value
Issue Date Cost (Note 1a)
Nal Acceptance Corp.,
10% due 9/11/1998 9/12/1996 $2,750,000 $2,035,000
Nal Acceptance Corp.
(Warrants) 9/12/1996 0 8,594
Polyphase Corporation,
12% due 7/01/1999 7/05/1994 2,000,000 370,000
---------- ----------
Total $4,750,000 $2,413,594
========== ==========
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
42
<PAGE> 111
<TABLE>
<CAPTION>
Merrill Lynch Convertible Fund, Inc. August 31, 1997
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $101,688,939) (Note 1a) $105,876,993
Cash 46,934
Deposits on short sales (Note 1h) 670,775
Receivables:
Securities sold $14,259,214
Interest 734,481
Capital shares sold 426,797
Dividends 148,414 15,568,906
-------------
Prepaid registration fees and other assets (Note 1f) 59,660
-------------
Total assets 122,223,268
-------------
Liabilities: Common stock sold short, at market value (proceeds -- $736,673)
(Notes 1a & 1h) 723,594
Payables:
Capital shares redeemed 2,923,609
Investment adviser (Note 2) 67,358
Distributor (Note 2) 2,848 2,993,815
-------------
Accrued expenses and other liabilities 189,844
-------------
Total liabilities 3,907,253
-------------
Net Assets: Net assets $118,316,015
=============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares authorized $634,642
Consist of: Class B Common Stock, $0.10 par value, 100,000,000 shares authorized 33,187
Class C Common Stock, $0.10 par value, 100,000,000 shares authorized 5,841
Class D Common Stock, $0.10 par value, 100,000,000 shares authorized 7,862
Paid-in capital in excess of par 84,298,010
Undistributed investment income -- net 645,348
Undistributed realized capital gains on investments -- net 28,490,017
Unrealized appreciation on investments -- net 4,201,108
-------------
Net assets $118,316,015
=============
Net Asset Value: Class A -- Based on net assets of $110,178,412 and 6,346,421
shares outstanding $17.36
=============
Class B -- Based on net assets of $5,758,869 and 331,864 shares outstanding $17.35
=============
Class C -- Based on net assets of $1,013,763 and 58,412 shares outstanding $17.36
=============
Class D -- Based on net assets of $1,364,971 and 78,624 shares outstanding $17.36
=============
See Notes to Financial Statements.
</TABLE>
43
<PAGE> 112
<TABLE>
<CAPTION>
Merrill Lynch Convertible Fund, Inc. August 31, 1997
FINANCIAL INFORMATION (continued)
Statement of Operations
For the Period For the
Jan. 1, 1997 Year Ended
to Aug. 31, 1997 Dec. 31, 1996
<S> <C> <C> <C>
Investment Income Interest and discount earned $7,843,078 $10,364,183
(Notes 1d & 1e): Dividends* 2,568,226 5,941,459
------------ ------------
Total income 10,411,304 16,305,642
------------ ------------
Expenses: Investment advisory fees (Note 2) 1,102,729 1,695,738
Dividends on securities sold short 190,393 4,704
Transfer agent fees -- Class A (Note 2) 65,095 87,085
Accounting services (Note 2) 63,816 99,274
Professional fees 48,754 69,955
Printing and shareholder reports 44,431 49,591
Listing fees 35,573 250
Interest on securities sold short 30,788 36,292
Directors' fees and expenses 29,582 45,322
Amortization of organization expenses 22,259 38,159
Custodian fees 17,657 26,466
Account maintenance and distribution fees -- Class B (Note 2) 2,343 --
Pricing services 2,023 2,983
Transfer agent fees -- Class B (Note 2) 460 --
Account maintenance and distribution fees -- Class C (Note 2) 369 --
Account maintenance fees -- Class D (Note 2) 136 --
Transfer agent fees -- Class D (Note 2) 108 --
Transfer agent fees -- Class C (Note 2) 78 --
Other 8,834 44,684
------------ ------------
Total expenses 1,665,428 2,200,503
------------ ------------
Investment income -- net 8,745,876 14,105,139
------------ ------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments -- net 50,688,978 19,901,753
(Loss) on Income taxes on realized gain on investments -- (4,841,320)
Investments & Foreign currency transactions -- net (108,244) (19,719)
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions -- Net Investments -- net (31,783,870) 17,386,660
(Notes 1b, 1c, Foreign currency transactions -- net 633 (441)
1e & 3): ------------ ------------
Net realized and unrealized gain on investments and foreign
currency transactions 18,797,497 32,426,933
------------ ------------
Net Increase in Net Assets Resulting from Operations $27,543,373 $46,532,072
------------ ------------
* Net withholding tax on dividends -- $2,260
============ ============
See Notes to Financial Statements.
</TABLE>
44
<PAGE> 113
<TABLE>
<CAPTION>
Merrill Lynch Convertible Fund, Inc. August 31, 1997
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
For the Period
Jan. 1, 1997 to For the Year
Aug. 31, Ended December 31,
Increase (Decrease) in Net Assets: 1997 1996 1995
<S> <C> <C> <C> <C>
Operations: Investment income -- net $8,745,876 $14,105,139 $14,296,369
Realized gain on investments and foreign currency
transactions -- net 50,580,734 19,882,034 15,446,497
Income taxes on realized gain on investments -- (4,841,320) (3,631,624)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions -- net (31,783,237) 17,386,219 19,334,251
------------- ------------- -------------
Net increase in net assets resulting from operations 27,543,373 46,532,072 45,445,493
------------- ------------- -------------
Dividends & Investment income -- net+ (8,134,631) (14,192,493) (14,117,464)
Distributions to Realized gain on investments -- net (Class A)++ -- (7,473,704) (4,235,374)
Shareholders ------------- ------------- -------------
(Note 1g): Net decrease in net assets resulting from dividends and
distributions to shareholders (8,134,631) (21,666,197) (18,352,838)
------------- ------------- -------------
Capital Share Net decrease in net assets from capital share
Transactions transactions (190,895,600) -- --
(Note 4): Offering costs resulting from issuance of
new classes of shares (190,000) -- (431,384)
------------- ------------- -------------
Net decrease in net assets derived from capital share
transactions (191,085,600) -- (431,384)
------------- ------------- -------------
Net Assets: Total increase (decrease) in net assets (171,676,858) 24,865,875 26,661,271
Beginning of period 289,992,873 265,126,998 238,465,727
------------- ------------- -------------
End of period* $118,316,015 $289,992,873 $265,126,998
============= ============= =============
* Undistributed investment income -- net (Note 1i) $645,348 $128,996 $223,416
============= ============= =============
+ Dividends from investment income -- net reflect when the Fund was a dual-structure closed-end
management investment company. All dividends were paid to Income Shareholders. Such shares were
redeemed on July 31, 1997.
++ Formerly Capital Shares.
See Notes to Financial Statements.
</TABLE>
45
<PAGE> 114
<TABLE>
<CAPTION>
Merrill Lynch Convertible Fund, Inc. August 31, 1997
FINANCIAL INFORMATION (continued)
Financial Highlights
Class A++++++
The following per share data and ratios have been For the Period
derived from information provided in the financial Jan. 1, 1997 to For the Year Ended December 31,
statements. Aug. 31,
1997+++ 1996+++ 1995 1994 1993 1992
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $15.57 $13.43 $11.13 $13.21 $12.87 $10.91
Performance:++++ -------- -------- -------- -------- -------- --------
Investment income -- net .06 -- -- -- -- --
Realized and unrealized gain (loss)
on investments and foreign currency
transactions -- net 1.75 2.78 2.66 (2.12) 1.43 2.03
-------- -------- -------- -------- -------- --------
Total from investment operations 1.81 2.78 2.66 (2.12) 1.43 2.03
-------- -------- -------- -------- -------- --------
Distributions of realized gain on
investments -- net -- (.64) (.36) (.01) (1.17) (.12)
-------- -------- -------- -------- -------- --------
Effect of repurchase of Treasury
Stock -- -- --+ .05 .08 .05
-------- -------- -------- -------- -------- --------
Capital charge resulting from
issuance of new classes of shares (.02) -- -- -- -- --
-------- -------- -------- -------- -------- --------
Net asset value, end of period $17.36 $15.57 $13.43 $11.13 $13.21 $12.87
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value per share 11.50%+++++ 20.60% 24.44% (15.68%) 13.94% 19.48%
Return:** ======== ======== ======== ======== ======== ========
Ratios to Average Expenses*** .90%* .78% .79% .87% .80% .80%
Net Assets: ======== ======== ======== ======== ======== ========
Investment income -- net 4.76%* 4.98% 5.40% 5.43% 5.10% 6.34%
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $110,178 $289,993 $265,127 $238,466 $274,999 $289,366
======== ======== ======== ======== ======== ========
Portfolio turnover 92.86% 129.06% 87.69% 69.37% 116.03% 76.54%
======== ======== ======== ======== ======== ========
Average commission rate paid++ $.0522 $.0447 -- -- -- --
======== ======== ======== ======== ======== ========
* Annualized.
** Total investment returns exclude the effects of sales loads. Performance results prior to August 31, 1997
are for when the Fund was a dual-structure closed-end management investment company and include only the
returns for the Capital Shares but exclude results from the Income Shares.
*** Excluding taxes on undistributed net realized long-term capital gains for years prior to the period January
1, 1997 to August 31, 1997.
+ Amount is less than $.01 per share.
++ For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average
commission rate per share for purchases and sales of equity securities.
+++ Excludes the effect of per share operating performance of the Fund's Income Shares, which were redeemed on
July 31, 1997. Per share operating performance prior to the period January 1, 1997 to August 31, 1997
reflects when the Fund was a dual-structure closed-end management investment company. For the period
January 1, 1997 to July 31, 1997, investment income -- net per Income Share was $0.73 and dividends of
investment income -- net per Income Share were $0.70.
++++ Based on average shares outstanding during the period.
+++++ Aggregate total investment return.
++++++ Formerly Capital Shares.
See Notes to Financial Statements.
</TABLE>
46
<PAGE> 115
<TABLE>
<CAPTION>
Merrill Lynch Convertible Fund, Inc. August 31, 1997
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. Aug. 4, 1997+ to Aug. 31, 1997
Class B++ Class C++ Class D++
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $16.91 $16.91 $16.91
Operating -------- -------- --------
Performance: Investment income -- net .05 .05 .07
Realized and unrealized gain on investments and foreign
currency transactions -- net .39 .40 .38
-------- -------- --------
Total from investment operations .44 .45 .45
-------- -------- --------
Net asset value, end of period $17.35 $17.36 $17.36
======== ======== ========
Total Investment Based on net asset value per share 2.60%++++ 2.66%++++ 2.66%++++
Return:** ======== ======== ========
Ratios to Average Expenses 2.66%* 2.74%* 1.92%*
Net Assets: ======== ======== ========
Investment income -- net 3.77%* 3.58%* 4.81%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $5,759 $1,014 $1,365
Data: ======== ======== ========
Portfolio turnover 92.86% 92.86% 92.86%
======== ======== ========
Average commission rate paid $.0522 $.0522 $.0522
======== ======== ========
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding during the period.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
47
<PAGE> 116
Merrill Lynch Convertible Fund, Inc. August 31, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Convertible Fund, Inc. (the "Fund"), formerly Convertible
Holdings, Inc., is registered under the Investment Company Act of 1940
as a non-diversified, open-end management investment company. Effective
August 4, 1997, as a result of the approval of its shareholders, the
Fund converted to an open-end management investment company. At that
time, the Fund's Capital Shares were converted to Class A Shares. The
Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System. Shares of Class A and Class D are sold with a front-
end sales charge. Shares of Class B and Class C may be subject to a
contingent deferred sales charge. All classes of shares have identical
voting, dividend, liquidation and other rights and the same terms and
conditions, except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and Class B
and Class C Shares 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 -- Portfolio securities which are traded on
stock exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the day
the securities are being valued or, lacking any sales, at the last
available bid price. Securities traded in the over-the-counter market
are valued at the last available bid price prior to the time of
valuation. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated by or
under the authority of the Board of Directors as the primary market.
Securities which are traded both in the over-the-counter market and on a
stock exchange are valued according to the broadest and most
representative market. Options written are valued at the last sale price
in the case of exchange-traded options or, in the case of options traded
in the over-the-counter market, the last asked price. Options purchased
are valued at the last sale price in the case of exchange-traded options
or, in the case of options traded in the over-the-counter market, the
last bid price. Short-term securities are valued at amortized cost,
which approximates market value. Other investments, including futures
contracts and related options, are stated at market value. Securities
and assets for which market value quotations are not readily available
are valued at their fair value as determined in good faith by or under
the direction of the Fund's Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the contract or
if the counterparty does not perform under the contract.
[bullet] Financial futures contracts -- The Fund may purchase or sell
interest rate futures 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.
[bullet] Options -- The Fund is authorized to write and purchase call
and put options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked to market
to reflect the current market value of the option written.
When a security is purchased or sold through an exercise of an option,
the related premium paid (or received) is added to (or deducted from)
the basis of the security acquired or deducted from (or added to) the
proceeds of the security sold. When an option expires (or the Fund
enters into a closing transaction), the Fund realizes a gain or loss on
the option to the extent of the premiums received or paid (or gain or
loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
48
<PAGE> 117
Merrill Lynch Convertible Fund, Inc. August 31, 1997
NOTES TO FINANCIAL STATEMENTS (continued)
[bullet] Forward foreign exchange contracts -- The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against either
specific transactions or portfolio positions. Such contracts are not
entered on the Fund's records. However, the effect on operations is
recorded from the date the Fund enters into such contracts. Premium or
discount is amortized over the life of the contracts.
[bullet] Foreign currency options and futures -- The Fund is also
authorized to purchase or sell listed or over-the-counter foreign
currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be effected
with respect to hedges on non-US dollar denominated securities owned by
the Fund, sold by the Fund but not yet delivered, or committed or
anticipated to be purchased by the Fund.
(c) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized.
Assets and liabilities denominated in foreign currencies are valued at
the exchange rate at the end of the period. Foreign currency
transactions are the result of settling (realized) or valuing
(unrealized) assets or liabilities expressed in foreign currencies into
US dollars. Realized and unrealized gains or losses from investments
include the effects of foreign exchange rates on investments.
(d) 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. Under the applicable foreign tax law, a withholding tax may
be imposed on interest, dividends, and capital gains at various rates.
(e) Security transactions and investment income -- Security transactions
are recorded on the dates the transactions are entered into (the trade
dates). Dividend income is recorded on the ex-dividend dates. Interest
income (including amortization of discount) is recognized on the accrual
basis. Realized gains and losses on security transactions are determined
on the identified cost basis.
(f) Prepaid registration fees -- Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions -- Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
(h) Short Sales -- When the Fund engages in a short sale, an amount
equal to the proceeds received by the Fund is reflected as an asset and
an equivalent liability. The amount of the liability is subsequently
marked to market to reflect the market value of the short sale. The Fund
maintains a segregated account of securities as collateral for the short
sales. The Fund is exposed to market risk based on the amount, if any,
that the market value of the stock exceeds the market value of the
securities in the segregated account.
(i) Reclassification -- Generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, current
year's permanent book/tax differences of $94,893 have been reclassified
between undistributed net realized capital gains and undistributed net
investment income and differences of $20,830,363 have been reclassified
between undistributed net realized capital gains and paid-in capital in
excess of par. These reclassifications have no effect on net assets or
net asset values per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill
Lynch Asset Management, L.P. ("MLAM"). 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 Distributors, Inc. ("MLFD"), a wholly-
owned subsidiary of Merrill Lynch Group, Inc.
MLAM 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 at the annual rate of 0.60% of the
average daily net assets of the Fund.
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
49
<PAGE> 118
Merrill Lynch Convertible Fund, Inc. August 31, 1997
NOTES TO FINANCIAL STATEMENTS (continued)
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% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides
account maintenance and distribution services to the 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 period January 1, 1997 to August 31, 1997, MLFD earned
underwriting discounts and direct commissions and MLPF&S earned dealer
concessions on sales of the Fund's Class A and Class D Shares as
follows:
MLFD MLPF&S
Class A $3,996 $1,242
Class D $2,306 $26,348
In addition, MLPF&S received $255,664 in commissions on the execution of
portfolio security transactions for the Fund for the period January 1,
1997 to August 31, 1997.
During the period January 1, 1997 to August 31, 1997, the Fund paid
Merrill Lynch Security Pricing Service, an affiliate of MLPF&S, $1,490
for security price quotations to compute the net asset value of the
Fund.
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 MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
the period January 1, 1997 to August 31, 1997 were $167,419,463 and
$363,659,855, respectively.
Net realized and unrealized gains (losses) as of August 31, 1997 were as
follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $51,193,460 $4,188,054
Short sales (504,482) 13,079
Foreign currency
transactions (108,244) (25)
------------- -------------
Total $50,580,734 $4,201,108
============= =============
As of August 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $3,990,249, of which $8,332,698 related to
appreciated securities and $4,342,449 related to depreciated securities.
The aggregate cost of investments at August 31, 1997 for Federal income
tax purposes was $101,886,744.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions was
$190,895,600 for the period January 1, 1997 to August 31, 1997. During
the year ended December 31, 1996, Capital Shares issued and outstanding
remained constant at 11,653,700.
Transactions in capital shares for each class were as follows:
Class A Shares for the
Period January 1, 1997 Dollar
to August 31, 1997 Shares Amount
Shares sold 45,211 $774,119
Shares redeemed (5,352,490) (91,314,601)
------------- -------------
Net decrease (5,307,279) $(90,540,482)
============= =============
Class B Shares for the
Period August 4, 1997+ Dollar
to August 31, 1997 Shares Amount
Shares sold 347,816 $5,946,236
Shares redeemed (15,952) (272,208)
------------- -------------
Net increase 331,864 $5,674,028
============= =============
+ Commencement of Operations.
50
<PAGE> 119
Merrill Lynch Convertible Fund, Inc. August 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
Class C Shares for the
Period August 4, 1997+ Dollar
to August 31, 1997 Shares Amount
Shares sold 59,874 $1,024,877
Shares redeemed (1,462) (25,410)
------------- -------------
Net increase 58,412 $999,467
============= =============
+ Commencement of Operations.
Class D Shares for the
Period August 4, 1997+ Dollar
to August 31, 1997 Shares Amount
Shares sold 96,058 $1,653,202
Shares redeemed (17,434) (302,405)
------------- -------------
Net increase 78,624 $1,350,797
============= =============
+ Commencement of Operations.
In addition, on July 31, 1997, all 11,653,700 Income Shares were
redeemed amounting to $108,379,410.
5. Subsequent Event:
On September 2, 1997, the Fund's Board of Directors declared an ordinary
income dividend in the amount of $.168967 per Class A Share, $.156437
per Class B Share, $.156428 per Class C Share, $.165229 per Class D
Share and a long-term capital gain distribution in the amount of
$4.420817 per share for each of the four Classes, payable on September
23, 1997 to shareholders of record as of September 15, 1997.
51
<PAGE> 120
- ------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Investment Objective and Policies....... 2
Portfolio Strategies Involving
Options, Futures and Foreign
Exchange Transactions............... 3
Other Investment Policies and
Practices........................... 3
Investment Restrictions............... 5
Management of the Fund.................. 8
Directors and Officers................ 8
Compensation of Directors............. 9
Management and Advisory
Arrangements........................ 10
Purchase of Shares...................... 11
Initial Sales Charge Alternatives --
Class A and Class D Shares.......... 12
Reduced Initial Sales Charges......... 13
Employer-Sponsored Retirement or
Savings Plans and Certain Other
Arrangements........................ 16
Distribution Plans.................... 17
Limitations on the Payment of Deferred
Sales Charges....................... 17
Redemption of Shares.................... 18
Deferred Sales Charges --
Class B and Class C Shares.......... 19
Portfolio Transactions and Brokerage.... 19
Determination of Net Asset Value........ 22
Shareholder Services.................... 23
Investment Account.................... 23
Automatic Investment Plans............ 24
Automatic Reinvestment of Dividends
and Capital Gains Distributions..... 24
Systematic Withdrawal Plans........... 24
Exchange Privilege.................... 26
Dividends, Distributions and Taxes...... 28
Dividends and Distributions........... 28
Taxes................................. 28
Tax Treatment of Options and Futures
Transactions........................ 31
Special Rules for Certain Foreign
Currency Transactions............... 31
Performance Data........................ 32
General Information..................... 35
Description of Shares................. 35
Computation of Offering Price Per
Share............................... 36
Independent Auditors.................. 36
Custodian............................. 36
Transfer Agent........................ 36
Legal Counsel......................... 37
Reports to Shareholders............... 37
Additional Information................ 37
Security Ownership of Certain
Beneficial Owners................... 37
Independent Auditors' Report............ 38
Financial Statements.................... 39
Code # 19011-1297
</TABLE>
[Merrill Lynch Logo]
MERRILL LYNCH
CONVERTIBLE FUND, INC.
[MLYNCH COMPASS GRAPH]
STATEMENT OF
ADDITIONAL
INFORMATION
December 29, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 121
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> 1
PROSPECTUS
FEBRUARY 24, 1997
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Global Convertible Fund, Inc. (the "Fund") is a mutual fund
that seeks to provide shareholders with high total return by investing primarily
in an internationally diversified portfolio of convertible debt securities,
convertible preferred stocks and "synthetic" convertible securities consisting
of a combination of debt securities or preferred stock and warrants or options.
The investment philosophy of the Fund is based on the belief that the
characteristics of convertible securities make them appropriate investments for
an investment company seeking a high total return from capital appreciation and
investment income. There can be no assurance that the investment objective of
the Fund will be realized. For more information on the Fund's investment
objective and policies, see "Investment Objective and Policies" on page 11.
------------------------
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing(SM) System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081
[(609)282-2800], or from securities dealers that have entered into selected
dealer agreements with the Distributor, including Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000
and the minimum subsequent purchase is $50, except that for retirement plans the
minimum initial purchase is $100 and the minimum subsequent purchase is $1.
Merrill Lynch may charge its customers a processing fee (presently $4.85) for
confirming purchases and repurchases. Purchases and redemptions made 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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the 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 February 24, 1997 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing the
Fund at the above telephone number or address. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE> 2
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).... 5.25%(c) None None 5.25%(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 year, 1.0% for None(d)
decreasing 1.0% annually to one year(f)
0.0% after the fourth year(e)
Exchange Fee............................. None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Investment Advisory Fees(g)............ 0.65% 0.65% 0.65% 0.65%
12b-1 Fees(h):
Account Maintenance Fees............. None 0.25% 0.25% 0.25%
Distribution Fees.................... None 0.75% 0.75% None
(Class B shares convert to Class
D
shares automatically after
approximately eight years and
cease being subject to
distribution fees)
Other Expenses:
Custodial Fees....................... 0.03% 0.03% 0.03% 0.03%
Shareholder Servicing Costs(i)....... 0.36% 0.43% 0.44% 0.31%
Other................................ 0.53% 0.53% 0.53% 0.53%
----- ----- ----- -----
Total Other Expenses............. 0.92% 0.99% 1.00% 0.87%
----- ----- ----- -----
Total Fund Operating Expenses............ 1.57% 2.64% 2.65% 1.77%
===== ===== ===== =====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain participants in
fee-based programs. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" -- page 28 and "Shareholder
Services -- Fee-Based Programs" -- page 39.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 29.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of Class
A shares by certain retirement plans in connection with certain fee-based
programs. Class A and Class D purchases of $1,000,000 or more may not be
subject to an initial sales charge. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares" -- page 28.
(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 1.0% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 39.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 39.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 39.
(g) See "Management of the Fund -- Management and Advisory Arrangements" -- page
23.
(h) See "Purchase of Shares -- Distribution Plans" -- page 33.
(i) See "Management of the Fund -- Transfer Agency Services" -- page 24.
2
<PAGE> 3
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 $52.50 initial sales
charge (Class A and Class D shares only) and assuming
(1) the Total Fund Operating Expenses for each class set
forth on page 2,
(2) a 5% annual return throughout the periods and (3)
redemption at the end of the period (including any
applicable CDSC for Class B and Class C Shares):
Class A.............................................. $ 68 $ 99 $ 134 $229
Class B.............................................. $ 67 $ 102 $ 140 $279*
Class C.............................................. $ 37 $ 82 $ 141 $298
Class D.............................................. $ 70 $ 105 $ 143 $250
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of
the period:
Class A.............................................. $ 68 $ 99 $ 134 $229
Class B.............................................. $ 27 $ 82 $ 140 $279*
Class C.............................................. $ 27 $ 82 $ 141 $298
Class D.............................................. $ 70 $ 105 $ 143 $250
</TABLE>
- ---------------
* Assumes conversion to Class D shares approximately eight years after purchase.
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 RATE OF RETURN, AND ACTUAL EXPENSES OR ANNUAL
RATE OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE. Class B and Class C shareholders who hold their shares for an extended
period of time may pay more in Rule 12b-1 distribution fees than the economic
equivalent of the maximum front-end sales charge permitted under the Conduct
Rules of the National Association of Securities Dealers, Inc. ("NASD"). Merrill
Lynch may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions made directly through the
Fund's transfer agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares."
MERRILL LYNCH SELECT PRICINGSM 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 50
registered investment companies advised by Merrill Lynch Asset Management, L.P.
("MLAM" or the "Manager") or Fund Asset Management, L.P. ("FAM"), an affiliate
of MLAM. Funds advised by MLAM or FAM that utilize the Merrill Lynch Select
PricingSM System are referred to herein as "MLAM-advised mutual funds."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the
3
<PAGE> 4
deferred sales charge arrangements. The CDSCs, distribution fees and account
maintenance fees that are imposed on Class B and Class C shares, as well as the
account maintenance fees that are imposed on 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 and distribution fees with respect to the
Class B and Class C shares in that the sales charges and distribution fees
applicable to each class provide for the financing of the distribution of the
shares of the Fund. The distribution-related revenues paid with respect to a
class will not be used to finance the distribution expenditures of another
class. Sales personnel may receive different compensation for selling different
classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is the most beneficial under his particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase of
Shares."
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
A Maximum 5.25% initial No No No
sales charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.75% B shares convert to
years, D shares automatically
at a rate of 4.0% during after approximately
the first year, decreasing eight years(5)
1.0%
annually to 0.0%(4)
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
- -------------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. Contingent deferred sales charges ("CDSCs") are imposed
if the redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class A
shares by certain retirement plans in connection with certain fee-based
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but instead may be subject to a 1.0%
CDSC if redeemed within one year. Such CDSC may be waived in connection with
certain fee-based programs. A 0.75% sales charge for 401(k) purchases over
$1,000,000 will apply. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans was modified. Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made have a ten year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
4
<PAGE> 5
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors who currently own Class A shares of the Fund in a
shareholder account are entitled to purchase additional Class A shares
of the Fund in that account. Eligible investors also include certain
retirement plans and participants in certain fee-based programs. In
addition, Class A shares will be offered at net asset value to Merrill
Lynch & Co., Inc. ("ML & Co.") and its subsidiaries (the term
"subsidiaries" when used herein with respect to ML & Co. includes FAM,
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 5.25%, which is reduced for purchases of
$25,000 and over and waived for purchases by certain retirement plans
and participants in connection with certain fee-based programs.
Purchases of $1,000,000 or more may not be subject to an initial sales
charge, but if the initial sales charge is waived such purchases may
be subject to a 1.0% CDSC if the shares are redeemed within one year
after purchase. Such CDSC may be waived in connection with certain
fee-based programs. Sales charges are also reduced under a right of
accumulation which takes into account the investor's holdings of all
classes of all MLAM-advised mutual funds. See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares."
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% 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. Such CDSC may be modified
in connection with certain fee-based programs. Approximately eight
years after issuance, Class B shares will convert automatically into
Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain
other MLAM-advised mutual funds into which exchanges may be made
convert into Class D shares automatically after approximately ten
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 0.75% of the Fund's average net
assets attributable to the Class C shares. Class C shares are also
subject to a 1.00% CDSC if they are redeemed within one year of
purchase. Such CDSC may be waived in connection with certain fee-based
programs. Although Class C shares are subject to a 1.0% CDSC for only
one
5
<PAGE> 6
year (as compared to four years for Class B), Class C shares have no
conversion feature and, accordingly, an investor who 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 Fund's Board of
Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. The maximum initial sales charge is 5.25%, which is
reduced for purchases of $25,000 or more. 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 1.0% CDSC if
the shares are redeemed within one year after purchase. Such CDSC may
be waived in connection with certain fee-based programs. The schedule
of initial sales charges and reductions for Class D shares is the same
as the schedule for Class A shares, except that there is no waiver for
purchases in connection with certain fee-based programs. Class D
shares also will be issued upon conversion of Class B shares as
described above under "Class B." See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his
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 who previously
purchased Class A shares may no longer be eligible to purchase Class A shares of
other MLAM-advised mutual funds, those previously purchased Class A shares,
together with Class B, Class C and Class D share holdings, will count toward a
right of accumulation 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
6
<PAGE> 7
and distribution fees potentially may be offset to the extent any return is
realized on the additional funds initially invested in Class B or Class C
shares. In addition, Class B shares will be converted into Class D shares of the
Fund after a conversion period of approximately eight years, and thereafter
investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forego 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> 8
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. Audited financial statements for
the fiscal year ended October 31, 1996 and the independent auditors' report
thereon are included in the Statement of Additional Information. Further
information about the performance of the Fund is contained in the Fund's most
recent annual report to shareholders which may be obtained, without charge, by
calling or by writing the Fund at the telephone number or address on the front
cover of this Prospectus.
The following per share data and ratios have been derived from information
provided in the Fund's audited Financial Statements:
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
----------------------------------------------------
1996++ 1995 1994 1993 1992
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....................................... $ 10.71 $ 10.75 $11.08 $ 9.79 $ 9.39
------- ------ ------ ------ ------
Investment income--net..................................................... .32 .42 .33 .23 .21
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net......................................................... .62 .11 (.27) 1.45 .68
------- ------ ------ ------ ------
Total from investment operations........................................... .94 .53 .06 1.68 .89
------- ------ ------ ------ ------
Less dividends and distributions:
Investment income--net.................................................... (.48) (.46) (.30) (.23) (.25)
Realized gain on investments--net......................................... (.63) (.11) (.09) (.16) (.24)
------- ------ ------ ------ ------
Total dividends and distributions.......................................... (1.11) (.57) (.39) (.39) (.49)
------- ------ ------ ------ ------
Net asset value, end of period............................................. $ 10.54 $ 10.71 $10.75 $11.08 $ 9.79
======= ====== ====== ====== ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share......................................... 9.34% 5.10% 0.61% 17.64% 10.00%
======= ====== ====== ====== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............................................. 1.57% 1.38% 1.66% 2.22% 2.47%
======= ====== ====== ====== ======
Expenses................................................................... 1.57% 1.38% 1.66% 2.22% 2.86%
======= ====== ====== ====== ======
Investment income--net..................................................... 3.05% 4.03% 2.97% 2.36% 2.61%
======= ====== ====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................................... $17,741 $23,634 $7,850 $4,557 $2,283
======= ====== ====== ====== ======
Portfolio turnover......................................................... 14.72% 101.12% 38.04% 26.02% 4.91%
======= ====== ====== ====== ======
Average Commission Rate Paid##............................................. $ .0679 $ -- $ -- $ -- $ --
======= ====== ====== ====== ======
<CAPTION>
1991 1990 1989+
------ ------ ------
<S> <C<C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....................................... $ 8.37 $ 9.95 $ 9.97
------ ------ ------
Investment income--net..................................................... .25 .38 .39
Realized and unrealized gain (loss) on investments and foreign currency
transactions--net......................................................... 1.22 (1.11) .21
------ ------ ------
Total from investment operations........................................... 1.47 (.73) .60
------ ------ ------
Less dividends and distributions:
Investment income--net.................................................... (.37) (.42) (.45)
Realized gain on investments--net......................................... (.08) (.43) (.17)
------ ------ ------
Total dividends and distributions.......................................... (.45) (.85) (.62)
------ ------ ------
Net asset value, end of period............................................. $ 9.39 $ 8.37 $ 9.95
====== ====== ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share......................................... 18.09% (7.86)% 6.29%#
====== ====== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............................................. 2.47% 2.39% 1.77%*
====== ====== ======
Expenses................................................................... 2.87% 2.39% 1.77%*
====== ====== ======
Investment income--net..................................................... 3.16% 4.55% 5.62%*
====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................................... $ 448 $ 162 $ 194
====== ====== ======
Portfolio turnover......................................................... 18.02% 22.76% 15.91%
====== ====== ======
Average Commission Rate Paid##............................................. $ -- $ -- $ --
====== ====== ======
</TABLE>
- ------------------------
+ Class A shares commenced operations on November 4, 1988.
++ Based on average shares outstanding during the period.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
8
<PAGE> 9
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C
--------
FOR THE
CLASS B YEAR
--------------------------------------------------------------------------------------- ENDED
OCTOBER
FOR THE YEAR ENDED OCTOBER 31, 31,
--------------------------------------------------------------------------------------- --------
1996++ 1995 1994 1993 1992 1991 1990 1989 1988+++ 1996++
------- ------- ------- ------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period........................ $ 10.77 $ 10.80 $ 11.13 $ 9.84 $ 9.44 $ 8.39 $ 9.95 $ 9.94 $ 10.00 $10.75
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Investment income--net......... .21 .37 .21 .13 .12 .18 .29 .37 .27 .21
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............. .62 .05 (.25) 1.46 .67 1.20 (1.10) .17 (.10) .62
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Total from investment
operations.................... .83 .42 (.04) 1.59 .79 1.38 (.81) .54 .17 .83
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Less dividends and
distributions:
Investment income--net........ (.36) (.34) (.20) (.14) (.15) (.25) (.32) (.36) (.23) (.36)
Realized gain on
investments--net............ (.63) (.11) (.09) (.16) (.24) (.08) (.43) (.17) -- (.63)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Total dividends and
distributions................. (.99) (.45) (.29) (.30) (.39) (.33) (.75) (.53) (.23) (.99)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Net asset value, end of
period........................ $ 10.61 $ 10.77 $ 10.80 $ 11.13 $ 9.84 $ 9.44 $ 8.39 $ 9.95 $ 9.94 $10.59
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share......................... 8.13% 4.01% (0.37)% 16.45% 8.77% 16.79% (8.68)% 5.58% 1.70%# 8.14%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................. 2.64% 2.37% 2.69% 3.26% 3.49% 3.50% 3.41% 2.63% 2.48%* 2.65%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
Expenses....................... 2.64% 2.37% 2.69% 3.26% 3.96% 3.88% 3.41% 2.97% 2.60%* 2.65%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
Investment income--net......... 1.98% 2.95% 1.95% 1.32% 1.53% 2.25% 3.51% 3.62% 3.74%* 1.97%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................... $38,830 $58,660 $53,121 $29,831 $13,975 $14,973 $18,296 $30,813 $41,232 $4,123
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
Portfolio turnover............. 14.72% 101.12% 38.04% 26.02% 4.91% 18.02% 22.76% 15.91% 20.24% 14.72%
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
Average Commission Rate
paid##........................ $ .0679 -- -- -- -- -- -- -- -- $.0679
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
<CAPTION>
CLASS D
------------------------------
FOR THE FOR THE
PERIOD FOR THE YEAR ENDED PERIOD
OCT. 21, OCT. 21,
1994+ TO OCTOBER 31, 1994+ TO
OCT. 31, ------------------- OCT. 31,
1995 1994++ 1996++ 1995 1994++
-------- -------- -------- -------- --------
<S> <<C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period........................ $10.81 $10.74 $10.72 $10.76 $10.69
------ ----- ------ ------ -----
Investment income--net......... .36 -- .31 .42 --
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............. .05 .07 .61 .09 .07
------ ----- ------ ------ -----
Total from investment
operations.................... .41 .07 .92 .51 .07
------ ----- ------ ------ -----
Less dividends and
distributions:
Investment income--net........ (.36) -- (.46) (.44) --
Realized gain on
investments--net............ (.11) -- (.63) (.11) --
------ ----- ------ ------ -----
Total dividends and
distributions................. (.47) -- (1.09) (.55) --
------ ----- ------ ------ -----
Net asset value, end of
period........................ $10.75 $10.81 $10.55 $10.72 $10.76
====== ===== ====== ====== =====
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share......................... 3.89% 0.65%# 9.07% 4.87% 0.65%#
====== ===== ====== ====== =====
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of
reimbursement................. 2.41% 5.64%* 1.77% 1.62% 5.13%*
====== ===== ====== ====== =====
Expenses....................... 2.41% 5.64%* 1.77% 1.62% 5.13%*
====== ===== ====== ====== =====
Investment income--net......... 2.99% (1.74)%* 2.85% 3.79% (1.24)%*
====== ===== ====== ====== =====
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................... $4,598 $ 203 $8,585 $3,499 $ 179
====== ===== ====== ====== =====
Portfolio turnover............. 101.12% 38.04% 14.72% 101.12% 38.04%
====== ===== ====== ====== =====
Average Commission Rate
paid##........................ -- -- $.0679 -- --
====== ===== ====== ====== =====
</TABLE>
- ------------------------
+ Commencement of operations.
++ Based on average shares outstanding during the period.
+++ Class B shares commenced operations on February 26, 1988.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
9
<PAGE> 10
SPECIAL CONSIDERATIONS
As a global fund, the Fund may invest in United States and foreign
securities. Investments in securities of foreign entities and securities
denominated in foreign currencies involve risks not typically involved in
domestic investments, including fluctuations in foreign exchange rates, future
foreign political and economic developments, and the possible imposition of
exchange controls or other foreign or United States governmental laws or
restrictions applicable to such investments. Since the Fund may invest in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates may affect the value of investments
in the portfolio and the unrealized appreciation or depreciation of investments
insofar as United States investors are concerned. Changes in foreign currency
exchange rates relative to the U.S. dollar will affect the U.S. dollar value of
the Fund's assets denominated in that currency and the Fund's yield on such
assets. Foreign currency exchange rates are determined by forces of supply and
demand on the foreign exchange markets. These forces are, in turn, affected by
the international balance of payments and other economic and financial
conditions, government intervention, speculation, and other factors. Moreover,
individual foreign economies may differ favorably or unfavorably from the United
States economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resources, self-sufficiency and balance of
payments position.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments that could affect investments in those countries.
There may be less publicly available information about a foreign financial
instrument than about a United States instrument, and foreign entities may not
be subject to accounting, auditing and financial reporting standards and
requirements comparable to those of United States entities. In addition, certain
foreign investments may be subject to foreign withholding taxes. See "Taxes."
Foreign financial markets, while growing in volume, have, for the most part,
substantially less volume than United States markets, and securities of many
foreign companies are less liquid and their prices more volatile than securities
of comparable domestic companies. The foreign markets also have different
clearance and settlement procedures and in certain markets there have been times
when settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could result either in losses to the Fund
due to subsequent declines in value of such portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Costs associated with transactions in foreign
securities are generally higher than with transactions in United States
securities. There is generally less government supervision and regulation of
exchanges, financial institutions and issuers in foreign countries than there is
in the United States.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in United States securities
since the expenses of the Fund, such as custodial costs, are higher.
The Fund may engage in various portfolio strategies to seek to increase its
return through the use of options on portfolio securities and to hedge its
portfolio against movements in the equity markets, interest rates and exchange
rates between currencies by the use of options, futures and options thereon.
Utilization of options and futures transactions involves the risk of imperfect
correlation in movements in the price of options
10
<PAGE> 11
and futures and movements in the price of the securities, interest rates or
currencies that are the subject of the hedge. There can be no assurance that a
liquid secondary market for options and futures contracts that are held by the
Fund will exist at any specific time. See "Investment Objective and
Policies -- Portfolio Strategies Involving Options and Futures". The Fund may
also purchase call options and stock index call options as an element of
synthetic convertible securities. See "Investment Objective and
Policies -- Convertible Securities."
The Fund has established no rating criteria for the convertible securities
and other debt securities in which it may invest, and such securities may not be
rated at all for creditworthiness. Securities rated in the medium to lower
rating categories of nationally recognized statistical rating organizations are
predominately 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
Fund does not intend to purchase debt securities that are in default.
The Fund may borrow up to 20% of its total assets taken at market value,
but only from banks as a temporary measure for extraordinary or emergency
purposes including to meet redemptions or to settle securities transactions.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek high total return from a
combination of capital appreciation and investment income. The Fund will seek to
achieve its objective by investing primarily in an internationally diversified
portfolio of convertible debt securities, convertible preferred stocks and
"synthetic" convertible securities consisting of a combination of debt
securities or preferred stock and warrants or options. Under normal
circumstances, the Fund will invest at least 65% of its total assets in
convertible securities and 80% of its assets in convertible securities and
synthetic convertible securities of at least three different countries including
the United States. The investment objective described in this paragraph is a
fundamental policy of the Fund and may not be changed without the approval of
the holders of a majority of the Fund's outstanding voting securities.
The convertible securities to be held by the Fund include any corporate
debt security or preferred stock that may be converted into underlying shares of
common stock. The common stock underlying convertible securities may be issued
by a different entity than the issuer of the convertible securities. Convertible
securities entitle the holder to receive interest payments paid on corporate
debt securities or the dividend preference on a preferred stock until such time
as the convertible security matures or is redeemed or until the holder elects to
exercise the conversion privilege. "Synthetic" convertible securities, as such
term is used herein, are created by combining separate securities that possess
the two principal characteristics of a true convertible security, i.e., fixed
income and the right to acquire equity securities. See "Convertible Securities"
below for additional information concerning convertible securities and synthetic
convertible securities eligible for purchase by the Fund.
The Fund believes that the characteristics of convertible securities make
them appropriate investments for an investment company seeking a high total
return from capital appreciation and investment income. These characteristics
include the potential for capital appreciation as the value of the underlying
common stock increases, the relatively high yield received from dividend or
interest payments as compared to common stock dividends and decreased risks of
decline in value relative to the underlying common stock due to their
11
<PAGE> 12
fixed-income nature. As a result of the conversion feature, however, the
interest rate or dividend preference on a convertible security is generally less
than would be the case if the securities were issued in nonconvertible form.
Although the Fund may invest in securities denominated in any currency that
are convertible into common stocks of companies located throughout the world, it
is expected that a majority of its assets will be invested in securities
denominated in United States dollars, currencies of Pacific Basin countries
(such as Japan, Australia, Hong Kong and Singapore), and currencies of Western
European countries (such as the United Kingdom, Germany, the Netherlands,
Switzerland, Sweden, France, Italy, Belgium, Norway, Denmark, Austria and Spain)
and that are convertible into equity securities of United States, Pacific Basin
or Western European corporations. To the extent the Fund acquires synthetic
convertible securities, it is expected that the debt securities or preferred
stock will principally be denominated in United States dollars, Pacific Basin
currencies or Western European currencies and the warrants or options will
principally be exercisable to purchase equity securities of United States,
Pacific Basin or Western European issuers.
Under normal circumstances, the Fund may invest up to 20% of its assets in
other types of securities including equity securities and nonconvertible debt
securities of United States and non-United States issuers.
The Fund has established no rating criteria for the debt securities in
which it may invest and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and unrated securities of
comparable quality 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. See the Statement of Additional Information for additional
information regarding ratings of debt securities. In purchasing such securities,
the Fund will rely on the Manager's judgment, analysis and experience in
evaluating the creditworthiness of an issuer of such securities. The Manager
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters. The Fund
does not intend to purchase debt securities that are in default or that the
Manager believes will be in default.
The Fund reserves the right as a temporary defensive measure to hold money
market securities, including repurchase agreements and purchase and sale
contracts, of United States and non-United States issuers, or cash (foreign
currencies or United States dollars), in such proportions as, in the opinion of
the Manager, prevailing market, economic or political conditions warrant. The
Fund has established no rating criteria for money market securities that it may
hold as a defensive measure. For this purpose, investments made for defensive
purposes will be maintained only during periods in which the Manager determines
that economic or financial conditions are adverse for holding or being fully
invested in convertible and synthetic convertible securities of United States
and non-United States issuers. A portion of the portfolio normally will be held
in U.S. dollars or dollar-denominated money market securities, including
repurchase agreements and purchase and sale contracts, to provide for possible
redemptions.
In evaluating proposed investments, the Manager will seek to maximize the
total return on the Fund's portfolio in terms of United States dollars. In this
regard, the Manager will consider factors that relate both to various securities
markets and to specific securities traded in those markets. In evaluating
markets, the Manager will consider such factors as the condition and growth
potential of various economies and securities markets, currency and taxation
factors (including the applicability and rate of withholding taxes) and other
pertinent financial, social, national and political factors. In analyzing
convertible securities, the Manager will
12
<PAGE> 13
consider both the yield on the convertible security and the potential capital
appreciation that is offered by the underlying common stock. There can be no
assurance that the Fund will achieve its investment objective.
The table below shows the average monthly dollar-weighted market value, by
Standard & Poor's Ratings Service ("S&P") rating category, of the convertible
securities held by the Fund during the fiscal year ended October 31, 1996:
<TABLE>
<CAPTION>
% TOTAL
RATING ASSETS
------------------------------------------------------------------- -------
<S> <C>
AAA................................................................ 14.121%
AA................................................................. 4.995
A.................................................................. 16.203
BBB................................................................ 16.591
BAA................................................................ 0.000
BB................................................................. 2.909
BA................................................................. 0.000
B.................................................................. 3.735
C.................................................................. 0.000
Not Rated*......................................................... 29.517
Commercial Paper & U.S. Gov't...................................... 11.929
-------
100.000%
=======
</TABLE>
- ---------------
* Convertible securities that are not rated by S&P. Such bonds may be rated by
nationally recognized statistical rating organizations other than S&P, or may
not be rated by any of such organizations. With respect to the percentage of
the Fund's assets invested in such securities, the Fund's Manager believes
that 2.204% are of comparable quality to obligations rated AAA, 5.395% are of
comparable quality to obligations rated AA, 11.879% are of comparable quality
to obligations rated A, .639% are of comparable quality to obligations rated
BBB, 4.689% are of comparable quality to obligations rated BAA, 1.798% are of
comparable quality to obligations rated BA, .952% are of comparable quality to
obligations rated B and 1.961% are of comparable quality to obligations rated
C. This determination is based on the Manager's own internal evaluation and
does not necessarily reflect how such securities would be rated by S&P if it
were to rate the securities.
For a description of the above referenced ratings, see the appendix to the
Statement of Additional Information. The Fund has established no rating criteria
for the securities in which it may invest and such securities may not be rated
at all for creditworthiness. The above percentages are for the fiscal year ended
October 31, 1996; the rating composition of the portfolio of the Fund may vary
over time.
CONVERTIBLE SECURITIES
Set forth below is additional information concerning traditional
convertible securities and "synthetic" convertible securities.
Convertible securities are issued and traded in a number of securities
markets. For the past several years, the principal markets have been the United
States, the Euromarket and Japan. Issuers during this period have included major
corporations domiciled in the United States, Japan, France, Switzerland, Canada
and the United Kingdom. Since the Fund will invest a substantial portion of its
assets in the United States market and the Euromarket, where convertible bonds
have been primarily denominated in the United States dollar, it is expected that
ordinarily a substantial portion of the convertible securities held by the Fund
will be
13
<PAGE> 14
denominated in United States dollars. However, the underlying equity securities
typically will be quoted in the currency of the country where the issuer is
domiciled. With respect to convertible securities denominated in a currency
different from that of the underlying equity securities, the conversion price
may be based on a fixed exchange rate established at the time the security is
issued. As a result, fluctuations in the exchange rate between the currency in
which the debt security is denominated and the currency in which the share price
is quoted will affect the value of the convertible security. As described below,
the Fund is authorized to enter into foreign currency hedging transactions in
which it may seek to reduce the impact of such fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion value," which is the
market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock. If, because of a low price of the
common stock, the conversion value is substantially below the investment value
of the convertible security, the price of the convertible security is governed
principally by its investment value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed-income security. The yield and conversion premium of
convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value.
Holders of convertible securities have a claim on the assets of the issuer
prior to the common stockholders but may be subordinated to similar
non-convertible securities of the same issuer. A convertible security may be
subject to redemption at the option of the issuer at a price established in the
charter provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by the Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the holder which
entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security.
As indicated above, "synthetic" convertible securities, for purposes of
this Prospectus, are created by combining separate securities that possess the
two principal characteristics of a true convertible security, i.e., fixed income
("fixed-income component") and the right to acquire equity securities
("convertibility component"). The fixed-income component is achieved by
investing in nonconvertible fixed-income securities such as nonconvertible
bonds, preferred stocks and money market instruments. The convertibility
component is achieved by investing in warrants, exchanges or NASDAQ listed call
options or stock index call options granting the holder the right to purchase a
specified quantity of securities within a specified period of time at a
specified price or to receive cash in the case of stock index options.
A warrant is an instrument issued by a corporation that gives a holder the
right to subscribe to a specified amount of capital stock at a set price for a
specified period of time. Warrants involve the risk that the price of
14
<PAGE> 15
the security underlying the warrant may not exceed the exercise price of the
warrant and the warrant may expire without any value. The Fund has not
established any limits on the purchase of warrants in connection with the
creation of synthetic convertible securities. See "Portfolio Strategies
Involving Options and Futures" for a discussion of call options and stock index
call options.
The synthetic convertible security differs from the true convertible
security in several respects. Unlike a true convertible security, which is a
single security having a unitary market value, a synthetic convertible security
is comprised of two or more separate securities, each with its own market value.
Therefore, the "market value" of a synthetic convertible security is the sum of
the values of its fixed-income component and its convertibility component. For
this reason, the values of a synthetic convertible security and a true
convertible security will respond differently to market fluctuations.
More flexibility is possible in the assembly of a synthetic convertible
security than in the purchase of a convertible security. While synthetic
convertible securities may be selected where the two components represent one
issuer or are issued by a single issuer, thus making the synthetic convertible
security similar to the true convertible security, the character of a synthetic
convertible security allows the combination of components representing distinct
issuers, when management believes that such a combination would better promote
the Fund's investment objective. A synthetic convertible security also is a more
flexible investment in that its two components may be purchased separately. For
example, the Fund may purchase a warrant for inclusion in a synthetic
convertible security but temporarily hold short-term investments while
postponing the purchase of a corresponding bond pending development of more
favorable market conditions.
A holder of a synthetic convertible security faces the risk of a decline in
the price of the stock or the level of the index involved in the convertibility
component, causing a decline in the value of the call option or warrant. Should
the price of the stock fall below the exercise price and remain there throughout
the exercise period, the entire amount paid for the call option or warrant would
be lost. Since a synthetic convertible security includes the fixed-income
component as well, the holder of a synthetic convertible security also faces the
risk that interest rates will rise, causing a decline in the value of the
fixed-income instrument.
Debt securities with attached equity warrants have been issued in the
United States, the Euromarket and Japan. These securities have been sold with
detachable warrants in the United States, Europe and Japan. In Japan, however,
warrant bonds (the term used to refer to these securities) were only issued with
non-detachable warrants prior to December 1986. Eurobonds with warrants have
been denominated in several currencies, including the United States dollar,
Japanese yen, German mark, Dutch guilder and British pound. However, the
exercise price of the warrants is typically expressed in the currency of the
country where the issuer is domiciled.
OTHER FACTORS
While it is the policy of the Fund generally not to engage in trading for
short-term gains, the Manager will effect portfolio transactions without regard
to holding period, if, in its judgment, such transactions are advisable in the
light of a change in circumstances of a particular company or within a
particular industry or in the general market, economic or financial conditions.
The Fund will, however, monitor its trading so as to comply with the
requirements for the special tax treatment afforded regulated investment
companies under the Code. See "Taxes."
Portfolio Turnover. The portfolio turnover rate is calculated by dividing
the lesser of the Fund's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of all securities whose maturities at
15
<PAGE> 16
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year. For the fiscal years ended
October 31, 1995 and 1996, the portfolio turnover rates were 101.12% and 14.72%,
respectively. High portfolio turnover involves correspondingly greater
transaction costs in the form of dealer spending and brokerage commissions,
which are borne directly by the Fund. Such turnover also has certain tax
consequences for the Fund.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
The Fund may engage in various portfolio strategies to seek to increase its
return through the use of options on portfolio securities and to hedge its
portfolio against movements in the equity markets, interest rates and exchange
rates between currencies. This use of options and futures transactions is in
addition to the Fund's ability to purchase call options and stock index call
options as an element of synthetic convertible securities. The Fund has
authority to write (i.e., sell) covered call options on its portfolio
securities, purchase put and call options on securities and engage in
transactions in stock index options, stock index futures and financial futures,
and related options on such futures. The Fund may also deal in forward foreign
exchange transactions and foreign currency options and futures, and related
options on such futures. Each of these portfolio strategies is described below.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options and Futures Transactions"), the
Manager believes that, because the Fund will (i) write only covered call options
on portfolio securities, (ii) in connection with the formation of synthetic
convertible securities, purchase call options or stock index call options only
as an element of synthetic convertibles, and (iii) engage in other options and
futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated with the speculative use of options and futures
transactions. While the Fund's use of hedging strategies is intended to reduce
the volatility of the net asset value of Fund shares, the Fund's net asset value
will fluctuate. There can be no assurance that the Fund's hedging transactions
will be effective. Furthermore, the Fund will only engage in hedging activities
from time to time and may not necessarily be engaging in hedging activities when
movements in the equity markets, interest rates or currency exchange rates
occur. Reference is made to the Statement of Additional Information for further
information concerning these strategies.
Writing Covered Call Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A covered
call option is an option where the Fund in return for a premium gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase of
an identical option prior to the expiration of the option it has written.
Covered call options serve as a partial hedge against the price of the
underlying security declining. The Fund may not write covered call options in
underlying securities in an amount exceeding 15% of the market value of its
total assets.
Purchasing Options. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its securities. By buying a put
option the Fund has a right to sell the underlying security at the
16
<PAGE> 17
exercise price, thus limiting the Fund's risk of loss through a decline in the
market value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset by
the amount of the premium paid for the put option and any related transaction
costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased. In
certain circumstances, the Fund may purchase call options on securities held in
its portfolio on which it has written call options or on securities which it
intends to purchase or, as discussed above, as an element of synthetic
convertible securities. The Fund will not purchase options on securities
(including options purchased as an element of synthetic convertible securities)
if, as a result of such purchase, the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Stock Index Options and Futures and Financial Futures. The Fund is
authorized to engage in transactions in stock index options and futures and
financial futures, and related options on such futures. In addition to the
purchase of stock index call options as an element of synthetic convertible
securities as discussed above, the Fund may purchase or write call options and
purchase put options on stock indexes to hedge against the risks of market-wide
stock price movements in the securities in which the Fund invests. The
effectiveness of the hedge will depend on the degree of diversification of the
Fund's portfolio and the sensitivity of the securities comprising the portfolio
to factors influencing the market as a whole. Because the value of an index
option depends upon movements in the level of the index rather than the price of
a particular stock, whether the Fund will realize a gain or loss on the purchase
or sale of an option on an index depends upon movements in the level of prices
in the stock market generally or in an industry or market segment rather than
movements in the price of a particular stock. Currently, stock index options
traded include the S&P 100 Index, the S&P 500 Index, the NYSE Composite Index,
the AMEX Market Value Index, the National Over-the-Counter Index, the FT Index
and other standard, broadly based stock market indices in the United States and
in foreign countries.
The Fund may also purchase and sell stock index futures contracts and
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities and interest rates, as
described below. A futures contract is an agreement between two parties which
obligates the purchaser of the futures contract to buy and the seller of a
futures contract to sell a security for a set price on a future date. Unlike
most other futures contracts, a stock index futures contract does not require
actual delivery of securities, but results in cash settlement based upon the
difference in value of the index between the time the contract was entered into
and the time of its settlement. The Fund may effect transactions in stock index
futures contracts in connection with equity securities in which it invests and
in financial futures contracts in securities issued or guaranteed by the
government of any country which is a member of the Organization for Economic
Cooperation and Development, United States government and agency securities and
corporate debt securities. Transactions by the Fund in stock index futures and
financial futures are subject to limitations as described below under
"Restrictions on the Use of Futures Transactions."
The Fund may sell stock index futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of the
Fund's securities portfolio that might otherwise result. When the Fund is not
fully invested in the securities markets and anticipates a significant market
advance, it may purchase stock index futures in order to gain rapid market
exposure that may in part or entirely offset increases
17
<PAGE> 18
in the cost of securities that the Fund intends to purchase. As such purchases
are made, an equivalent amount of stock index futures contracts will be
terminated by offsetting sales. The Fund does not consider purchases of futures
contracts to be a speculative practice under these circumstances. It is
anticipated that, in a substantial majority of these transactions, the Fund will
purchase such securities upon termination of the long futures position, whether
the long position is the purchase of a stock index futures contract or the
purchase of a call option on a stock index future, but under unusual
circumstances (e.g., the Fund experiences a significant amount of redemptions),
a long futures position may be terminated without the corresponding purchase of
securities.
The Fund may sell financial futures contracts in anticipation of an
increase in the general level of interest rates. Generally, as interest rates
rise, the market value of debt securities which may be held by the Fund will
fall, thus reducing the net asset value of the Fund. However, as interest rates
rise, the value of the Fund's short position in the futures contract will also
tend to increase, thus offsetting all or a portion of the depreciation in the
market value of the Fund's investments which are being hedged. While the Fund
will incur commission expenses in selling and closing out futures positions,
these commissions are generally less than the transaction expenses which would
have been incurred had the Fund sold portfolio securities in order to reduce its
exposure to increases in interest rates. The Fund also may purchase financial
futures contracts in anticipation of a decline in interest rates when it is not
fully invested in a particular market in which it intends to make investments to
gain market exposure that may in part or entirely offset an increase in the cost
of securities it intends to purchase. It is anticipated that, in a substantial
majority of these transactions, the Fund will purchase securities upon
termination of the futures contract.
The Fund also has authority to purchase and write call and put options on
futures contracts in connection with its hedging activities. Generally, these
strategies are utilized under the same market and market sector conditions
(i.e., conditions relating to specific types of investments) in which the Fund
enters into futures transactions. The Fund may purchase put options or write
call options on futures contracts rather than selling the underlying futures
contract in anticipation of a decrease in the market value of a security or an
increase in interest rates. Similarly, the Fund may purchase call options, or
write put options on futures contracts, as a substitute for the purchase of such
futures to hedge against the increased cost resulting from an increase in the
market value or a decline in interest rates of securities which the Fund intends
to purchase.
The Fund may engage in options and futures transactions on exchanges and in
options in the over-the-counter markets ("OTC options"). In general,
exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligations is guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. OTC options transactions are
two-party contracts with price and terms negotiated by the buyer and seller. See
"Restrictions on OTC Options" below for information as to restrictions on the
use of OTC options.
Foreign Currency Hedging. The Fund has authority to deal in forward
foreign exchange among currencies of the different countries in which it will
invest and multinational currency units as a hedge against possible variations
in the foreign exchange rates among these currencies. This is accomplished
through contractual agreements to purchase or sell a specified currency at a
specified future date (up to one year) and price set at the time of the
contract. The Fund's dealings in forward foreign exchange will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward foreign currency with
respect to specific receivables or payables of the Fund accruing in connection
with the purchase and sale of its portfolio securities, the sale and redemption
of shares of the Fund or the payment of dividends and distributions by the Fund.
Position hedging is the sale of forward foreign currency
18
<PAGE> 19
with respect to portfolio security positions denominated or quoted in such
foreign currency. The Fund will not speculate in foreign forward exchange. The
Fund will not attempt to hedge all of its foreign portfolio positions. The Fund
may not commit more than 15% of its total assets to position hedging contracts.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates.
The Fund is also authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be effected with respect to hedges
on non-U.S. dollar denominated securities owned by the Fund, sold by the Fund
but not yet delivered, or committed or anticipated to be purchased by the Fund.
As an illustration, the Fund may use such techniques to hedge the stated value
in United States dollars of an investment in a yen denominated security. In such
circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of yen for dollars at a specified price
by a future date. To the extent the hedge is successful, a loss in the value of
the yen relative to the dollar will tend to be offset by an increase in the
value of the put option. To offset, in whole or in part, the cost of acquiring
such a put option, the Fund may also sell a call option which, if exercised,
requires it to sell a specified amount of pounds for dollars at a specified
price by a future date (a technique called a "straddle"). By selling such call
option in this illustration, the Fund gives up the opportunity to profit without
limit from increases in the relative value of the yen to the dollar. The Manager
believes that "straddles" of the type which may be utilized by the Fund
constitute hedging transactions and are consistent with the policies described
above.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or sell a currency at a fixed price on a future date (with exchange-traded
contracts and OTC options having the characteristics described above). A futures
contract on a foreign currency is an agreement between two parties to buy and
sell a specified amount of a currency for a set price on a future date. Futures
contracts and options on futures contracts are traded on boards of trade of
futures exchanges. The Fund will not speculate in foreign currency options,
futures or related options. Accordingly, the Fund will not hedge a currency
substantially in excess of the market value of securities that it has committed
or anticipates to purchase that are denominated in such currency, and in the
case of securities that have been sold by the Fund but not yet delivered, the
proceeds thereof in its denominated currency. The Fund may not incur potential
net liabilities of more than 20% of its total assets from foreign currency
options, futures or related options.
Restrictions on the Use of Futures Transactions. Under regulations of the
Commodity Futures Trading Commission ("CFTC"), 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 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 contracts and options.
(However, as stated above, the Fund intends to engage in such options and
futures
19
<PAGE> 20
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 futures contract, or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., high grade commercial paper and daily tender adjustable
notes) or liquid securities in a segregated account with the Fund's Custodian so
that the amount so segregated, plus the amount of initial and variation margin
held in the account of its broker, equals the market value of the futures
contract, thereby insuring that the use of such futures is unleveraged.
Restrictions on OTC Options. The Fund will engage in OTC options,
including over-the-counter foreign currency options and options on foreign
currency futures, only with member banks of the Federal Reserve System and
primary dealers in United States Government securities or with affiliates of
such banks or dealers that have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50 million.
The Fund will acquire only those OTC options for which the Manager believes the
Fund can receive on each business day at least two independent bids or offers
(one of which will be from an entity other than a party to the option).
The staff of the Securities and Exchange Commission (the "Commission") has
taken the position that purchased OTC options and the assets used as cover for
written OTC options are illiquid securities. Therefore, the Fund has adopted an
investment policy pursuant to which it will not purchase or sell OTC options
(including OTC options on futures contracts) if, as a result of such
transactions, the sum of the market value of OTC options currently outstanding
that are held by the Fund, the market value of the underlying securities covered
by OTC call options currently outstanding that were sold by the Fund and margin
deposits on the Fund's existing OTC options on futures contracts exceed 10% of
the net assets of the Fund, taken at market value, together with all other
assets of the Fund that are illiquid or are not otherwise readily marketable.
However, if the OTC option is sold by the Fund to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New York and the
Fund has the unconditional contractual right to repurchase such OTC option from
the dealer at a predetermined price, then the Fund will treat as illiquid such
amount of the underlying securities as is equal to the repurchase price less the
amount by which the option is "in-the-money" (i.e., current market value of the
underlying security minus the option's strike price). The repurchase price with
the primary dealers is typically a formula price which is generally based on a
multiple of the premium received for the option, plus the amount by which the
option is "in-the-money." This policy as to OTC options is not a fundamental
policy of the Fund and may be amended by the Directors of the Fund without the
approval of the Fund's shareholders. However, the Fund will not change or modify
this policy prior to the change or modification by the Commission staff of its
position.
Risk Factors in Options and Futures Transactions. Utilization of options
and futures transactions to hedge the portfolio involves the risk of imperfect
correlation in movements in the price of options and futures and movements in
the price of the securities, interest rates or currencies that are the subject
of the hedge. If the price of the options or futures moves more or less than the
price of 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 the subject of the
hedge. The successful use of options and futures also depends on the Manager's
ability to predict correctly price movements in the market involved in a
particular options or futures transaction.
The Fund intends to enter into options and futures transactions on an
exchange or in the over-the-counter market, only if there appears to be a liquid
secondary market for such options or futures or, in the case of over-the-counter
transactions, the Manager believes the Fund can receive on each business day at
least two
20
<PAGE> 21
independent bids or offers. However, there can be no assurance that a liquid
secondary market will exist at any specific time. Thus, it may not be possible
to close an options or futures position. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
hedge effectively its portfolio. There is also the risk of loss by the Fund of
margin deposits or collateral in the event of bankruptcy of a broker with whom
the Fund has an open position in an option, a futures contract or related
option.
The exchanges on which the Fund intends to conduct options transactions
have generally established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not covered)
that may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts that any person may trade on a particular trading day. The Manager
does not believe that these trading and position limits will have any adverse
impact on the portfolio strategies for hedging the Fund's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
Portfolio Transactions. In executing portfolio transactions, the Fund
seeks to obtain the best net results, taking into account such factors as price
(including the applicable brokerage commissions or dealer spread), size of
order, difficulty of execution, operation facilities of the firm involved and
the firm's risk in positioning a block of securities. While the Fund generally
seeks reasonably competitive commission rates, the Fund does not necessarily pay
the lowest commission or spread available. The Fund contemplates that,
consistent with its policy of obtaining the best net results, it will place
orders for transactions with a number of brokers and dealers, including Merrill
Lynch, an affiliate of the Manager. Subject to obtaining the best price and
execution, brokers who provide supplemental investment research to the Fund 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 and the expenses of the Manager will not necessarily be reduced as a
result of the receipt of such supplemental information. See "Management of the
Fund -- Management and Advisory Arrangements." In addition, consistent with the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"), 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.
It is expected that the majority of the shares of the Fund will be sold by
Merrill Lynch.
The Fund anticipates that its brokerage transactions involving securities
of companies domiciled in countries other than the United States will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States, although the Fund will
endeavor to achieve the best net results in effecting such transactions.
Repurchase Agreements. The Fund may invest in money market 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
United States Government securities or an affiliate thereof. Under such
agreements, the bank or primary dealer or an affiliate thereof 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 obligation. Such
agreements usually cover short periods, such as under one week.
21
<PAGE> 22
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In a repurchase agreement, the Fund will require the seller to provide
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement. In the
event of default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with disposition of the collateral. In the event of a
default under such a repurchase agreement, instead of the contractual fixed
rate, the rate of return to the Fund shall be dependent upon intervening
fluctuations of the market value of such security and the accrued interest on
the security. In such event, the Fund would have rights against the seller for
breach of contract with respect to any losses arising from market fluctuations
following the failure of the seller to perform. 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% of the
Fund's total assets.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio with a value not exceeding 33 1/3% of its total
assets to banks, brokers and other financial institutions and receive collateral
in cash or securities issued or guaranteed by the United States Government. Such
collateral will be maintained at all times in an amount equal to at least 100%
of the current market value of the loaned securities. During the period of such
a loan, the Fund receives the income on the loaned securities and either
receives the income on the collateral or other compensation, i.e., negotiated
loan premium or fee, for entering into the loan and thereby increases its yield.
In the event that the borrower defaults on its obligation to return borrowed
securities, because of insolvency or otherwise, the Fund could experience delays
and costs in gaining access to the collateral and could suffer a loss to the
extent that the value of the collateral falls below the market value of the
borrowed securities.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
Among the more significant restrictions, the Fund may not borrow amounts in
excess of 33 1/3% of its total assets taken at market value (including the
amount borrowed), and an additional 5% of its total assets for temporary
purposes. As a non-fundamental restriction, the Fund is further limited and may
not 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.
Investors are referred to the Statement of Additional Information for a
complete description of such restrictions and policies.
22
<PAGE> 23
MANAGEMENT OF THE FUND
DIRECTORS
The Directors of the Fund consist of six individuals, five of whom are not
"interested persons" of the Fund as defined in the Investment Company Act. The
Directors are responsible for the overall supervision of the operations of the
Fund and perform the various duties imposed on the directors or trustees of
investment companies by the Investment Company Act.
The Directors are:
ARTHUR ZEIKEL* -- President of the Manager and its affiliate, FAM;
President and Director of Princeton Services, Inc. ("Princeton Services");
Executive Vice President of ML & Co.; and Director of the Distributor.
JAMES H. BODURTHA -- Director and Executive Vice President, The China
Business Group, Inc.
HERBERT I. LONDON -- John M. Olin Professor of Humanities, New York
University.
ROBERT R. MARTIN -- Former Chairman, Kinnard Investments, Inc.
JOSEPH L. MAY -- Attorney in private practice.
ANDRE F. PEROLD -- Professor, Harvard Business School.
- ---------------
*Interested person, as defined by the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, which is an affiliate of FAM 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 investment management services. The Manager or FAM
acts as the investment adviser for more than 130 registered investment
companies. The Manager also offers portfolio management and portfolio analysis
services to individuals and institutions. As of January 31, 1997, the Manager
and FAM had a total of approximately $239.8 billion in investment company and
other portfolio assets under management, including accounts of certain
affiliates of the Manager.
Subject to the direction of the Directors of the Fund, 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 and analysis and that
from other relevant sources. The responsibility for making decisions to buy,
sell or hold a particular security rests with the Manager. The Manager performs
certain of the other administrative services and provides all of the office
space, facilities, equipment and necessary personnel for management of the Fund.
Harry E. Dewdney is the Portfolio Manager of the Fund. Mr. Dewdney has been
a Vice President and Portfolio Manager of the Manager since 1986. From 1978 to
1986, he was Senior Vice President of the International Trading and Foreign
Exchange Department of Prescott, Ball & Turben, Inc.
The Fund pays the Manager a monthly fee at the annual rate of 0.65% of the
average daily net assets of the Fund. For the fiscal year ended October 31, 1996
the fee paid by the Fund to the Manager was $463,001 (based upon average net
assets of approximately $71.2 million). Of this amount, none was reimbursed by
the Manager to the Fund pursuant to certain operating expense limitations.
23
<PAGE> 24
Also, the Manager has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K."), an indirect, wholly owned subsidiary of ML & Co. and an affiliate
of the Manager, pursuant to which the Manager pays MLAM U.K. a fee for providing
investment advisory services to the Manager with respect to the Fund, in an
amount to be determined from time to time by the Manager and MLAM U.K. but in no
event in excess of the amount the Manager actually receives for providing
services to the Fund pursuant to the Management Agreement. MLAM U.K. has offices
at Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
The Management Agreement obligates the Fund to pay certain expenses
incurred in its operations including, among other things, the management fee,
legal and audit fees, registration fees, unaffiliated Directors' fees and
expenses, custodian and transfer fees, accounting costs, the costs of issuing
and redeeming shares and certain of the costs of printing proxies, shareholder
reports, prospectuses and statements of additional information distributed to
shareholders. Accounting services are provided to the Fund by the Manager and
the Fund reimburses the Manager for its costs in connection with such services.
For the fiscal year ended October 31, 1996, the Fund reimbursed the Manager
$79,047 for accounting services. For the fiscal year ended October 31, 1996, the
ratio of total expenses to average net assets was 1.57% for Class A shares,
2.64% for Class B shares, 2.65% for Class C shares and 1.77% for Class D shares.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-l of the Investment Company Act which incorporates the Code of Ethics of the
Manager (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Manager and, as described below,
impose additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security which at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Manager.
Furthermore, the Codes provide for trading "blackout periods" which prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which
is a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant to a
transfer agency, dividend disbursing agency and shareholder servicing agency
agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Fund pays the Transfer Agent a
fee of up to $11.00 per Class A or Class D account and up to $14.00 per Class B
or Class C account and is entitled to reimbursement from the Fund for certain
transaction charges and out-of-pocket expenses incurred by it under the Transfer
Agency Agreement. The term "account" includes a shareholder
24
<PAGE> 25
account maintained directly by the Transfer Agent and any other account
representing the beneficial interest of a person in the relevant share class on
a recordkeeping system, provided the recordkeeping system is maintained by a
subsidiary of ML & Co. For the fiscal year ended October 31, 1996, the Fund paid
the Transfer Agent $286,532 pursuant to the Transfer Agency Agreement for
providing transfer agency services.
PURCHASE OF SHARES
The Distributor, an affiliate of the Manager, FAM and Merrill Lynch, acts
as the distributor of the shares of the Fund. Shares of the Fund are offered
continuously for sale by the Distributor and other eligible securities dealers
(including Merrill Lynch). Shares of the Fund may be purchased from securities
dealers or by mailing a purchase order directly to the Transfer Agent. The
minimum initial purchase is $1,000 and the minimum subsequent purchase is $50,
except for retirement plans, for which the minimum initial purchase is $100 and
the minimum subsequent purchase is $1. Different minimums may apply to purchases
made through the Merrill Lynch BlueprintSM Program. See "Purchase of
Shares -- Merrill Lynch BlueprintSM Program" in the Statement of Additional
Information.
The Fund offers its shares in four classes, at a public offering price
equal to the next determined net asset value per share plus sales charges that
are 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
PricingSM System, as described below. The applicable offering price for purchase
orders is based upon the net asset value of the Fund next determined after
receipt of the purchase order by the Distributor. As to purchase orders received
by securities dealers prior to the close of business on the New York Stock
Exchange ("NYSE") (generally, 4:00 p.m., New York time), which includes orders
received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined as of 15 minutes
after the close of business on the NYSE on that day, provided the Distributor in
turn receives the order from the securities dealer prior to 30 minutes after the
close of business on the NYSE on that day. If the purchase orders are not
received by the Distributor prior to 30 minutes after the close of business on
the NYSE, such orders shall be deemed received on the next business day. The
Fund or the Distributor may suspend the continuous offering of the Fund's shares
of any Class at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any order
may be rejected by the Distributor or the Fund. Neither the Distributor nor the
dealers are permitted to withhold placing orders to benefit themselves by a
price change. Merrill Lynch may charge its customers a processing fee (presently
$4.85) to confirm a sale of shares to such customers. Purchases directly through
the Fund's Transfer Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System, which permits each investor to choose the method of purchasing
shares that the investor believes is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
relevant circumstances. Shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives and shares of Class B and Class C
are sold to investors choosing the deferred sales charge alternatives. Investors
should determine whether under their particular circumstances it is more
advantageous to incur an initial sales charge or to have the entire initial
purchase price invested in the Fund with the investment thereafter being subject
to a CDSC and ongoing distribution fees. A discussion of the factors that
25
<PAGE> 26
investors should consider in determining the method of purchasing shares under
the Merrill Lynch Select PricingSM System is set forth under "Merrill Lynch
Select PricingSM 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, distribution fees and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, will be imposed directly against those
classes and not against all assets of the Fund and, accordingly, such charges
will not affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by 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 (except that Class B shareholders may vote upon any
material changes to expenses charged under the Class D Distribution Plan). See
"Distribution Plans" below. Each class has different exchange privileges. See
"Shareholder Services -- Exchange 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 and distribution fees with respect to Class B and
Class C shares in that the sales charges and distribution fees applicable to
each class provide for the financing of the distribution of the shares of the
Fund. The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales personnel
may receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, which are
eligible to sell shares.
26
<PAGE> 27
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System.
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
A Maximum 5.25% initial No No No
sales charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.75% B shares convert to
years, D shares automatically
at a rate of 4.0% during after approximately
the first year, decreasing eight years(5)
1.0%
annually to 0.0%(4)
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
- -------------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</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 "Initial Sales Charge
Alternatives -- Class A and Class D Shares -- Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class A
shares by certain retirement plans in connection with certain fee-based
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but, if the initial sales charge is
waived, may be subject to a 1.0% CDSC for one year. A 0.75% sales charge for
401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans are modified. Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made have a ten year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
27
<PAGE> 28
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 alternative is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below:
<TABLE>
<CAPTION>
SALES CHARGE DISCOUNT TO
AS SELECTED DEALERS
SALES CHARGE AS PERCENTAGE* OF AS PERCENTAGE OF
PERCENTAGE OF THE NET AMOUNT THE OFFERING
AMOUNT OF PURCHASE OFFERING PRICE INVESTED PRICE
- ------------------------------------------------ --------------- -------------- ----------------
<S> <C> <C> <C>
Less than $25,000............................... 5.25% 5.54% 5.00%
$25,000 but less than $50,000................... 4.75 4.99 4.50
$50,000 but less than $100,000.................. 4.00 4.16 3.75
$100,000 but less than $250,000................. 3.00 3.09 2.75
$250,000 but less than $1,000,000............... 2.00 2.04 1.80
$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 and on Class A share purchases in connection with certain
fee-based programs. If the sales charge is waived in connection with a purchase
of $1,000,000 or more, such purchases may be subject to a CDSC of 1.0% if the
shares are redeemed within one year after purchase. Such CDSC may be waived in
connection with certain fee-based programs. A sales charge of 0.75% will be
charged on purchases of $1 million or more of Class A or Class D shares by
certain Employer Sponsored Retirement or Savings Plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended (the "Securities Act").
For the fiscal year ended October 31, 1996, the Fund sold 685,844 Class A
shares for aggregate net proceeds of $7,246,703. The gross sales charges for the
sale of Class A shares of the Fund for that year were $1,648, of which $117 and
$1,531 were received by the Distributor and Merril Lynch, respectively. For the
fiscal year ended October 31, 1996, the Distributor received no CDSCs with
respect to redemptions within one year after purchase of Class A shares
purchased subject to a front-end sales charge waiver. For the fiscal year ended
October 31, 1996, the Fund sold 225,183 Class D shares for aggregate net
proceeds of $2,423,111. The gross sales charges for the sale of Class D shares
of the Fund for that year were $25,194, of which $1,818 and $23,376 were
received by the Distributor and Merrill Lynch, respectively. During the fiscal
year ended October 31, 1996, the Distributor received CDSCs of $497 with respect
to redemptions 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. Certain employer sponsored retirement or savings
plans, including eligible 401(k) plans, may purchase Class A shares at net asset
value provided such plans meet the required minimum number of eligible employees
or required amount of assets advised by MLAM or any of its affiliates. Class A
shares are available at net asset value to corporate warranty insurance reserve
fund programs provided that the program has $3 million or more initially
invested in MLAM-advised
28
<PAGE> 29
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,
collective investment trusts for which Merrill Lynch Trust Company serves as
trustee and certain purchases made in connection with certain fee-based
programs. In addition, Class A shares are offered at net asset value to ML & Co.
and its subsidiaries and their directors and employees and to members of the
Boards of MLAM-advised investment companies, including the Fund. Certain persons
who acquired shares of certain MLAM-advised closed-end funds in their initial
offerings who wish to reinvest the net proceeds from a sale of their closed-end
fund shares of common stock in shares of the Fund also may purchase Class A
shares of the Fund if certain conditions set forth in the Statement of
Additional Information are met (for closed-end funds that commenced operations
prior to October 21, 1994). In addition, Class A shares of the Fund and certain
other MLAM-advised mutual funds are offered at net asset value to shareholders
of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain conditions set
forth in the Statement of Additional Information are met, to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock pursuant to a tender offer conducted by
such funds in shares of the Fund and certain other MLAM-advised mutual funds.
Reduced Initial Sales Charges. No sales charges are imposed upon Class A
and Class D shares issued as a result of the automatic reinvestment of dividends
or capital gains distributions. Class A and Class D sales charges also may be
reduced under a Right of Accumulation and a Letter of Intention. Class A shares
are offered at net asset value to certain eligible Class A investors as set
forth above under "Eligible Class A Investors." See "Shareholder
Services -- Fee-Based Programs."
Class A and Class D shares are offered at net asset value to Employee
Access AccountsSM available through qualified employers that provide
employer-sponsored retirement and savings plans that are eligible to purchase
such shares at net asset value. Subject to certain conditions Class A and Class
D shares are offered at net asset value to shareholders of Merrill Lynch
Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc., and
Class A shares are offered at net asset value to shareholders of Merrill Lynch
Senior Floating Rate Fund, Inc., who wish to reinvest in shares of the Fund the
net proceeds from a sale of certain of their shares of common stock pursuant to
tender offers conducted by those funds.
Class D shares are offered at net asset value, without a sales charge, to
an investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
BlueprintSM Program.
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.
29
<PAGE> 30
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, approximately eight 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 distribution fees of 0.75%
of net assets as discussed below under "Distribution Plans." The proceeds from
the account maintenance fees are used to compensate Merrill Lynch for providing
continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares from the dealers' 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 eight years after issuance, Class B shares will
convert automatically into Class D shares of the Fund, which are subject to an
account maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten 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 that
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 charge will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. For the year ended October 31, 1996,
the Distributor received CDSCs of $110,201 with respect to redemptions of Class
B shares, all of which were paid to Merrill Lynch.
30
<PAGE> 31
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B
CDSC AS A
YEAR SINCE PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
--------------------------------------------------------------------- -----------------
<S> <C>
0-1.................................................................. 4.0%
1-2.................................................................. 3.0%
2-3.................................................................. 2.0%
3-4.................................................................. 1.0%
4 and thereafter..................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
applicable rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over four years or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the four-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment. With respect to
the remaining 40 shares, the charge 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).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from Individual Retirement Account ("IRA")
or other retirement plans or following death or disability (as defined in the
Internal Revenue Code of 1986, as amended (the "Code")) of a shareholder.
The Class B CDSC also is waived on redemptions of shares by certain
eligible 401(a) and eligible 401(k) plans and in connection with certain group
plans placing orders through the Merrill Lynch BlueprintSM Program. The CDSC is
also waived for any Class B shares that are purchased by an eligible 401(a) plan
that are rolled over into a Merrill Lynch or Merrill Lynch Trust Company
custodied IRA and held in such account at the time of redemption and for any
Class B shares that were acquired and held at the time of redemption in an
Employee Access Account(sm) available through employers providing eligible
401(k) plans. The Class B CDSC also is waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. Additional information concerning the
waiver of the Class B CDSC is set forth in the Statement of Additional
Information. The terms of the CDSC may be modified in connection with certain
fee-based programs. See "Shareholder Services -- Fee-Based Programs."
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
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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. No Class C CDSC will be assessed in connection
with certain fee-based programs. See "Shareholder Services -- Fee-Based
Programs."
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.
For the fiscal year ended October 31, 1996, the Distributor received CDSCs
of $2,756 with respect to redemptions of Class C Shares, all of which were paid
to Merrill Lynch.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans that qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a
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Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised mutual
funds held in that Class B Retirement Plan will be converted into Class D shares
of the appropriate funds. Subsequent to such conversion, that Class B Retirement
Plan will be sold Class D shares of the appropriate funds at net asset value.
The Conversion Period also may be modified for retirement plan investors
who participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% 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 October 31, 1996, the Fund paid the Distributor
$436,795 pursuant to the Class B Distribution Plan (based on average net assets
subject to such Class B Distribution Plan of approximately $43.7 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.
For the fiscal year ended October 31, 1996, the Fund paid the Distributor
$37,775 pursuant to the Class C Distribution Plan (based on average net assets
subject to such Class C Distribution Plan of approximately $3.8 million), all of
which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class C shares.
For the fiscal year ended October 31, 1996, the Fund paid the Distributor
$16,646 pursuant to the Class D Distribution Plan (based on average net assets
subject to such Class D Distribution Plan of
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<PAGE> 34
approximately $6.7 million), all of which was paid to Merrill Lynch for
providing account maintenance activities in connection with Class D shares.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the 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 quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs
and the expenses consist of financial consultant compensation.
As of December 31, 1995, the last date at which fully allocated data is
available, the fully allocated accrual expenses incurred by the Distributor and
Merrill Lynch exceeded fully allocated accrual revenues for such period by
approximately $131,000 (.28% of Class B net assets at that date). As of October
31, 1996 direct cash revenues for the period since the commencement of
operations exceeded direct cash expenses by $2,614,878 (6.73% of Class B net
assets at that date). Similar fully allocated accrual data for Class C Shares is
not presented because such revenues and expenses for the period are de minimis.
As of October 31, 1996, for Class C shares, direct cash revenues for the period
since the commencement of operations exceeded direct cash expenses by $54,782
(1.33% 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 the Class B, Class C and Class D shares, and there is no
assurance that the Directors of the Fund will approve the continuance of the
Distribution Plans from year to year. However, the Distributor intends to seek
annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Directors will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or distribution
of each class of shares separately. The initial sales charges, the account
maintenance fee, the distribution fee and/or the CDSCs received with respect to
one class will not be used to subsidize the sale of shares of another class.
Payments of the distribution fee on Class B shares will terminate upon
conversion of those Class B shares into Class D shares as set forth under
"Deferred Sales Charge Alternatives -- Class B and Class C Shares -- Conversion
of Class B Shares to Class D Shares."
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee and
the CDSC borne by the Class B 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%
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(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
payments in excess of the amount payable under the NASD formula will not be
made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund on 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 that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive on redemption all dividends
declared through the date of redemption. The value of shares at the time of
redemption may be more or less than the shareholder's cost, depending on the
market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Fund's Transfer Agent, Merrill Lynch Financial Data Services,
Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests
delivered other than by mail should be delivered to Merrill Lynch Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Proper notice of redemption in the case of shares deposited with the Transfer
Agent may be accomplished by a written letter requesting redemption. Proper
notice of redemption in the case of shares for which certificates have been
issued may be accomplished by a written letter as noted above accompanied by
certificates for the shares to be redeemed. Redemption requests should not be
sent to the Fund. The redemption request 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 or on the certificate, as the
case may be. 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, the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications.
Notarized signatures are not sufficient. In certain instances, the Transfer
Agent may require additional documents such as, but not limited to, trust
instruments, death certificates, appointments as executor or administrator, or
certificates of corporate authority. For shareholders redeeming directly with
the Transfer Agent, payments will be mailed within seven days of receipt of a
proper notice of redemption.
At various times, the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it
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has assured itself that good payment (e.g., cash, or certified check drawn on a
United States bank) has been collected for the purchase of such shares.
Normally, this delay will not exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund will normally accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the regular close of business on
the NYSE (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 NYSE on the same day. Dealers have the responsibility of
submitting such repurchase requests to the Fund not later than 30 minutes after
the close of business on the NYSE in order to obtain that day's closing price.
These repurchase arrangements are for the convenience of shareholders and
do not involve a charge by the Fund (other than any applicable CDSC). However,
securities firms which do not have selected dealer agreements with the
Distributor may impose a charge on the shareholder for transmitting the notice
of repurchase to the Fund. Merrill Lynch may charge its customers a processing
fee (presently $4.85) to confirm a repurchase of shares. Repurchases directly
through the Fund's Transfer Agent are not subject to the processing fee. The
Fund reserves the right to reject any order for repurchase, which right of
rejection might affect adversely shareholders seeking redemption through the
repurchase procedure. However, a shareholder whose order for repurchase is
rejected by the Fund may redeem shares as set forth above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
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. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request 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.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in shares of the Fund. Certain of such
services are not available to investors who place orders for the Fund through
the Merrill Lynch BlueprintSM Program. Full details as to each of such services
and instructions as to how to participate in the various plans and services, or
to change options with respect thereto, can be obtained from the Fund by calling
the telephone number on the cover page hereof or from the Distributor or Merrill
Lynch. Included in such services are the following:
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INVESTMENT ACCOUNT
Each shareholder whose account (an "Investment Account") is maintained at
the Transfer Agent has an Investment Account and will receive statements, at
least quarterly, from the Transfer Agent. These quarterly statements will serve
as transaction confirmations for automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions. These statements will also show any other activity in the account
since the preceding statement. Shareholders will receive separate transaction
confirmations for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of ordinary income dividends and
long-term capital gains distributions. Shareholders may make additions to their
Investment Accounts at any time by mailing a check directly to the Transfer
Agent. Shareholders may also maintain their accounts through Merrill Lynch. Upon
the transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name may be opened automatically at
the Transfer Agent. Shareholders considering transferring their Class A or Class
D shares from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the Class A or Class D shares are to
be transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A or Class D shares (paying any applicable CDSC) so
that the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder
at the Transfer Agent. 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 firm for re-registration as described in the preceding sentence.
Shareholders considering transferring a tax-deferred retirement account such as
an individual retirement account from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder either must redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund each have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated in accordance
with the rules of the Commission.
Under the Merrill Lynch Select 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
the account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual
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<PAGE> 38
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 that 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 for the newly acquired shares of the other
fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of 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 of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services -- Exchange Privilege" in the
Statement of Additional Information.
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 next determined on the ex-dividend date of such dividend
or distribution. A shareholder may at any time, by written notification or by
telephone (1-800-MER-FUND) to the Transfer Agent, elect to have subsequent
dividends or capital gains distributions, or both, paid in cash, rather than
reinvested, in which event payment will be mailed on or about the payment date.
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.
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SYSTEMATIC WITHDRAWAL PLANS.
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his Investment Account through automatic payment by check or
through automatic payment by direct deposit to his bank account on either a
monthly or quarterly basis. Alternatively, Class A shareholder whose shares are
held within a CMA(R), CBA(R) or Retirement Account may elect to have shares
redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through
the Systematic Redemption Program, subject to certain conditions.
AUTOMATIC INVESTMENT PLANS.
Regular additions of shares may be made to an investor's Investment Account
by pre-arranged charges of $50 or more to his regular bank account. Investors
who maintain CMA(R) or CBA(R) accounts may arrange to have periodic investments
made in the Fund in their CMA(R) or CBA(R) accounts or in certain related
accounts in amounts of $100 or more ($1 for retirement accounts) through the
CMA(R) or CBA(R) Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares that will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from Merrill Lynch Investor
Services at (800) MER-FUND (637-3863).
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
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Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in warrants, futures and options) ("capital
gain dividends") are taxable to shareholders as long-term capital gains,
regardless of the length of time the shareholder has owned Fund shares. Any loss
upon the sale or exchange of Fund shares held for six months or less, however,
will be treated as long-term capital loss to the extent of any capital gain
dividends received by the shareholder. Distributions in excess of the Fund's
earnings and profits will first reduce the adjusted tax basis of a holder's
shares and, after such adjusted tax basis is reduced to zero, will constitute
capital gains to such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible for
the dividends received deduction allowed to corporations under the Code if
certain requirements are met. 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.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against their
U.S. income taxes. No deductions for foreign taxes, however, may be claimed by
noncorporate shareholders who do not itemize deductions. A shareholder that is a
nonresident alien individual or a foreign corporation may be subject to U.S.
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against such
U.S. tax for the foreign taxes treated as having been paid by such shareholder.
The Fund will report annually to its shareholders the amount per share of such
withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer
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identification number is on file with the Fund or who, to the Fund's knowledge,
have furnished an incorrect number. When establishing an account, an investor
must certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are not
"regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
income dividend distributions, and all or a portion of distributions made before
the losses were realized but in the same taxable year would be recharacterized
as a return of capital to shareholders, thereby reducing the basis of each
shareholder's Fund shares and resulting in a capital gain for any shareholder
who received a distribution greater than the shareholder's tax basis in Fund
shares (assuming the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon the purchase of the new shares in the absence
of the exchange privilege. Instead, such sales charge will be treated as an
amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
that are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
41
<PAGE> 42
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
yield for various specified time periods in advertisements or information
furnished to present or prospective shareholders. Average annual total return is
computed separately for Class A, Class B, Class C and Class D shares in
accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period such as
in the case of Class B and Class C shares and the maximum sales charge in the
case of Class A and Class D shares. Dividends paid by the Fund with respect to
all shares, to the extent any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in the same amount, except
that account maintenance and distribution charges and any incremental transfer
agency costs relating to each class of shares will be borne exclusively by that
class. The Fund will include performance data for all classes of shares of the
Fund in any advertisement or information including performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average annual total return data
since the average annual rates of return reflect compounding; aggregate total
return data generally will be higher than average annual total return data since
the aggregate rates of return reflect compounding over a longer period of time.
In advertisements distributed to investors whose purchases are subject to waiver
of the CDSC in the case of Class B or Class C shares (such as investors in
certain retirement plans) or to reduced sales loads in the case of Class A and
Class D shares, the performance data may take into account the reduced, and not
the maximum, sales charge or may not take into account the CDSC and therefore
may reflect greater total return since, due to the reduced sales charges 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 for each class will be computed based on a 30-day period
by dividing (a) the net income based on the yield of each security earned during
the period by (b) the average daily number of shares outstanding in each class
during the period that were entitled to receive dividends multiplied by the
maximum offering price/net asset value per share of that class on the last day
of the period. The yield for the 30-day period ended October 31, 1996 was 2.37%
for Class A shares, 1.45% for Class B shares, 1.42% for Class C shares and 2.14%
for Class D shares.
42
<PAGE> 43
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return 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 that of the Standard &
Poor's 500 Index, the Dow Jones Industrial Average or performance data published
by Lipper Analytical Services, Inc. and Morningstar Publications, Inc.
("Morningstar"), Money Magazine, U.S. News & World Report, Business Week, CDA
Investment Technology, Inc., Forbes Magazine, Fortune Magazine or other industry
publications. From time to time, the Fund may include the Fund's Morningstar
risk-adjusted performance ratings in advertisements or supplemental sales
literature. As with other performance data, performance comparisons should not
be considered indicative of the Fund's relative performance for any future
period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all its net investment income.
Dividends from such net investment income are paid quarterly. All net realized
long- or short-term capital gains, if any, are distributed to the Fund's
shareholders at least annually. From time to time, the Fund may declare a
special distribution at or about the end of the calendar year in order to comply
with Federal tax requirements that certain percentages of its ordinary income
and capital gains be distributed during the calendar year. Gains or losses
attributable to certain foreign currency transactions may increase or decrease
the amount of the Fund's income available for distribution to shareholders. If
such losses exceed other income during a taxable year, (a) the Fund would not be
able to make any ordinary income dividend distributions, and (b) all or a
portion of distributions made before the losses were realized would be
recharacterized as a return of capital to shareholders, rather than as an
ordinary income dividend, thereby reducing each shareholder's tax basis in the
Fund shares for Federal income tax purposes. See "Taxes." If in any fiscal year,
the Fund has net income from certain foreign currency transactions, such income
will be distributed annually. Dividends may be reinvested automatically in
shares of the Fund at net asset value. Shareholders may elect in writing to
receive any such dividends or distributions, or both, in cash. Dividends and
distributions are taxable to shareholders as discussed under "Taxes" whether
they are reinvested in shares of the Fund or received in cash.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and transfer agency
fees applicable with respect to such class of shares. See "Additional
Information -- Determination of Net Asset Value."
DETERMINATION OF NET ASSET VALUE
The net asset value of shares of all classes of the Fund is determined by
the Manager once daily, 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m. New York time), on each day during which the NYSE is open
for trading. Any assets or liabilities initially expressed in terms of non-U.S.
dollar currencies are translated into U.S. dollars at the prevailing market
rates as quoted by one or more banks or dealers on the day of valuation. The net
asset value per share is computed by dividing the value of the
43
<PAGE> 44
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time,
rounded to the nearest cent. Expenses, including the fees payable to the Manager
and the Distributor, are accrued daily.
The per share net asset value of Class A shares generally will be higher
than the per share net asset value of shares of other classes, reflecting the
daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to the Class B and Class C shares
and the daily expense accruals of the account maintenance fees applicable with
respect to 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 four
classes will tend to converge (although not necessarily meet) immediately after
the payment of dividends or distributions, which will differ by approximately
the amount of the expense accrual differential between the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Directors as the
primary market. Securities traded in the over-the-counter ("OTC") market are
valued at the last available bid price in the OTC market prior to the time of
valuation. Portfolio securities that are traded on both the OTC market and on a
stock exchange are valued according to the broadest and most representative
market. Other investments, including futures contracts and related options,
shall be stated at market value. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Directors of the Fund. The Fund
employs Merrill Lynch Securities Pricing Service ("MLSPS"), an affiliate of the
Manager, to provide securities prices for the Fund. During the fiscal year ended
October 31, 1996, the Fund made no payments to MLSPS for such service.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on October 22, 1987. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock, each of which consists of 100,000,000 shares. Shares of Class A,
Class B, Class C and Class D Common Stock represent an interest in the same
assets of the Fund and are identical in all respects except that Class B, Class
C and Class D shares bear certain expenses related to the account maintenance
associated with such shares, and Class B and Class C shares bear certain
expenses related to 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 Directors of the Fund
may classify and reclassify the shares of the Fund into additional classes of
Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act of
1940 does not require shareholders to act upon any of the following matters: (i)
election of Directors; (ii) approval of an
44
<PAGE> 45
investment advisory agreement; (iii) approval of a distribution agreement; and
(iv) ratification of selection of independent accountants. Also, the by-laws of
the Fund require that a special meeting of shareholders be held upon the written
request of at least 10% of the outstanding shares of the Fund entitled to vote
at such meeting. Voting rights for Directors are not cumulative. Shares issued
are fully paid and non-assessable and have no preemptive rights. Shares have the
conversion rights described in this Prospectus. Each share of Common Stock is
entitled to participate equally in dividends and distributions declared by the
Fund and in the net assets of the Fund upon liquidation or dissolution after
satisfaction of outstanding liabilities except, as noted above, the Class B,
Class C and Class D shares bear certain additional expenses.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
P.O. BOX 45289
JACKSONVILLE, FLORIDA 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch Financial Consultant or Merrill Lynch Financial
Data Services, Inc. at 800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
45
<PAGE> 46
[THIS PAGE IS INTENTIONALLY LEFT BLANK]
46
<PAGE> 47
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINTSM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINTSM PROGRAM
APPLICATION BY CALLING TOLL FREE (800) 637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ]
Class C shares [ ] Class D shares
of Merrill Lynch Global Convertible Fund, Inc. and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to Merrill Lynch Financial
Data Services, Inc., as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
1. .......................................................... 4.
..........................................................
2. .......................................................... 5.
..........................................................
3. .......................................................... 6.
..........................................................
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address.........................................................................
(Zip Code)
<TABLE>
<S> <C>
Occupation .........................................
...................................................
Signature of Owner
<CAPTION>
Occupation ......................................... 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 Global Convertible Fund, Inc. 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.
47
<PAGE> 48
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. -- 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
"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 Global Convertible Fund, Inc. 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 Global Convertible
Fund, Inc. 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 Global Convertible Fund, Inc. 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 Global Convertible Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
shareholder's signature.
...............................................................
Dealer Name and Address
By .............................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------- ------------
..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer Account No.
</TABLE>
48
<PAGE> 49
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. -- 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> <C> <C> <C> <C> <C> <C>
(PLEASE PRINT) ------------------------------------
Name of Owner.......................................................................
------------------------------------
Social Security No.
First Name Initial Last Name or Taxpayer Identification No.
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
.................................................................................... Account Number...........................
(Zip Code) (if existing account)
<CAPTION>
(PLEASE PRINT)
<S> <C> <C> <C>
Name of Owner.......................................................................
First Name Initial Last Name
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
....................................................................................
(Zip Code)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND D SHARES ONLY (See terms and
conditions in the Statement of Additional Information)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [ ] Class A or [ ] Class D shares in Merrill Lynch Global
Convertible Fund, Inc. at cost or current offering price. Withdrawals to be made
either (check one) [ ] Monthly on the 24th day of each month, or [ ] Quarterly
on the 24th day of March, June, September and December. If the 24th falls on a
weekend or holiday, the next succeeding business day will be utilized. Begin
systematic withdrawal on ________________ (month), or as soon as possible
thereafter.
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [ ]
$________ or [ ] ____% of the current value of [ ] Class A or [ ] Class D shares
in the account.
SPECIFY WITHDRAWAL METHOD: [ ] check or [ ] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
[ ] as indicated in Item 1.
[ ] to the order of..........................................................
Mail to (check one)
[ ] the address indicated in Item 1.
[ ] Name (please print)......................................................
Address.........................................................................
...........................................................................
Signature of Owner
..............................................................................
Date............................................................................
Signature of Co-Owner (if any)..................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO 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.
49
<PAGE> 50
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. -- 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 Global Convertible Fund, Inc., 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 Global Convertible Fund, Inc. as indicated below:
Amount of each check or ACH debit $..........................................
Account Number...............................................................
Please date and invest ACH debits on the 20th of each month
beginning ________________ or as soon thereafter as possible.
(month)
I agree that you are 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 debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of Fund shares including liquidating shares of the Fund and
credit my bank account. I further agree that if a debit is not honored upon
presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS DRAWN BY
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City............................................ State .......... Zip ..........
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.
50
<PAGE> 51
MANAGER
Merrill Lynch 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 08536-9081
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE> 52
- ------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table................................. 2
Merrill Lynch Select Pricing(SM) System... 3
Financial Highlights...................... 8
Special Considerations.................... 10
Investment Objective and Policies......... 11
Convertible Securities.................. 13
Other Factors........................... 15
Portfolio Strategies Involving Options
and Futures........................... 16
Other Investment Policies and
Practices............................. 21
Investment Restrictions................. 22
Management of the Fund.................... 23
Directors............................... 23
Management and Advisory Arrangements.... 23
Code of Ethics.......................... 24
Transfer Agency Services................ 24
Purchase of Shares........................ 25
Initial Sales Charge
Alternatives -- Class A and Class D
Shares................................ 28
Deferred Sales Charge Alternatives --
Class B and Class C Shares............ 29
Distribution Plans...................... 33
Limitations on the Payment of Deferred
Sales Charges......................... 34
Redemption of Shares...................... 35
Redemption.............................. 35
Repurchase.............................. 36
Reinstatement Privilege -- Class A and
Class D Shares........................ 36
Shareholder Services...................... 36
Investment Account...................... 37
Exchange Privilege...................... 37
Automatic Reinvestment of Dividends and
Capital Gains Distributions........... 38
Systematic Withdrawal Plans............. 39
Automatic Investment Plans.............. 39
Taxes..................................... 39
Performance Data.......................... 42
Additional Information.................... 43
Dividends and Distributions............. 43
Determination of Net Asset Value........ 43
Organization of the Fund................ 44
Shareholder Reports..................... 45
Shareholder Inquiries................... 45
Authorization Form........................ 47
Code # 10665-0297
</TABLE>
[Merrill Lynch Logo]
MERRILL LYNCH
GLOBAL CONVERTIBLE
FUND, INC.
PROSPECTUS [Merrill Lynch Compass]
February 24, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 53
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
Merrill Lynch Global Convertible Fund, Inc. (the "Fund") is a mutual fund
that seeks to provide shareholders with high total return by investing primarily
in an internationally diversified portfolio of convertible debt securities,
convertible preferred stocks and "synthetic" convertible securities consisting
of a combination of debt securities or preferred stock and warrants or options.
The investment philosophy of the Fund is based on the belief that the
characteristics of convertible securities make them appropriate investments for
an investment company seeking a high total return from capital appreciation and
investment income. There can be no assurance that the investment objective of
the Fund will be realized.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances.
-------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated
February 24, 1997 (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.
-------------------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
-------------------------
The date of this Statement of Additional Information is February 24, 1997.
<PAGE> 54
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek high total return from a
combination of capital appreciation and investment income. The Fund will seek to
achieve its objective by investing primarily in an internationally diversified
portfolio of convertible debt securities, convertible preferred stocks and
"synthetic" convertible securities consisting of a combination of debt
securities or preferred stock and warrants or options. Reference is made to
"Investment Objective and Policies" in the Prospectus for a discussion of the
investment objective and policies of 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 the Manager. As a result of the investment policies described in
the Prospectus, under certain market conditions the Fund's portfolio turnover
may be higher than that of other investment companies; however, it is extremely
difficult to predict portfolio turnover rates with any degree of accuracy.
Higher portfolio turnover may contribute to higher transactional costs and
negative tax consequences, such as an increase in capital gain dividends or in
ordinary income dividends of accrued market discount, as well as greater
difficulty meeting the requirement for qualification as a regulated investment
company that less than 30% of its gross income be derived from the sale or other
disposition of securities held for less than three months. See "Dividends,
Distributions and Taxes."
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion under the caption "Investment Objective
and Policies -- Portfolio Strategies Involving Options and Futures" in the
Prospectus for information with respect to various portfolio strategies
involving options and futures. The following is further information relating to
portfolio strategies involving options and futures the Fund may utilize.
Writing Covered Call Options. The writer of a covered call option has no
control over when he may be required to sell his securities since he may be
assigned an exercise notice at any time prior to the termination of his
obligation as a writer. If an option expires unexercised, the writer realizes a
gain in the amount of the premium. Such a gain, of course, may be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer realizes a gain or loss from the sale
of the underlying security.
Options referred to herein and in the Fund's Prospectus may be options
issued by The Options Clearing Corporation (the "Clearing Corporation"), which
are currently traded on the Chicago Board Options Exchange, American Stock
Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange or New York Stock
Exchange. Options referred to herein and in the Fund's Prospectus may also be
options traded on foreign securities exchanges such as the London Stock Exchange
and the Amsterdam Stock Exchange. An option position may be closed out only on
an exchange that provides a secondary market for an option of the same series.
If a secondary market does not exist, it might not be possible to effect closing
transactions in particular options, with the result, in the case of a covered
call option, that the Fund will not be able to sell the underlying security
until the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect
2
<PAGE> 55
to particular classes or series of options or underlying securities; (iv)
unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or the Clearing Corporation may not
at all times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Clearing Corporation as a
result of trades on that exchange would continue to be exercisable in accordance
with their terms.
The Fund may also enter into over-the-counter call option transactions
("OTC options"), which are two party contracts with price and terms negotiated
between the buyer and seller. The Fund will only enter into over-the-counter
option transactions with respect to portfolio securities for which management
believes the Fund can receive on each business day at least two independent bids
or offers (one of which will be from an entity other than a party to the
option).
Stock Index Options and Futures and Financial Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
options and futures and financial futures, and related options on such futures.
Set forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security or, in the case of an index-based futures contract, to make and accept
a cash settlement for a set price on a future date. A majority of transactions
in 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. Futures contracts and options
on futures contracts are traded on boards of trade which have been designated
"contracts markets" for the trading thereof by the Commodity Futures Trading
Commission ("CFTC").
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the purchaser
and seller under the futures contract. Subsequent payments to and from the
broker, called "variation margin," are required to be made on a daily basis as
the price of the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"mark to the market". At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
An order has been obtained from the Commission exempting the Fund from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "Investment Company Act") in connection with its strategy
of investing in 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 Fund and commodities brokers with
respect to initial and variation margin. Section 18(f) of the Investment Company
Act prohibits an open-end investment company such as the Fund from issuing a
"senior security" other than a borrowing from a bank. The staff of the
Commission has in the past indicated that a futures contract may be a "senior
security" under the Investment Company Act.
3
<PAGE> 56
Foreign Currency Hedging. Generally, the foreign exchange transactions of
the Fund will be conducted on a spot, i.e., cash, basis at the spot rate for
purchasing or selling currency prevailing in the foreign exchange market. This
rate under normal market conditions differs from the prevailing exchange rate in
an amount generally less than 0.15 of one percent due to the costs of converting
from one currency to another. However, the Fund has authority to deal in foreign
exchange among currencies of the different countries in which it will invest as
a hedge against possible variations in the foreign exchange rate among these
currencies. The Fund may not position hedge with respect to the currency of a
particular country to an extent greater than the aggregate market value (at the
time of making such sale) of the securities held in its portfolio denominated or
quoted in that particular foreign currency. If the Fund enters into a position
hedging transaction, its custodian bank will place cash or liquid securities in
a separate account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of such forward contract. If the
value of the securities placed in the separate account declines, additional cash
or securities will be placed in the account so that the value of the account
will equal the amount of the Fund's commitment with respect to such contracts.
The Fund will not attempt to hedge all of its foreign portfolio positions and
will enter into such transactions only to the extent, if any, deemed appropriate
by the Manager. The Fund will not enter into a position hedging commitment if,
as a result thereof, the Fund would have more than 15% of the value of its total
assets committed to such contracts. The Fund will not enter into a forward
contract with a term of more than one year.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in foreign currency transactions varies with such factors as the
currencies involved, the length of the contract period and the market conditions
then prevailing. Since transactions in foreign currency exchange usually are
conducted on a principal basis, no fees or commissions are involved.
Risk Factors in Options and Futures Transactions. Prior to exercise or
expiration, an exchange-traded option position can only be terminated by
entering into a closing purchase or sale transaction. This requires a secondary
market on an exchange for call or put options of the same series. The Fund will
enter into an option or futures transaction on an exchange only if there appears
to be a liquid secondary market for such options or futures. However, there can
be no assurance that a liquid secondary market will exist for any particular
call or put option or futures contract at any specified time. Thus, it may not
be possible to close an option or futures position. The Fund will acquire only
over-the-counter options for which management believes the Fund can receive on
each business day at least two independent bids or offers (one of which will be
from an entity other than a party to the option). In the case of a futures
position or an option on a futures position written by the Fund in the event of
adverse price movements, the Fund would continue to be required to make daily
cash payments of variation margin. In such situations, if the Fund has
insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do so.
In addition, the Fund may be required to take or make delivery of the security
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
hedge effectively its portfolio. There is also the risk of loss by the Fund of
margin deposits in the event of bankruptcy of a broker with whom the Fund has an
open position in a futures contract or related option.
4
<PAGE> 57
The exchanges on which the Fund intends to conduct options transactions
have generally established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these limits
and it may impose other sanctions or restrictions. The Manager does not believe
that these trading and position limits will have any adverse impact on the
portfolio strategies for hedging the Fund's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
Lending of Portfolio Securities. The Fund may lend securities from its
portfolio to approved borrowers and receive therefor collateral in cash or
securities issued or guaranteed by the United States Government. Such collateral
will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. The purpose of such loans is to
permit the borrower to use such securities for delivery to purchasers when such
borrower has sold short. If cash collateral is received by the Fund, it is
invested in short-term money market securities, and a portion of the yield
received in respect of such investment is retained by the Fund. Alternatively,
if securities are delivered to the Fund as collateral, the Fund and the borrower
negotiate a rate for the loaned premium to be received by the Fund for lending
its portfolio securities. In either event, the total yield on the Fund's
portfolio is increased by loans of its portfolio securities. The Fund will have
the right to regain record ownership of loaned securities to exercise beneficial
rights such as voting rights, subscription rights and rights to dividends,
interest or other distributions. Such loans are terminable at any time. The Fund
may pay reasonable finder's, administrative and custodial fees in connection
with such loans.
High Yield Securities. The Fund has established no rating criteria for
debt securities in which it may invest. Therefore, the Fund may invest in
convertible and, to a limited extent, non-convertible debt securities either (a)
which are rated BBB or better by Standard & Poor's Ratings Service ("S&P") or
Baa or better by Moody's Investors Service, Inc. ("Moody's") or which, in the
Manager's judgment, possess similar credit characteristics ("investment grade
securities") or (b) which are rated BB or lower by S&P or Ba or lower by Moody's
or which, in the Manager's judgment, possess similar credit characteristics
("high yield securities," also commonly referred to as "junk bonds"). The
Manager considers the ratings assigned by S&P or Moody's as one of several
factors in its independent credit analysis of issuers.
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 adversely affected by
specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of high yield securities because such securities may be unsecured and
may be subordinated to other credits of the issuer.
5
<PAGE> 58
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, the secondary trading
market for high yield securities is generally not as liquid as the secondary
market for higher rated securities. Reduced secondary market liquidity may have
an adverse impact on market price and the 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.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to adversely affect the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent it is required to seek recovery upon a default on a portion holding
or participate in the restructuring of the obligation.
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 Investment Company Act means
the lesser of (i) 67% of the Fund's shares represented at a meeting at which
more than 50% of the outstanding shares of the Fund are represented or (ii) more
than 50% of the Fund's outstanding shares). The Fund may not:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value at the
time of each investment, in the securities of issuers in any particular
industry (excluding the U.S. Government and its agencies and
instrumentalities). For purposes of this restriction, states,
municipalities and their political subdivisions are not considered part of
any industry.
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interest therein or issued by companies which
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
this Statement of Additional Information, as they may be amended from time
to time.
6
<PAGE> 59
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
d. Notwithstanding fundamental investment restriction (7) above,
borrow amounts in excess of 20% of its total assets, taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act involving
only usual and customary commissions or transactions permitted pursuant to an
exemptive order under the Investment Company Act. See "Portfolio Transactions
and Brokerage". Without such an exemptive order, the Fund is prohibited from
engaging in portfolio transactions with Merrill Lynch or its affiliates acting
as principal and from purchasing securities in public offerings that are not
registered under the Securities Act in which such firms or any of its affiliates
participate as an underwriter or dealer.
7
<PAGE> 60
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and portfolio manager
of the Fund, including their ages and their principal occupations for at least
the last five years, is set forth below. Unless otherwise noted, the address of
each executive officer and Director is P.O. Box 9011, Princeton, New Jersey
08543-9011.
ARTHUR ZEIKEL (64) -- President and Director(1)(2) -- President of the
Manager (which term as used herein includes its corporate predecessors) since
1977; President of Fund Asset Management, L.P. ("FAM") (which term as used
herein includes its corporate predecessors) since 1977; President and Director
of Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Director of
Merrill Lynch Funds Distributor, Inc. ("MLFD" or the "Distributor").
JAMES H. BODURTHA (53) -- Director(2) -- 36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996. Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
HERBERT I. LONDON (57) -- Director(2) -- 113-115 University Place, New
York, New York 10003. John M. Olin Professor of Humanities, New York University
since 1993 and Professor thereof since 1980; Dean, Gallatin Division of New York
University from 1978 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Trustee, Hudson Institute since 1980; Director,
Danion Corporation since 1991; Overseer, Center for Naval Analyses from 1983 to
1993; Limited Partner, Hypertech L.P. since 1996.
ROBERT R. MARTIN (69) -- Director(2) -- 513 Grand Hill, St. Paul, Minnesota
55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc. from 1990
to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989; Director,
Carnegie Capital Management from 1977 to 1985 and Chairman thereof in 1979;
Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Chairman of the Board, WTC Industries
Inc. in 1994; Trustee, Northland College since 1992.
JOSEPH L. MAY (67) -- Director(2) -- 424 Church Street, Suite 2000,
Nashville, Tennessee 37219. Attorney in private practice since 1984; President,
May and Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to
1983; Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The
May Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
ANDRE F. PEROLD (44) -- Director(2) -- Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and Associate
Professor from 1983 to 1989; Trustee, The Common Fund, since 1989; Director,
Quantec Limited since 1991.
TERRY K. GLENN (56) -- Executive Vice President(1)(2) -- Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of the Distributor since
1986 and Director thereof since 1991; President of Princeton Administrators,
L.P. since 1988.
8
<PAGE> 61
JOSEPH T. MONAGLE, JR. (47) -- Senior Vice President(1)(2) -- Senior Vice
President of the Manager and FAM since 1983; Vice President of the Manager from
1978 to 1990; Senior Vice President of Princeton Services since 1993.
HARRY E. DEWDNEY (68) -- Vice President and Portfolio Manager(1) -- Vice
President and Portfolio Manager of the Manager since 1986; Senior Vice President
of the International Trading and Foreign Exchange Department of Prescott, Ball &
Turben, Inc. from 1978 to 1986.
DONALD C. BURKE (36) -- Vice President(1)(2) -- Vice President and Director
of Taxation of the Manager since 1990; Employee of Deloitte & Touche LLP from
1981 to 1990.
GERALD M. RICHARD (47) -- Treasurer(1)(2) -- Senior Vice President and
Treasurer of the Manager and FAM since 1984; Vice President of the Distributor
since 1981 and Treasurer thereof since 1984; Senior Vice President and Treasurer
of Princeton Services since 1993.
MARK B. GOLDFUS (50) -- Secretary(1)(2) -- Vice President of the Manager
since 1985.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a trustee, director or officer of certain other
investment companies for which the Manager or FAM acts as investment adviser
or manager.
At January 31, 1997, the officers and Directors of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of common
stock of ML & Co., and owned an aggregate of less than 1% of the outstanding
shares of the Fund.
COMPENSATION OF DIRECTORS
Pursuant to the terms of the management agreement with the Fund, the
Manager pays all compensation of officers and employees of the Fund as well as
the fees of all Directors who are affiliated persons of ML & Co. or its
subsidiaries. The Fund pays each Director not affiliated with ML & Co. or its
affiliates an annual fee of $5,000 plus $500 for each meeting of the Board
attended. The Fund also pays each member of the Audit and Nominating Committee
(the "Committee"), which consists of the non-affiliated Directors, an annual fee
of $1,000 plus $250 for each meeting attended. The Fund reimburses each
unaffiliated Director for his out-of-pocket expenses relating to attendance at
Board and Committee meetings. For the fiscal year ended October 31, 1996, fees
and expenses paid to the non-affiliated Directors aggregated $45,497.
The following table sets forth for the fiscal year ended October 31, 1996,
compensation paid by the Fund to the non-affiliated Directors and, for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
investment companies (including the Fund) advised by MLAM and its affiliate, FAM
("MLAM/FAM Advised Funds"), to the non-affiliated Directors.
9
<PAGE> 62
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS MLAM/FAM ADVISED
NAME OF COMPENSATION ACCRUED AS PART FUNDS PAID TO
DIRECTOR FROM FUND OF FUND EXPENSE DIRECTORS(1)
- ------------------------------------------- ------------ ------------------- ----------------
<S> <C> <C> <C>
James H. Bodurtha.......................... $9,000 None $148,500
Herbert I. London.......................... 9,000 None 148,500
Robert R. Martin........................... 9,000 None 148,500
Joseph L. May.............................. 9,000 None 148,500
Andre F. Perold............................ 9,000 None 148,500
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Bodurtha (23 registered investment companies consisting of 46 portfolios);
Mr. London (23 registered investment companies consisting of 46 portfolios);
Mr. Martin (23 registered investment companies consisting of 46 portfolios);
Mr. May (23 registered investment companies consisting of 46 portfolios);
and Mr. Perold (23 registered investment companies consisting of 46
portfolios). For purposes of this table, each series of a series investment
company is treated as a separate fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund -- Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients for which the Manager or its
affiliates act as an adviser. Because of different objectives or other factors,
a particular security may be bought for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities by
the Manager for the Fund or other funds for which it acts as investment adviser
or for its 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.
The Fund has entered into a management agreement with the Manager (the
"Management Agreement"). As discussed in the Prospectus, the Manager receives
for its services to the Fund monthly compensation at the annual rate of 0.65% of
the average daily net assets of the Fund. For the fiscal years ended October 31,
1994, 1995 and 1996, the fees paid by the Fund to the Manager aggregated
$285,526, $779,627 and $463,001, respectively.
As described in the Prospectus, in 1996 the Manager also entered into a
sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited ("MLAM
U.K.") pursuant to which MLAM U.K. provides investment advisory services to the
Manager with respect to the Fund.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the fees of
all Directors of the Fund who are affiliated persons of ML & Co. or any of its
affiliates. The Fund pays all other expenses incurred in the operation of the
Fund, including, among other things, taxes, expenses for legal and auditing
services, costs of printing proxies, stock certificates, shareholder reports and
prospectuses and statements of
10
<PAGE> 63
additional information (except to the extent paid by the Distributor), charges
of the custodian, any sub-custodian and transfer agent, expenses of redemption
of shares, Commission fees, expenses of registering the shares under Federal,
state or foreign laws, fees and expenses of nonaffiliated Directors, accounting
and pricing costs (including the daily calculation of net asset value),
insurance, interest, brokerage costs, litigation and other extraordinary or
nonrecurring expenses, and other expenses properly payable by the Fund. As
required by the Fund's Distribution Agreement, the Distributor will pay the
promotional expenses of the Fund incurred in connection with the offering of
shares of the Fund. Certain expenses in connection with the account maintenance
and distribution of Class B and Class C shares will be financed by the Fund
pursuant to a Distribution Plan in compliance with Rule 12b-1 under the
Investment Company Act. See "Purchase of Shares -- Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Distribution Plans."
The Manager is a limited partnership, the partners of which are ML & Co.
and Princeton Services. ML & Co. and Princeton Services are "controlling
persons" of the Manager as defined under the Investment Company Act because of
their ownership of its voting securities or their power to exercise a
controlling influence over its management or policies.
Duration and Termination. Unless earlier terminated as described herein,
the Management Agreement will remain in effect from year to year if approved
annually (a) by the Board of Directors or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Directors who are not parties to
such contract or interested persons (as defined in the Investment Company Act)
of any such party. Such contracts are not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party thereto
or by the vote of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System; shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents an identical interest
in the investment portfolio of the Fund and has the same rights except that
Class B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees, and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the Rule 12b-1
distribution plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid (except that Class B shareholders
may vote upon any material changes to expenses charged under the Class D
Distribution Plan). Each class has different exchange privileges. See
"Shareholder Services -- Exchange Privilege."
The Merrill Lynch Select PricingSM System is used by more than 50
registered investment companies advised by the Manager or its affiliate, FAM.
Funds advised by the Manager or FAM that utilize the Merrill Lynch Select
PricingSM System are referred to herein as "MLAM-advised mutual funds."
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution
11
<PAGE> 64
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 year ended
October 31, 1994 were $24,608, of which the Distributor received $2,045 and
Merrill Lynch received $22,563. The gross sales charges for the sale of Class A
shares for the fiscal year ended October 31, 1995 were $19,530, of which the
Distributor received $1,587 and Merrill Lynch received $17,943. The gross sales
charges for the sale of Class A shares for the fiscal year ended October 31,
1996 were $1,648, of which the Distributor received $117 and Merrill Lynch
received $1,531. The gross sales charges for Class D shares for the period from
October 21, 1994 (commencement of operations) to October 31, 1994 were $4,122,
of which the Distributor received $325 and Merrill Lynch received $3,797. The
gross sales charges for the sale of Class D shares for the fiscal year ended
October 31, 1995 were $62,513, of which the Distributor received $4,666 and
Merrill Lynch received $57,847. The gross sales charges for the sale of Class D
Shares for the fiscal year ended October 31, 1996 were $25,194, of which the
Distributor received $1,818 and Merrill Lynch received $23,376.
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 own account and single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or other
employee benefit trust created pursuant to a plan qualified under Section 401 of
the Internal Revenue Code, as amended (the "Code")) although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company", as that term is defined in the Investment Company Act, but does not
include purchases by any such company which has not been in existence for at
least six months or which has no purpose other than the purchase of shares of
the Fund or shares of other registered investment companies at a discount;
provided, however, that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein are
credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer or clients or an investment advisor.
The term "purchase" also includes purchases by employee benefit plans not
qualified under Section 401 of the Code, including purchases by employees or by
employers on behalf of employees, by means of a payroll deduction plan or
otherwise, of shares of the Fund. Purchases by such a company or non-qualified
employee benefit plan will qualify for the quantity discounts discussed above
only if the Fund and the Distributor are able to realize economies of scale in
sales effort and sales related expense by means of the company, employer or plan
making the Fund's Prospectus available to individual investors or employees and
forwarding investments by such persons to the Fund and by any such employer or
plan bearing the expense of any payroll deduction plan.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or FAM
who purchased such closed-end fund shares prior to October 21, 1994 (the
12
<PAGE> 65
date the Merrill Lynch Select Pricing System commenced operations) and wish to
reinvest the net proceeds of a sale of their closed-end fund shares of common
stock in Eligible Class A shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such shares
on or after October 21, 1994 and wish to reinvest the net proceeds from a sale
of their closed-end fund shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund and other MLAM-advised mutual
funds ("Eligible Class D shares"), if the following conditions are met. First,
the sale of closed-end fund shares must be made through Merrill Lynch and the
net proceeds therefrom must be immediately reinvested in Eligible Class A or
Class D shares. Second, the closed-end fund shares must either have been
acquired in the initial public offering or be shares representing dividends from
shares of common stock acquired in such offering. Third, the closed-end fund
shares must have been continuously maintained in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the eligible
fund in connection with a tender offer conducted by the eligible fund and
reinvest the proceeds immediately in the designated class of shares of the Fund.
This investment option is available only with respect to eligible shares as to
which no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designated class of the Fund on such day.
REDUCED INITIAL SALES CHARGE
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing, or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or of
any other MLAM-advised mutual funds made within a 13-month period starting with
the first purchase pursuant to a Letter of Intention in the form provided in the
13
<PAGE> 66
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides plan
participant recordkeeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares; however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A 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. If the total amount of shares purchased does not
equal the amount stated in the Letter of Intention (minimum of $25,000), the
investor will be notified and must pay, within 20 days of the expiration of such
Letter, the difference between the sales charge on the Class A or Class D shares
purchased at the reduced rate and the sales charge applicable to the sales
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
13-month period (while remaining registered in the name of the purchaser) for
this purpose. The first purchase under the Letter of Intention must be at least
five percent of the dollar amount of such Letter. If during the term of such
Letter, a purchase brings the total amount invested to an amount equal to or in
excess of the amount indicated in the Letter, the purchaser will be entitled on
that purchase and subsequent purchases to the reduced percentage sales charge
which would be applicable to a single purchase equal to the total dollar value
of the Class A 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.
Merrill Lynch Blueprint SMProgram. Class A and Class D shares of the Fund
are offered to participants in the Merrill Lynch BlueprintSM Program
("Blueprint"). Blueprint is directed to small investors, group IRAs and
participants in certain affinity groups such as credit unions, trade
associations and benefit plans. Investors placing orders to purchase Class A or
Class D shares of the Fund through Blueprint will acquire the Class A or Class D
shares at net asset value plus a sales charge calculated in accordance with the
Blueprint sales charge schedule (i.e., up to $300 at 4.25%, from $300.01 to
$5,000 at 3.25% plus $3.00 and $5,000.01 or more at the standard sales charge
rates disclosed in the Prospectus). Class A and Class D shares of the Fund are
being offered at net asset value plus a sales charge of .50% for corporate or
group IRA programs placing orders to purchase their Class A or Class D shares
through Blueprint. Services available to investors placing orders for Class A or
Class D shares through Blueprint, including exchange privileges, may differ from
those available to other investors in Class A or Class D shares.
Class A and Class D shares are offered at net asset value to Blueprint
participants through the Merrill Lynch Directed IRA Rollover Program ("IRA
Rollover Program") available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from Employer Sponsored Retirement and Savings Plans
(as defined below) whose Trustee and/or Plan Sponsor has entered into the
Merrill Lynch Directed IRA Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days
14
<PAGE> 67
following the day such orders are placed. The minimum initial purchase price is
$100, with a $50 minimum for subsequent purchases through Blueprint. There are
no minimum initial or subsequent purchase requirements for participants who are
part of an automatic investment plan. Additional information concerning
purchases through Blueprint, including any annual fees and transaction charges,
is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
BlueprintSM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Employee Access Accounts SM. Class A or Class D shares are offered at net
asset value to Employee Access AccountsSM available through qualified employers
that provide employer-sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum for such accounts
is $500, except that the initial minimum for shares purchased for such accounts
pursuant to the Automatic Investment Program is $50.
Purchase Privilege of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised investment companies, directors and employees
of ML & Co. and its subsidiaries (the term "subsidiaries", when used herein with
respect to ML & Co., includes FAM, the Manager and certain other entities
directly or indirectly wholly owned and controlled by ML & Co.) and their
directors and employees, and any trust, pension, profit-sharing or other benefit
plan for such persons, may purchase Class A shares of the Fund at net asset
value.
Class D shares of the Fund 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 had
been made within 60 days prior to the investment in the Fund, and the proceeds
from the redemption had been maintained in the interim in cash or a money market
fund.
Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares of
such other fund were subject to a sales charge either at the time of purchase or
on a deferred basis; and second, such purchase of Class D shares must be made
within 90 days after such notice.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: first, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from the redemption of shares
of such other mutual fund and that such shares have been outstanding for a
period of no less than six months; and second, such purchase of Class D shares
must be made within 60 days after the redemption and the proceeds from the
redemption must be maintained in the interim in cash or a money market fund.
15
<PAGE> 68
TMASM Managed Trusts. Class A shares are offered to TMASM Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares of the Fund may be reduced to the net asset value per Class D
share in connection with the acquisition of the assets of or merger or
consolidation with a personal holding company or a public or private investment
company. The value of the assets or company acquired in a tax-free transaction
may be adjusted in appropriate cases to reduce possible adverse tax consequences
to the Fund which might result from an acquisition of assets having net
unrealized appreciation which is disproportionately higher at the time of
acquisition than the realized or unrealized appreciation of the Fund. The
issuance of Class D shares for consideration other than cash is limited to bona
fide reorganizations, statutory mergers or other acquisitions of portfolio
securities which (i) meet the investment objective 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.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based on
the number of employees eligible to participate in the plan, the aggregate
amount invested by the plan in specified investments and/or the services
provided by Merrill Lynch to the plan. Certain other plans may purchase Class B
shares with a waiver of the contingent deferred sales charge ("CDSC") upon
redemption, based on similar criteria. Such Class B shares will convert into
Class D shares approximately ten years after the plan purchases the first share
of any MLAM-advised mutual fund. Minimum purchase requirements may be waived or
varied for such plans. Additional information regarding purchases by
employer-sponsored retirement or savings plans and certain other arrangements is
available toll-free from Merrill Lynch Business Financial Services at (800)
237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares -- Distribution Plan" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance fees and/or distribution fees paid to the Distributor. In
their consideration of each Distribution Plan, the Directors must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholders. Each
Distribution Plan further provides that so long as the Distribution Plan remains
in effect, the selection and nomination of Directors who are not
16
<PAGE> 69
"interested persons" of the Fund, as defined in the Investment Company Act (the
"Independent Directors"), shall be committed to the discretion of the
Independent Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there is a
reasonable likelihood that such Distribution Plan will benefit the Fund and its
related class of shareholders. The Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the Independent Directors or
by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders, and all material amendments are required to be
approved by the vote of Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in such Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of each Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of such Distribution Plan or such report, the first two years in an easily
accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
The following table sets forth comparative information as of October 31,
1996 with respect to the Class B shares 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.
17
<PAGE> 70
<TABLE>
<CAPTION>
DATA CALCULATED AS OF OCTOBER 31, 1996
-------------------------------------------------------------------------------------------
ANNUAL
ALLOWABLE ALLOWABLE AMOUNTS DISTRIBUTION
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
GROSS SALES 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 Shares
Under NASD Rule as Adopted...... $102,827 $6,427 $ 2,598 $9,025 $3,472 $ 5,553 $291
Under Distributor's Voluntary
Waiver........................ $102,827 $6,427 $ 514 $6,941 $3,472 $ 3,469 $291
Class C Shares
Under NASD Rule as Adopted...... $ 10,164 $ 635 $ 84 $ 719 $ 76 $ 643 $ 31
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B shares sold since February 26, 1988
(commencement of operations) and 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. Of the
distribution fee payments for Class B shares made prior to July 6, 1993
under a prior plan at the 0.75% rate, 0.50% of average daily net assets has
been treated as a distribution fee and 0.25% of average daily net assets has
been deemed to have been a service fee and not subject to the NASD maximum
sales charge rule. See "Purchase of Shares -- Distribution Plans" in the
Prospectus.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the NASD maximum or, with respect to the Class B shares,
the voluntary maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for periods during which trading on the NYSE is
restricted as determined by the Commission or such exchange is closed (other
than customary weekend and holiday closings), for any period during which an
emergency exists, as defined by the Commission, as a result of which disposal of
portfolio securities or determination of the net asset value of the Fund is not
reasonably practicable, and for such other periods as the Commission may by
order permit for the protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's costs, depending on the market value of the securities held by the
Fund at such time.
DEFERRED SALES CHARGES -- CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares," while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or on redemption of Class B
shares following the death or disability of a Class B shareholder. Redemptions
for which the waiver applies are: (a) any partial or complete redemption in
connection with a distribution following retirement under a tax-deferred
retirement plan or attaining age 59 1/2 in the case of an IRA or other
retirement plan, or part of a series of equal periodic payments (not less
frequently than annually)
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made for the life (or life expectancy) or any redemption resulting from the
tax-free return of an excess contribution to an IRA; or (b) any partial or
complete redemption following the death or disability (as defined in the Code)
of a Class B shareholder (including one who owns the Class B shares as joint
tenant with his or her spouse), provided the redemption is requested within one
year of the death or initial determination of disability. For the fiscal years
ended October 31, 1994, 1995 and 1996, the Distributor received CDSCs of
$55,082, $329,050 and $110,201, respectively, with respect to redemptions of
Class B shares, all of which were paid to Merrill Lynch. For the period October
21, 1994 (commencement of operations for Class C shares) to October 31, 1994,
the Distributor received no CDSCs with respect to the redemption of Class C
shares. For the fiscal years ended October 31, 1995 and 1996, the Distributor
received CDSCs of $3,929 and $2,756, respectively, with respect to redemptions
of Class C shares, all of which were paid to Merrill Lynch.
The CDSC is also waived for any Class B shares that were acquired and held
at the time of redemption by Employee Access Accounts available through
employers that provide Eligible 401(k) Plans. The initial minimum for such
accounts of $500, except that the initial minimum for shares purchased for such
accounts pursuant to the Automatic Investment Program is $50.
Merrill Lynch Blueprint SMProgram. Class B shares are offered to certain
participants in the BlueprintSM Program. Blueprint is directed to small
investors group IRAs and participants in certain affinity groups such as trade
associations, credit unions and benefit plans. Class B shares of the Fund are
offered through Blueprint only to members of certain affinity groups. The CDSC
is waived in connection with purchase orders placed through Blueprint by members
of such affinity groups. Services, including the exchange privilege, available
to Class B investors through Blueprint, however, may differ from those available
to other Class B investors. Orders for purchases and redemptions of Class B
shares of the Fund may be grouped for execution purposes which, in some
circumstances, may involve the execution of such orders two business days
following the day such orders are placed. The minimum initial purchase price is
$100, with a $50 minimum for subsequent purchases through Blueprint. There is no
minimum initial or subsequent purchase requirement for investors who are part of
a Blueprint automatic investment plan. Additional information concerning these
Blueprint programs, including any annual fees or transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
BlueprintSM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for making the Fund's portfolio decisions,
placing the Fund's brokerage business, evaluating the reasonableness of
brokerage commissions and negotiating the amount of any commissions paid,
subject to a policy established by the Fund's Directors and officers. The Fund
has no obligation to deal with any broker or group of brokers in the execution
of transactions in portfolio securities. Orders for transactions in portfolio
securities are placed for the Fund with a number of brokers and dealers,
including Merrill Lynch. In placing orders, it is the policy of the Fund to
obtain the most favorable net results, taking into account various factors,
including price, commissions, if any, size of the transaction and difficulty of
execution. Where practicable, the Manager surveys a number of brokers and
dealers in connection with proposed portfolio transactions and selects the
broker or dealer that offers the Fund best price and execution or other services
which are of benefit to the Fund. Securities firms also may receive brokerage
commissions on transactions including covered call options written by the Fund
and the sale of underlying securities upon the exercise of such options. In
addition, consistent with the Conduct Rules of the National Association of
Securities Dealers, Inc. and policies established by the Directors of the Fund,
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.
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The Fund does not use any particular broker or dealer, and brokers who
provide supplemental investment research to the Manager may receive orders for
transactions by the Fund. Such supplemental research services ordinarily consist
of assessments and analyses of the business or prospects of a company, industry
or economic sector. Information so received will be in addition to and not in
lieu of the services required to be performed by the Manager under the
Management Agreement. If in the judgment of the Manager the Fund will benefit
from supplemental research services, the Manager is authorized to pay brokerage
commissions to a broker furnishing such services that are in excess of
commissions that another broker may have charged for effecting the same
transaction. The expenses of the Manager will not necessarily be reduced as a
result of the receipt of such supplemental information, and the Manager may use
such information in servicing its other accounts. Whether or not a particular
broker-dealer sells shares of the Fund neither qualifies nor disqualifies such
broker-dealer to execute transactions for the Fund.
The Fund anticipates that its brokerage transactions involving securities
of companies domiciled in countries other than the United States will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions are generally higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less governmental supervision and regulation of
foreign stock exchanges and brokers than in the United States.
Foreign equity securities may be held by the Fund in the form of American
Depositary Receipts (ADRs) or European Depositary Receipts (EDRs) or other
securities convertible into foreign equity securities. ADRs and EDRs may be
listed on stock exchanges, or traded in over-the-counter markets in the United
States or Europe, as the case may be. ADRs, like other securities traded in the
United States, will be subject to negotiated commission rates.
The Fund invests in certain securities traded in the over-the-counter
market and, where possible, deals directly with the dealers who make a market in
the securities involved, except in those circumstances in which better prices
and execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund are prohibited from dealing with the Fund as principal
in the purchase and sale of securities. Since transactions in the
over-the-counter market usually involve transactions with dealers acting as
principal for their own accounts, affiliated persons of the Fund, including
Merrill Lynch, will not serve as the Fund's dealer in such transactions.
However, an affiliated person of the Fund may serve as its broker in over-the-
counter transactions conducted on an agency basis. For the fiscal year ended
October 31, 1994, the Fund paid aggregate commissions of $62,415, $1,968 or 3.2%
of which was paid to Merrill Lynch for effecting 5.2% of the aggregate amount of
transactions in which the Fund paid brokerage commissions. For the fiscal year
ended October 31, 1995, the Fund paid aggregate commissions of $181,779, $4,200
or 2.31% of which was paid to Merrill Lynch for effecting 1.05% of the aggregate
dollar amount of transactions in which the Fund paid brokerage commissions. For
the fiscal year ended October 31, 1996, the Fund paid $31,793, none of which was
paid to Merrill Lynch.
The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a daily
basis in United States dollars, the Fund intends to manage its portfolio so as
to give reasonable assurance that it will be able to obtain United States
dollars to the extent necessary to meet anticipated redemptions. Under present
conditions, it is not believed that these considerations will have any
significant effect on its portfolio strategy.
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Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the United States national securities exchanges from
executing 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 of 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.
For the fiscal year ended October 31, 1995, Merrill Lynch effected one
portfolio transaction pursuant to such contract aggregating $704,200. For the
fiscal year ended October 31, 1996, Merrill Lynch effected no portfolio
transactions pursuant to such contract.
The Directors of the Fund have considered the possibility of recapturing
for the benefit of the Fund brokerage commissions, dealer spreads and other
expenses of possible portfolio transactions, such as underwriting commissions,
by conducting such portfolio transactions through affiliated entities, including
Merrill Lynch. For example, brokerage commissions received by Merrill Lynch
could be offset against the management fee paid by the Fund to the Manager.
After considering all factors deemed relevant, the Directors made a
determination not to seek such recapture. The Directors will reconsider this
matter from time to time.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information -- Determination of Net Asset
Value" in the Prospectus concerning the determination of net asset value.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below and in the
Prospectus under "Shareholder Services" which are designated to facilitate
investment in its shares. Certain of such services are not available to
investors who place orders for the Company's shares through the Merrill Lynch
Blueprint(sm) Program. Full details as to each of such services and copies of
the various plans described below and instructions as to how to participate in
the various services or plans, or how to change options with respect thereto,
can be obtained from the Fund, the Distributor or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
"Investment Account" and will receive, at least quarterly, statements from the
Transfer Agent. The statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of income dividends. The
statements also will show any other activity in the account since the preceding
statement. Shareholders will receive separate transaction confirmations for each
purchase or sale transaction other than automatic investment purchases and the
reinvestment of income dividends.
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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 shareholders directly from the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares so that the cash proceeds can be transferred to
the account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that he
or she be issued certificates for the shares and then must turn the certificates
over to the new firm for re-registration as described in the preceding sentence.
Shareholders considering transferring a tax-deferred retirement account such as
an individual retirement account from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares. A shareholder may make additions to his or her Investment Account
at any time by mailing a check directly to the Transfer Agent.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer, or by mail directly to the Transfer Agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Fund's Automatic Investment Plan whereby the Fund is authorized
through pre-authorized checks or automated clearing house debits of $50 or more
to charge the regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such shareholder.
Alternatively, investors who maintain CMA(R) or CBA(R) accounts may arrange to
have periodic investments made in the Fund, in their CMA(R) or CBA(R) accounts
or in certain related accounts in amounts of $100 or more ($1 for retirement
accounts) through the CMA(R) or CBA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
automatically reinvested in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of business
on the payment date of the dividend or distribution. Shareholders may elect in
writing to receive either their dividends or capital gains distributions, or
both, in cash, in which event payment will be mailed or direct deposited on or
about the payment date.
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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, those instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS -- CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account in either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders who have acquired
Class A or Class D shares of the Fund having a value, based on cost or the
current offering price, of $5,000 or more, and monthly withdrawals are available
for shareholders with Class A or Class D shares with such a value of $10,000 or
more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify either a dollar amount or a percentage of the value of his 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 NYSE is not open for
business on such date, the Class A or Class D shares will be redeemed at the
close of business on the following business day. The check for the withdrawal
payment will be mailed, or the direct deposit for the withdrawal payment will be
made, on the next business day following redemption. When a shareholder is
making systematic withdrawals, dividends and distributions on all Class A or
Class D shares in the Investment Account are reinvested automatically in the
Class A or Class D shares. A shareholder's Systematic Withdrawal Plan may be
terminated at any time, without charge or penalty, by the shareholder, the Fund,
the Fund's transfer agent or the Distributor. Withdrawal payments should not be
considered as dividends, yield or income. Each withdrawal is a taxable event. If
periodic withdrawals continuously exceed reinvested dividends, the shareholder's
original investment may be reduced correspondingly. Purchases of additional
Class A or Class D shares concurrent with withdrawals are ordinarily
disadvantageous to the shareholder because of sales charges and tax liabilities.
The Fund will not knowingly accept purchase orders for Class A or Class D shares
of the Fund from investors who maintain a Systematic Withdrawal Plan unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
Alternatively, a Class A or Class D shareholder whose shares are held
within a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed
on a monthly, bimonthly, quarterly, semiannual or annual basis through the
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$25. The proceeds of systematic redemptions will be posted to the shareholder's
account five business days after the date the shares are redeemed. Monthly
systematic redemptions will be made at net asset value on the first Monday of
each month, bimonthly systematic redemptions will be made at net asset value on
the first Monday of every other month, and quarterly, semiannual or annual
redemptions are made at net asset value on the first Monday of months selected
at the shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic
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Investment Plan, Automatic Investment Program. For more information on the
CMA(R) or CBA(R) Systematic Redemption Program, eligible shareholders should
contact their Merrill Lynch Financial Consultant.
RETIREMENT PLANS
Self-directed IRAs and other retirement plans are available from Merrill
Lynch. Under these plans, investments may be made in the Fund and in certain of
the other mutual funds sponsored by Merrill Lynch as well as in other
securities. Merrill Lynch charges an initial establishment fee and an annual
custodial fee for each account. Information with respect to these plans is
available upon request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $250, and the minimum subsequent purchase is $1.
(except that the minimum initial purchase through Blueprint is $100).
Capital gains and income received in each of the plans referred to above
are exempt from Federal taxation until distributed from the plans. Investors
considering participation in any such plan should review specific tax laws
relating thereto and should consult their attorneys or tax advisers with respect
to the establishment and maintenance of any such plan.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds. Under the Merrill Lynch Select
Pricing(SM) System, Class A shareholders may exchange Class A shares of 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 the account in which the exchange is
made at the time of the exchange or is otherwise eligible to purchase Class A
shares of the second fund. If the Class A shareholder wants to exchange Class A
shares for shares of 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 also
are exchangeable for shares of certain MLAM-advised money market funds as
follows: Class A shares may be exchanged for shares of Merrill Lynch Ready
Assets Trust, Merrill Lynch Retirement Reserves Money Fund (available only for
exchanges within certain retirement plans), Merrill Lynch U.S.A. Government
Reserves and Merrill Lynch U.S. Treasury Money Fund; Class B, Class C and Class
D shares may be exchanged for shares of Merrill Lynch Government Fund, Merrill
Lynch Institutional Fund, Merrill Lynch Institutional Tax-Exempt Fund and
Merrill Lynch Treasury Fund. Shares with a net asset value of at least $100 are
required to qualify for the exchange privilege, and any shares utilized in an
exchange must have been held by the shareholder for 15 days. It is contemplated
that the exchange privilege may be applicable to other new mutual funds whose
shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("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
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transacted on the basis of relative net asset value per Class A or Class D
share, respectively, plus an amount equal to the difference, if any, between the
sales charge previously paid on the outstanding Class A or Class D shares and
the sales charge payable at the time of the exchange on the new Class A or Class
D shares. With respect to outstanding Class A or Class D shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class A or
Class D shares in the initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class A or Class D shares. For purposes of
the exchange privilege, Class A and Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class A or Class D shares on which the
dividend was paid. Based on this formula, Class A and Class D shares of the Fund
generally will be exchanged into the Class A or Class D shares of the other
funds or into shares of certain 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 Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will continue
to be subject to the Fund's CDSC schedule if such schedule is higher than the
CDSC schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through use
of the exchange privilege will be subject to the Fund's CDSC schedule if such
schedule is higher than the CDSC schedule relating to the Class B or Class C
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
or Class C shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period of the new Class B or Class C shares.
For example, an investor may exchange Class B or Class C shares of the Fund for
those of Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after
having held the Fund's Class B shares for two and a half years. The 2% CDSC that
generally would apply to redemption would not apply to the exchange. Three years
later the investor may decide to redeem the Class B shares of Special Value Fund
and receive cash. There will be no CDSC due on this redemption, since by
"tacking" the two and a half year holding period of the Fund's Class B shares to
the three year holding period for the Special Value Fund Class B shares, the
investor will be deemed to have held the new Class B shares for more than five
years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Manager or its affiliates, but the period of
time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the CDSC or, with respect to Class B shares, towards satisfaction of
the conversion period. However, shares of a money market fund which were
acquired as a result of an exchange for Class B or Class C shares of 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 newly acquired fund will be aggregated with previous
holding periods for purposes of reducing the CDSC. Thus, for example, an
investor may exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund ("Institutional Fund") after having held the Fund Class B
shares for two and a half years and three years later decide to redeem the
shares for cash. At the time of this redemption, the 2% CDSC that would have
been due had the Class B shares of the Fund been redeemed for cash rather than
exchanged for shares of Institutional Fund will be
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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 would not incur a
CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, a shareholder should contact their
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an investor
may exercise the exchange privilege. Certain funds may suspend the offering of
their shares to the general public at any time and thereafter may resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income, if any.
Dividends from such net investment income will be paid quarterly. All net
realized long- or short-term capital gains, if any, will be distributed to the
Fund's shareholders annually. From time to time, the Fund may declare a special
distribution at or about the end of the calendar year in order to comply with
Federal tax requirements that certain percentages of its ordinary income and
capital gains be distributed during the calendar year. If in any fiscal year,
the Fund has net income from certain foreign currency transactions, such income
will be distributed at least annually.
See "Shareholder Services -- Automatic Reinvestment of Dividends and
Capital Gains Distributions" for information concerning the manner in which
dividends and distributions may be reinvested automatically in shares of the
Fund. Shareholders may elect in writing to receive any such dividends or
distributions, or both, in cash. Dividends and distributions are taxable to
shareholders, as discussed below, whether they are reinvested in shares of the
Fund or received in cash. The per share dividends on each class of shares will
be reduced as a result of any account maintenance, distribution and transfer
agency fees applicable with respect to such class of shares. See "Determination
of Net Asset Value."
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. If it so
qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital gains
that it distributes to Class A, Class B, Class C and Class D shareholders
(together, the "shareholders"). The Fund intends to distribute substantially all
of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
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shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less, however, will be
treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible for
the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. For this purpose, the Fund will allocate dividends
eligible for the dividends received deduction among the Class A, Class B, Class
C and Class D shareholders according to a method (which it believes is
consistent with the Securities and Exchange Commission rule permitting the
issuance and sale of multiple classes of stock) 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. If the Fund pays a dividend in January that 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.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Shareholders
may be able to claim United States foreign tax credits with respect to such
taxes, subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. If more than 50% in value of
the Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, the Fund will be eligible, and intends, to file an
election with the Internal Revenue Service pursuant to which shareholders of the
Fund will be required to include their proportionate shares of such withholding
taxes in their United States income tax returns as gross income, treat such
proportionate shares as taxes paid by them, and deduct such proportionate shares
in computing their taxable incomes or, alternatively, use them as foreign
27
<PAGE> 80
tax credits against their United States income taxes. No deductions for foreign
taxes, however, may be claimed by noncorporate shareholders who do not itemize
deductions. A shareholder that is a nonresident alien individual or a foreign
corporation may be subject to U.S. withholding tax on the income resulting from
the Fund's election described in this paragraph but may not be able to claim a
credit or deduction against such U.S. tax for the foreign taxes treated as
having been paid by such shareholder. The Fund will report annually to its
shareholders the amount per share of such withholding taxes. For this purpose,
the Fund will allocate foreign taxes and foreign source income among the Class
A, Class B, Class C and Class D shareholders according to a method similar to
that described above for the allocation of dividends eligible for the dividends
received deduction.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon the purchase of the new shares in the absence
of the exchange privilege. Instead, such sales charge will be treated as an
amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to minimize imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition of
the tax. In such event, the Fund will be liable for the tax only on the amount
by which it does not meet the foregoing distribution requirements.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield securities"), as previously described. Some of these
high yield securities may be purchased at a discount and may therefore cause the
Fund to accrue and distribute income before amounts due under the obligations
are paid. In addition, a portion of the interest payments on such high yield
securities may be treated as dividends for Federal income tax purposes; in such
case, if the issuer of such high yield securities is a domestic corporation,
dividend payments by the Fund will be eligible for the dividends received
deduction allowed to domestic corporations under the Code.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may write (i.e., sell), purchase or sell options, futures and
forward foreign exchange contracts. Options and futures contracts that are
"Section 1256 contracts" will be "marked to market" for Federal
28
<PAGE> 81
income tax purposes at the end of each taxable year, i.e., each such option or
futures contract will be treated as sold for its fair market value on the last
day of the taxable year. Unless such contract is a forward foreign exchange
contract, or is a non-equity option or a regulated futures contract for a
non-U.S. currency for which the Fund elects to have gain or loss treated as
ordinary gain or loss under Code Section 988 (as described below), gain or loss
from 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 or currency exchange rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in options, futures
and forward foreign exchange contracts. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in options, futures and
forward foreign exchange contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Fund may be
restricted in effecting closing transactions within three months after entering
into an option or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stocks, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, futures, or forward
foreign exchange contracts will be valued for purposes of the RIC
diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders as
ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions, and all or a portion of
distributions made before the losses were realized but in the same taxable year
would be recharacterized as a return of capital to shareholders,
29
<PAGE> 82
thereby reducing the basis of each shareholder's Fund shares and resulting in a
capital gain for any shareholder who received a distribution greater than such
shareholder's basis in Fund shares (assuming the shares were held as a capital
asset). These rules and the mark-to-market rules described above, however, will
not apply to certain transactions entered into by the Fund solely to reduce the
risk of currency fluctuations with respect to its investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, as well as yield, in advertisements or information
furnished to present or prospective shareholders. From time to time, the Fund
may include the Fund's Morningstar risk-adjusted performance ratings in
advertisements or supplemental sales literature. Total return figures are based
on the Fund's historical performance and are not intended to indicate future
performance. Average annual total return is determined separately for Class A,
Class B, Class C and Class D shares in accordance with formulas specified by the
Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) the rates of return calculated will not be average annual rates,
but rather, actual annual, annualized or aggregate rates and (2) the maximum
applicable sales charges will not be included with respect to annual or
annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time.
30
<PAGE> 83
Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------------ ------------------------------------------
EXPRESSED AS A REDEEMABLE VALUE EXPRESSED AS A REDEEMABLE VALUE
PERCENTAGE BASED OF A HYPOTHETICAL PERCENTAGE BASED OF A HYPOTHETICAL
ON A HYPOTHETICAL $1,000 INVESTMENT AT ON A HYPOTHETICAL $1,000 INVESTMENT AT
PERIOD $1,000 INVESTMENT THE END OF THE PERIOD $1,000 INVESTMENT THE END OF THE PERIOD
- ---------------------------- ----------------- --------------------- ----------------- ---------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended
October 31, 1996.......... 3.60% $1,036.00 4.17% $1,041.70
Five Years Ended
October 31, 1996.......... 7.23% $1,417.50 7.25% $1,419.30
Inception (February 26,
1988) to October 31,
1996...................... 5.76% $1,625.40
Inception (November 4, 1988)
to October 31, 1996....... 6.38% $1,639.30
</TABLE>
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended October 31,
1996...................... 9.34% $1,093.40 8.13% $1,081.30
1995...................... 5.10% $1,051.00 4.01% $1,040.10
1994...................... 0.61% $1,006.10 (0.37)% $ 996.30
1993...................... 17.64% $1,176.40 16.45% $1,164.50
1992...................... 10.00% $1,100.00 8.77% $1,087.70
1991...................... 18.09% $1,180.90 16.79% $1,167.90
1990...................... (7.86)% $ 921.40 (8.68)% $ 913.20
1989...................... 5.58% $1,055.80
Inception (February 26,
1988)
to October 31, 1988....... 1.70% $1,017.00
Inception (November 4, 1988)
to October 31, 1989....... 6.29% $1,062.90
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 26,
1988) to October 31,
1996...................... 62.54% $1,625.40
Inception (November 4, 1988)
to October 31, 1996....... 63.93% $1,639.30
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended
October 31, 1996.......... 2.37% 1.45%
</TABLE>
31
<PAGE> 84
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
------------------------------------------ ------------------------------------------
EXPRESSED AS A REDEEMABLE VALUE EXPRESSED AS A REDEEMABLE VALUE
PERCENTAGE BASED OF A HYPOTHETICAL PERCENTAGE BASED OF A HYPOTHETICAL
ON A HYPOTHETICAL $1,000 INVESTMENT AT ON A HYPOTHETICAL $1,000 INVESTMENT AT
PERIOD $1,000 INVESTMENT THE END OF THE PERIOD $1,000 INVESTMENT THE END OF THE PERIOD
- ---------------------------- ----------------- --------------------- ----------------- ---------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended October 31,
1996...................... 7.15% $1,071.50 3.35% $1,033.50
Inception (October 21, 1994)
to October 31, 1996....... 6.25% $1,130.80 4.38% $1,090.90
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended October 31,
1996...................... 8.14% $1,081.40 9.07% $1,090.70
1995...................... 3.89% $1,038.90 4.87% $1,048.70
Inception (October 21, 1994)
to October 31, 1994....... 0.65% $1,006.50 0.65% $1,006.50
</TABLE>
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21, 1994)
to October 31, 1996....... 13.08% $1,130.80 9.09% $1,090.90
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended
October 31, 1996.......... 1.42% 2.14%
</TABLE>
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 waiver
of the CDSC and therefore may reflect greater total return since, due to the
reduced sales charges or the waiver of sales charges, a lower amount of expenses
is deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on October 22, 1987. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock, each of which consists of 100,000,000 shares. Class A, Class B,
Class C and Class D Common Stock represent an interest 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
32
<PAGE> 85
relating to such expenditures. The Board of Directors of the Fund may classify
and reclassify the shares of the Fund into additional classes of Common Stock at
a future date.
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held and will vote on the election of
Directors and any other matter submitted to a shareholder vote. The Fund does
not intend to hold meetings of shareholders in any year in which the Investment
Company Act does not require shareholders to act upon any of the following
matters: (i) election of Directors; (ii) approval of an investment advisory
agreement; (iii) approval of a distribution agreement; and (iv) ratification of
selection of independent accountants. Generally, under Maryland law, a meeting
of shareholders may be called for any purpose on the written request of the
holders of at least 25% of the outstanding shares of the Fund. Voting rights for
Directors are not cumulative. Shares issued are fully paid and non-assessable
and have no preemptive rights. Redemption and conversion rights are discussed
elsewhere herein and in the Prospectus. Each share of Class B, Class C and Class
D Common Stock is entitled to participate equally in dividends and distributions
declared by the Fund and in the net assets of the Fund upon liquidation or
dissolution after satisfaction of outstanding liabilities. Stock certificates
will be issued by the Transfer Agent only on specific request. Certificates for
fractional shares are not issued in any case.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares for $100,000. Such shares were acquired for investment and can only be
disposed by redemption.
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 on October 31, 1996, is calculated as
set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net Assets.............................. $17,741,239 $38,830,004 $4,122,419 $8,585,261
========== ========== ========= =========
Number of Shares Outstanding............ 1,683,579 3,658,695 389,247 813,909
========== ========== ========= =========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding).......................... $10.54 $10.61 $10.59 $10.55
Shares Charge (for Class A and Class D
shares: 5.25% of offering price (5.54%
of net asset value per share))*....... 0.58 ** ** 0.58
---- ---- ---- ----
Offering Price.......................... $11.12 $10.61 $10.59 $11.13
====== ====== ====== ======
</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 of shares. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares"
in the Prospectus and "Redemption of Shares -- Deferred Sales
Charges -- Class B and Class C Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Fund. The independent
auditors are responsible for auditing the annual financial statements of the
Fund.
33
<PAGE> 86
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 351, Boston, Massachusetts
02101, acts as the Custodian of the Fund's assets. The Custodian is responsible
for safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities and collecting interest and dividends on the
Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's Transfer Agent. The
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts. See
"Management of the Fund -- Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements audited
by independent auditors, is sent to shareholders each year. After the end of
each year, shareholders will receive Federal income tax information regarding
dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act, to which reference is hereby made.
------------------
Under a separate agreement, Merrill Lynch & Co., Inc. has granted the Fund
the right to use the "Merrill Lynch" name and has reserved the right to withdraw
its consent to the use of such name by the Fund at any time or to grant the use
of such name to any other company, and the Fund has granted Merrill Lynch & Co.,
Inc., under certain conditions, the use of any other name it might assume in the
future, with respect to any corporation organized by Merrill Lynch & Co., Inc.
To the knowledge of the Fund, no person owned beneficially 5% or more of
the Fund's shares on January 16, 1997.
34
<PAGE> 87
APPENDIX
RATINGS OF DEBT SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
Aaa Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated AA are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated BAA are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated BA are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore 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 desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic
rating classification from AA through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
35
<PAGE> 88
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
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 makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. PRIME-1 repayment
capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well established industries
-- High rates of return on funds employed
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation
-- 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.
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, then the name or
names of such supporting entity or entities are listed within parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representation and gives no opinion on the
legal validity or enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
36
<PAGE> 89
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds,
a variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols, presented below, are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stocks occupy a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
Preferred stock rating symbols and their definitions are as follows:
aaa An issue which is rated "AAA" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa An issue which is rated "AA" is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the
foreseeable future.
a An issue which is rated "A" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "BAA" is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of
time.
ba An issue which is rated "BA" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue which is rated "B" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa An issue which is rated "CAA" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
ca An issue which is rated "CA" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.
c This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "AA" through "B" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICE ("STANDARD & POOR'S") CORPORATE
DEBT RATINGS
A Standard & Poor's corporate or municipal 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.
37
<PAGE> 90
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 it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
(1) 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; (2) nature of and provisions of the obligation; and (3)
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 and 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.
Debt rated BB, B, CCC, CC and C is regarded, on balance, as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB- rating.
B Debt rated B has a greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity
or willingness to pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BB or BB- rating.
CCC Debt rated CCC has a current identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions
to meet timely payments of interest and repayment of
38
<PAGE> 91
principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal.
The CCC rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied B or B- rating.
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed
but debt service payments are continued.
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 also used
when interest payments or principal repayments are not made on the date
due even if the applicable grace period has not expired, unless Standard
& Poor's believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
PLUS (+) or MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing with the major
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal amount
of those bonds to the extent that the underlying deposit collateral is
insured by the Federal Savings & Loan Insurance Corp. or the Federal
Deposit Insurance Corp. and interest is adequately collateralized.
* Continuance of the rating is contingent upon Standard & Poor's receipt of
an executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.
NR Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
Debt Obligations of Issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments may impose certain
ratings or other standards for obligations eligible for investment by savings
banks, trust companies, insurance companies and fiduciaries generally.
39
<PAGE> 92
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-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless Standard
& Poor's believes that such payments will be made during such grace
period.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be higher than
the bond rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer.
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment-capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable sinking
fund requirements in accordance with the terms of the obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay
the preferred stock obligations.
40
<PAGE> 93
AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the
"A" category.
BB B
CCC Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay
preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such
issues will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
PLUS (+) or MINUS (-): To provide more detailed indications of preferred
stock quality, 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.
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the rating.
Preferred stock ratings are wholly unrelated to Standard & Poor's earnings and
dividend rankings for common stocks.
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.
41
<PAGE> 94
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Global Convertible Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Global Convertible Fund, Inc. as
of October 31, 1996, the related statements of operations for the year then
ended and changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the five-year
period then ended. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1996, 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 Global
Convertible Fund, Inc. as of October 31, 1996, 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
December 4, 1996
42
<PAGE> 95
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
LATIN Shares Value Percent of
AMERICA Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Mexico Utilities--Communications 20,000 Telefonos de Mexico, S.A. de C.V.
(TELMEX) (ADR) (a) $ 756,200 $ 610,000 0.88%
Total Investments in Latin American
Securities 756,200 610,000 0.88
NORTH
AMERICA
United States Food/Beverage/ 20,531 ConAgra Inc. 653,326 1,023,984 1.48
Tobacco & Household
Metals & Mining 10,000 ++WHX Corp. 179,350 83,750 0.12
Retail Stores 20,000 Home Depot, Inc. 944,247 1,095,000 1.58
Total Investments in United States
Common Stocks 1,776,923 2,202,734 3.18
Convertible Preferred Stocks
Canada Oil & Gas Producers 25,000 Occidental Petroleum Corp., Pfd.,
Series A 1,371,600 1,606,250 2.32
Total Investments in Canadian
Convertible Preferred Stocks 1,371,600 1,606,250 2.32
United States Data Processing 20,000 UNISYS Corp., $3.75 Pfd., Series A 1,233,875 605,000 0.87
Insurance 25,000 American General Corp., Pfd. 1,306,729 1,306,250 1.89
25,000 St. Paul Companies, Inc., Pfd. 1,307,892 1,312,500 1.89
----------- ----------- -------
2,614,621 2,618,750 3.78
</TABLE>
43
<PAGE> 96
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
NORTH AMERICA Shares Value Percent of
(concluded) Industries Held Convertible Preferred Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United States Metals & Mining 50,000 USX Corp., $3.25 Pfd. $ 2,413,750 $ 2,106,250 3.04%
(concluded) 35,500 WHX Corp., Pfd. 1,630,980 1,375,625 1.99
20,000 WHX Corp., Pfd., Series B 1,000,150 790,000 1.14
----------- ----------- -------
5,044,880 4,271,875 6.17
Real Estate 50,000 Merry Land & Investment Company,
Investment Trust Inc., Pfd. 1,261,637 1,312,500 1.89
Total Investments in United States
Convertible Preferred Stocks 10,155,013 8,808,125 12.71
Face
Amount Convertible Bonds
United Automobile Parts US$ 2,000,000 The Pep Boys--Manny, Moe & Jack,
States 4% due 9/01/1999 1,931,875 2,080,000 3.00
Building &
Construction 2,000,000 Masco Corp., 5.25% due 2/15/2012 1,765,500 1,930,000 2.79
Chemicals 1,400,000 Ashland Oil Inc., 6.75% due 7/01/2014 1,379,000 1,429,750 2.06
Computer Services 500,000 Cray Research, Inc., 6.125% due
2/01/2011 510,000 380,625 0.55
Industrial 2,000,000 Rouse Co., 5.75% due 7/23/2002 1,699,000 2,000,000 2.89
Insurance 2,000,000 Aegon N.V., 4.75% due 11/01/2004 2,420,250 3,640,000 5.25
Machine Diversified 1,500,000 Cooper Industries, Inc.,
7.05% due 1/01/2015 1,538,750 1,590,000 2.30
Metals & Mining 1,000,000 USX Corp., 7% due 6/15/2017 913,500 960,000 1.39
Natural Gas 3,200,000 Consolidated Natural Gas Co.,
7.25% due 12/15/2015 3,243,250 3,440,000 4.97
Oil & Related 2,000,000 Pennzoil Co., 4.75% due 10/01/2003 1,904,250 2,330,000 3.36
Pharmaceuticals 1,500,000 Alza Corp., 5% due 5/01/2006 1,503,750 1,438,125 2.08
Retail Stores 3,200,000 Home Depot, Inc., 3.25% due 10/01/2001 3,284,375 3,196,000 4.61
Transportation 1,200,000 Alaska Air Group, Inc.,
6.50% due 6/15/2005 1,247,250 1,360,500 1.96
Total Investments in United States
Convertible Bonds 23,340,750 25,775,000 37.21
Total Investments in
North American Securities 36,644,286 38,392,109 55.42
PACIFIC Shares
BASIN Held Common Stocks
Hong Kong Utilities--Electric 70,000 Shandong Huaneng Power Company Ltd.
(ADR) (a) 704,200 638,750 0.92
Total Investments in Hong Kong
Common Stocks 704,200 638,750 0.92
Japan Financial Services 10,000 Daiwa Securities Co., Ltd. 109,055 108,132 0.16
10,000 Nikko Securities Co., Ltd. 91,790 95,824 0.14
10,000 Yamaichi Securities Co., Ltd. 94,000 55,736 0.08
----------- ----------- -------
294,850 259,692 0.38
Machinery 20,000 Shimadzu Corp. 156,900 117,802 0.17
</TABLE>
44
<PAGE> 97
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Trading 50,000 Marubeni Corp. 241,883 231,648 0.33
Total Investments in Japanese
Common Stocks 693,633 609,142 0.88
Face
Amount Convertible Bonds
Hong Kong Food & Beverage US$ 2,000,000 Dairy Farms International Holdings Ltd.,
6.50% due 5/10/2049 1,977,000 1,355,000 1.95
Real Estate 2,500,000 Wharf Capital Ltd.,
5% due 7/15/2000 2,655,000 3,142,500 4.54
Total Investments in Hong Kong
Convertible Bonds 4,632,000 4,497,500 6.49
Japan Auto & Truck YEN 50,000,000 No. 2 Toyota Motor Corp., 1.20%
due 1/28/1998 572,731 611,429 0.88
Chemicals 100,000,000 No. 6 Sumitomo Bakelite Co., Ltd.,
1.20% due 9/29/2006 1,042,946 927,473 1.34
Electronics 40,000,000 No. 2 Kokusai Electric Co.,
1.30% due 9/30/2002 452,059 374,505 0.54
50,000,000 No. 5 Matsushita Electric Industrial Co.,
1.30% due 3/29/2002 513,387 511,209 0.74
37,000,000 No. 6 Sanyo Electric Co., Ltd.,
1.70% due 11/29/2002 391,721 340,888 0.49
50,000,000 No. 11 Sharp Corp., 1.50% due 9/30/1998 551,096 505,494 0.73
50,000,000 No. 2 Tokyo Electron Ltd., 0.90%
due 9/30/2003 572,581 442,198 0.64
----------- ----------- -------
2,480,844 2,174,294 3.14
Food & Beverage 100,000,000 No. 9 Asahi Breweries, Ltd., 0.95%
due 12/26/2002 1,114,675 915,165 1.32
50,000,000 No. 1 Sanyo Coca-Cola Bottling, Inc.,
0.90% due 6/30/2003 522,384 441,758 0.64
50,000,000 No. 3 Sapporo Breweries, Ltd.,
1.20% due 12/18/2009 525,379 441,319 0.64
----------- ----------- -------
2,162,438 1,798,242 2.60
Industrial 70,000,000 No. 3 Sony Corp., 1.40% due 9/30/2003 832,971 782,769 1.13
50,000,000 No. 5 Sony Corp., 0.15% due 3/30/2001 498,392 469,451 0.68
----------- ----------- -------
1,331,363 1,252,220 1.81
Leisure 50,000,000 No. 5 Canon Co., 1% due 12/20/2002 639,008 646,154 0.93
Machinery 100,000,000 No. 8 Matsushita Electric Works, Ltd.,
2.70% due 5/31/2002 1,228,409 1,054,945 1.52
25,000,000 No. 8 NEC Corp., 1.70% due 3/31/1999 315,788 280,220 0.41
30,000,000 No. 2 Nippondenso Co., Ltd., 1.20%
due 12/26/1997 337,449 337,582 0.49
----------- ----------- -------
1,881,646 1,672,747 2.42
Retail Stores 50,000,000 No. 1 Taiyo Company Ltd., 2.50%
due 2/28/2002 594,601 446,154 0.64
Transportation 50,000,000 No. 6 Keihan Electric Railway Co., Ltd.,
1% due 3/31/2003 539,009 404,396 0.58
50,000,000 No. 1 Nankai Electric Railway Co., Ltd.,
2.70% due 3/30/2001 593,306 463,736 0.67
50,000,000 No. 6 Yamato Transport Co., Ltd.,
1.70% due 9/30/2002 539,151 490,110 0.71
----------- ----------- -------
1,671,466 1,358,242 1.96
Total Investments in Japanese
Convertible Bonds 12,377,043 10,886,955 15.72
Total Investments in Pacific
Basin Securities 18,406,876 16,632,347 24.01
</TABLE>
45
<PAGE> 98
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
WESTERN Shares Value Percent of
EUROPE Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United Kingdom Business Services 71,944 ++Cordiant PLC (Ordinary) $ 170,504 $ 118,194 0.17%
Total Investments in United Kingdom
Common Stocks 170,504 118,194 0.17
Face
Amount Convertible Bonds
France Leisure Frf 4,200,000 Euro Disney SCA, 6.75% due 10/01/2001 686,298 854,575 1.23
Pharmaceuticals 7,000 Sanofi S.A., 4% due 1/01/2000 (Units) 498,434 703,042 1.02
Total Investments in French
Convertible Bonds 1,184,732 1,557,617 2.25
Italy Foreign Government US$ 1,500,000 Republic of Italy, 5% due 6/28/2001 1,526,250 1,500,000 2.16
Obligations
Total Investments in Italian
Convertible Bonds 1,526,250 1,500,000 2.16
United Kingdom Food & Pound 500,000 Allied-Lyons PLC, 6.75% due 7/07/2008 858,247 799,067 1.15
Beverage Sterling
US$ 1,500,000 Grand Metropolitan PLC,
6.50% due 1/31/2000 1,612,500 1,750,500 2.53
Pound 550,000 Northern Foods PLC, 6.75% due 8/08/2008 867,775 796,221 1.15
Sterling
Total Investments in United Kingdom
Convertible Bonds 3,338,522 3,345,788 4.83
Total Investments in Western
European Securities 6,220,008 6,521,599 9.41
Short-Term Securities
United States Commercial Paper* US$ 3,358,000 General Electric Capital Corp.,
5.56% due 11/01/1996 3,358,000 3,358,000 4.85
US Government US Treasury Bills:
Obligations* 500,000 4.84% due 11/14/1996 499,126 499,126 0.72
1,500,000 4.85% due 11/14/1996 1,497,373 1,497,373 2.16
1,393,000 4.84% due 1/02/1997 1,381,389 1,381,132 1.99
----------- ----------- -------
3,377,888 3,377,631 4.87
Total Investments in
Short-Term Securities 6,735,888 6,735,631 9.72
Total Investments $68,763,258 68,891,686 99.44
===========
Unrealized Appreciation on Forward Foreign Exchange Contracts** 62,673 0.09
Other Assets Less Liabilities 324,564 0.47
----------- -------
Net Assets $69,278,923 100.00%
=========== =======
<FN>
++Non-income producing security.
(a)American Depositary Receipts (ADR).
*Commercial Paper and certain US Government Obligations are traded on a
discount basis; the interest rates shown are the discount rates paid at the
time of purchase by the Fund.
**Forward foreign exchange contracts as of October 31, 1996 were as follows:
</FN>
<CAPTION>
Unrealized
Appreciation
Foreign Currency Sold Expiration Date (Note 1c)
<S> <C> <C>
YEN 300,000,000 December 1996 $62,673
Unrealized Appreciation on Forward Foreign
Exchange Contracts (US$ Commitment--$2,714,932) $62,673
=======
See Notes to Financial Statements.
</TABLE>
46
<PAGE> 99
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of October 31, 1996
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$68,763,258) (Note 1a) $68,891,686
Unrealized appreciation on forward foreign exchange contracts (Note 1c) 62,673
Cash 2,245
Receivables:
Interest $ 555,904
Capital shares sold 79,979
Dividends 7,089 642,972
-----------
Prepaid expenses (Note 1f) 80,879
-----------
Total assets 69,680,450
-----------
Liabilities: Payables:
Capital shares redeemed 160,746
Distributor (Note 2) 38,585
Investment adviser (Note 2) 38,508 237,839
-----------
Accrued expenses and other liabilities 163,693
-----------
Total liabilities 401,532
-----------
Net Assets: Net assets $69,278,923
===========
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized $ 168,358
Consist of: Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 365,869
Class C Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 38,925
Class D Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 81,391
Paid-in capital in excess of par 66,516,350
Undistributed investment income--net 82,617
Undistributed realized capital gains on investments and foreign currency transactions--net 1,834,020
Unrealized appreciation on investments and foreign currency transactions--net 191,393
-----------
Net assets $69,278,923
===========
Net Asset Class A--Based on net assets of $17,741,239 and 1,683,579 shares outstanding $ 10.54
Value: ===========
Class B--Based on net assets of $38,830,004 and 3,658,695 shares outstanding $ 10.61
===========
Class C--Based on net assets of $4,122,419 and 389,247 shares outstanding $ 10.59
===========
Class D--Based on net assets of $8,585,261 and 813,909 shares outstanding $ 10.55
===========
See Notes to Financial Statements.
</TABLE>
47
<PAGE> 100
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended October 31, 1996
<S> <C> <C> <C>
Investment Interest and discount earned (net of $13,671 foreign withholding tax) $ 2,420,356
Income Dividends (net of $850 foreign withholding tax) 882,162
(Notes 1d & 1e): -----------
Total income 3,302,518
-----------
Expenses: Investment advisory fees (Note 2) $ 463,001
Account maintenance and distribution fees--Class B (Note 2) 436,795
Transfer agent fees--Class B (Note 2) 185,100
Printing and shareholder reports 116,876
Accounting services (Note 2) 79,047
Professional fees 72,610
Registration fees (Note 1f) 63,434
Transfer agent fees--Class A (Note 2) 61,964
Directors' fees and expenses 45,497
Account maintenance & distribution fees--Class C (Note 2) 37,775
Transfer agent fees--Class D (Note 2) 22,690
Custodian fees 18,882
Transfer agent fees--Class C (Note 2) 16,778
Account maintenance fees--Class D (Note 2) 16,646
Pricing fees 4,691
Other 4,830
-----------
Total expenses 1,646,616
-----------
Investment income--net 1,655,902
-----------
Realized & Realized gain from:
Unrealized Gain Investments--net 1,396,864
(Loss) on Foreign currency transactions--net 437,160 1,834,024
Investments & Change in unrealized appreciation/depreciation on: -----------
Foreign Currency Investments--net 2,709,718
Transactions--Net Foreign currency transactions--net (129,242) 2,580,476
(Notes 1b, 1c, ----------- -----------
1e & 3): Net realized and unrealized gain on investments and foreign currency transactions 4,414,500
-----------
Net Increase in Net Assets Resulting from Operations $ 6,070,402
===========
See Notes to Financial Statements.
</TABLE>
48
<PAGE> 101
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended,
October 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C> <C>
Operations: Investment income--net $ 1,655,902 $ 3,817,569
Realized gain on investments and foreign currency transactions--net 1,834,024 4,600,356
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net 2,580,476 (1,186,046)
----------- -----------
Net increase in net assets resulting from operations 6,070,402 7,231,879
----------- -----------
Dividends & Investment income--net:
Distributions Class A (694,324) (983,944)
to Shareholders Class B (1,473,613) (2,414,489)
(Note 1g): Class C (112,375) (162,116)
Class D (224,218) (132,498)
Realized gain on investments--net:
Class A (820,273) (133,107)
Class B (2,671,664) (832,533)
Class C (180,592) (20,618)
Class D (171,093) (14,017)
----------- -----------
Net decrease in net assets resulting from dividends and distributions
to shareholders (6,348,152) (4,693,322)
----------- -----------
Capital Share Net increase (decrease) in net assets derived from capital share transactions (20,834,705) 26,499,640
Transactions ----------- -----------
(Note 4):
Net Assets: Total increase (decrease) in net assets (21,112,455) 29,038,197
Beginning of year 90,391,378 61,353,181
----------- -----------
End of year* $69,278,923 $90,391,378
=========== ===========
<FN>
*Undistributed investment income--net $ 82,617 $ 931,245
=========== ===========
</FN>
See Notes to Financial Statements.
</TABLE>
49
<PAGE> 102
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived Class A
from information provided in the financial statements. For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1996++++ 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.71 $ 10.75 $ 11.08 $ 9.79 $ 9.39
Operating -------- -------- -------- -------- -------
Performance: Investment income--net .32 .42 .33 .23 .21
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .62 .11 (.27) 1.45 .68
-------- -------- -------- -------- -------
Total from investment operations .94 .53 .06 1.68 .89
-------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net (.48) (.46) (.30) (.23) (.25)
Realized gain on investments--net (.63) (.11) (.09) (.16) (.24)
-------- -------- -------- -------- -------
Total dividends and distributions (1.11) (.57) (.39) (.39) (.49)
-------- -------- -------- -------- -------
Net asset value, end of year $ 10.54 $ 10.71 $ 10.75 $ 11.08 $ 9.79
======== ======== ======== ======== =======
Total Investment Based on net asset value per share 9.34% 5.10% .61% 17.64% 10.00%
Return:** ======== ======== ======== ======== =======
Ratios to Average Expenses, net of reimbursement 1.57% 1.38% 1.66% 2.22% 2.47%
Net Assets: ======== ======== ======== ======== =======
Expenses 1.57% 1.38% 1.66% 2.22% 2.86%
======== ======== ======== ======== =======
Investment income--net 3.05% 4.03% 2.97% 2.36% 2.61%
======== ======== ======== ======== =======
Supplemental Net assets, end of year (in thousands) $ 17,741 $ 23,634 $ 7,850 $ 4,557 $ 2,283
Data: ======== ======== ======== ======== =======
Portfolio turnover 14.72% 101.12% 38.04% 26.02% 4.91%
======== ======== ======== ======== =======
Average commission rate paid++++++ $ .0679 -- -- -- --
======== ======== ======== ======== =======
<CAPTION>
The following per share data and ratios have been derived Class B
from information provided in the financial statements. For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1996++++ 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.77 $ 10.80 $ 11.13 $ 9.84 $ 9.44
Operating -------- -------- -------- -------- -------
Performance: Investment income--net .21 .37 .21 .13 .12
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .62 .05 (.25) 1.46 .67
-------- -------- -------- -------- -------
Total from investment operations .83 .42 (.04) 1.59 .79
-------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net (.36) (.34) (.20) (.14) (.15)
Realized gain on investments--net (.63) (.11) (.09) (.16) (.24)
-------- -------- -------- -------- -------
Total dividends and distributions (.99) (.45) (.29) (.30) (.39)
-------- -------- -------- -------- -------
Net asset value, end of year $ 10.61 $ 10.77 $ 10.80 $ 11.13 $ 9.84
======== ======== ======== ======== =======
Total Investment Based on net asset value per share 8.13% 4.01% (.37%) 16.45% 8.77%
Return:** ======== ======== ======== ======== =======
Ratios to Average Expenses, net of reimbursement 2.64% 2.37% 2.69% 3.26% 3.49%
Net Assets: ======== ======== ======== ======== =======
</TABLE>
50
<PAGE> 103
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Expenses 2.64% 2.37% 2.69% 3.26% 3.96%
======== ======== ======== ======== =======
Investment income--net 1.98% 2.95% 1.95% 1.32% 1.53%
======== ======== ======== ======== =======
Supplemental Net assets, end of year (in thousands) $ 38,830 $ 58,660 $ 53,121 $ 29,831 $13,975
Data: ======== ======== ======== ======== =======
Portfolio turnover 14.72% 101.12% 38.04% 26.02% 4.91%
======== ======== ======== ======== =======
Average commission rate paid++++++ $ .0679 -- -- -- --
======== ======== ======== ======== =======
<CAPTION>
Class C Class D
For the For the
The following per share data and ratios Period Period
have been derived from information Oct. 21, Oct. 21,
provided in the financial statements. For the Year Ended 1994++ to For the Year Ended 1994++ to
October 31, Oct. 31, October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1996++++ 1995 1994++++ 1996++++ 1995 1994++++
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.75 $ 10.81 $ 10.74 $ 10.72 $ 10.76 $ 10.69
Operating ------- -------- -------- -------- -------- -------
Performance: Investment income--net .21 .36 -- .31 .42 --
Realized and unrealized gain on investments
and foreign currency transactions--net .62 .05 .07 .61 .09 .07
------- -------- -------- -------- -------- -------
Total from investment operations .83 .41 .07 .92 .51 .07
------- -------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net (.36) (.36) -- (.46) (.44) --
Realized gain on investments--net (.63) (.11) -- (.63) (.11) --
------- -------- -------- -------- -------- -------
Total dividends and distributions (.99) (.47) -- (1.09) (.55) --
------- -------- -------- -------- -------- -------
Net asset value, end of period $ 10.59 $ 10.75 $ 10.81 $ 10.55 $ 10.72 $ 10.76
======= ======== ======== ======== ======== =======
Total Investment Based on net asset value per share 8.14% 3.89% .65%+++ 9.07% 4.87% .65%+++
Return:** ======= ======== ======== ======== ======== =======
Ratios to Average Expenses 2.65% 2.41% 5.64%* 1.77% 1.62% 5.13%*
Net Assets: ======= ======== ======== ======== ======== =======
Investment income (loss)--net 1.97% 2.99% (1.74%)* 2.85% 3.79% (1.24%)*
======= ======== ======== ======== ======== =======
Supplemental Net assets, end of period (in thousands) $ 4,123 $ 4,598 $ 203 $ 8,585 $ 3,499 $ 179
Data: ======= ======== ======== ======== ======== =======
Portfolio turnover 14.72% 101.12% 38.04% 14.72% 101.12% 38.04%
======= ======== ======== ======== ======== =======
Average commission rate paid++++++ $ .0679 -- -- $ .0679 -- --
======= ======== ======== ======== ======== =======
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
++++++For fiscal years beginning on or after September 1, 1995, the Fund is required
to disclose its average commission rate per share for purchases and sales of
equity securities. The "Average Commission Rate Paid" includes commissions
paid in foreign currencies, which have been converted into US dollars using
the prevailing exchange rate on the date of the transaction. Such conversions
may materially affect the rate shown.
</FN>
See Notes to Financial Statements.
</TABLE>
51
<PAGE> 104
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Global Convertible Fund, Inc. (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--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at the
last available bid price. Securities traded in the over-the-counter
market are valued at the last available bid price prior to the time of
valuation. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated
by or under the authority of the Board of Directors as the primary
market. Securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the broad-
est and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or,
in the case of options traded in the over-the-counter market, the
last asked price. Options purchased are valued at the last sale price
in the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market value quotations are not available are valued at
their fair value as determined in good faith by or under the direction
of the Fund's Board of Directors.
(b) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing
when recognized. Assets and liabilities denominated in foreign
currencies are valued at the exchange rate at the end of the period.
Foreign currency transactions are the result of settling (realized)
or valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(c) 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 equity, debt and currency
markets. Losses may arise due to changes in the value of the con-
tract or if the counterparty does not perform under the contract.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the effect on opera-
tions is recorded from the date the Fund enters into such contracts.
Premium or discount is amortized over the life of the contracts.
* Foreign currency options and futures--The Fund may also purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign exchange
rates. Such transactions may be effected with respect to hedges on
non-US dollar denominated securities owned by the Fund, sold by
the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund.
* 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 con-
tracts 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.
* Options--The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is subsequently
52
<PAGE> 105
marked to market to reflect the current market value of the option
written. When a security is purchased or sold through an exercise of
an option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted
from (or added to) the proceeds of the security sold. When an
option expires (or the Fund enters into a closing transaction), the
Fund realizes a gain or loss on the option to the extent of the
premiums received or paid (or gain or loss to the extent the cost
of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing
investments.
(d) 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. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends, and capital
gains at various rates.
(e) Security transactions and investment income--Security trans-
actions are recorded on the dates the transactions are entered into
(the trade dates). Dividend income is recorded on the ex-dividend
date, except that if the ex-dividend date has passed, certain divi-
dends from foreign securities are recorded as soon as the Fund is
informed of the ex-dividend date. Interest income (including amor-
tization of discount) is recognized on the accrual basis. Realized
gains and losses on security transactions are determined on the
identified cost basis.
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid
by the Fund are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general
partner of MLAM 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.
MLAM 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 at the annual rate of 0.65%
of the average daily value of the Fund's net assets.
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% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to
the 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 October 31, 1996, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $ 117 $ 1,531
Class D $ 1,818 $23,376
For the year ended October 31, 1996, MLPF&S received contingent
deferred sales charges of $110,201 and $2,756 relating to transactions
in Class B and Class C Shares, respectively. Furthermore, MLPF&S
received contingent deferred sales charges of $497 relating to
transactions subject to front-end sales charges waivers in Class D
Shares.
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 MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended October 31, 1996 were $9,589,917 and
$32,752,174, respectively.
53
<PAGE> 106
NOTES TO FINANCIAL STATEMENTS (concluded)
Net realized and unrealized gains (losses) as of October 31, 1996 were
as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $ 1,397,590 $ 128,685
Short-term investments (726) (257)
Foreign currency transactions (26,974) 292
Forward foreign exchange contracts 464,134 62,673
------------ -------------
Total $ 1,834,024 $ 191,393
============ =============
As of October 31, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $128,428, of which $4,577,553
related to appreciated securities and $4,449,125 related to depreci-
ated securities. At October 31, 1996, the aggregate cost of invest-
ments for Federal income tax purposes was $68,763,258.
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share
transactions were $(20,834,705) and $26,499,640 for the years ended
October 31, 1996 and October 31, 1995, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 685,844 $ 7,246,703
Shares issued to shareholders in
reinvestment of dividends
and distributions 135,086 1,380,166
------------ -------------
Total issued 820,930 8,626,869
Shares redeemed (1,343,548) (14,564,322)
------------ -------------
Net decrease (522,618) $ (5,937,453)
============ =============
Class A Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 4,429,386 $ 47,904,765
Shares issued to shareholders in
reinvestment of dividends
and distributions 91,827 983,674
------------ -------------
Total issued 4,521,213 48,888,439
Shares redeemed (3,044,979) (33,329,139)
------------ -------------
Net increase 1,476,234 $ 15,559,300
============ =============
Class B Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 958,130 $ 10,188,233
Shares issued to shareholders in
reinvestment of dividends
and distributions 295,014 3,025,724
------------ -------------
Total issued 1,253,144 13,213,957
Automatic conversion of shares (559,618) (5,864,176)
Shares redeemed (2,481,068) (26,810,294)
------------ -------------
Net decrease (1,787,542) $ (19,460,513)
============ =============
Class B Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 7,306,514 $ 77,802,488
Shares issued to shareholders in
reinvestment of dividends
and distributions 244,737 2,595,029
------------ -------------
Total issued 7,551,251 80,397,517
Automatic conversion of shares (159,520) (1,700,100)
Shares redeemed (6,861,967) (75,080,334)
------------ -------------
Net increase 529,764 $ 3,617,083
============ =============
54
<PAGE> 107
Class C Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 234,669 $ 2,490,027
Shares issued to shareholders in
reinvestment of dividends
and distributions 21,832 223,912
------------ -------------
Total issued 256,501 2,713,939
Shares redeemed (294,992) (3,188,951)
------------ -------------
Net decrease (38,491) $ (475,012)
============ =============
Class C Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 1,012,755 $ 10,768,784
Shares issued to shareholders in
reinvestment of dividends
and distributions 13,905 149,071
------------ -------------
Total issued 1,026,660 10,917,855
Shares redeemed (617,701) (6,780,755)
------------ -------------
Net increase 408,959 $ 4,137,100
============ =============
Class D Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 225,183 $ 2,423,111
Automatic conversion of shares 562,293 5,864,176
Shares issued to shareholders in
reinvestment of dividends
and distributions 27,215 280,369
------------ -------------
Total issued 814,691 8,567,656
Shares redeemed (327,147) (3,529,383)
------------ -------------
Net increase 487,544 $ 5,038,273
============ =============
Class D Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 593,147 $ 6,348,782
Automatic conversion of shares 160,026 1,700,100
Shares issued to shareholders in
reinvestment of dividends
and distributions 10,076 107,975
------------ -------------
Total issued 763,249 8,156,857
Shares redeemed (453,469) (4,970,700)
------------ -------------
Net increase 309,780 $ 3,186,157
============ =============
55
<PAGE> 108
- ------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies... 2
Portfolio Strategies Involving
Options and Futures............ 2
Other Investment Policies and
Practices...................... 5
Investment Restrictions........... 6
Management of the Fund.............. 8
Directors and Officers............ 8
Compensation of Directors......... 9
Management and Advisory
Arrangements................... 10
Purchase of Shares.................. 11
Redemption of Shares................ 18
Portfolio Transactions and
Brokerage......................... 19
Determination of Net Asset Value.... 21
Shareholder Services................ 21
Dividends, Distributions and
Taxes............................. 26
Performance Data.................... 30
General Information................. 32
Description of Shares............. 32
Computation of Offering Price Per
Share.......................... 33
Independent Auditors.............. 33
Custodian......................... 34
Transfer Agent.................... 34
Legal Counsel..................... 34
Reports to Shareholders........... 34
Additional Information............ 34
Appendix............................ 35
Independent Auditors' Report........ 42
Financial Statements................ 43
Code #10666-0297
</TABLE>
[Merrill Lynch Logo]
MERRILL LYNCH
GLOBAL CONVERTIBLE
FUND, INC.
STATEMENT OF [Merrill Lynch Compass]
ADDITIONAL
INFORMATION
February 24, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 1
MERRILL LYNCH
CONVERTIBLE
FUND, INC.
[FUND LOGO]
Annual Report
August 31, 1997
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
Merrill Lynch
Convertible Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
[RECYCLE LOGO]
Printed on post-consumer recycled paper
MERRILL LYNCH CONVERTIBLE FUND, INC.
DEAR SHAREHOLDER
We are pleased to provide you with this first annual report for Merrill Lynch
Convertible Fund, Inc. As we announced in the June 30, 1997 semi-annual report,
on August 4, 1997 Merrill Lynch Convertible Fund, Inc. converted to open-end
status; that is, the Fund's shares are redeemable at net asset value at any
time. In addition, the Fund became available through the Merrill Lynch Select
Pricing(SM) System; therefore, clients can now purchase shares with an upfront
sales charge (Class A or Class D Shares), or at net asset value, subject to a
contingent deferred sales charge and/or an annual distribution fee (Class B or
Class C Shares). Holders of the Capital Shares of the closed-end fund became
Class A shareholders with this change. See "About Fund Performance" on page 4 of
this report to shareholders for a complete description of each class of shares
available. Performance information, including average annual total returns, can
be found on pages 4 and 5 of this report to shareholders.
The Environment
The convertible market performed well this past year, benefiting from sharply
higher stock prices and a relatively benign interest rate environment. Prices of
convertible bonds got an added boost from a dramatic increase in the volatility
of stock prices which sustained conversion premiums as a result of increases in
the value of the call options embedded within convertible bonds and convertible
preferred stocks.
During the year ended August 31, 1997, stocks advanced sharply in price
reflecting excellent fundamentals, which include a strong economic environment,
low inflation, and relatively stable and constructive interest rates. However,
we believe the valuation parameters of the stock market discounted these
positive fundamentals. As mentioned in our June 30, 1997 report to shareholders,
the stock market's valuations based on book values and dividend yields are at
historical highs. This situation increases the risk in equities. If the economy
is more robust
<PAGE> 2
than expected, corporate earnings might be surprising. This could allow for
further upward potential for stocks. However, an economy strong enough to
accelerate earnings this much might force the Federal Reserve Board to raise
interest rates, compressing valuation multiples. Therefore, we are cautious
toward the stock market, notwithstanding positive economic fundamentals such as
low interest rates, low inflation and solid economic growth.
Fiscal Year in Review
The Fund changed dramatically during the fiscal year ended August 31, 1997,
having just completed its transition from a dual-structure closed-end mutual
fund to a multi-class open-end mutual fund. We also took this opportunity to
receive shareholder approval to modify the Fund's investment objectives and
policies. This conversion process started on July 31, 1997 with the redemption
of the Income Shares and concluded with the change of our fiscal year.
During the fiscal year ended August 31, 1997, the Fund's Class A Shares' net
asset value increased 26.73% (including the performance of Capital Shares prior
to conversion, before charges and expenses) notwithstanding the fact that about
half of the Fund's assets were in cash during much of this period. We maintained
our cash reserves at this level to accommodate the Fund's cash needs for the
redemption of the Income Shares as well as estimated liquidity needs for those
Capital shareholders wishing to reallocate their investments as the Fund became
open-ended. (Fund results shown do not reflect sales charges, and would be lower
if sales charges were included.)
During the 12 months ended August 31, 1997, we continued to consolidate the Fund
by reducing the number of positions and companies held. At the start of the
fiscal year, we held 112 positions in 99 companies. At the end of the fiscal
year, this figure had declined to 66 positions in 63 companies. This narrower
focus allowed us to concentrate on security selection and sector allocation to
seek to enhance performance. For example, we carried a large exposure to the
pollution control sector, which appreciated substantially during the year. In
particular, two of the investments we held during the year, Allied Waste
Industries, Inc. and Philip Environmental Inc., each nearly doubled in value.
During the year, other pollution control companies owned by the Fund which
contributed to our performance were USA Waste Services, Inc. and US Filter
Corporation. In addition, several of the companies held in the Fund, while
conglomerates, have exposure to pollution control. These companies included
Thermo Electron Corporation, Thermo Instrument Systems Inc. and several of the
Thermo spin-out companies.
While we have since sold most of the Fund's bank holdings for valuation reasons,
the Fund benefited greatly from its overweighting in this area during the fiscal
year. Such holdings included Banc One Corporation, Boatmens' Bancshares, Inc.,
Deposit Guaranty Corp., Jefferson Pilot
<PAGE> 3
Corp. (convertible into Nations Bank Corp.), Onbancorp Inc., Southern National
Corp. and Union Planters Corp. Only Jefferson Pilot Corp. and BankAtlantic
Bancorp., Inc. remained in the Fund at fiscal year-end. When we bought most of
these positions, the average bank stock sold for about eight times earnings and
about one times book value. Presently, most banks are about 15 times earnings
and about 2.5 times book value. We had focused mainly on the regional banks,
trying to capitalize on the consolidation trend in force and their relative
undervaluation.
The Fund benefited from many acquisitions and mergers during the 12 months ended
August 31, 1997. Mergers and acquisitions affected several of the banks already
mentioned. In the financial services area, Pioneer Financial Services Inc. and
American Travelers Corp. were both acquired by Conseco Inc. In healthcare,
Regency Health Services, Inc. was purchased by Sun Healthcare Group Inc. and
Emergency Medical Response was purchased by Laidlaw, Inc. Tyco Toys Inc. was
taken over by Mattel Inc. These acquisitions validated our original premise
regarding the values inherent in these businesses and their attractively low
stock valuations.
Our heavy exposure to the paper sector also contributed to the Fund's
performance during the fiscal year as paper prices firmed late in the period,
lifting the prices of paper stocks higher. Albany International Corp.,
International Paper Co. and James River Corp. of Virginia were Fund holdings
that did particularly well. We took advantage of opportunities to sell into
strength. Only International Paper Co. and small amounts of Albany International
Corp. and Boise Cascade Corp. remained in the Fund at fiscal year-end.
The technology sector, which we view as many sectors and not one homogeneous
area, was volatile during the 12 months and produced mixed results. We had
focused on the downtrodden semiconductor area through our holdings in Cypress
Semiconductor Corp., Integrated Device Technology Inc. and Taiwan Semiconductor
Co. and the semiconductor equipment area through Novellus Systems Inc. Memory
device companies such as Storage Technology Corp. and EMC Corp. also added
significantly to Fund performance and were sold on strength. Safeguard
Scientific, a partnership of entrepreneurial companies focused on information
technology markets and which brings emerging technology companies public through
rights offerings to its shareholders, was another technology company which was
profitably bought and sold during the 12-month period. We also profitably bought
and sold Microsoft Corp. convertible preferred stock. In addition, we also had
exposure to two electronic parts distributors stocks that were held after forced
conversion of the convertibles, Arrow Electronics Inc. and Avnet Inc. Both
performed very well, in our opinion, and consequently were later sold.
One area of disappointment for the Fund was in metals, where our exposure to the
steel sector through WHX Corp. and Worthington
<PAGE> 4
Industries Inc. (convertible into Rouge Industries Inc.) hindered Fund
performance. AK Steel Holdings Corp., while up for the year, underperformed the
market. Coeur d'Alene Mines Corp., a silver and gold producer, and Cypress Amax
Minerals Co., a copper, molybdenum and precious metals producer, were also
disappointing as a result of weak metal prices. Prices for these commodities
continue to be weak. However, the current low security valuations (indicating
full discounting of these problems), combined with near universal negativity
regarding the stocks, reinforce our positive long-term view on this sector. One
aspect about the steel sector which is of particular importance is that about
70% of the industry must renegotiate with its unions in 1998 and 1999. This may
lead to labor unrest and strikes. This has the effect of tightening the
supply/demand situation in the industry, improving raw material prices and
potentially earnings, as was recently the case when WHX CORP. went on strike,
the longest strike in the steel industry this century.
We also had selective positions in the energy and oil service sectors that were
quite strong during the year. One of our largest positions was in Key Energy
Group Inc., an oil service company whose stock rose over 300% during the period.
Most of the position was sold prior to fiscal year-end. Other oil and gas
investments that contributed to the Fund's performance were the offshore oil
drillers Diamond Offshore Drilling Inc. and Nabors Industries Inc., and Callon
Petroleum Co., a small exploration and production company. USX-US Steel Group
Inc. 7% convertible debentures (which were convertible into one part USX-US
Steel Group Inc. and five parts USX-Marathon Group Oil) also provided exposure
to the oil sector. All of these were sold as investors' perceptions of energy
stocks moved from undervaluations and pessimism to overvaluation and consensus
optimism.
Finally, at the outset of the fiscal year, we had a large allocation in common
stocks (20.3% of total assets) which reflected our belief that these stocks had
excellent potential for appreciation since they were historically inexpensive
and the economic fundamentals were constructive. We reduced the stock component
of the Fund to 4.9% of total assets by fiscal year-end 1997, based in part on
our more cautious stance on stocks.
In Conclusion
We thank you for your support of Merrill Lynch Convertible Fund, Inc., and we
look forward to serving your investment needs in the months and years ahead.
Sincerely,
/s/ ARTHUR ZEIKEL
Arthur Zeikel
President
/s/ DANIEL A. LUCHANSKY
Daniel A. Luchansky
Vice President and Portfolio Manager
October 1, 1997
<PAGE> 5
IMPORTANT TAX INFORMATION
Of the ordinary income distributions paid quarterly to shareholders by Merrill
Lynch Convertible Fund, Inc. during its taxable year ended August 31, 1997,
26.52% qualifies for the dividends received deduction for corporations.
Additionally, there were no capital gains distributed by the Fund during the
period.
Please retain this information for your records.
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill Lynch
Select Pricing(SM) System, which offers four pricing alternatives:
- - Class A Shares incur a maximum initial sales charge (front-end load) of
5.25% and bear no ongoing distribution or account maintenance fees. Class A
Shares are available only to eligible investors.
- - Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each year
thereafter to 0% after the fourth year. In addition, Class B Shares are subject
to a distribution fee of 0.75% and an account maintenance fee of 0.25%. These
shares automatically convert to Class D Shares after approximately 8 years.
(There is no initial sales charge for automatic share conversions.)
- - Class C Shares are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. In addition, Class C Shares are subject to a
1% contingent deferred sales charge if redeemed within one year of purchase.
- - Class D Shares incur a maximum initial sales charge of 5.25% and an
account maintenance fee of 0.25% (but no distribution fee).
<PAGE> 6
None of the past results shown should be considered a representation of future
performance. Figures shown in the "Average Annual Total Return" table as well as
the total returns and cumulative total return in the "Performance Summary" table
assume reinvestment of all dividends and capital gains distributions at net
asset value on the ex-dividend date. Investment return and principal value of
shares will fluctuate so that shares, when redeemed, may be worth more or less
than their original cost. Dividends paid to each class of shares will vary
because of the different levels of account maintenance, distribution and
transfer agency fees applicable to each class, which are deducted from the
income available to be paid to shareholders.
Recent Performance Results*
<TABLE>
<CAPTION>
12 Month 3 Month
8/31/97 5/31/97+ 8/31/96 % Change % Change+
<S> <C> <C> <C> <C> <C>
ML Convertible Fund, Inc. Class A Shares++ $17.36 $16.11 $14.25 + 21.82% + 7.76%
ML Convertible Fund, Inc. Class B Shares 17.35 16.91 -- -- + 2.60
ML Convertible Fund, Inc. Class C Shares 17.36 16.91 -- -- + 2.66
ML Convertible Fund, Inc. Class D Shares 17.36 16.91 -- -- + 2.66
ML Convertible Fund, Inc. Class A Shares -- Total Return++ + 26.73(1) + 7.76
ML Convertible Fund, Inc. Class B Shares -- Total Return -- + 2.60
ML Convertible Fund, Inc. Class C Shares -- Total Return -- + 2.66
ML Convertible Fund, Inc. Class D Shares -- Total Return -- + 2.66
</TABLE>
* Investment results shown do not reflect sales charges; results shown would
be lower if a sales charge was included.
+ Investment results and net asset values shown for Class B, Class C and Class
D Shares are since their inception on 8/4/97.
++ Performance results for per share net asset value of Class A Shares prior to
August 4, 1997 reflect the performance of the Fund's Capital Shares during
the when the Fund was closed-end.
(1) Percent change includes reinvestment of $0.641 per share ordinary income
dividends.
<PAGE> 7
Average Annual Total Return+
<TABLE>
<CAPTION>
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
<S> <C> <C>
Year Ended 6/30/97 + 17.80% + 11.61%
Five Years Ended 6/30/97 + 11.78 + 10.59
Ten Years Ended 6/30/97 + 5.20 + 4.63
</TABLE>
+ Performance results for per share net asset value of Class A Shares prior to
August 4, 1997 reflect the performance of the Fund's Capital Shares during
the period when the Fund was closed-end.
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge currently applicable to Class A Shares.
[GRAPHIC LINE CHART OMITTED: TOTAL RETURN BASED ON A $10,000 INVESTMENT]
Total Return Based on a $10,000 Investment -- Class A Shares
A line graph depicting the growth of an investment in the Fund's Class A Shares
compared to growth of an investment in the Value Line Convertible Index.
Beginning and ending values are:
<TABLE>
<CAPTION>
8/87 8/97
<S> <C> <C>
ML Convertible Fund, Inc.+--
Class A Shares*+++ $ 9,475 $15,847
Value Line Convertible Index++ $10,000 $26,456
</TABLE>
* Assuming maximum sales charge currently applicable to Class A Shares,
transaction costs and other operating expenses, including advisory fees.
+ Merrill Lynch Convertible Fund, Inc. primarily invests in a portfolio of
convertible debt securities, convertible preferred stocks and synthetic
convertible securities.
++ This unmanaged Index tracks the performance of all convertibles (over 590
bonds and preferreds). The Index gives equal weight to each issue and is
calculated on a total return basis.
+++ Performance results for Class A Shares prior to August 4, 1997 reflect the
performance of the Fund's Capital Shares during the period when the Fund was
closed-end. Total return includes capital appreciation/depreciation and
income. Convertible Holdings, Inc. (the predecessor fund) was a
dual-structure closed-end fund. The performance numbers referenced in the
graph are for the funds Capital Shares only. As a result, the results do not
fully reflect total historical performance since they do not include the
<PAGE> 8
performance of the fund's Income Shares. The average annual total return of
the Income Shares over the ten-year period ended July 31, 1997 (the date of
the conversion to open-end status) was +14.54%. The cumulative ten-year
Income Share total return over the same period was +288.62%.
Past performance is not predictive of future performance.
Performance Summary -- Class A Shares+
<TABLE>
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
8/2/85 -- 12/31/85 $9.30 $10.34 -- -- + 11.18%
1986 10.34 11.49 $0.230 -- + 14.13
1987 11.49 8.49 0.460 -- - 21.34
1988 8.49 8.69 -- -- + 2.36
1989 8.69 10.12 -- -- + 16.46
1990 10.12 7.67 -- -- - 24.21
1991 7.67 10.91 -- -- + 42.24
1992 10.91 12.87 -- $0.120 + 19.48
1993 12.87 13.21 -- 1.168 + 13.94
1994 13.21 11.13 -- 0.008 - 15.68
1995 11.13 13.43 -- 0.363 + 24.44
1996 13.43 15.57 -- 0.641 + 20.60
1/1/97 -- 8/31/97 15.57 17.36 -- -- + 11.50
Total $0.690 Total $2.300
Cumulative total return as of 8/31/97: +146.36%**
</TABLE>
+ Performance results for per share net asset value of Class A Shares prior to
August 4, 1997 are for the period when the Fund was a dual-structure
closed-end fund and represents performance for the predecessor Capital Shares
only, but excludes returns from the Income Shares.
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower if sales charge
was included.
<PAGE> 9
Merrill Lynch Convertible Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
S&P Moody's Face Value
Industry Rating Rating Amount Convertible Debentures Cost (Note 1a)
<S> <C> <C> <C> <C> <C> <C>
Automotive NR* Baa1 $ 900,000 Magna International Inc., 7.25% due
Parts -- 5.9% 7/05/2005 $ 772,368 $ 1,024,496
BB- B1 2,000,000 Mascotech, Inc., 4.50% due 12/15/2003 1,840,000 1,855,000
Pep Boys -- Manny, Moe & Jack (The):
BBB Baa3 2,500,000 4% due 9/15/1999 2,575,000 2,487,500
BBB Baa3 1,500,000 4.089% due 9/20/2011 (d) 854,172 791,250
NR* NR* 750,000 Tower Automotive, Inc., 5% due
8/01/2004 (b) 750,000 803,438
------------ ------------
6,791,540 6,961,684
Banking & NR* NR* 500,000 BankAtlantic Bancorp, Inc., 6.75%
Financial -- 0.7% due 7/01/2006+ 830,955 790,000
Conglomerates -- 2.0% Polyphase Corporation+:
AAA Aaa 1,000,000 12% due 12/01/1997 (b) 1,000,000 185,000
NR* NR* 2,000,000 12% due 7/01/1999++ 2,000,000 370,000
A- Ba2 1,500,000 Thermo Electron Corporation, 4.25% due
1/01/2003 1,732,500 1,788,750
------------ ------------
4,732,500 2,343,750
Dental Supplies -- NR* NR* 550,000 Phoenix Shannon PLC, 9.50% due
0.1% 11/01/2000 (b)(c) 550,000 165,000
Environmental -- A- NR* 1,250,000 Thermo Ecotek Corp., 4.875% due
2.2% 4/15/2004 (b) 1,251,563 1,281,250
NR* NR* 750,000 Thermo Fibertek Inc., 4.50% due
7/15/2004 (b) 750,000 773,438
BBB- Ba2 500,000 USA Waste Services, Inc., 4%
due 2/01/2002 500,000 566,875
------------ ------------
2,501,563 2,621,563
Financial NR* NR* 2,750,000 Nal Acceptance Corp., 10% due
Services -- 1.7% 9/11/1998++ 2,750,000 2,035,000
Healthcare B B3 2,000,000 Integrated Health Services Inc.,
Services -- 6.6% 6% due 1/01/2003 1,880,000 2,195,000
BB- B1 1,250,000 PhyCor, Inc., 4.50% due 2/15/2003 1,353,750 1,237,500
BBB+ Ba1 3,122,000 Quantum Health Resources, Inc., 4.75%
due 10/01/2000 2,735,097 2,934,680
NR* NR* 1,500,000 RoTech Medical Corporation, 5.25%
due 6/01/2003 1,497,277 1,492,500
------------ ------------
7,466,124 7,859,680
Home Builders -- 3.0% B- B2 1,000,000 Continental Homes Holding Corp.,
6.875% due 11/01/2002 1,000,000 1,113,750
BB++ Ba3 751,000 Toll Brothers Inc., 4.75% due 1/15/2004 627,190 803,570
BB- B1 1,500,000 US Home Corp., 4.875% due 11/01/2005 1,316,875 1,601,250
------------ ------------
2,944,065 3,518,570
Metals & Mining -- BBB- Baa2 1,500,000 Inco, Limited, 5.75% due 7/01/2004 1,781,150 1,717,500
1.4%
Oil Services -- 0.7% NR* NR* 330,000 Key Energy Group Inc., 7% due
7/01/2003 (b) 520,575 884,813
Pharmaceuticals -- BBB- Baa3 1,500,000 Alza Corporation, 5% due 5/01/2006 1,595,625 1,522,500
1.3%
Real Estate Investment NR* B3 1,500,000 Capstone Capital Trust, Inc., 6.55%
Trusts -- 1.2% due 3/14/2002 1,365,290 1,445,625
Restaurants -- 2.4% B- B2 1,500,000 Boston Market, 7.75% due 5/01/2004 1,381,250 1,286,250
B B3 1,425,000 Hometown Buffet Inc., 7% due
12/01/2002 1,452,750 1,583,531
------------ ------------
2,834,000 2,869,781
Retail -- BB- Baa3 5,000,000 Office Depot, Inc., 4.891% due
Office Products -- 4.5% 11/01/2008 (d) 2,914,081 3,018,750
US Office Products Co.:
B- B3 1,000,000 5.50% due 5/15/2003 842,500 922,500
B- B3 1,500,000 5.50% due 5/15/2003 (b) 1,413,750 1,389,375
------------ ------------
5,170,331 5,330,625
Retail Stores -- 2.4% A+ A1 2,500,000 Home Depot, Inc. (The), 3.25%
due 10/01/2001 2,500,000 2,800,000
Scientific A- NR* 2,000,000 Thermo Cardiosystems, Inc., 4.75%
Equipment -- 3.9% due 5/15/2004 (b) 2,000,000 2,090,000
A Baa2 1,250,000 Thermo Instrument Systems Inc.,
4.50% due 10/15/2003 (b) 1,280,000 1,387,500
A- Baa3 1,000,000 Thermo Optek Corp., 5% due
10/15/2000 (b) 1,035,000 1,160,000
------------ ------------
4,315,000 4,637,500
Software Application NR* NR* 1,000,000 Wind River Systems Inc., 5% due
Development -- 1.0% 8/01/2002 (b) 1,000,000 1,126,250
Technology -- 2.8% NR* NR* 1,000,000 Apple Computer, Inc., 6% due
6/01/2001 950,000 1,000,000
B- B3 750,000 Data General Corporation, 6%
due 5/15/2004 (b) 750,000 1,181,250
NR* NR* 1,000,000 Premiere Technologies, Inc.,
5.75% due 7/01/2004 (b) 1,000,000 1,123,750
------------ ------------
2,700,000 3,305,000
Textiles -- 0.9% B+ B1 1,100,000 Fieldcrest Cannon, Inc., 6% due
3/15/2012 753,500 1,006,500
Water Treatment BB+ B2 1,750,000 US Filter Corporation, 4.50%
Systems -- 1.7% due 12/15/2001 1,750,000 1,964,375
------------ ------------
Total Convertible Debentures -- 46.4% 54,852,218 54,905,716
============ ============
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
Shares
Held Convertible Preferred Stocks
<S> <C> <C> <C> <C> <C> <C>
Banking & NR* A1 10,000 Jefferson Pilot Corp. (ACESSM)
Financial -- 0.9% (into Nations Bank Corp.) (e) 725,000 1,051,250
Energy -- 1.7% BB- Ba3 40,000 CalEnergy Capital Trust II, 6.25% (b) 2,000,000 1,995,000
Minerals -- 2.0% NR* Ba1 43,150 Cyprus Amax Minerals Co., $4.00,
Series A 2,312,840 2,324,706
Paper -- 1.9% BBB+ Baa1 40,000 International Paper Co., $5.25 (b) 1,902,000 2,225,000
Precious Metals -- NR* B2 59,900 Coeur d'Alene Mines Corporation 1,080,136 1,059,481
0.9%
Real Estate BBB+ Baa2 30,000 Public Storage Inc., $2.062 759,300 1,380,000
Investment
Trusts -- 1.1%
Restaurants -- 1.7% BBB Baa2 35,000 Wendy's International, Inc.,
Series A 1,750,000 1,977,500
Retail -- 1.0% NR* NR* 19,500 Kmart Financing I 1,024,920 1,149,281
Steel -- 4.6% B B1 52,000 AK Steel Holding Corp. 1,348,342 2,054,000
B NR* 40,000 WHX Corporation, Series A 1,590,840 1,775,000
A- A3 103,610 Worthington Industries, Inc. 1,751,527 1,683,663
------------ ------------
4,690,709 5,512,663
Transportation -- 0.5% BBB+ Ba2 10,000 CNF Transportation Inc., Series A 500,000 580,000
Utilities -- 1.3% AA Aa3 35,500 Citizens Utilities Trust 1,519,755 1,584,187
------------ ------------
Total Convertible Preferred
Stocks -- 17.6% 18,264,660 20,839,068
============ ============
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>
Common Stocks
<S> <C> <C> <C> <C>
Drug Distribution -- 0.6% 27,400 Bindley Western Industries Inc. 526,144 690,138
Environmental -- 0.2% 16,918 Allied Waste Industries, Inc. (c) 80,883 253,770
Financial Services -- 0.0% 1 Nal Acceptance Corp. (Warrants)(a)++ 0 8,594
Food & Beverage -- 0.7% 25,000 RJR Nabisco, Inc. 821,875 870,312
Funeral Services -- 0.5% 20,000 Service Corporation International 366,079 640,000
Paper -- 0.6% 17,700 Boise Cascade Corporation 585,162 700,256
Paper/Machine -- 0.5% 20,000 Albany International Corp., Class A 448,262 541,250
Railcar Production -- 0.5% 15,479 Trinity Industries Leasing Co. 293,789 615,290
Semiconductors -- 1.6% 58,800 Cypress Semiconductor Corporation (c) 706,253 1,043,700
60,000 Integrated Device Technology, Inc. (c) 788,465 813,750
------------ ------------
1,494,718 1,857,450
------------ ------------
Total Common Stocks -- 5.2% 4,616,912 6,177,060
============ ============
</TABLE>
<PAGE> 12
<TABLE>
<CAPTION>
Face Value
Amount Short-Term Securities Cost (Note 1a)
<S> <C> <C> <C> <C>
Commercial $6,000,000 Countrywide Home Loans, Inc.,
Paper** -- 20.3% 5.52% due 9/16/1997 $ 5,983,440 $5,983,440
4,000,000 Finova Capital Corp., 5.54% due
10/21/1997 3,967,375 3,967,375
3,036,000 General Motors Acceptance Corp.,
5.69% due 9/02/1997 3,034,081 3,034,081
6,000,000 Lexington Parker Capital Company LLC,
5.52% due 9/02/1997 5,996,320 5,996,320
5,000,000 WCP Funding Inc., 5.52%
due 10/02/1997 4,973,933 4,973,933
------------ ------------
Total Short-Term Securities -- 20.3% 23,955,149 23,955,149
============ ============
Total Investments -- 89.5% $101,688,939 105,876,993
============
Short Sales (Proceeds -- $736,673) -- (0.6%) (723,594)
Other Assets Less Liabilities -- 11.1% 13,162,616
------------
Net Assets --100.0% $118,316,015
============
</TABLE>
(a) Warrants entitle the Fund to purchase a predetermined number of shares of
Common Stock. The purchase price and number of shares are subject to
adjustment under certain conditions until the expiration date.
(b) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(c) Non-income producing security.
(d) Represents a zero coupon or step bond; the interest rate shown is the
effective yield at the time of purchase by the Fund.
(e) Adjustable Convertible Extendable Securities.
* Not Rated.
** Commercial Paper is traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
+ Covered Short Sales entered into as of August 31, 1997 were as follows:
<TABLE>
<CAPTION>
Value
Shares Issue (Notes 1a & 1h)
<S> <C> <C>
55,000 BankAtlantic Bancorp. $ (715,000)
5,500 Polyphase Corporation (8,594)
----------
Total (Proceeds -- $736,673) $ (723,594)
==========
</TABLE>
++ Restricted securities as to resale. The value of the Fund's investment
<PAGE> 13
in restricted securities was approximately $2,414,000, representing 2.0% of
net assets.
<TABLE>
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <C> <C> <C>
Nal Acceptance Corp.,
10% due 9/11/1998 9/12/1996 $2,750,000 $2,035,000
Nal Acceptance Corp.
(Warrants) 9/12/1996 0 8,594
Polyphase Corporation,
12% due 7/01/1999 7/05/1994 2,000,000 370,000
---------- ----------
Total $4,750,000 $2,413,594
========== ==========
</TABLE>
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $101,688,939) (Note 1a) $105,876,993
Cash 46,934
Deposits on short sales (Note 1h) 670,775
Receivables:
Securities sold $ 14,259,214
Interest 734,481
Capital shares sold 426,797
Dividends 148,414 15,568,906
-------------
Prepaid registration fees and other assets (Note 1f) 59,660
------------
Total assets 122,223,268
------------
Liabilities: Common stock sold short, at market value (proceeds -- $736,673)
(Notes 1a & 1h) 723,594
Payables:
Capital shares redeemed 2,923,609
Investment adviser (Note 2) 67,358
Distributor (Note 2) 2,848 2,993,815
-------------
Accrued expenses and other liabilities 189,844
------------
Total liabilities 3,907,253
------------
Net Assets: Net assets $118,316,015
============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares authorized $ 634,642
Consist of: Class B Common Stock, $0.10 par value, 100,000,000 shares authorized 33,187
Class C Common Stock, $0.10 par value, 100,000,000 shares authorized 5,841
Class D Common Stock, $0.10 par value, 100,000,000 shares authorized 7,862
Paid-in capital in excess of par 84,298,010
Undistributed investment income -- net 645,348
Undistributed realized capital gains on investments -- net 28,490,017
Unrealized appreciation on investments -- net 4,201,108
------------
Net assets $118,316,015
============
Net Asset Value: Class A -- Based on net assets of $110,178,412 and 6,346,421
shares outstanding $ 17.36
============
Class B -- Based on net assets of $5,758,869 and 331,864 shares outstanding $ 17.35
============
Class C -- Based on net assets of $1,013,763 and 58,412 shares outstanding $ 17.36
============
Class D -- Based on net assets of $1,364,971 and 78,624 shares outstanding $ 17.36
============
</TABLE>
See Notes to Financial Statements.
<PAGE> 14
Statement of Operations
<TABLE>
<CAPTION>
For the Period For the
Jan. 1, 1997 Year Ended
to Aug. 31, 1997 Dec. 31, 1996
<S> <C> <C> <C>
Investment Income Interest and discount earned $ 7,843,078 $ 10,364,183
(Notes 1d & 1e): Dividends* 2,568,226 5,941,459
------------ ------------
Total income 10,411,304 16,305,642
------------ ------------
Expenses: Investment advisory fees (Note 2) 1,102,729 1,695,738
Dividends on securities sold short 190,393 4,704
Transfer agent fees -- Class A (Note 2) 65,095 87,085
Accounting services (Note 2) 63,816 99,274
Professional fees 48,754 69,955
Printing and shareholder reports 44,431 49,591
Listing fees 35,573 250
Interest on securities sold short 30,788 36,292
Directors' fees and expenses 29,582 45,322
Amortization of organization expenses 22,259 38,159
Custodian fees 17,657 26,466
Account maintenance and distribution fees -- Class B (Note 2) 2,343 --
Pricing services 2,023 2,983
Transfer agent fees -- Class B (Note 2) 460 --
Account maintenance and distribution fees -- Class C (Note 2) 369 --
Account maintenance fees -- Class D (Note 2) 136 --
Transfer agent fees -- Class D (Note 2) 108 --
Transfer agent fees -- Class C (Note 2) 78 --
Other 8,834 44,684
------------ ------------
Total expenses 1,665,428 2,200,503
------------ ------------
Investment income -- net 8,745,876 14,105,139
------------ ------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments -- net 50,688,978 19,901,753
(Loss) on Income taxes on realized gain on investments -- (4,841,320)
Investments & Foreign currency transactions -- net (108,244) (19,719)
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions -- Net Investments -- net (31,783,870) 17,386,660
(Notes 1b, 1c, Foreign currency transactions -- net 633 (441)
1e & 3): ------------ ------------
Net realized and unrealized gain on investments and foreign
currency transactions 18,797,497 32,426,933
------------ ------------
Net Increase in Net Assets Resulting from Operations $ 27,543,373 $ 46,532,072
------------ ------------
* Net withholding tax on dividends -- $ 2,260
============ ============
</TABLE>
See Notes to Financial Statements.
<PAGE> 15
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Period
Jan. 1, 1997 to For the Year
Aug. 31, Ended December 31,
Increase (Decrease) in Net Assets: 1997 1996 1995
<S> <C> <C> <C> <C>
Operations: Investment income -- net $ 8,745,876 $ 14,105,139 $ 14,296,369
Realized gain on investments and foreign currency
transactions -- net 50,580,734 19,882,034 15,446,497
Income taxes on realized gain on investments -- (4,841,320) (3,631,624)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions -- net (31,783,237) 17,386,219 19,334,251
------------- ------------- -------------
Net increase in net assets resulting from operations 27,543,373 46,532,072 45,445,493
------------- ------------- -------------
Dividends & Investment income -- net+ (8,134,631) (14,192,493) (14,117,464)
Distributions to Realized gain on investments -- net (Class A)++ -- (7,473,704) (4,235,374)
Shareholders ------------- ------------- -------------
(Note 1g): Net decrease in net assets resulting from dividends and
distributions to shareholders (8,134,631) (21,666,197) (18,352,838)
------------- ------------- -------------
Capital Share Net decrease in net assets from capital share
Transactions transactions (190,895,600) -- --
(Note 4): Offering costs resulting from issuance of
new classes of shares (190,000) -- (431,384)
------------- ------------- -------------
Net decrease in net assets derived from capital share
transactions (191,085,600) -- (431,384)
------------- ------------- -------------
Net Assets: Total increase (decrease) in net assets (171,676,858) 24,865,875 26,661,271
Beginning of period 289,992,873 265,126,998 238,465,727
------------- ------------- -------------
End of period* $ 118,316,015 $ 289,992,873 $ 265,126,998
============= ============= =============
* Undistributed investment income -- net (Note 1i) $ 645,348 $ 128,996 $ 223,416
============= ============= =============
</TABLE>
+ Dividends from investment income -- net reflect when the Fund was a
dual-structure closed-end management investment company. All dividends were
paid to Income Shareholders. Such shares were redeemed on July 31, 1997.
++ Formerly Capital Shares.
See Notes to Financial Statements.
<PAGE> 16
Financial Highlights
<TABLE>
<CAPTION>
Class A++++++
The following per share data and ratios have been For the Period
derived from information provided in the financial Jan. 1, 1997 to For the Year Ended December 31,
statements. Aug. 31,
1997+++ 1996+++ 1995 1994 1993 1992
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 15.57 $ 13.43 $ 11.13 $ 13.21 $ 12.87 $ 10.91
Performance:++++ -------- -------- -------- -------- -------- --------
Investment income -- net .06 -- -- -- -- --
Realized and unrealized gain (loss)
on investments and foreign currency
transactions -- net 1.75 2.78 2.66 (2.12) 1.43 2.03
-------- -------- -------- -------- -------- --------
Total from investment operations 1.81 2.78 2.66 (2.12) 1.43 2.03
-------- -------- -------- -------- -------- --------
Distributions of realized gain on
investments -- net -- (.64) (.36) (.01) (1.17) (.12)
-------- -------- -------- -------- -------- --------
Effect of repurchase of Treasury
Stock -- -- --+ .05 .08 .05
-------- -------- -------- -------- -------- --------
Capital charge resulting from
issuance of new classes of shares (.02) -- -- -- -- --
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 17.36 $ 15.57 $ 13.43 $ 11.13 $ 13.21 $ 12.87
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value per share 11.50%+++++ 20.60% 24.44% (15.68%) 13.94% 19.48%
Return:** ======== ======== ======== ======== ======== ========
Ratios to Average Expenses*** .90%* .78% .79% .87% .80% .80%
Net Assets: ======== ======== ======== ======== ======== ========
Investment income -- net 4.76%* 4.98% 5.40% 5.43% 5.10% 6.34%
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $110,178 $289,993 $265,127 $238,466 $274,999 $289,366
======== ======== ======== ======== ======== ========
Portfolio turnover 92.86% 129.06% 87.69% 69.37% 116.03% 76.54%
======== ======== ======== ======== ======== ========
Average commission rate paid++ $ .0522 $ .0447 -- -- -- --
======== ======== ======== ======== ======== ========
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads. Performance
results prior to August 31, 1997 are for when the Fund was a
dual-structure closed-end management investment company and include only
the returns for the Capital Shares but exclude results from the Income
Shares.
*** Excluding taxes on undistributed net realized long-term capital gains for
years prior to the period January 1, 1997 to August 31, 1997.
+ Amount is less than $.01 per share.
++ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities.
+++ Excludes the effect of per share operating performance of the Fund's
Income Shares, which were redeemed on July 31, 1997. Per share operating
performance prior to the period January 1, 1997 to August 31, 1997
reflects when the Fund was a dual-structure closed-end management
investment company. For the period January 1, 1997 to July 31, 1997,
investment income -- net per Income Share was $0.73 and dividends of
investment income -- net per Income Share were $0.70.
++++ Based on average shares outstanding during the period.
+++++ Aggregate total investment return.
++++++ Formerly Capital Shares.
See Notes to Financial Statements.
<PAGE> 17
<TABLE>
<CAPTION>
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. Aug. 4, 1997+ to Aug. 31, 1997
Class B++ Class C++ Class D++
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 16.91 $ 16.91 $ 16.91
Operating -------- -------- --------
Performance: Investment income -- net .05 .05 .07
Realized and unrealized gain on investments and foreign
currency transactions -- net .39 .40 .38
-------- -------- --------
Total from investment operations .44 .45 .45
-------- -------- --------
Net asset value, end of period $ 17.35 $ 17.36 $ 17.36
======== ======== ========
Total Investment Based on net asset value per share 2.60%++++ 2.66%++++ 2.66%++++
Return:** ======== ======== ========
Ratios to Average Expenses 2.66%* 2.74%* 1.92%*
Net Assets: ======== ======== ========
Investment income -- net 3.77%* 3.58%* 4.81%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 5,759 $ 1,014 $ 1,365
Data: ======== ======== ========
Portfolio turnover 92.86% 92.86% 92.86%
======== ======== ========
Average commission rate paid $ .0522 $ .0522 $ .0522
======== ======== ========
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding during the period.
++++ Aggregate total investment return.
See Notes to Financial Statements.
<PAGE> 18
Merrill Lynch Convertible Fund, Inc. August 31, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Convertible Fund, Inc. (the "Fund"), formerly Convertible
Holdings, Inc., is registered under the Investment Company Act of 1940 as a
non-diversified, open-end management investment company. Effective August 4,
1997, as a result of the approval of its shareholders, the Fund converted to an
open-end management investment company. At that
<PAGE> 19
time, the Fund's Capital Shares were converted to Class A Shares. The Fund
offers four classes of shares under the Merrill Lynch Select PricingSM System.
Shares of Class A and Class D are sold with a front-end sales charge. Shares of
Class B and Class C may be subject to a contingent deferred sales charge. All
classes of shares have identical voting, dividend, liquidation and other rights
and the same terms and conditions, except that Class B, Class C and Class D
Shares bear certain expenses related to the account maintenance of such shares,
and Class B and Class C Shares 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 -- Portfolio securities which are traded on stock
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last available bid price
prior to the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange designated by or
under the authority of the Board of Directors as the primary market. Securities
which are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market. Options written
are valued at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last asked price.
Options purchased are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the
over-the-counter market, the last bid price. Short-term securities are valued at
amortized cost, which approximates market value. Other investments, including
futures contracts and related options, are stated at market value. Securities
and assets for which market value quotations are not readily available are
valued at their fair value as determined in good faith by or under the direction
of the Fund's Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the equity, debt and currency markets. Losses may arise due
to changes in the value of the contract or if the counterparty does not perform
under the contract.
- - Financial futures contracts -- The Fund may purchase or sell interest rate
futures 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
<PAGE> 20
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.
- - Options -- The Fund is authorized to write and purchase call and put options.
When the Fund writes an option, an amount equal to the premium received
by the Fund is reflected as an asset and an equivalent liability. The amount of
the liability is subsequently marked to market to reflect the current market
value of the option written.
When a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the basis of
the security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent of
the premiums received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
- - Forward foreign exchange contracts -- The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on operations is recorded from the date the
Fund enters into such contracts. Premium or discount is amortized over the life
of the contracts.
- - Foreign currency options and futures -- The Fund is also authorized to
purchase or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as a short or
long hedge against possible variations in foreign exchange rates. Such
transactions may be effected with respect to hedges on non-US dollar denominated
securities owned by the Fund, sold by the Fund but not yet delivered, or
committed or anticipated to be purchased by the Fund.
(c) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into
<PAGE> 21
US dollars. Realized and unrealized gains or losses from investments include the
effects of foreign exchange rates on investments.
(d) 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. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(e) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Interest income (including
amortization of discount) is recognized on the accrual basis. Realized gains and
losses on security transactions are determined on the identified cost basis.
(f) Prepaid registration fees -- Prepaid registration fees are charged to
expense as the related shares are issued.
(g) Dividends and distributions -- Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(h) Short Sales -- When the Fund engages in a short sale, an amount equal to the
proceeds received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked to market to
reflect the market value of the short sale. The Fund maintains a segregated
account of securities as collateral for the short sales. The Fund is exposed to
market risk based on the amount, if any, that the market value of the stock
exceeds the market value of the securities in the segregated account.
(i) Reclassification -- Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $94,893 have been reclassified between undistributed net
realized capital gains and undistributed net investment income and differences
of $20,830,363 have been reclassified between undistributed net realized capital
gains and paid-in capital in excess of par. These reclassifications have no
effect on net assets or net asset values per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill
Lynch Asset Management, L.P. ("MLAM"). 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.
<PAGE> 22
The Fund has also entered into a Distribution Agreement and Distribution Plans
with Merrill Lynch Funds Distributors, Inc. ("MLFD"), a wholly-owned subsidiary
of Merrill Lynch Group, Inc.
MLAM 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 at
the annual rate of 0.60% of the average daily net assets of the Fund.
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:
<TABLE>
<CAPTION>
Account Distribution
Maintenance Fee Fee
<S> <C> <C>
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
</TABLE>
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 period January 1, 1997 to August 31, 1997, MLFD earned underwriting
discounts and direct commissions and MLPF&S earned dealer concessions on sales
of the Fund's Class A and Class D Shares as follows:
<TABLE>
<CAPTION>
MLFD MLPF&S
<S> <C> <C>
Class A $4,260 $ 1,242
Class D $2,306 $26,348
</TABLE>
In addition, MLPF&S received $255,664 in commissions on the execution of
portfolio security transactions for the Fund for the period January 1, 1997 to
August 31, 1997.
During the period January 1, 1997 to August 31, 1997, the Fund paid Merrill
Lynch Security Pricing Service, an affiliate of MLPF&S, $1,490 for security
price quotations to compute the net asset value of the
<PAGE> 23
Fund.
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 MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
MLAM, PSI, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
period January 1, 1997 to August 31, 1997 were $167,419,463 and $363,659,855,
respectively.
Net realized and unrealized gains (losses) as of August 31, 1997 were as
follows:
<TABLE>
<CAPTION>
Realized Unrealized
Gains (Losses) Gains (Losses)
<S> <C> <C>
Long-term investments $ 51,193,460 $ 4,188,054
Short sales (504,482) 13,079
Foreign currency
transactions (108,244) (25)
------------- -------------
Total $ 50,580,734 $ 4,201,108
============= =============
</TABLE>
As of August 31, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $3,990,249, of which $8,332,698 related to appreciated
securities and $4,342,449 related to depreciated securities. The aggregate cost
of investments at August 31, 1997 for Federal income tax purposes was
$101,886,744.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions was
$190,895,600 for the period January 1, 1997 to August 31, 1997. During the year
ended December 31, 1996, Capital Shares issued and outstanding remained constant
at 11,653,700.
Transactions in capital shares for each class were as follows:
<PAGE> 24
<TABLE>
<CAPTION>
Class A Shares for the
Period January 1, 1997 Dollar
to August 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 45,211 $ 774,119
Shares redeemed (5,352,490) (91,314,601)
------------ ------------
Net decrease (5,307,279) $(90,540,482)
============ ============
<CAPTION>
Class B Shares for the
Period August 4, 1997+ Dollar
to August 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 347,816 $ 5,946,236
Shares redeemed (15,952) (272,208)
------------ ------------
Net increase 331,864 $ 5,674,028
============ ============
+ Commencement of Operations
<CAPTION>
Class C Shares for the
Period August 4, 1997+ Dollar
to August 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 59,874 $ 1,024,877
Shares redeemed (1,462) (25,410)
------------ ------------
Net increase 58,412 $ 999,467
============ ============
+ Commencement of Operations
<CAPTION>
Class D Shares for the
Period August 4, 1997+ Dollar
to August 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 96,058 $ 1,653,202
Shares redeemed (17,434) (302,405)
------------ ------------
Net increase 78,624 $ 1,350,797
============ ============
</TABLE>
+ Commencement of Operations.
In addition, on July 31, 1997, all 11,653,700 Income Shares were redeemed
amounting to $108,379,410.
5. Subsequent Event:
On September 2, 1997, the Fund's Board of Directors declared an ordinary income
dividend in the amount of $.168967 per Class A Share, $.156437 per Class B
Share, $.156428 per Class C Share, $.165229 per Class D Share and a long-term
capital gain distribution in the amount of $4.420817 per share for each of the
four Classes, payable on September 23, 1997 to shareholders of record as of
September 15, 1997.
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Convertible Fund, Inc.
(Formerly Convertible Holdings, Inc.):
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Convertible Fund, Inc. as of
August 31, 1997, the related statements of operations for the period January 1,
1997 to August 31, 1997 and for the year ended December 31, 1996, the statements
of changes in net assets for the period January 1, 1997 to August 31, 1997 and
each of the years in the two-year period ended December 31, 1996 and the
financial highlights for the period January 1, 1997 to August 31, 1997 and for
each of the years in the five-year period ended December 31, 1996. 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, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Convertible Fund, Inc. as of August 31, 1997, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
October 15, 1997
<PAGE> 26
PORTFOLIO INFORMATION (unaudited)
As of August 31, 1997
<TABLE>
<CAPTION>
Percent of
Ten Largest Holdings Net Assets
<S> <C>
Office Depot, Inc., 4.891% due 11/01/2008 2.6%
Quantum Health Resources, Inc., 4.75%
due 10/01/2000 2.5
Home Depot, Inc. (The), 3.25% due 10/01/2001 2.4
Pep Boys -- Manny, Moe & Jack (The), 4% due
9/15/1999 2.1
Cyprus Amax Minerals Co., $4.00, Series A 2.0
International Paper Co., $5.25 1.9
Integrated Health Services Inc., 6% due
1/01/2003 1.9
Thermo Cardiosystems, Inc., 4.75% due
5/15/2004 1.8
AK Steel Holding Corp. 1.7
Nal Acceptance Corp., 10% due 9/12/1998 1.7
</TABLE>
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
James H. Bodurtha, Director
Herbert I. London, Director
Robert R. Martin, Director
Joseph L. May, Director
Andre F. Perold, Director
Terry K. Glenn, Executive Vice President
Joseph T. Monagle Jr., Senior Vice President
Donald C. Burke, Vice President
Vincent T. Lathbury III, Vice President
Daniel A. Luchansky, Vice President and
Portfolio Manager
Barton A. Vogel, Vice President
Gerald M. Richard, Treasurer
Ira P. Shapiro, Secretary
Custodian
The Chase Manhattan Bank
Global Securities Services
Chase MetroTech Center
Brooklyn, NY 11245
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
10/23/97 Merill Lynch Convertible Fund, Inc. PAGE 30
<PAGE> 1
MERRILL LYNCH
GLOBAL
CONVERTIBLE
FUND, INC.
[FUND LOGO]
Annual Report
October 31, 1997
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
Merrill Lynch
Global Convertible
Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
<PAGE> 2
Printed on post-consumer recycled paper
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
Officers and
Directors
Arthur Zeikel, President and Director
James H. Bodurtha, Director
Herbert I. London, Director
Robert R. Martin, Director
Joseph L. May, Director
Andre F. Perold, Director
Terry K. Glenn, Executive Vice President
Joseph T. Monagle Jr., Senior Vice President
Donald C. Burke, Vice President
Daniel A. Luchansky, Vice President
Gerald M. Richard, Treasurer
Lawrence A. Rogers, Secretary
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
<PAGE> 3
Merrill Lynch Global Convertible Fund, Inc., October 31, 1997
TO OUR SHAREHOLDERS
Volatile is the word that best describes the quarter ended October 31, 1997.
Virtually every world equity market experienced negative returns for the October
quarter, with many experiencing unnerving fluctuations. For example, the Hang
Seng Stock Index, the benchmark for the Hong Kong stock market, saw its value
plummet 13.7% on October 27 then rebound 18.8% the following day. The Dow Jones
Industrial Average recorded both its largest point gain and largest point
decline in history in the same week.
<PAGE> 4
The Asian equity markets fared the worst, with serious local economic problems
and depreciating currencies. For the October quarter, the Hang Seng Stock Index
tumbled 34.6% while the Nikkei 225 Index fell 19.1%. Other local markets in
South Korea, Malaysia, Indonesia and Singapore were weak as well, experiencing
double-digit declines. The US market, as measured by the Standard & Poor's 500
Index, declined 3.7%. Major European markets posted negative returns also.
Concerns of an Asian economic slowdown have reverberated throughout the world,
raising questions about the appropriateness of current equity valuations.
Although certain markets are down dramatically and appear inexpensive on a
current earnings basis, the increased interest rates in these markets may have a
negative impact on economic growth and future earnings.
The fixed-income markets rallied during the quarter ended October 31, 1997. The
ten-year US Treasury note ended October yielding 5.83%, a 51 basis point (0.51%)
drop since the July quarter. There were three main forces that helped lift the
US bond market: continuing low inflation domestically, mounting deflationary
pressure from abroad and a global flight to quality. These factors helped
convince the Federal Reserve Board (FRB) not to raise interest rates, which is
an added positive for the market.
Global unrest bodes well for US dollar-denominated debt instruments, as
evidenced by the move out of Asian currencies into the US dollar, confirming the
US dollar as the dominant world currency. We believe this trend will persist,
and have allocated the majority of our assets to dollar-denominated securities.
In Europe, continued European Monetary Union posturing resulted in the
Bundesbank raising short-term interest rates on October 9, 1997 in an effort to
curtail inflation as well as continue the long-standing strong Deutschemark
policy. Japan's ten-year government yield remained low, closing out the October
quarter at 1.82%.
It was a challenging three months for the convertible market. For the quarter
ended October 31, 1997, the total return for global convertible securities, as
measured by the Lipper Overseas Global Convertible Funds Average, was -1.61%.
The Fund's holdings remain concentrated in the United States, accounting for
51.4% of portfolio net assets. The US economy has remained hospitable,
exhibiting continued growth with little sign of accelerated inflation. This is
evidenced by the most recent consumer price index and producer price index
statistics. Furthermore, continued distress in the emerging markets has all but
prohibited the FRB from raising interest rates in the near future, a positive
for US investments.
<PAGE> 5
We sold some smaller positions during the October quarter, including Japanese
firms Shimadza Corp., Marubeni Corp. and Yamaichi Securities Co., Ltd., as well
as Dairy Farms International Holdings Limited, whose operations are mostly in
Asia. We added Phycor, Inc., ThermoTrex Corp. and Assisted Living Concepts,
Inc., US holdings that we believe have exceptional prospects. We will continue
to maintain offshore exposure through our investments in Japan and to a lesser
extent in the United Kingdom, Hong Kong, France and the Netherlands. Finally, we
adopted a more defensive posture, temporarily raising our cash levels from 5.8%
of net assets at the start of the October quarter to nearly 27% at the close of
the quarter. These assets will be invested over time as suitable securities are
identified.
Fiscal Year in Review
For the year ended October 31, 1997, the Fund's Class A, Class B, Class C and
Class D Shares had total returns of +17.79%, +16.56%, +16.40% and +17.41%,
respectively. The Fund outperformed the Lipper Overseas Convertible Fund Average
of 16 other funds, which had a total return of +9.95% for the fiscal year.
(Results shown do not reflect sales charges and would be lower if sales charges
were included. Complete performance information, including average annual total
returns, can be found on pages 5--9 of this report to shareholders.)
The Fund's performance can be partially attributed to our overweighting in US
domestic issues. Fund holdings such as Home Depot, Inc. and WHX Corp. scored
sharp gains during the fiscal year ended October 31, 1997. The US equity market,
as measured by the unmanaged Standard & Poor's 500 Index, performed strongly
during the year ended October 31, 1997, returning +32.09%. Fixed-income products
experienced healthy gains for the year, with the ten-year US Treasury note
returning +9.60%.
Our largest exposure outside the United States was in Japan (8.45% of net
assets). Although the Japanese equity market posted a negative return for the
fiscal year (as measured by the 19.58% Nikkei 225 decline), three of our largest
Japanese holdings, Matsushita Electric Industrial Co., Sony Corp. and Tokyo
Electron Ltd., registered gains. The Fund's holdings remain concentrated in US
dollar-denominated investments. The positive performance of the US markets is
owed to continued economic and earnings growth, low inflation and relatively
stable interest rates coupled with a proactive, fiscally responsible government.
Furthermore, as noted, the US central bank is not likely to raise short-term
interest rates in the wake of the Asian financial crisis. Throughout the year,
we have decreased our foreign holdings but will continue to maintain
international exposure, as mandated by our prospectus, in companies that we
believe are promising investments in Japan and to a lesser extent in the United
Kingdom, Hong Kong, France and the Netherlands. In addition, we may enter other
countries as conditions warrant.
<PAGE> 6
In Conclusion
It is our opinion that the worldwide volatility exhibited during the October
quarter may be a precursor for the future. There are issues related to the
emerging markets that have yet to play out completely. Currency, interest rate
and stock market volatility should be expected. The US market, although
apparently healthy, can be affected by events offshore. However, we believe the
climate for our Fund will be favorable in response to the inherent properties of
convertible securities. Compared to equities, convertible securities' total
returns historically capture about three-quarters of a stock market's advance,
but only participate in about half of a market's decline while having a
substantially higher current yield. In addition, compared to the fixed-income
universe, convertible securities are consistently ranked among the
best-performing subcategories as measured by Lipper Analytical Services over all
measured time periods. In our view, global convertible issues are likely to
offer good upside potential during firm equity and bond markets, yet offer a
degree of protection when market conditions become negative.
We thank you for your ongoing interest in Merrill Lynch Global Convertible Fund,
Inc., and we look forward to reviewing our outlook and strategy in our upcoming
quarterly report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Daniel A. Luchansky)
Daniel A. Luchansky
Vice President and Portfolio Manager
Merrill Lynch Global Convertible Fund, Inc., October 31, 1997
<PAGE> 7
December 1, 1997
We are saddened to report the death of Harry Dewdney, Vice President and
Portfolio Manager of Merrill Lynch Global Convertible Fund, Inc. The Fund
benefited from his skillful and discerning management since its inception in
1988. Harry's colleagues and many friends at Merrill Lynch Asset Management will
greatly miss his companionship and guidance.
Daniel A. Luchansky has been designated to be the Fund's successor Portfolio
Manager. Mr. Luchansky has been employed by Merrill Lynch Asset Management, L.P.
(MLAM) since 1991 as Vice President and Portfolio Manager. Prior thereto he was
involved in high yield analysis as well as convertible bond portfolio management
and analysis for MLAM from 1986 to 1991.
PERFORMANCE DATA
About Fund
Performance
Investors are able to purchase shares of the Fund through the Merrill Lynch
Select Pricing SM System, which offers four pricing alternatives:
* Class A Shares incur a maximum initial sales charge (front-end load) of 5.25%
and bear no ongoing distribution or account maintenance fees. Class A Shares
are available only to eligible investors.
* Class B Shares are subject to a maximum contingent deferred sales charge of 4%
if redeemed during the first year, decreasing 1% each year thereafter to 0%
after the fourth year. In addition, Class B Shares are subject to a
distribution fee of 0.75% and an account maintenance fee of 0.25%. These
shares automatically convert to Class D Shares after approximately 8 years.
(There is no initial sales charge for automatic share conversions.)
<PAGE> 8
* Class C Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
contingent deferred sales charge if redeemed within one year of purchase.
* Class D Shares incur a maximum initial sales charge of 5.25% and an account
maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation of future
performance. Figures shown in the "Average Annual Total Return" tables as well
as the total returns and cumulative total returns in the "Performance Summary"
tables assume reinvestment of all dividends and capital gains distributions at
net asset value on the ex-dividend date. Investment return and principal value
of shares will fluctuate so that shares, when redeemed, may be worth more or
less than their original cost. Dividends paid to each class of shares will vary
because of the different levels of account maintenance, distribution and
transfer agency fees applicable to each class, which are deducted from the
income available to be paid to shareholders.
Performance
Summary--
Class A Shares
<TABLE>
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
11/4/88--12/31/88 $ 9.97 $ 9.76 $0.173 $0.101 + 0.68%
1989 9.76 9.50 0.431 0.483 + 6.83
1990 9.50 8.20 0.047 0.497 - 8.07
1991 8.20 9.06 0.151 0.382 +17.22
1992 9.06 9.67 0.123 0.267 +11.12
1993 9.67 10.68 0.081 0.327 +14.74
1994 10.68 10.29 0.029 0.304 - 0.54
1995 10.29 10.27 -- 1.280 +12.54
1996 10.27 10.54 0.190 0.388 + 8.40
1/1/97--10/31/97 10.54 11.87 -- 0.099 +13.67
------ ------
Total $1.225 Total $4.128
Cumulative total return as of 10/31/97: +103.79%**
</TABLE>
* Figures may include short-term capital gains distributions.
** Figures do not include any sales charge; results would be lower if sales
charge was included.
<PAGE> 9
Merrill Lynch Global Convertible Fund, Inc., October 31, 1997
PERFORMANCE DATA (continued)
Performance
Summary--
Class B Shares
<TABLE>
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
2/26/88--12/31/88 $10.00 $ 9.77 $0.173 $0.313 + 2.63%
1989 9.77 9.51 0.431 0.376 + 5.68
1990 9.51 8.25 0.047 0.373 - 8.94
1991 8.25 9.12 0.151 0.284 +15.99
1992 9.12 9.74 0.123 0.166 + 9.99
1993 9.74 10.74 0.081 0.228 +13.48
1994 10.74 10.35 0.029 0.205 - 1.45
1995 10.35 10.35 -- 1.146 +11.30
1996 10.35 10.63 0.190 0.272 + 7.26
1/1/97--10/31/97 10.63 11.90 -- 0.064 +12.62
------ ------
Total $1.225 Total $3.427
Cumulative total return as of 10/31/97: +89.45%**
</TABLE>
* Figures may include short-term capital gains distributions.
** Figures do not reflect deduction of any sales charge; results would be lower
if sales charge was deducted.
Performance
Summary--
Class C Shares
<TABLE>
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $10.74 $10.33 $0.029 $0.162 - 2.03%
1995 10.33 10.34 -- 1.146 +11.43
1996 10.34 10.60 0.190 0.277 + 7.12
1/1/97--10/31/97 10.60 11.87 -- 0.055 +12.56
------ ------
Total $0.219 Total $1.640
Cumulative total return as of 10/31/97: +31.62%**
</TABLE>
<PAGE> 10
* Figures may include short-term capital gains distributions.
** Figures do not reflect deduction of any sales charge; results would be lower
if sales charge was deducted.
Performance
Summary--
Class D Shares
<TABLE>
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $10.69 $10.30 $0.029 $0.170 - 1.78%
1995 10.30 10.29 -- 1.252 +12.34
1996 10.29 10.55 0.190 0.365 + 8.04
1/1/97--10/31/97 10.55 11.86 -- 0.092 +13.39
------ ------
Total $0.219 Total $1.879
Cumulative total return as of 10/31/97: +35.18%**
</TABLE>
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower if sales charge
was included.
Recent
Performance
Results
<TABLE>
<CAPTION>
12 Month 3 Month
10/31/97 7/31/97 10/31/96 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Global Convertible Fund, Inc. Class A Shares* $11.87 $12.09 $10.54 +14.68%(1) - 1.82%
ML Global Convertible Fund, Inc. Class B Shares* 11.90 12.15 10.61 +14.19(1) - 2.06
ML Global Convertible Fund, Inc. Class C Shares* 11.87 12.13 10.59 +14.12(1) - 2.14
ML Global Convertible Fund, Inc. Class D Shares* 11.86 12.09 10.55 +14.47(1) - 1.90
Dow Jones Industrial Average** 7,442.08 8,222.61 6,029.38 +23.43 - 9.49
S&P 500 Index** 914.62 954.29 705.27 +29.68 - 4.16
Japan Nikkei Dow Jones 225**++ 16,458.94 20,331.43 20,466.86 -19.58 -19.05
London Financial Times Index** 4,842.30 4,907.50 3,979.10 +21.69 - 1.33
ML Global Convertible Fund, Inc. Class A Shares--Total Return* +17.79(2) - 1.82
ML Global Convertible Fund, Inc. Class B Shares--Total Return* +16.56(3) - 2.06
ML Global Convertible Fund, Inc. Class C Shares--Total Return* +16.40(4) - 2.14
ML Global Convertible Fund, Inc. Class D Shares--Total Return* +17.41(5) - 1.90
Dow Jones Industrial Average--Total Return** +25.76 - 9.09
S&P 500 Index--Total Return** +32.09 - 3.73
</TABLE>
<PAGE> 11
* Investment results shown do not reflect sales charges; results shown would
be lower if a sales charge was included.
** An unmanaged broad-based index comprised of common stocks.
++ Index is expressed in base currency terms (yen).
(1) Percent change includes reinvestment of $0.190 per share capital gains
distributions.
(2) Percent change includes reinvestment of $0.285 per share ordinary income
dividends and $0.190 per share capital gains distributions.
(3) Percent change includes reinvestment of $0.220 per share ordinary income
dividends and $0.190 per share capital gains distributions.
(4) Percent change includes reinvestment of $0.211 per share ordinary income
dividends and $0.190 per share capital gains distributions.
(5) Percent change includes reinvestment of $0.271 per share ordinary income
dividends and $0.190 per share capital gains distributions.
Merrill Lynch Global Convertible Fund, Inc., October 31, 1997
PERFORMANCE DATA (concluded)
Total Return
Based on a $10,000
Investment
Class A Shares
A line graph depicting the growth of an investment in the Fund's Class A Shares
compared to the growth of an investment in the S&P 500 Total Return Index.
Beginning and ending values are:
<TABLE>
<CAPTION>
11/04/88** 10/97
<S> <C> <C>
ML Global Convertible Fund, Inc.++--
Class A Shares* $ 9,475 $19,311
S&P 500 Total Return Index++++ $10,000 $42,759
</TABLE>
<PAGE> 12
Class B Shares
A line graph depicting the growth of an investment in the Fund's Class B Shares
compared to the growth of an investment in the S&P 500 Total Return Index.
Beginning and ending values are:
<TABLE>
<CAPTION>
2/26/88** 10/97
<S> <C> <C>
ML Global Convertible Fund, Inc.++--
Class B Shares* $10,000 $18,945
S&P 500 Total Return Index++++ $10,000 $45,249
</TABLE>
Class C & Class D Shares
A line graph depicting the growth of an investment in the Fund's Class C and
Class D Shares compared to the growth of an investment in the S&P 500 Total
Return Index. Beginning and ending values are:
<TABLE>
<CAPTION>
10/21/94** 10/97
<S> <C> <C>
ML Global Convertible Fund, Inc.++--
Class C Shares* $10,000 $13,162
ML Global Convertible Fund, Inc.++--
Class D Shares* $ 9,475 $12,807
S&P 500 Total Return Index++++ $10,000 $21,059
</TABLE>
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
** Commencement of operations.
++ ML Global Convertible Fund, Inc. invests primarily in an internationally
diversified portfolio of convertible debt securities, convertible preferred
stocks and "synthetic" convertible securities consisting of a combination
of debt securities or preferred stock and warrants or options.
++++ This unmanaged broad-based Index is comprised of common stocks.
Past performance is not predictive of future performance.
<PAGE> 13
Average Annual
Total Return
<TABLE>
<CAPTION>
% Return Without % Return With
Sales Charge Sales Charge**
<S> <C> <C>
Class A Shares*
Year Ended 9/30/97 +19.33% +13.06%
Five Years Ended 9/30/97 +10.10 + 8.91
Inception (11/4/88) through 9/30/97 + 8.53 + 7.87
</TABLE>
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
<TABLE>
<CAPTION>
% Return % Return
Without CDSC With CDSC**
<S> <C> <C>
Class B Shares*
Year Ended 9/30/97 +18.08% +14.08%
Five Years Ended 9/30/97 + 8.94 + 8.94
Inception (2/26/88) through 9/30/97 + 7.08 + 7.08
</TABLE>
* Maximum contingent deferred sales charge is 4% and is reduced to 0% after 4
years.
** Assuming payment of applicable contingent deferred sales charge.
<TABLE>
<CAPTION>
% Return % Return
Without CDSC With CDSC**
<S> <C> <C>
Class C Shares*
Year Ended 9/30/97 +18.02% +17.02%
Inception (10/21/94) through 9/30/97 +10.48 +10.48
</TABLE>
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after 1
year.
** Assuming payment of applicable contingent deferred sales charge.
<TABLE>
<CAPTION>
% Return Without % Return With
Sales Charge Sales Charge**
<S> <C> <C>
Class D Shares*
Year Ended 9/30/97 +19.08% +12.83%
Inception (10/21/94) through 9/30/97 +11.45 + 9.43
</TABLE>
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
<PAGE> 14
Merrill Lynch Global Convertible Fund, Inc., October 31, 1997
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
NORTH Shares Value Percent of
AMERICA Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United States Food/Beverage/ 20,000 ConAgra Inc. $ 309,079 $ 602,500 2.08%
Tobacco & Household
Pharmaceuticals 1,091 ++Crescendo Pharmaceuticals Corp. 12,547 12,274 0.04
Retail Stores 22,500 Home Depot, Inc. 707,041 1,251,562 4.33
Total Investments in
United States Common Stocks 1,028,667 1,866,336 6.45
Convertible Preferred Stocks
United States Insurance 10,000 American General Corp., Pfd. 523,200 665,000 2.30
15,000 St. Paul Companies, Inc., Pfd. 784,736 1,050,000 3.63
------------ ------------ -------
1,307,936 1,715,000 5.93
Oil & Gas Producers 7,000 Lomak Petroleum, Inc., $5.75 Pfd. 350,000 353,500 1.22
10,000 Occidental Petroleum Corp.,
Pfd., Series A 580,600 940,000 3.25
------------ ------------ -------
930,600 1,293,500 4.47
Real Estate 20,000 Merry Land & Investment
Investment Company, Inc., Pfd. 509,462 552,500 1.91
Trust
Steel 30,000 USX Capital Trust I, Pfd. 1,387,500 1,425,000 4.93
20,000 WHX Corp., Pfd., Series B 993,700 985,000 3.40
------------ ------------ -------
2,381,200 2,410,000 8.33
Total Investments in
United States Convertible
Preferred Stocks 5,129,198 5,971,000 20.64
</TABLE>
<PAGE> 15
<TABLE>
<CAPTION>
Face
Amount Convertible Bonds
<S> <C> <C> <C> <C> <C> <C> <C>
Canada Metals & US$ 700,000 Inco, Limited, 5.75% due
Mining 7/01/2004 765,625 712,250 2.46
Total Investments in Canadian
Convertible Bonds 765,625 712,250 2.46
United States Assisted Living 300,000 Assisted Living Concepts, Inc.,
6% due 11/01/2002 300,000 330,000 1.14
Automobile Parts 1,500,000 The Pep Boys--Manny, Moe & Jack,
4% due 9/01/1999 1,461,250 1,481,250 5.12
Health Services 1,500,000 PhyCor, Inc., 4.50% due 2/15/2003 1,395,000 1,387,500 4.80
Medical Equipment 800,000 ThermoTrex Corp., 3.25% due
11/01/2007 800,000 802,000 2.77
Pharmaceuticals 1,500,000 Alza Corp., 5% due 5/01/2006 1,531,250 1,462,500 5.06
Retail Stores 500,000 Home Depot, Inc., 3.25% due
10/01/2001 509,375 627,500 2.17
Transportation 600,000 Alaska Air Group, Inc., 6.50% due
6/15/2005 625,500 951,000 3.29
Total Investments in
United States Convertible Bonds 6,622,375 7,041,750 24.35
Total Investments in
North American Securities 13,545,865 15,591,336 53.90
</TABLE>
<PAGE> 16
<TABLE>
PACIFIC Shares
BASIN Held Common Stocks
<S> <C> <C> <C> <C> <C> <C>
Hong Kong Utilities--Electric 50,000 Shandong Huaneng Power Company
Ltd. (ADR) (a) 503,000 371,875 1.29
Total Investments in
Hong Kong Common Stocks 503,000 371,875 1.29
<CAPTION>
Face
Amount Convertible Bonds
<S> <C> <C> <C> <C> <C> <C> <C>
Japan Auto & YEN 25,000,000 No. 2 Toyota Motor Corp.,
Truck 1.20% due 1/28/1998 286,365 359,371 1.24
Chemicals 50,000,000 No. 6 Sumitomo Bakelite Co.,
Ltd., 1.20% due 9/29/2006 521,478 499,958 1.73
Electronics 50,000,000 No. 5 Matsushita Electric
Industrial Co., 1.30% due
3/29/2002 513,387 532,402 1.84
30,000,000 No. 3 Sony Corp., 1.40% due
9/30/2003 361,653 454,704 1.57
30,000,000 No. 2 Tokyo Electron Ltd.,
0.90% due 9/30/2003 343,548 488,146 1.69
------------ ------------ -------
1,218,588 1,475,252 5.10
Food & Beverage 14,000,000 No. 1 Sanyo Coca-Cola Bottling,
Inc., 0.90% due 6/30/2003 146,267 110,873 0.38
Total Investments in Japanese
Convertible Bonds 2,172,698 2,445,454 8.45
Total Investments in
Pacific Basin Securities 2,675,698 2,817,329 9.74
WESTERN
EUROPE
France Leisure Frf 4,200,000 Euro Disney SCA, 6.75% due
10/01/2001 686,298 780,572 2.70
Pharmaceuticals 7,000 Sanofi S.A., 4% due 1/01/2000
(Units) 498,434 730,963 2.53
Total Investments in French
Convertible Bonds 1,184,732 1,511,535 5.23
Netherlands Insurance US$ 500,000 Aegon N.V., 4.75% due 11/01/2004 626,250 1,387,500 4.80
Total Investments in the
Netherlands Convertible Bonds 626,250 1,387,500 4.80
</TABLE>
<PAGE> 17
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
United Kingdom Food & Pound 500,000 Allied-Lyons PLC, 6.75% due 858,247 842,994 2.91
Beverage Sterling 7/07/2008
US$ 500,000 Grand Metropolitan PLC,
6.50% due 1/31/2000 552,500 647,500 2.24
Total Investments in
United Kingdom Convertible Bonds 1,410,747 1,490,494 5.15
Total Investments in
Western European Securities 3,221,729 4,389,529 15.18
</TABLE>
Merrill Lynch Global Convertible Fund, Inc., October 31, 1997
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
SHORT-TERM Face Value Percent of
SECURITIES Amount Issue Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Commercial US$ 865,000 General Motors Acceptance
Paper* Corp., 5.75% due 11/03/1997 $ 864,724 $ 864,724 2.99%
US Government US Treasury Bills:
Obligations* 750,000 4.62% due 11/06/1997 749,519 749,519 2.59
750,000 4.83% due 11/13/1997 748,793 748,793 2.59
1,400,000 4.85% due 11/13/1997 1,397,737 1,397,737 4.83
800,000 4.80% due 11/20/1997 797,973 797,973 2.76
2,500,000 4.85% due 12/04/1997 2,488,885 2,488,885 8.61
750,000 4.85% due 12/11/1997 745,958 745,958 2.58
------------ ------------ -------
6,928,865 6,928,865 23.96
Total Investments in
Short-Term Securities 7,793,589 7,793,589 26.95
Total Investments $ 27,236,881 30,591,783 105.77
============
Liabilities in Excess of Other Assets (1,669,496) (5.77)
------------ -------
Net Assets $ 28,922,287 100.00%
============ =======
</TABLE>
(a) American Depositary Receipts (ADR).
++ Non-income producing security .
* Commercial Paper and certain US Government Obligations are traded on a
discount basis; the interest rates shown are the discount rates paid at the
time of purchase by the Fund.
See Notes to Financial Statements.
<PAGE> 18
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
As of October 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$27,236,881) (Note 1a) $ 30,591,783
Cash 840,687
Foreign cash (Note 1b) 241,801
Receivables:
Securities sold $ 760,125
Interest 144,790
Capital shares sold 16,375
Dividends 1,489 922,779
------------
Prepaid expenses (Note 1f) 40,417
------------
Total assets 32,637,467
------------
Liabilities: Payables:
Securities purchased 2,209,812
Capital shares redeemed 129,346
Distributor (Note 2) 18,024
Investment adviser (Note 2) 16,446 2,373,628
------------
Accrued expenses and other liabilities 1,341,552
------------
Total liabilities 3,715,180
------------
Net Assets: Net assets $ 28,922,287
============
Net Assets Class A Shares of Common Stock, $0.10 par value,
Consist of: 100,000,000 shares authorized $ 29,199
Class B Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 149,016
Class C Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 9,367
Class D Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 55,764
Paid-in capital in excess of par 21,584,498
Accumulated distributions in excess of investment
loss--net (Note 1g) (572,021)
Undistributed realized capital gains on investments and
foreign currency transactions--net 4,312,039
Unrealized appreciation on investments and foreign
currency transactions--net 3,354,425
------------
Net assets $ 28,922,287
============
Net Asset Class A--Based on net assets of $3,465,875 and 291,989
Value: shares outstanding $ 11.87
============
Class B--Based on net assets of $17,730,531 and 1,490,162
shares outstanding $ 11.90
============
Class C--Based on net assets of $1,112,046 and 93,671
shares outstanding $ 11.87
============
Class D--Based on net assets of $6,613,835 and 557,641
shares outstanding $ 11.86
============
</TABLE>
See Notes to Financial Statements.
<PAGE> 19
Merrill Lynch Global Convertible Fund, Inc., October 31, 1997
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Year Ended October 31, 1997
<S> <C> <C> <C>
Investment Interest and discount earned (net of $6,762
Income foreign withholding tax) $ 1,585,213
(Notes 1d & 1e): Dividends (net of $963 foreign withholding tax) 637,281
------------
Total income 2,222,494
------------
Expenses: Investment advisory fees (Note 2) $ 301,179
Account maintenance and distribution fees--Class B (Note 2) 267,689
Transfer agent fees--Class B (Note 2) 114,858
Printing and shareholder reports 90,433
Accounting services (Note 2) 69,859
Registration fees (Note 1f) 67,344
Professional fees 65,021
Directors' fees and expenses 45,388
Transfer agent fees--Class A (Note 2) 36,491
Transfer agent fees--Class D (Note 2) 28,456
Account maintenance and distribution fees--Class C (Note 2) 24,342
Account maintenance fees--Class D (Note 2) 18,545
Custodian fees 15,132
Transfer agent fees--Class C (Note 2) 11,193
Pricing fees 9,942
Other 4,519
------------
Total expenses 1,170,391
------------
Investment income--net 1,052,103
------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 4,313,181
(Loss) on Foreign currency transactions--net (961,097) 3,352,084
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 3,226,474
(Notes 1b, 1c, Foreign currency transactions--net (63,442) 3,163,032
1e & 3): ------------ ------------
Net realized and unrealized gain on investments and
foreign currency transactions 6,515,116
------------
Net Increase in Net Assets Resulting from Operations $ 7,567,219
============
</TABLE>
See Notes to Financial Statements.
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended
October 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income--net $ 1,052,103 $ 1,655,902
Realized gain on investments and foreign
currency transactions--net 3,352,084 1,834,024
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 3,163,032 2,580,476
------------ ------------
Net increase in net assets resulting from operations 7,567,219 6,070,402
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (339,437) (694,324)
Shareholders Class B (569,149) (1,473,613)
(Note 1g): Class C (57,198) (112,375)
Class D (168,936) (224,218)
In excess of investment income--net:
Class A (14,383) --
Class B (24,118) --
Class C (2,424) --
Class D (7,159) --
Realized gain on investments--net:
Class A (371,547) (820,273)
Class B (771,279) (2,671,664)
Class C (84,137) (180,592)
Class D (171,039) (171,093)
------------ ------------
Net decrease in net assets resulting from dividends
and distributions to shareholders (2,580,806) (6,348,152)
------------ ------------
Capital Share Net decrease in net assets derived from capital
Transactions share transactions (45,343,049) (20,834,705)
(Note 4): ------------ ------------
Net Assets: Total decrease in net assets (40,356,636) (21,112,455)
Beginning of year 69,278,923 90,391,378
------------ ------------
End of year* $ 28,922,287 $ 69,278,923
============ ============
*Undistributed (accumulated distributions in excess of)
investment income--net (Note 1h) $ (572,021) $ 82,617
============ ============
</TABLE>
See Notes to Financial Statements.
<PAGE> 20
Merrill Lynch Global Convertible Fund, Inc., October 31, 1997
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
The following per share data and ratios Class A
have been derived from information provided
in the financial statements. For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996++++ 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.54 $ 10.71 $ 10.75 $ 11.08 $ 9.79
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .33 .32 .42 .33 .23
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net 1.47 .62 .11 (.27) 1.45
-------- -------- -------- -------- --------
Total from investment operations 1.80 .94 .53 .06 1.68
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.24) (.48) (.46) (.30) (.23)
In excess of investment income--net (.01) -- -- -- --
Realized gain on investments--net (.22) (.63) (.11) (.09) (.16)
-------- -------- -------- -------- --------
Total dividends and distributions (.47) (1.11) (.57) (.39) (.39)
-------- -------- -------- -------- --------
Net asset value, end of year $ 11.87 $ 10.54 $ 10.71 $ 10.75 $ 11.08
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 17.79% 9.34% 5.10% .61% 17.64%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.81% 1.57% 1.38% 1.66% 2.22%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 3.01% 3.05% 4.03% 2.97% 2.36%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 3,466 $ 17,741 $ 23,634 $ 7,850 $ 4,557
Data: ======== ======== ======== ======== ========
Portfolio turnover 33.42% 14.72% 101.12% 38.04% 26.02%
======== ======== ======== ======== ========
Average commission rate paid++++++ $ .0607 $ .0679 -- -- --
======== ======== ======== ======== ========
</TABLE>
<PAGE> 21
<TABLE>
<CAPTION>
The following per share data and ratios Class B
have been derived from information provided
in the financial statements. For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996++++ 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.61 $ 10.77 $ 10.80 $ 11.13 $ 9.84
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .21 .21 .37 .21 .13
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.49 .62 .05 (.25) 1.46
-------- -------- -------- -------- --------
Total from investment operations 1.70 .83 .42 (.04) 1.59
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.18) (.36) (.34) (.20) (.14)
In excess of investment income--net (.01) -- -- -- --
Realized gain on investments--net (.22) (.63) (.11) (.09) (.16)
-------- -------- -------- -------- --------
Total dividends and distributions (.41) (.99) (.45) (.29) (.30)
-------- -------- -------- -------- --------
Net asset value, end of year $ 11.90 $ 10.61 $ 10.77 $ 10.80 $ 11.13
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 16.56% 8.13% 4.01% (.37%) 16.45%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 2.87% 2.64% 2.37% 2.69% 3.26%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 1.92% 1.98% 2.95% 1.95% 1.32%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 17,730 $ 38,830 $ 58,660 $ 53,121 $ 29,831
Data: ======== ======== ======== ======== ========
Portfolio turnover 33.42% 14.72% 101.12% 38.04% 26.02%
======== ======== ======== ======== ========
Average commission rate paid++++++ $ .0607 $ .0679 -- -- --
======== ======== ======== ======== ========
</TABLE>
<PAGE> 22
<TABLE>
<CAPTION>
Class C
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year Ended 1994++ to
October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996++++ 1995 1994++++
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.59 $ 10.75 $ 10.81 $ 10.74
Operating -------- -------- -------- --------
Performance: Investment income--net .21 .21 .36 --
Realized and unrealized gain on investments
and foreign currency transactions--net 1.47 .62 .05 .07
-------- -------- -------- --------
Total from investment operations 1.68 .83 .41 .07
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.17) (.36) (.36) --
In excess of investment income--net (.01) -- -- --
Realized gain on investments--net (.22) (.63) (.11) --
-------- -------- -------- --------
Total dividends and distributions (.40) (.99) (.47) --
-------- -------- -------- --------
Net asset value, end of period $ 11.87 $ 10.59 $ 10.75 $ 10.81
======== ======== ======== ========
Total Investment Based on net asset value per share 16.40% 8.14% 3.89% .65%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 2.89% 2.65% 2.41% 5.64%*
Net Assets: ======== ======== ======== ========
Investment income (loss)--net 1.91% 1.97% 2.99% (1.74%)*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 1,112 $ 4,123 $ 4,598 $ 203
Data: ======== ======== ======== ========
Portfolio turnover 33.42% 14.72% 101.12% 38.04%
======== ======== ======== ========
Average commission rate paid++++++ $ .0607 $ .0679 -- --
======== ======== ======== ========
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+++ Aggregate total investment return.
++ Commencement of operations.
++++ Based on average shares outstanding during the period.
++++++ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid"
includes commissions paid in foreign currencies, which have been
converted into US dollars using the prevailing exchange rate on the date
of the transaction. Such conversions may significantly affect the rate
shown.
See Notes to Financial Statements.
<PAGE> 23
Merrill Lynch Global Convertible Fund, Inc., October 31, 1997
FINANCIAL HIGHLIGHTS (concluded)
<TABLE>
<CAPTION>
Class D
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year Ended 1994++ to
October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996++++ 1995 1994++++
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.55 $ 10.72 $ 10.76 $ 10.69
Operating -------- -------- -------- --------
Performance: Investment income--net .30 .31 .42 --
Realized and unrealized gain on investments
and foreign currency transactions--net 1.47 .61 .09 .07
-------- -------- -------- --------
Total from investment operations 1.77 .92 .51 .07
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.23) (.46) (.44) --
In excess of investment income--net (.01) -- -- --
Realized gain on investments--net (.22) (.63) (.11) --
-------- -------- -------- --------
Total dividends and distributions (.46) (1.09) (.55) --
-------- -------- -------- --------
Net asset value, end of period $ 11.86 $ 10.55 $ 10.72 $ 10.76
======== ======== ======== ========
Total Investment Based on net asset value per share 17.41% 9.07% 4.87% .65%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 2.09% 1.77% 1.62% 5.13%*
Net Assets: ======== ======== ======== ========
Investment income (loss)--net 2.69% 2.85% 3.79% (1.24%)*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 6,614 $ 8,585 $ 3,499 $ 179
Data: ======== ======== ======== ========
Portfolio turnover 33.42% 14.72% 101.12% 38.04%
======== ======== ======== ========
Average commission rate paid++++++ $ .0607 $ .0679 -- --
======== ======== ======== ========
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+++ Aggregate total investment return.
++ Commencement of operations.
++++ Based on average shares outstanding during the period.
++++++ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average Commission Rate Paid"
includes commissions paid in foreign currencies, which have been
converted into US dollars using the prevailing exchange rate on the date
of the transaction. Such conversions may significantly affect the rate
shown.
See Notes to Financial Statements.
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Global Convertible Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. Shares of Class A and Class D are sold with a front-end
sales charge. Shares of Class B and Class C may be subject to a contingent
deferred sales charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that
Class B, Class C and Class D Shares bear certain expenses related to the account
maintenance of such shares, and Class B and Class C Shares also bear certain
expenses related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant accounting
policies followed by the Fund.
<PAGE> 25
(a) Valuation of investments--Portfolio securities which are traded on stock
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last available bid price
prior to the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange designated by or
under the authority of the Board of Directors as the primary market. Securities
which are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market. Options written
are valued at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last asked price.
Options purchased are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the
over-the-counter market, the last bid price. Short-term securities are valued at
amortized cost, which approximates market value. Other investments, including
futures contracts and related options, are stated at market value. Securities
and assets for which market value quotations are not available are valued at
their fair value as determined in good faith by or under the direction of the
Fund's Board of Directors.
(b) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
(c) 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 equity, debt and currency markets. Losses may arise due
to changes in the value of the contract or if the counterparty does not perform
under the contract. Forward foreign exchange contracts--The Fund is authorized
to enter into forward foreign exchange contracts as a hedge against either
specific transactions or portfolio positions. Such contracts are not entered on
the Fund's records. However, the effect on operations is recorded from the date
the Fund enters into such contracts. Premium or discount is amortized over the
life of the contracts.
* Foreign currency options and futures--The Fund may also purchase or sell
listed or over-the-counter foreign currency options, foreign currency futures
and related options on foreign currency futures as a short or long hedge against
possible variations in foreign exchange rates. Such transactions may be effected
with respect to hedges on non-US dollar denominated securities owned by the
Fund, sold by the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund.
<PAGE> 26
* 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.
Merrill Lynch Global Convertible Fund, Inc., October 31, 1997
NOTES TO FINANCIAL STATEMENTS (continued)
* Options--The Fund is authorized to write covered call options and purchase put
options. When the Fund writes an option, an amount equal to the premium received
by the Fund is reflected as an asset and an equivalent liability. The amount of
the liability is subsequently marked to market to reflect the current market
value of the option written. When a security is purchased or sold through an
exercise of an option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from (or added to)
the proceeds of the security sold. When an option expires (or the Fund enters
into a closing transaction), the Fund realizes a gain or loss on the option to
the extent of the premiums received or paid (or gain or loss to the extent the
cost of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(d) 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. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the exdividend dates. Dividends from foreign
securities where the exdividend date may have passed are subsequently recorded
when the Fund has determined the ex-dividend date. Interest income (including
amortization of discount) is recognized on the accrual basis. Realized gains and
losses on security transactions are determined on the identified cost basis.
<PAGE> 27
(f) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates. Distributions in excess of net investment
income are due primarily to differing tax treatments for foreign currency
transactions.
(h) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $523,937 have been reclassified between undistributed
net realized capital gains and accumulated distributions in excess of net
investment income. These reclassifications have no effect on net assets or net
asset values per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM 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.
MLAM 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 at
the annual rate of 0.65% of the average daily value of the Fund's net assets.
Pursuant to 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:
<TABLE>
<CAPTION>
Account Distribution
Maintenance Fee Fee
<S> <C> <C>
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
</TABLE>
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.
<PAGE> 28
For the year ended October 31, 1997, MLFD earned underwriting discounts and
MLPF&S earned dealer concessions on sales of the Fund's Class A and Class D
Shares as follows:
<TABLE>
<CAPTION>
MLFD MLPF&S
<S> <C> <C>
Class A $ 42 $ 519
Class D $ 395 $5,780
</TABLE>
For the year ended October 31, 1997, MLPF&S received contingent deferred sales
charges of $209,470 and $1,308 relating to transactions in Class B and Class C
Shares, respectively.
During the year ended October 31, 1997, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of MLPF&S, $59 for security price quotations to
compute the net asset value of the Fund.
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 MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
MLAM, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 1997 were $14,422,368 and $60,395,126, respectively.
Net realized and unrealized gains (losses) as of October 31, 1997 were as
follows:
<TABLE>
<CAPTION>
Realized Unrealized
Gains (Losses) Gains (Losses)
<S> <C> <C>
Long-term investments $ 4,313,459 $ 3,354,902
Short-term investments (278) --
Foreign currency transactions (982,156) (477)
Forward foreign exchange contracts 21,059 --
----------- -----------
Total $ 3,352,084 $ 3,354,425
=========== ===========
</TABLE>
As of October 31, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $3,345,402, of which $3,696,792 related to appreciated
securities and $351,390 related to depreciated securities. At October 31,1997,
the aggregate cost of investments for Federal income tax purposes was
$27,246,381.
<PAGE> 29
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions were
$45,343,049 and $20,834,705 for the years ended October 31, 1997 and October 31,
1996, respectively.
Transactions in capital shares for each class were as follows:
<TABLE>
<CAPTION>
Class A Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 1,031,544 $ 11,066,318
Shares issued to shareholders in
reinvestment of dividends
and distributions 59,638 620,254
------------ ------------
Total issued 1,091,182 11,686,572
Shares redeemed (2,482,772) (26,937,299)
------------ ------------
Net decrease (1,391,590) $(15,250,727)
============ ============
<CAPTION>
Class A Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
<S> <C> <C>
Shares sold 685,844 $ 7,246,703
Shares issued to shareholders in
reinvestment of dividends
and distributions 135,086 1,380,166
------------ ------------
Total issued 820,930 8,626,869
Shares redeemed (1,343,548) (14,564,322)
------------ ------------
Net decrease (522,618) $ (5,937,453)
============ ============
<CAPTION>
Class B Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 314,434 $ 3,542,687
Shares issued to shareholders in
reinvestment of dividends
and distributions 99,185 1,040,450
------------ ------------
Total issued 413,619 4,583,137
Automatic conversion of shares (28,947) (322,485)
Shares redeemed (2,553,205) (28,269,334)
------------ ------------
Net decrease (2,168,533) $(24,008,682)
============ ============
<CAPTION>
Class B Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
<S> <C> <C>
Shares sold 958,130 $ 10,188,233
Shares issued to shareholders in
reinvestment of dividends
and distributions 295,014 3,025,724
------------ ------------
Total issued 1,253,144 13,213,957
Automatic conversion of shares (559,618) (5,864,176)
Shares redeemed (2,481,068) (26,810,294)
------------ ------------
Net decrease (1,787,542) $(19,460,513)
============ ============
</TABLE>
<PAGE> 30
Merrill Lynch Global Convertible Fund, Inc., October 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
<TABLE>
<CAPTION>
Class C Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 45,903 $ 515,280
Shares issued to shareholders in
reinvestment of dividends
and distributions 11,375 118,943
----------- -----------
Total issued 57,278 634,223
Shares redeemed (352,854) (3,888,088)
----------- -----------
Net decrease (295,576) $(3,253,865)
=========== ===========
<CAPTION>
Class C Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
<S> <C> <C>
Shares sold 234,669 $ 2,490,027
Shares issued to shareholders in
reinvestment of dividends
and distributions 21,832 223,912
----------- -----------
Total issued 256,501 2,713,939
Shares redeemed (294,992) (3,188,951)
----------- -----------
Net decrease (38,491) $ (475,012)
=========== ===========
<CAPTION>
Class D Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 40,916 $ 459,749
Automatic conversion of shares 29,028 322,485
Shares issued to shareholders in
reinvestment of dividends
and distributions 23,285 243,244
----------- -----------
Total issued 93,229 1,025,478
Shares redeemed (349,497) (3,855,253)
----------- -----------
Net decrease (256,268) $(2,829,775)
=========== ===========
<CAPTION>
Class D Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
<S> <C> <C>
Shares sold 225,183 $ 2,423,111
Automatic conversion of shares 562,293 5,864,176
Shares issued to shareholders in
reinvestment of dividends
and distributions 27,215 280,369
----------- -----------
Total issued 814,691 8,567,656
Shares redeemed (327,147) (3,529,383)
----------- -----------
Net increase 487,544 $ 5,038,273
=========== ===========
</TABLE>
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Global Convertible Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Global Convertible Fund, Inc. as
of October 31, 1997, the related statements of operations for the year then
ended and changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the five-year
period then ended. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1997, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch Global
Convertible Fund, Inc. as of October 31, 1997, 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
December 5, 1997
<PAGE> 32
IMPORTANT TAX INFORMATION (unaudited)
The following information summarizes all per share distributions paid by Merrill
Lynch Global Convertible Fund, Inc. during the taxable year ended October 31,
1997:
<TABLE>
<CAPTION>
Domestic Qualifying Interest From Domestic Non-Qualifying Total Long-Term
Record Date Payable Date Ordinary Income Federal Obligations Ordinary Income Ordinary Income Capital Gains
<S> <C> <C> <C> <C> <C> <C>
Class A Shares:
12/17/96 12/26/96 $.100506 $.005557 $.079841 $.185904 $.189624
4/16/97 4/24/97 $.093975 $.000289 $.004640 $.098904 --
Class B Shares:
12/17/96 12/26/96 $.084422 $.004668 $.067064 $.156154 $.189624
4/16/97 4/24/97 $.060776 $.000187 $.003001 $.063964 --
Class C Shares:
12/17/96 12/26/96 $.084237 $.004657 $.066918 $.155812 $.189624
4/16/97 4/24/97 $.052706 $.000162 $.002603 $.055471 --
Class D Shares:
12/17/96 12/26/96 $.096733 $.005348 $.076845 $.178926 $.189624
4/16/97 4/24/97 $.087116 $.000268 $.004302 $.091686 --
</TABLE>
The qualifying domestic ordinary income qualifies for the dividends received
deduction for corporations.
The law varies in each state as to whether and what percentage of dividend
income attributable to Federal obligations is exempt from state income tax. We
recommend that you consult your tax adviser to determine if any portion of the
dividends you received is exempt from state income tax.
Please retain this information for your records.
