<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1997
SECURITIES ACT FILE NO. 33-6091
INVESTMENT COMPANY ACT FILE NO. 811-4684
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 15 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 16 [X]
(CHECK APPROPRIATE BOX OR BOXES)
---------------------
MERRILL LYNCH GLOBAL BOND FUND
FOR INVESTMENT AND RETIREMENT
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH GLOBAL BOND FUND FOR INVESTMENT AND RETIREMENT
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------------
COPIES TO:
<TABLE>
<S> <C>
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
JOHN A. MACKINNON, ESQ.
</TABLE>
---------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] this post-effective amendment designates a new
effective date for a previously filed
post-effective amendment.
---------------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF
BENEFICIAL INTEREST UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24f-2
UNDER THE INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR
THE REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON FEBRUARY 20, 1997.
---------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES BEING AMOUNT OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED BEING REGISTERED PER SHARE OFFERING PRICE FEE
- ------------------------------------------------------------------------------------------------------
Shares of Beneficial Interest
(par value $.10 per share).... 27,430,111 $9.21 $329,994* $100
======================================================================================================
</TABLE>
*(1) The calculation of the maximum aggregate price is made pursuant to Rule
24e-2 under the Investment Company Act of 1940.
(2) The total amount of securities redeemed or repurchased during the
Registrant's previous fiscal year was 27,394,281 shares of Beneficial
Interest.
(3) None of the shares described in (2) above have been used for reduction
pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment Company Act
of 1940 in previous filings during Registrant's current fiscal year.
(4) All of the shares redeemed during Registrant's previous fiscal year are
being used for the reduction of the registration fee in this amendment to
the Registration Statement.
================================================================================
<PAGE> 2
MERRILL LYNCH GLOBAL BOND FUND FOR INVESTMENT AND RETIREMENT
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- -------------- ------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.......................... Cover Page
Item 2. Synopsis............................ Fee Table; Merrill Lynch Select
Pricing(SM) System
Item 3. Condensed Financial Information..... Financial Highlights; Performance
Data
Item 4. General Description of Registrant... Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund.............. Fee Table; Investment Objective and
Policies; Management of the Fund;
Portfolio Transactions and
Brokerage; Inside Back Cover Page
Item 5A. Management's Discussion of Fund
Performance....................... Not Applicable
Item 6. Capital Stock and Other
Securities........................ Cover Page; Additional Information
Item 7. Purchase of Securities Being
Offered........................... Cover Page; Fee Table; Merrill Lynch
Select Pricing(SM) System;
Purchase of Shares; Shareholder
Services; Additional Information;
Inside Back Cover Page
Item 8. Redemption or Repurchase............ Fee Table; Merrill Lynch Select
Pricing(SM) System; Shareholder
Services; Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal Proceedings........... Not Applicable
PART B
Item 10. Cover Page.......................... Cover Page
Item 11. Table of Contents................... Back Cover Page
Item 12. General Information and History..... Not Applicable
Item 13. Investment Objective and Policies... Investment Objective and Policies
Item 14. Management of the Fund.............. Management of the Fund
Item 15. Control Persons and Principal
Holders of Securities............. Management of the Fund; General
Information -- Security Ownership
of Certain Beneficial Owners
Item 16. Investment Advisory and Other
Services.......................... Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and Other
Practices......................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other
Securities........................ General Information
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered.......... Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services;
General Information
Item 20. Tax Status.......................... Dividends, Distributions and
Taxes -- Taxes
Item 21. Underwriters........................ Purchase of Shares
Item 22. Calculation of Performance Data..... Performance Data
Item 23. Financial Statements................ Financial Statements
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE> 3
PROSPECTUS
APRIL 28, 1997
MERRILL LYNCH GLOBAL BOND FUND
FOR INVESTMENT AND RETIREMENT
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE (609) 282-2800
------------------------
The investment objective of Merrill Lynch Global Bond Fund for Investment
and Retirement (the "Fund") is to seek a high total investment return by
investing in a global portfolio of debt instruments denominated in various
currencies and multinational currency units. Total investment return is the
aggregate of capital value changes and income. Accordingly, investments may be
shifted among obligations denominated in particular currencies or currency units
depending upon management's analysis of total investment return available from
obligations in terms of both potential for capital appreciation in U.S. dollars
and the rate of income paid on such obligations. Under normal conditions, the
Fund's investments will be denominated in at least three currencies or
multinational currency units. The Fund generally will invest without regard to
tax considerations applicable to distributions to shareholders and therefore may
particularly appeal to investors for whom current tax liability is not a major
consideration, such as employee benefit plans and individual retirement accounts
("IRAs"). The Fund presently contemplates that it will invest primarily in
obligations denominated in the currencies of the U.S., Japan, Canada, Western
European nations, New Zealand and Australia as well as in European Currency
Units ("ECUs"). The Fund may seek to hedge against interest rate and currency
risks through the use of options, futures and foreign currency transactions.
Investments on an international basis involve special considerations. See "Risk
Factors and Special Considerations." For more information on the Fund's
investment objective and policies, please see "Investment Objective and
Policies" on page 12.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing(SM) System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from securities dealers which have entered into selected dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000, and the
minimum subsequent purchase is $50, 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, but as of May
1, 1997, $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."
------------------------
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 April 28, 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 -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE> 4
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ------------------------------- ------------ ----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)..... 4.00%(c) None None 4.00%(c)
Sales Charge Imposed on Dividend
Reinvestments........................... None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)........... None(d) 4.0% during the first year, 1.0% for one None(d)
decreasing 1.0% annually year(f)
thereafter 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(h):
Account Maintenance Fees................ None 0.25% 0.25% 0.25%
Distribution Fees....................... None 0.50% 0.55% None
(Class B shares convert to
Class D shares automatically
after approximately ten years
and cease being subject to
distribution fees)
Other Expenses:
Custodial Fees.......................... 0.04% 0.04% 0.04% 0.04%
Shareholder Servicing Costs(i).......... 0.15% 0.18% 0.21% 0.11%
Other................................... 0.08% 0.08% 0.08% 0.08%
------- ----- ----- -------
Total Other Expenses................ 0.27% 0.30% 0.33% 0.23%
------- ----- ----- -------
TOTAL FUND OPERATING EXPENSES............... 0.87% 1.65% 1.73% 1.08%
======= ===== ===== =======
</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 26 and "Shareholder
Services -- Fee-Based Programs" -- page 38.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 28.
(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 or Class D purchases of $1,000,000 or
more are not subject to an initial sales charge. See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares" -- page 26.
(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% if redeemed within one year after purchase. Such CDSC may be waived
in connection with certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs" -- page 38.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 38.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 38.
(g) See "Management of the Fund -- Management and Advisory
Arrangements" -- page 22.
(h) See "Purchase of Shares -- Distribution Plans" -- page 32.
(i) See "Management of the Fund -- Transfer Agency Services" -- page 24.
2
<PAGE> 5
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR
THE PERIOD OF:
----------------------------
1 3 5 10
YEAR YEARS YEARS YEARS
--- --- --- ----
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment including the maximum $40 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......................................... $49 $67 $86 $143
Class B......................................... $57 $72 $90 $195
Class C......................................... $28 $54 $94 $204
Class D......................................... $51 $73 $97 $166
An investor would pay the following expenses on the
same $1,000 investment assuming no redemption at
the end of the period:
Class A......................................... $49 $67 $86 $143
Class B......................................... $17 $52 $90 $195
Class C......................................... $18 $54 $94 $204
Class D......................................... $51 $73 $97 $166
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE. Class B and Class C shareholders who hold their shares for an extended
period of time may pay more in Rule 12b-1 distribution fees than the economic
equivalent of the maximum front-end sales charges permitted under the Conduct
Rules of the National Association of Securities Dealers, Inc. (the "NASD").
Merrill Lynch may charge its customers a processing fee (presently $4.85, but as
of May 1, 1997, $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 "Investment Adviser") or its affiliate, Fund Asset
Management, L.P. ("FAM"). Funds advised by MLAM or FAM that utilize the Merrill
Lynch Select Pricing(SM) System are referred to herein as "MLAM-advised mutual
funds."
3
<PAGE> 6
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
CDSCs, distribution and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on the
Class D shares, are imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges do not affect the net asset
value of any other class or have any impact on investors choosing another sales
charge option.
Dividends paid by the Fund for each class of shares are calculated in the
same manner at the same time and will differ only to the extent that account
maintenance and distribution fees and any incremental transfer agency costs
relating to a particular class are borne exclusively by that class. Each class
has different exchange privileges. See "Shareholder Services -- Exchange
Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges 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>
- ----------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- ----------------------------------------------------------------------------------------------------
A Maximum 4.00% initial No No No
sales charge(2)(3)
- ----------------------------------------------------------------------------------------------------
B CDSC for a period of four 0.25% 0.50% B shares convert to
years, at a rate of 4.0% during D shares automatically
the first year, decreasing 1.0% after approximately
annually to 0.0%(4) ten years(5)
- ----------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.55% No
- ----------------------------------------------------------------------------------------------------
D Maximum 4.00% 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.
(footnotes continued on next page)
4
<PAGE> 7
(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 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 certain
retirement plans was modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have an
eight-year conversion period. If Class B shares of the Fund are exchanged
for Class B shares of another MLAM-advised mutual fund, the conversion
period applicable to the Class B shares acquired in the exchange will apply,
and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
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 of the Fund are offered to a limited group of investors and also
will be issued upon reinvestment of dividends on outstanding Class A
shares. Investors that currently own Class A shares of the Fund in a
shareholder account are entitled to purchase additional Class A shares
of the Fund in that account. Other eligible investors include certain
retirement plans and participants in certain fee-based programs. In
addition, Class A shares are 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
MLAM, 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 is 4.00%, 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 also are 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 0.50% of the Fund's average net assets
attributable to the Class B shares and a CDSC if they are redeemed
within four years of purchase. The CDSC may be modified in connection
with certain fee-based programs. Approximately ten years after
issuance, Class B shares will convert automatically into Class D shares
of the Fund, which are subject to an account maintenance fee but no
distribution fee; Class B shares of certain other MLAM-advised mutual
funds into which exchanges may be made convert into Class D shares
automatically after approximately eight years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired
in the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once a month on the basis of
5
<PAGE> 8
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 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 0.55% of the Fund's average net assets
attributable to the Class C shares. Class C shares are also subject to
a CDSC of 1.0% 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 that purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Fund's Board of Trustees and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% 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 4.00% is reduced
for purchases of $25,000 and over. Purchases of $1,000,000 or more may
not be subject to an initial sales charge but if the initial sales
charge is waived, such purchases 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 the 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 or
her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the deferred sales charges imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
also may elect to purchase Class A or Class D shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class B or
Class C shares may exceed the initial sales charge and, in the case of Class D
shares, the
6
<PAGE> 9
account maintenance fee. Although some investors that previously purchased Class
A shares may no longer be eligible to purchase Class A shares of other
MLAM-advised mutual funds, those previously purchased Class A shares, together
with Class B, Class C and Class D share holdings, will count toward a right of
accumulation which may qualify the investor for reduced initial sales charges on
new initial sales charge purchases. In addition, the ongoing Class B and Class C
account maintenance and distribution fees will cause Class B and Class C shares
to have higher expense ratios, pay lower dividends and have lower total returns
than the initial sales charge shares. The ongoing Class D account maintenance
fees will cause Class D shares to have a higher expense ratio, pay lower
dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately ten years, and thereafter investors will be
subject to lower ongoing fees.
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 forgo the Class B conversion feature, making their investment
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See "Purchase of Shares -- Limitations on the Payment of Deferred
Sales Charges."
7
<PAGE> 10
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. Financial statements and the
independent auditors' report thereon for the fiscal year ended December 31, 1996
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 DECEMBER 31,
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990
------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 9.54 $ 8.96 $ 10.03 $ 9.79 $ 10.38 $ 9.93 $ 9.77
------- ------- ------- -------- ------- ------- -------
Investment income -- net...................... .56 .59 .55 .70 .77 .95 1.01
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net......................... .02 .58 (1.07) .56 .01 .55 .42
------- ------- ------- -------- ------- ------- -------
Total from investment operations.............. .58 1.17 (.52) 1.26 .78 1.50 1.43
------- ------- ------- -------- ------- ------- -------
Less dividends and distributions:
Investment income -- net.................... (.56) (.39) (.24) (.67) (1.14) (1.05) (1.27)
Realized gain on investments -- net......... -- -- -- (.30) (.23) -- --
Return of capital -- net.................... -- (.20) (.28) -- -- -- --
In excess of realized gain on
investments -- net........................ -- -- (.03) (.05) -- -- --
------- ------- ------- -------- ------- ------- -------
Total dividends and distributions............. (.56) (.59) (.55) (1.02) (1.37) (1.05) (1.27)
------- ------- ------- -------- ------- ------- -------
Net asset value, end of period................ $ 9.56 $ 9.54 $ 8.96 $ 10.03 $ 9.79 $ 10.38 $ 9.93
======= ======= ======= ======== ======= ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............ 6.42% 13.39% (5.29)% 13.21% 7.83% 16.00% 15.64%
======= ======= ======= ======== ======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses...................................... .87% .86% .84% .82% .84% .99% 1.06%
======= ======= ======= ======== ======= ======= =======
Investment income -- net...................... 6.02% 6.31% 5.84% 6.44% 12.24% 8.02% 12.71%
======= ======= ======= ======== ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)...... $72,876 $85,610 $90,823 $108,241 $61,131 $21,211 $10,601
======= ======= ======= ======== ======= ======= =======
Portfolio turnover............................ 1234.05% 512.75% 405.00% 419.99% 235.11% 67.76% 159.79%
======= ======= ======= ======== ======= ======= =======
<CAPTION>
FOR THE PERIOD
OCTOBER 21,
1988+ TO
DECEMBER 31,
1989 1988
------ ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $10.24 $10.22
------ ------
Investment income -- net...................... .83 .35
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net......................... (.17) (.08)
------ ------
Total from investment operations.............. .66 .27
------ ------
Less dividends and distributions:
Investment income -- net.................... (.71) (.25)
Realized gain on investments -- net......... -- --
Return of capital -- net.................... (.42) --
In excess of realized gain on
investments -- net........................ -- --
------ ------
Total dividends and distributions............. (1.13) (.25)
------ ------
Net asset value, end of period................ $ 9.77 $10.24
====== ===============
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............ 7.27% 2.66%#
====== ===============
RATIOS TO AVERAGE NET ASSETS:
Expenses...................................... 1.05% 1.01%*
====== ===============
Investment income -- net...................... 7.33% 22.63%*
====== ===============
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)...... $9,156 $1,684
====== ===============
Portfolio turnover............................ 188.22% 198.60%
====== ===============
</TABLE>
- ---------------
<TABLE>
<C> <S>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
# Aggregate total investment return.
</TABLE>
8
<PAGE> 11
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- -------- --------
<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............................ $ 9.54 $ 8.96 $ 10.03 $ 9.79 $ 10.39 $ 9.93 $ 9.77 $ 10.24
-------- -------- -------- -------- -------- -------- -------- --------
Investment income -- net........... .49 .51 .47 .60 .70 .85 .93 .77
Realized and unrealized gain (loss)
on investments and foreign
currency transactions -- net...... .02 .58 (1.07) .58 (.01) .58 .42 (.18)
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment operations... .51 1.09 (.60) 1.18 .69 1.43 1.35 .59
-------- -------- -------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income -- net.......... (.49) (.34) (.20) (.59) (1.06) (.97) (1.19) (.67)
Realized gain on
investments -- net.............. -- -- -- (.30) (.23) -- -- --
Return of capital -- net.......... -- (.17) (.24) -- -- -- -- (.39)
In excess of realized gain on
investments -- net.............. -- -- (.03) (.05) -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions..................... (.49) (.51) (.47) (.94) (1.29) (.97) (1.19) (1.06)
-------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of period..... $ 9.56 $ 9.54 $ 8.96 $ 10.03 $ 9.79 $ 10.39 $ 9.93 $ 9.77
========== ========== ========== ========== ========= ========= ========= ==========
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share............................. 5.60% 12.52% (6.01)% 12.36% 6.91% 15.23% 14.76% 6.45%
========== ========== ========== ========== ========= ========= ========= ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses........................... 1.65% 1.64% 1.61% 1.58% 1.61% 1.77% 1.84% 1.82%
========== ========== ========== ========== ========= ========= ========= ==========
Investment income -- net........... 5.25% 5.56% 5.06% 5.72% 11.67% 7.76% 11.97% 4.73%
========== ========== ========== ========== ========= ========= ========= ==========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)........................ $347,529 $540,887 $700,995 $897,150 $637,834 $380,749 $274,124 $262,641
========== ========== ========== ========== ========= ========= ========= ==========
Portfolio turnover................. 1234.05% 512.75% 405.00% 419.99% 235.11% 67.76% 159.79% 188.22%
========== ========== ========== ========== ========= ========= ========= ==========
<CAPTION>
FOR THE PERIOD
AUG. 29,
1986+ TO
JULY 31,
1988 1987++ 1987
-------- -------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET
VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 10.68 $ 10.31 $ 10.00
-------- -------- -------
Investment income -- net........... .77 .30 .63
Realized and unrealized gain (loss)
on investments and foreign
currency transactions -- net...... (.39) 1.29 .33
-------- -------- -------
Total from investment operations... .38 1.59 .96
-------- -------- -------
Less dividends and distributions:
Investment income -- net.......... (.82) (.30) (.65)
Realized gain on
investments -- net.............. -- (.92) --
Return of capital -- net.......... -- -- --
In excess of realized gain on
investments -- net.............. -- -- --
-------- -------- -------
Total dividends and
distributions..................... (.82) (1.22) (.65)
-------- -------- -------
Net asset value, end of period..... $ 10.24 $ 10.68 $ 10.31
========== ========== =================
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share............................. 3.82% 16.26%# 9.79%#
========== ========== =================
RATIOS TO AVERAGE NET ASSETS:
Expenses........................... 1.74% 1.78%* 1.75%*
========== ========== =================
Investment income -- net........... 10.16% 6.98%* 6.79%*
========== ========== =================
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)........................ $304,607 $314,529 $353,222
========== ========== =================
Portfolio turnover................. 198.60% 111.97% 123.87%
========== ========== =================
</TABLE>
- ---------------
<TABLE>
<C> <S>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ In 1987, the Fund changed its fiscal year end from July 31 to December 31; the information is for the period August 1, 1987
to December 31, 1987.
# Aggregate total investment return.
</TABLE>
9
<PAGE> 12
FINANCIAL HIGHLIGHTS -- (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C CLASS D
--------------------------------------- --------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD FOR THE YEAR ENDED FOR THE PERIOD
DECEMBER 31, OCT. 21, 1994+ DECEMBER 31, OCT. 21, 1994+
-------------------- TO DEC. 31, ------------------- TO DEC. 31,
1996 1995 1994 1996 1995 1994
------- ------- --------------- ------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........ $ 9.54 $ 8.96 $ 9.21 $ 9.54 $ 8.96 $ 9.21
------- ------- ------- ------- ------- -------
Investment income -- net.................... .48 .51 .09 .54 .56 .10
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net........................ .02 .58 (.25) .01 .58 (.25)
------- ------- ------- ------- ------- -------
Total from investment operations............ .50 1.09 (.16) .55 1.14 (.15)
------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income -- net................... (.48) (.34) (.03) (.54) (.37) (.04)
Return of capital -- net................... -- (.17) (.05) -- (.19) (.05)
In excess of realized gain on
investments -- net....................... -- -- (.01) -- -- (.01)
------- ------- ------- ------- ------- -------
Total dividends and distributions........... (.48) (.51) (.09) (.54) (.56) (.10)
------- ------- ------- ------- ------- -------
Net asset value, end of period.............. $ 9.56 $ 9.54 $ 8.96 $ 9.55 $ 9.54 $ 8.96
========= ========= =============== ========= ========= ===============
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......... 5.51% 12.44% (1.73)%# 6.05% 13.11% (1.62)%#
========= ========= =============== ========= ========= ===============
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................... 1.73% 1.71% 1.69%* 1.08% 1.11% 1.12%*
========= ========= =============== ========= ========= ===============
Investment income -- net.................... 5.16% 5.44% 5.20%* 5.74% 6.07% 5.81%*
========= ========= =============== ========= ========= ===============
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).... $ 9,351 $ 8,468 $ 3,614 $45,685 $ 5,665 $ 1,755
========= ========= =============== ========= ========= ===============
Portfolio turnover.......................... 1234.05% 512.75% 405.00% 1234.05% 512.75% 405.00%
========= ========= =============== ========= ========= ===============
</TABLE>
- ---------------
<TABLE>
<C> <S>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
# Aggregate total investment return.
</TABLE>
10
<PAGE> 13
RISK FACTORS AND SPECIAL CONSIDERATIONS
Although the Fund provides a vehicle for investors to participate in the
international debt markets, the Fund should not be considered a balanced
investment program. As a non-diversified investment company, the Fund may invest
a larger percentage of its assets in individual issuers than a diversified
investment company. In this regard, the Fund is not subject to the general
limitation that it not invest more than five percent of its total assets in the
securities of any one issuer. To the extent the Fund makes investments in excess
of five percent of its assets in a particular issuer, its exposure to credit and
market risks associated with that issuer is increased.
As a global fund, the Fund may invest in U.S. and foreign securities.
Investments in securities of foreign entities and securities denominated in
foreign currencies involve risks not typically related to domestic investment,
including, but not limited to, fluctuations in foreign exchange rates, future
foreign political and economic developments and the possible imposition of
exchange controls or other foreign or U.S. 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 U.S. 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 those currencies 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 U.S. 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 investment in those countries.
There may be less publicly available information about a foreign financial
instrument than about a U.S. instrument, and foreign entities may not be subject
to accounting, auditing and financial reporting standards and requirements
comparable to those to which U.S. entities are subject. In addition, certain
foreign investments may be subject to foreign withholding taxes. Investors will
be able to deduct such taxes in computing their taxable income or to use such
amounts as credits against their U.S. income taxes if more than 50% of the
Fund's total assets at the close of any taxable year consists of stocks or
securities in foreign corporations. See "Additional Information -- Taxes."
Foreign financial markets, while generally growing in volume, typically have
substantially less volume than U.S. markets, and securities of many foreign
companies are less liquid and their prices 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 been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays or other
problems 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 the value of such portfolio security or, if the
Fund has entered into a
11
<PAGE> 14
contract to sell the security, could result in possible liability to the
purchaser. Costs associated with transactions in foreign securities generally
are higher than with transactions in U.S. securities. There generally is 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 U.S. securities because
the expenses of the Fund, such as custodial costs, are higher. The portfolio
turnover of the Fund may be higher than that of many investment companies. See
"Investment Objective and Policies -- Other Investment Policies and
Practices -- Portfolio Turnover."
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 securities markets 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 prices of options and futures and movements in the prices of
the securities or currencies which are the subject of the hedge. There can be no
assurance that a liquid secondary market for options and futures contracts will
exist at any specific time. See "Investment Objective and Policies -- Hedging
Techniques."
The net asset value of the Fund's shares, to the extent that the Fund
invests in fixed-income securities, will be affected by changes in the general
level of interest rates. When interest rates decline, the value of a portfolio
of fixed income securities can be expected to rise. Conversely, when interest
rates rise, the value of a portfolio of fixed income securities can be expected
to decline.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's objective is to seek a high total investment return by investing
in a global portfolio of debt instruments denominated in various currencies and
multinational currency units. Total investment return is the aggregate of
capital value changes and income. This investment objective is a fundamental
policy of the Fund which may not be changed without a vote of a majority of its
outstanding shares as defined below. There can be no assurance that this
investment objective will be realized. The Fund will seek to achieve its
objective through a fully managed investment approach described below. The Fund
is a non-diversified open-end management investment company. The Fund may seek
to hedge against interest rate and currency risks through the use of options,
futures and foreign currency transactions.
As an investment company making investments in debt instruments on a global
basis, the Fund may purchase debt obligations issued or guaranteed by U.S. or
foreign governments (including foreign states, provinces and municipalities) or
their agencies and instrumentalities ("governmental entities"), or issued or
guaranteed by international organizations designated or supported by multiple
governmental entities to promote economic reconstruction or development
("supranational entities") such as the International Bank for Reconstruction and
Development (the "World Bank") and the European Coal and Steel Community, or
issued by either U.S. or foreign corporations or financial institutions.
With respect to the creditworthiness of the Fund's portfolio securities,
under normal conditions all of the securities owned by the Fund will be (i)
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities or (ii) obligations which have a credit rating of A or better
by Standard & Poor's Ratings Services ("S&P") or by Moody's Investors Service,
Inc. ("Moody's") or commercial paper rated A-1
12
<PAGE> 15
by S&P or Prime-1 by Moody's or obligations that the Fund's Investment Adviser
has determined to be of similar creditworthiness. The Fund's Investment Adviser
may determine that a non-dollar denominated obligation of a foreign government
is of similar creditworthiness notwithstanding S&P's or Moody's less favorable
rating of a dollar denominated obligation of the same issuer, provided that the
Investment Adviser believes that such dollar denominated obligation is assigned
a lower rating because it is denominated in a currency other than the foreign
government's own currency.
In evaluating obligations, the Investment Adviser will utilize its internal
credit analysis resources as well as financial and economic information obtained
from other sources. With respect to foreign corporate issuers, the Investment
Adviser will consider the financial condition of the issuer and market and
economic conditions relevant to its operations. In terms of foreign governmental
obligations, the Investment Adviser will review the financial position of the
issuer and political and economic conditions in the country. Investment in
securities of supranational entities is subject to the additional risk to be
considered by the Investment Adviser that member governments will fail to make
required capital contributions and that a supranational entity will thus be
unable to meet its obligations.
The Fund's fully managed approach enables it to seek high total investment
return by investing in debt instruments denominated in various currencies and
currency units on the basis of the potential capital appreciation of such
instruments in U.S. dollars and the rates of income paid on such instruments. As
a general matter, in evaluating investments, the Fund will consider, among other
factors, the relative levels of interest rates prevailing in various countries,
the potential appreciation of such investments in their denominated currencies
and, for debt instruments not denominated in U.S. dollars, the potential
movement in the value of such currencies compared to the U.S. dollar. In seeking
capital appreciation, the Fund may invest in relatively low-yielding instruments
in expectation of favorable currency fluctuations or interest rate movements,
thereby potentially reducing the Fund's current yield. In seeking income, the
Fund may invest in short-term instruments with relatively high yields (as
compared to other debt securities) meeting the Fund's investment criteria,
notwithstanding that the Fund may not anticipate that such instruments will
experience substantial capital appreciation.
The average maturity of the Fund's portfolio securities will vary based
upon the Investment Adviser's assessment of economic and market conditions. As
with all debt securities, changes in market yields will affect the Fund's asset
value as the prices of portfolio securities generally increase when interest
rates decline and decrease when interest rates rise. Prices of longer term
securities generally fluctuate more in response to interest rate changes than do
shorter term securities. The Fund does not expect the average maturity of its
portfolio to exceed ten years.
The Fund may invest in debt instruments denominated in any currency or
multinational currency unit. An illustration of a multinational currency unit is
the ECU which is a "basket" consisting of specified amounts of the currencies of
certain of the member states of the European Community, a Western European
economic cooperative association including France, Germany, The Netherlands and
the United Kingdom. The specific amounts of currencies comprising the ECU may be
adjusted by the Council of Ministers of the European Community to reflect
changes in relative values of the underlying currencies. The Investment Adviser
does not believe that such adjustments will adversely affect holders of
ECU-denominated obligations or the marketability of such securities. European
supranationals, in particular, issue ECU-denominated obligations. The Fund may
invest in debt instruments denominated in the currency of one nation although
issued by a governmental entity, corporation or financial institution of another
nation. For example, the Fund may invest
13
<PAGE> 16
in a Japanese yen-denominated obligation issued by a U.S. corporation. Such
investments involve credit risks associated with the issuer and currency risks
associated with the currency in which the obligation is denominated. It is
anticipated that the Fund will invest primarily in marketable instruments
denominated in the currencies of the U.S., Japan, Canada, Western European
nations, New Zealand and Australia as well as in ECUs. Further, it is
anticipated that such instruments will be issued primarily by entities located
in such countries and by supranational entities. Under certain adverse
conditions, the Fund may restrict the financial markets or currencies in which
its assets will be invested and may invest its assets solely in the U.S.
financial markets or U.S. dollar-denominated obligations.
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 that Act. However, the Fund will not invest more than 15% of its
total assets in illiquid investments, which includes securities for which there
is no readily available market, securities subject to contractual restrictions
on resale, certain investments in asset-backed and receivable-backed securities
and restricted securities, unless the Fund's Trustees continuously determine,
based on the trading markets for the specific restricted security, that it is
liquid. The Trustees may adopt guidelines and delegate to the Investment Adviser
the daily function of determining and monitoring liquidity of restricted
securities. The Trustees, 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
Trustees will carefully monitor the Fund's investments in these securities,
focusing on such factors, among others, as valuation, liquidity and availability
of information. 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 restricted securities.
HEDGING TECHNIQUES
The Fund may engage in various portfolio strategies to hedge its portfolio
against interest rate and currency risks. These strategies include the use of
options on portfolio securities, currency options, financial and currency
futures, options on such futures and forward foreign currency transactions. The
Fund may enter into such transactions only in connection with its hedging
strategies. While the Fund's use of hedging strategies is intended to reduce the
volatility of the net asset value of its shares, the net asset values of the
Fund's shares 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. When the Fund engages in transactions denominated
in foreign currencies, it will be subject to the risks of adverse changes in the
exchange rates between such foreign currencies and the U.S. dollar, the currency
used to value the Fund's assets. Reference is made to the Statement of
Additional Information for further information concerning these strategies.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options, Futures and Currency
Transactions"), the Investment Adviser believes that, because the Fund will only
engage in these transactions for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated with the speculative use of options and futures
transactions. Tax requirements may limit the Fund's ability to engage in the
hedging transactions and strategies described below. See "Additional
Information -- Taxes."
14
<PAGE> 17
The following is a description of the hedging instruments that the Fund may
utilize with respect to interest rate and currency risks.
Hedging Interest Rate Risks. The Fund is authorized to purchase and write
(i.e., sell) call options on its portfolio securities, purchase put options on
securities and engage in transactions in financial futures and related options,
as described below.
The Fund may write call options with respect to securities it owns which
provide the holder of the option the right to buy the underlying security
covered by the option at the stated exercise price until the option expires. The
Fund writes only covered call options, which means that so long as the Fund is
obligated as the writer of a call option, it will own the underlying securities
subject to the option. The Fund may also purchase put options, which will
provide it with the right to sell the underlying securities at the stated
exercise price, thus limiting the Fund's risk of loss through a decline in the
market value of the securities until the put expires. The Fund may write call
options on securities with respect to which it has purchased a put option. By
purchasing a put option on a security, the Fund limits its risk of loss on that
security. By writing a call option on the security, the Fund will offset, in
whole or in part, the cost of purchasing such put option, but limits its
opportunity to profit from an increase in the value of the security above the
exercise price. There is no percentage limitation with respect to portfolio
securities on which the Fund may write call options.
The Fund may also purchase and sell financial futures contracts ("futures
contracts") as a hedge against adverse changes in interest rates, as described
below. A futures contract is an agreement between two parties that obligates the
purchaser of the futures contract to buy and the seller of a futures contract to
sell a particular commodity, in this case securities, for a set price on a
future date. The Fund may effect transactions in futures contracts in U.S. and
foreign agency and government securities and corporate debt securities.
Transactions by the Fund in financial futures are subject to limitations as
described below under "Restrictions on the Use of Futures Transactions."
The Fund is authorized to sell financial futures contracts in anticipation
of an increase in the general level of interest rates. Generally, as interest
rates rise, the market values of fixed-income 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 that are being
hedged. While the Fund will incur commission expenses in selling and closing out
futures positions, these commissions are generally less than the transaction
expenses that the Fund would have incurred had the Fund sold portfolio
securities in order to reduce its exposure to increases in interest rates. The
Fund also may purchase financial futures contracts in anticipation of a decline
in interest rates when it is not fully invested in 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 may purchase 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. The Fund
does not consider purchases of futures contracts to be a speculative practice
under these circumstances. In a substantial majority of these transactions, the
Fund will purchase securities upon termination of the futures contract.
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<PAGE> 18
The Fund may also 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 an increase in interest rates. Similarly, the Fund may
purchase call options, or write put options on futures contracts, as a
substitute for the purchase of such futures to hedge against the increased cost
resulting from a decline in interest rates of securities which the Fund intends
to purchase. Limitations on transactions in options on futures contracts are
described below.
The Fund may engage in options and futures transactions on exchanges and in
the over-the-counter markets. 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. Over-the-counter ("OTC") transactions are two-party
contracts with prices and terms negotiated by the buyer and seller. The Fund
will engage in OTC options only with member banks of the Federal Reserve System
and primary dealers in U.S. Government securities or with affiliates of such
banks or dealers which have capital of at least $50 million or whose obligations
are guaranteed by an entity having capital of at least $50 million.
To trade futures contracts, the Fund is not required to deposit funds equal
to the value of the futures contract. The Fund need only make a deposit, called
an "initial margin deposit," equal to a percentage (typically 15% or less) of
the value of the futures contract. As a result, a relatively small adverse move
in the price of a futures contract may result in immediate and substantial
losses to the Fund. For example, if at the time of purchase 10% of the price of
a futures contract is deposited as margin, a 10% decrease in the price of that
contract would, if the contract were then closed out, result in total loss of
the initial margin deposit before any deduction for brokerage commissions and
other transaction costs. A decrease of more than 10% would result in a loss of
more than the total initial margin deposit. Options on futures contracts are
similarly or even more highly leveraged. However, when the Fund purchases a
futures contract, or writes a put option or purchases a call option thereon, an
amount of cash and cash equivalents will be deposited in a segregated account
with the Fund's custodian so that the amount so segregated, plus the amount of
initial and variation margin held in the account of its broker, equals the
market value of the futures contract, thereby ensuring that the effect of
leverage from such futures contract is minimized.
The staff of 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 which are held by the Fund, the market value
of the underlying securities covered by OTC call options currently outstanding
which were sold by the Fund and margin deposits on the Fund's existing OTC
options on futures contracts exceeds 15% of the total assets of the Fund, taken
at market value, together with all other assets of the Fund which 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
security minus the option's strike price). The repurchase price with the primary
dealers is typically
16
<PAGE> 19
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 Trustees of the Fund without the approval of the Fund's
shareholders. However, the Fund will not change or modify this policy prior to
the change or modification by the Commission staff of its position.
Hedging Foreign Currency Risks. The Fund is authorized to deal in forward
foreign exchange between 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 between 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 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 purchase or sale of one forward foreign currency for another
currency with respect to portfolio security positions denominated or quoted in
such foreign currency to offset the effect of an anticipated substantial
appreciation or depreciation, respectively, in the value of such currency
relative to the U.S. dollar. In this situation, the Fund also may, for example,
enter into a forward contract to sell or purchase a different foreign currency
for a fixed U.S. dollar amount where it is believed that the U.S. dollar value
of the currency to be sold or bought pursuant to the forward contract will fall
or rise, as the case may be, whenever there is a decline or increase,
respectively, in the U.S. dollar value of the currency in which portfolio
securities of the Fund are denominated (this practice being referred to as a
"cross-hedge"). The Fund will not speculate in forward foreign exchange. 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.
In connection with its trading in forward foreign currency contracts, the
Fund will contract with a foreign or domestic bank or foreign or domestic
securities dealer, to make or take future delivery of a specified amount of a
particular currency. There are no limitations on daily price moves in such
forward contracts, and banks and dealers are not required to continue to make
markets in such contracts. There have been periods during which certain banks or
dealers have refused to quote prices for such forward contracts or have quoted
prices with an unusually wide spread between the price at which the bank or
dealer is prepared to buy and that at which it is prepared to sell. Governmental
imposition of credit controls might limit any such forward contract trading.
With respect to its trading of forward contracts, if any, the Fund will be
subject to the risk of bank or dealer failure and the inability of, or refusal
by, a bank or dealer to perform with respect to such contracts. Any such default
would deprive the Fund of any profit potential or force the Fund to cover its
commitments for resale, if any, at the then-market price and could result in a
loss to the Fund.
The Fund is also authorized to purchase or sell listed or OTC 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 (including securities denominated in the
ECU) owned by the Fund, sold by the Fund
17
<PAGE> 20
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 U.S. dollars of an investment in a Japanese 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 dollar relative to the yen 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 yen for dollars at a specified price
by a future date (a technique called a "spread"). By selling such a 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.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or to sell a currency at a fixed price on a future date. Listed options are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) which are issued by a
clearing corporation, traded on an exchange and have standardized strike prices
and expiration dates. OTC options are two-party contracts and have negotiated
strike prices and expiration dates. The Fund will engage in OTC options only
with member banks of the Federal Reserve System or primary dealers in U.S.
Government securities or with affiliates of such banks or dealers which 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 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). 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 or 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 the securities denominated in such currency which it owns, the
expected acquisition price of securities which it has committed or anticipates
to purchase which are denominated in such currency and, in the case of
securities which have been sold by the Fund but not yet delivered, the proceeds
thereof in its denominated currency. Further, the Fund will segregate at its
custodian U.S. Government or other high quality securities having a market value
substantially representing any subsequent net decrease in the market value of
such hedged positions, including net positions with respect to cross-currency
hedges. The Fund may not incur potential net liabilities with respect to
currency and securities positions, including net liabilities with respect to
cross-currency hedges, of more than 33 1/3% of its total assets from foreign
currency options, futures, related options and forward currency transactions.
Restrictions on the Use of Futures Transactions. Regulations of the
Commodity Futures Trading Commission ("CFTC") applicable to the Fund provide
that the futures trading activities described herein will not result in the Fund
being deemed a "commodity pool," as defined under such regulations, if the Fund
adheres to certain restrictions. In particular, the Fund may purchase and sell
futures contracts and options thereon (i) for bona fide hedging purposes and
(ii) for non-hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed 5%
of the liquidation value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any such contracts and options.
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<PAGE> 21
An order has been obtained from the Commission which exempts the Fund from
certain provisions of the Investment Company Act of 1940, as amended (the
"Investment Company Act"), in connection with transactions involving futures
contracts and options thereon.
Risk Factors in Options, Futures and Currency 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 and currencies which are the subject of
the hedge. If the price of the options or futures moves more or less than the
price of the hedged securities or currencies, the Fund will experience a gain or
loss that will not be completely offset by movements in the price of the
securities or currencies which are the subject of the hedge. The successful use
of options and futures also depends on the Investment Adviser's ability to
predict correctly price movements in the market involved in a particular options
or futures transaction. To compensate for imperfect correlations, the Fund may
purchase or sell futures contracts in a greater dollar amount than the hedged
securities or currencies if the volatility of the hedged securities or
currencies is historically greater than the volatility of the options or futures
contracts. Conversely, the Fund may purchase or sell fewer futures contracts if
the volatility of the price of the hedged securities or currencies is
historically less than that of the options or futures contracts. The risk of
imperfect correlation generally tends to diminish as the maturity date of the
futures contract approaches.
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions,
management believes the Fund can receive on each business day at least two
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 transaction. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
hedge effectively its portfolio. There is also the risk of loss by the Fund of
margin deposits or collateral in the event of bankruptcy of a broker with whom
the Fund has an open position in an option, a futures contract or related
option.
The exchanges on which options on portfolio securities and currency are
traded have generally established limitations governing the maximum number of
call or put options on the same underlying security and 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. The Investment
Adviser 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. The securities in which the Fund invests are
traded primarily in the OTC market. Since portfolio transactions generally will
not be effected on foreign securities exchanges, the Fund generally does not
expect to incur potential settlement delays which may occur on certain of such
exchanges. Where possible, the Fund will deal directly with the dealers who make
a market in the securities involved except in those circumstances where better
prices and execution are available elsewhere. Such dealers usually are acting as
principal for their own account. On occasion, securities may be purchased
directly from the issuer. Such portfolio securities are generally traded on a
net basis and do not normally involve either
19
<PAGE> 22
brokerage commissions or transfer taxes. Securities firms may receive brokerage
commissions on certain portfolio transactions, including options, futures and
options on futures transactions and the purchase and sale of underlying
securities upon exercise of options. The Fund has no obligation to deal with any
broker in the execution of transactions in portfolio securities. Under the
Investment Company Act, persons affiliated with the Fund, 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 may serve as its
broker in transactions conducted on an exchange and in OTC transactions
conducted on an agency basis. In addition, consistent with the Conduct Rules of
the NASD, the Fund 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 costs associated with transactions in U.S. securities,
although the Fund will endeavor to achieve the best net results in effecting
such transactions.
Repurchase Agreements; Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
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 Investment
Adviser, substantial capital relative to the Fund's exposure, or (ii) have
provided the Fund with a third-party guaranty or other credit enhancement. A
purchase and sale contract is similar to a repurchase agreement, but purchase
and sale contracts, unlike repurchase agreements, allocate interest on the
underlying security to the purchaser during the term of the agreement. In all
instances, the Fund takes possession of the underlying securities when investing
in repurchase agreements or purchase and sale contracts. Nevertheless, if the
seller were to default on its obligation to repurchase a security under a
repurchase agreement or purchase and sale contract 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
total assets in repurchase agreements or purchase and sale contracts maturing in
more than seven days, together with all other illiquid securities.
Lending of Portfolio Securities. The Fund is authorized to lend
securities from its portfolio, with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions if it receives
collateral in cash or securities issued or guaranteed by the U.S. Government
which will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. During the period of such a loan,
the Fund receives the income on the loaned securities and a loan fee 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 fell below the
market value of the borrowed securities.
Investment Restrictions. The Fund's investment activities are subject to
further restrictions that are described in the Statement of Additional
Information. Investment restrictions and policies that are fundamen-
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<PAGE> 23
tal 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 (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (ii) 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
corporate issuers in any particular industry. In addition, the Fund has adopted
non-fundamental restrictions which may be changed by the Board of Trustees
without shareholder approval. As a non-fundamental policy, the Fund may not
borrow amounts in excess of 10% of its total assets (taken at market value) and
then only from banks as a temporary measure for extraordinary or emergency
purposes or to meet redemptions.
As a non-fundamental policy, the Fund will not invest in securities that
cannot be readily resold because of legal or contractual restrictions or that
cannot otherwise be marketed, redeemed or put to the issuer or a third party,
including repurchase agreements and purchase and sale contracts maturing in more
than seven days, if, regarding all such securities, more than 15% of its total
assets taken at market value would be invested in such securities.
Notwithstanding the foregoing, the Fund may purchase without regard to this
limitation securities that are not registered under the Securities Act, but that
can be offered and sold to "qualified institutional buyers" under Rule 144A
under the Securities Act, provided that the Fund's Board of Trustees
continuously determines, based on the trading markets for the specific Rule 144A
security, that it is liquid. The Board of Trustees may adopt guidelines and
delegate to the Investment Adviser 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 offshore 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 the
securities of a single issuer. The Fund's investments will be limited, however,
in order to qualify for the special tax treatment afforded regulated investment
companies ("RICs") under the Internal Revenue Code of 1986, as amended (the
"Code"). See "Additional Information -- 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, and the Fund will not own more than 10% of the
outstanding voting securities of a single issuer. Foreign government securities
(unlike U.S. Government securities) are not exempt from the diversification
requirements of the Code and are considered obligations 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.
Portfolio Turnover. The Investment Adviser will effect portfolio
transactions without regard to holding period, if, in its judgment, such
transactions are advisable in light of a change in circumstance 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.
As a result of the investment policies of the Fund, the Fund's portfolio
turnover may be higher than that of other investment companies, however, it is
extremely difficult to
21
<PAGE> 24
predict portfolio turnover rates with any degree of accuracy. 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 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
purposes of determining this rate, all securities whose maturities at the time
of acquisition are one year or less are excluded.) The portfolio turnover rates
for the fiscal years ended December 31, 1995 and 1996 were 512.75% and 1234.05%,
respectively. The increase in the portfolio turnover rate in 1996 was due to a
greater utilization of hedging strategies than in prior years. 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 federal income tax 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
"Additional Information -- Taxes."
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
The Board of Trustees of the Fund consists of six individuals, five of whom
are not "interested persons" of the Fund as defined in the Investment Company
Act. The Board of Trustees of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company Act.
The Trustees of the Fund are:
ARTHUR ZEIKEL* -- President of the Investment Adviser and its affiliate,
FAM; President and Director of Princeton Services, Inc.; Executive Vice
President of ML & Co.; and Director of the Distributor.
DONALD CECIL -- Special Limited Partner of Cumberland Partners (an
investment partnership).
EDWARD H. MEYER -- Chairman of the Board, President and Chief Executive
Officer of Grey Advertising Inc.
CHARLES C. REILLY -- Self-employed financial consultant; former President
and Chief Investment Officer of Verus Capital, Inc.; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc.
RICHARD R. WEST -- Dean Emeritus, New York University Leonard N. Stern
School of Business Administration.
EDWARD D. ZINBARG -- Former Executive Vice President of The Prudential
Insurance Company of America.
- ---------------
* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Investment Adviser acts as the Fund's investment adviser. The
Investment Adviser is owned and controlled by ML & Co., a financial services
holding company and the parent of Merrill Lynch. The Investment Adviser provides
the Fund with management and investment advisory services. The Investment
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<PAGE> 25
Adviser or its affiliate, FAM, acts as the investment adviser for more than 130
registered investment companies and provides investment advisory services to
individuals and institutions. As of March 31, 1997, the Investment Adviser and
FAM had a total of approximately $247.2 billion in investment company and other
portfolio assets under management, including accounts of certain affiliates of
the Investment Adviser.
The Fund has entered into an investment advisory agreement with the
Investment Adviser (the "Investment Advisory Agreement") provides that, subject
to the direction of the Board of Trustees of the Fund, the Investment Adviser 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 Investment Adviser, subject to review by the Board of Trustees.
The Investment Adviser 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 transactions
accordingly. The Investment Adviser 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 Investment Advisory Agreement.
The Investment Adviser 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 year ended December 31, 1996, the Investment Adviser earned
a fee of $3,323,159 (based upon average net assets of approximately $553.9
million).
Also, the Investment Adviser 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 Investment Adviser, pursuant to which the Investment Adviser pays MLAM
U.K. a fee for providing investment advisory services to the Investment Adviser
with respect to the Fund in an amount to be determined from time to time by the
Investment Adviser and MLAM U.K. but in no event in excess of the amount the
Investment Adviser actually receives for providing services to the Fund pursuant
to the Investment Advisory Agreement. MLAM U.K. has offices at Milton Gate, 1
Moor Lane, London EC2Y 9HA, England.
The Investment Advisory Agreement obligates the Fund to pay certain
expenses incurred in its operations including, among other things, the
investment advisory fee; legal and audit fees; registration fees; unaffiliated
Trustees' fees and expenses; custodian and transfer agency 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. Accounting services are provided to the Fund by the Investment
Adviser, and the Fund reimburses the Investment Adviser for its costs in
connection with such services on a semi-annual basis. For the fiscal year ended
December 31, 1996, the amount of such reimbursement was $140,282. For the fiscal
year ended December 31, 1996, the ratio of total expenses to average net assets
for Class A, Class B, Class C and Class D shares was .87%, 1.65%, 1.73% and
1.08%, respectively.
Sean J. Casey has served as the Portfolio Manager for the Fund since 1995
and is primarily responsible for the day-to-day management of the Fund's
investment portfolio. Mr. Casey has been a Vice President and Senior Portfolio
Manager of the Investment Adviser since 1995.
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<PAGE> 26
CODE OF ETHICS
The Board of Trustees of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act that incorporates the Code of Ethics of the
Investment Adviser (together, the "Codes"). The Codes significantly restrict the
personal investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all employees of the Investment Adviser 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
Investment Adviser 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 Investment Adviser. 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 Transfer Agent receives 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 for out-of-pocket expenses
incurred by the Transfer Agent under the Transfer Agency Agreement. The term
"account" includes a shareholder account maintained directly by the Transfer
Agent and any other account representing a beneficial interest of a person in
the relevant share class or a record-keeping system, provided the record-keeping
system is maintained by a subsidiary of ML & Co. For the fiscal year ended
December 31, 1996, the Fund paid $973,584 to the Transfer Agent pursuant to the
Transfer Agency Agreement.
PURCHASE OF SHARES
The Distributor, an affiliate of both the Investment Adviser 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.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon the
class of shares selected by the investor under the Merrill Lynch Select
Pricing(SM) System, as described below. As to purchase orders received by
securities dealers prior to the close of business on the
24
<PAGE> 27
New York Stock Exchange (the "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 orders 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, but as of May 1, 1997, $5.35) to confirm a sale
of shares to such customers. Purchases made directly through the Transfer Agent
are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. Shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a 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
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
CDSCs, distribution and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, are imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges do not affect the net asset
value of any other class or have any impact on investors choosing another sales
charge option. Dividends paid by the Fund for each class of shares are
calculated in the same manner at the same time and 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 shares may vote on 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
25
<PAGE> 28
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, which are
eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- --------------------------------------------------------------------------------------------------------
A Maximum 4.00% initial No No No
sales charge(2)(3)
- --------------------------------------------------------------------------------------------------------
B CDSC for a period of four 0.25% 0.50% B shares convert to
years, at a rate of 4.0% D shares automatically
during after approximately
the first year, decreasing ten years(5)
1.0%
annually to 0.0%(4)
- --------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.55% No
- --------------------------------------------------------------------------------------------------------
D Maximum 4.00% 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 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 certain
retirement plans was modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have an
eight-year conversion period. If Class B shares of the Fund are exchanged
for Class B shares of another MLAM-advised mutual fund, the conversion
period applicable to the Class B shares acquired in the exchange will apply,
and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(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.
26
<PAGE> 29
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES LOAD AS SALES LOAD AS DISCOUNT TO
PERCENTAGE PERCENTAGE* OF SELECTED DEALERS
OF OFFERING THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED THE OFFERING PRICE
- --------------------------------------------------- -------------- -------------- ------------------
<S> <C> <C> <C>
Less than $25,000.................................. 4.00% 4.17% 3.75%
$25,000 but less than $50,000...................... 3.75 3.90 3.50
$50,000 but less than $100,000..................... 3.25 3.36 3.00
$100,000 but less than $250,000.................... 2.50 2.56 2.25
$250,000 but less than $1,000,000.................. 1.50 1.52 1.25
$1,000,000 and over**.............................. 0.00 0.00 0.00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994, and on Class A
purchases by certain retirement plan investors 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. 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. The
proceeds from the account maintenance fees are used to compensate Merrill Lynch
for providing continuing account maintenance activities.
For the fiscal year ended December 31, 1996, the Fund sold 2,910,360 Class
A shares for aggregate net proceeds of $27,329,155. The gross sales charges for
the sale of Class A shares for that year were $6,333, of which $656 and $5,677
were received by the Distributor and Merrill Lynch, respectively. For that year,
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 December 31, 1996, the Fund sold 1,000,673
Class D shares for aggregate net proceeds of $9,338,179. The gross sales charges
for the sale of Class D shares for that year were $33,228, of which $2,761 and
$30,467 were received by the Distributor and Merrill Lynch, respectively. For
that year, the Distributor received CDSCs of approximately $786 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. Investors who 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 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 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
27
<PAGE> 30
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. 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 initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under "Eligible Class A Investors." 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. 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., 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 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.
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 ten years after Class B shares are
issued, such Class B shares, together with shares issued upon dividend
28
<PAGE> 31
reinvestment with respect to those shares, are automatically converted into
Class D shares of the Fund and thereafter will be subject to lower continuing
fees. See "Conversion of Class B Shares to Class D Shares" below. Both Class B
and Class C shares are subject to an account maintenance fee of 0.25% of net
assets and Class B and Class C shares are subject to distribution fees of 0.50%
and 0.55%, respectively, of net assets, as discussed under "Distribution Plans."
The proceeds from the account maintenance fees are used to compensate Merrill
Lynch for providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares, from its own funds. The combination of the CDSC and
the ongoing distribution fee facilitates the ability of the Fund to sell the
Class B and Class C shares without a sales charge being deducted at the time of
purchase. Approximately ten years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately eight years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges" below. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder
Services -- Exchange Privilege" will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges -- Class B Shares. Class B shares 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 CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS
B
CDSC
AS A
PERCENTAGE
OF
DOLLAR
AMOUNT
YEAR SINCE SUBJECT
PURCHASE TO
PAYMENT MADE CHARGE
-------------------------------------------------------- -----
<S> <C>
0-1..................................................... 4.00%
1-2..................................................... 3.00
2-3..................................................... 2.00
3-4..................................................... 1.00
4 and thereafter........................................ 0.00
</TABLE>
29
<PAGE> 32
For the fiscal year ended December 31, 1996, the Distributor received CDSCs of
$877,464, with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The charge will not be applied to dollar amounts representing
an increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment. With respect to
the remaining 40 shares, the CDSC is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase for shares purchased on or
after October 21, 1994).
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 the 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 also is waived for any Class B shares that are
purchased by eligible 401(k) or eligible 401(a) 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. Effective on or about May 12, 1997, the Class
B CDSC also will be waived for any Class B shares purchased within eligible
Employee Access(SM) Accounts. 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 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. The Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs." For the fiscal year ended December 31, 1996,
the Distributor received CDSCs of $5,199, with respect to redemptions of Class C
shares, all of which were paid to Merrill Lynch.
30
<PAGE> 33
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately ten
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% 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 that 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 which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value.
31
<PAGE> 34
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 rates of 0.50%,
with respect to Class B shares, and 0.55%, with respect to Class C shares, 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 December 31, 1996, the Fund paid the Distributor
$3,344,107 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Class B Distribution Plan of approximately $445.9
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 December 31, 1996, the Fund paid the
Distributor $78,131 pursuant to the Class C Distribution Plan (based on average
net assets subject to such Class C Distribution Plan of approximately $9.8
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 December 31, 1996, the Fund paid the
Distributor $44,099 pursuant to the Class D Distribution Plan (based on average
net assets subject to such Class D Distribution Plan of approximately $17.6
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 upon 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
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respect to the distribution-related revenues and expenses is presented to the
Trustees 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, 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, 1996, with respect to Class B shares, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch for the
period since August 29, 1986 (commencement of operations), exceeded fully
allocated accrual revenues by approximately $1,958,000 (.56% of Class B net
assets at that date). As of December 31, 1996, with respect to Class B shares,
direct cash revenues for the period since the commencement of operations
exceeded direct cash expenses by $28,118,222 (8.09% of Class B net assets at
that date). As of December 31, 1996, with respect to Class C shares, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch for the
period since October 21, 1994 (commencement of operations) exceeded the fully
allocated revenues by $116,000 (1.24% of Class C net assets at that date). As of
December 31, 1996, with respect to Class C shares, direct cash revenues for the
period since October 21, 1994 (commencement of operations) exceeded direct cash
expenses by $78,921 (.84% of Class C net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Trustees of the 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 Trustees will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not be
used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those Class
B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to
Class D Shares."
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the 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% (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
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<PAGE> 36
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
fees. In certain circumstances the amount payable pursuant to the voluntary
maximum may exceed the amount payable under the NASD formula. In such
circumstances payment in excess of the amount payable under the NASD formula
will not be made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all full and fractional shares of
the Fund upon receipt of a written request in proper form. The redemption price
is the net asset value per share next determined after the initial receipt of
proper notice of redemption. Except for any CDSC which may be applicable, there
will be no charge for redemption if the redemption request is sent directly to
the Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value of
shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Transfer Agent, Merrill Lynch Financial Data Services, Inc.,
P.O. Box 45289, Jacksonville, Florida 32232-5289. 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 delivered other than by mail should be delivered to Merrill
Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Redemption requests should not be sent to the Fund. A
redemption request requires the signatures of all persons in whose names the
shares are registered, signed exactly as their names appear on the Transfer
Agent's register or on the certificate, as the case may be. The signature(s) on
the redemption request must be guaranteed by an "eligible guarantor institution"
(including, for example, Merrill Lynch branch offices and certain other
financial institutions) as such is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended, the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications.
Notarized signatures are not sufficient. In certain instances, the Transfer
Agent may require additional documents such as, but not limited to, trust
instruments, death certificates, appointments as executor or administrator, or
certificates of corporate authority. For shareholders redeeming directly with
the Transfer Agent, payments will be mailed within seven days of receipt of a
proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that good
payment (e.g., cash or certified check drawn on a U.S. bank) has been collected
for the purchase of such shares. In addition, the Fund reserves the right not to
honor redemption requests where the shares to be redeemed have been purchased by
check within 10 days prior to the date the
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<PAGE> 37
redemption request is received unless the Fund or its Transfer Agent has been
advised, and has confirmed, that the check used for investment has been cleared
for payment by the shareholder's bank.
REPURCHASE
The Fund will also repurchase shares through a shareholder's listed
securities dealer. The Fund will normally accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the close of business on the NYSE
(generally, 4:00 p.m., New York time), on the day received and that such request
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.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC); however, securities dealers 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, but as of May 1, 1997, $5.35) to
confirm a repurchase of shares. Repurchases made directly through the Transfer
Agent are not subject to the processing fee. The Fund reserves the right to
reject any order for repurchase, which right of rejection might adversely affect
shareholders seeking redemption through the repurchase procedure. However, a
shareholder whose order for repurchase is rejected by the Fund may redeem shares
as set forth above.
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 for redemption
was accepted by the Transfer Agent or the Distributor. The reinstatement will be
made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Fund. Certain of such services are not available to investors who place purchase
orders for the Fund's shares through the Merrill Lynch BlueprintSM Program. Full
details as to each of such services, copies of the various plans described below
and instructions as to how to participate in the various plans and services, or
to change options with respect thereto, can be obtained from the Fund by
35
<PAGE> 38
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.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gain distributions. 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 gain distributions. A shareholder may
make additions to his or her Investment Account at any time by mailing a check
directly to the Transfer Agent. Shareholders also may maintain their accounts
through Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch
brokerage account, an Investment Account in the transferring shareholder's name
will be opened automatically, without charge, at the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
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 who are 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 the issuance of 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
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
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.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated in accordance
with the rules of the Commission.
Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his or her account in which the exchange is made at the time of the exchange or
is otherwise eligible to purchase Class A shares of the second fund. If the
Class A shareholder wants to exchange
36
<PAGE> 39
Class A shares for shares of a second MLAM-advised mutual fund, and the
shareholder does not hold Class A shares of the second fund in his or her
account at the time of the exchange and is not otherwise eligible to acquire
Class A shares of the second fund, the shareholder will receive Class D shares
of the second fund as a result of the exchange. Class D shares also may be
exchanged for Class A shares of a second MLAM-advised mutual fund at any time as
long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period 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 automatically reinvested
in full and fractional shares of the Fund, without sales charge, at the net
asset value per share next determined after the close of business on the NYSE on
the payable 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,
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<PAGE> 40
paid in cash rather than reinvested, in which event payment will be mailed on or
about the payment date. Cash payments can also be directly deposited to the
shareholder's bank account. No CDSC will be imposed upon redemption of shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his or her Investment Account 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. A Class A or Class D shareholder whose shares are
held within a CMA(R), CBA(R) or Retirement Account may elect to have shares
redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through
the CMA(R) or CBA(R) Systematic Redemption Program, subject to certain
conditions.
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 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.
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 which 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 or (800) 637-3863.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return
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<PAGE> 41
is computed separately for Class A, Class B, Class C and Class D shares in
accordance with a formula 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 fees 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, 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 longer periods 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 charges in the case of Class A and
Class D shares, 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 performance data
published by Lipper Analytical Services, Inc., Morningstar Publications, Inc.,
Money Magazine, U.S. News & World Report, Business Week, CDA Investment
Technology, Inc., Forbes Magazine, Fortune Magazine or other industry
publications. In addition, from time to time the Fund may include its
risk-adjusted performance ratings assigned by Morningstar Publications, Inc. in
advertising or supplemental sales literature. As with other performance data,
performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.
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<PAGE> 42
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
The net investment income of the Fund is declared as dividends daily prior
to the determination of the net asset value which is calculated 15 minutes after
the close of business on the NYSE (generally, 4:00 p.m., New York time) on that
day. The net investment income of the Fund for dividend purposes consists of
interest earned on portfolio securities, less expenses, in each case computed
since the most recent determination of the net asset value. Expenses of the
Fund, including the advisory fee and any account maintenance and/or distribution
fees, are accrued daily. Dividends of net investment income are declared daily
and reinvested monthly in the form of additional full and fractional shares of
the Fund at net asset value unless the shareholder elects to receive such
dividends in cash. Shares will accrue dividends as long as they are issued and
outstanding. 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
his or her Fund shares for Federal income tax purposes and resulting in a
capital gain for any shareholder who received such a distribution greater than
the shareholder's tax basis in Fund shares (assuming the shares were held as a
capital asset). For a detailed discussion of the Federal tax considerations
relevant to foreign currency transactions, see "Additional
Information -- Taxes." If in any fiscal year the Fund has net income from
certain foreign currency transactions, such income will be distributed annually.
Shares are issued and outstanding as of the settlement date of a purchase order
to the settlement date of a redemption order.
All net realized long- or short-term capital gains, if any, are declared
and distributed to the Fund's shareholders at least annually. Capital gains
distributions will be automatically reinvested in shares unless the shareholder
elects, at any time, in writing or by telephone (1-800-MER-FUND) to the Transfer
Agent, to receive such distributions in cash.
For information as to how to elect either dividend reinvestment or cash
payments, see "Shareholder Services -- Automatic Reinvestment of Dividends and
Capital Gains Distributions." Dividends and distributions are taxable to
shareholders as described below whether they are reinvested in shares of the
Fund or received in cash.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes is determined once daily
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 Fund
will also 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 materially
affected, but only if on any such day the Fund is required to sell or redeem
shares. 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
40
<PAGE> 43
banks or dealers on the day of valuation. The net asset value per share is
computed by dividing the sum of the market value of the securities held by the
Fund plus any cash or other assets (including interest accrued but not yet
received) minus all liabilities (including accrued expenses) by the total number
of shares outstanding at such time to the nearest cent. Expenses, including the
fees payable to the Investment Adviser 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 will generally be higher
than the per share net asset value of shares of the other classes, reflecting
the daily expense accruals of the account maintenance and transfer agency fees
applicable with respect to the Class B, Class C and Class D shares; in addition,
the per share net asset value of the Class D shares generally will be higher
than the per share net asset value of the Class B and Class C shares, reflecting
the daily expense accruals of the distribution fees applicable with respect to
Class B and Class C shares. Since the distribution fees borne by the Class C
shares are higher than the distribution fees borne by the Class B shares, the
per share net asset value of the Class B shares generally will be higher than
the per share net asset value of the Class C shares. It is expected, however,
that the per share net asset value of the classes will tend to converge
(although not necessarily meet) immediately after the payment of dividends or
distributions, which will differ by approximately the amount of the expense
accrual 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 Board of Trustees 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
which are traded both in the OTC market and on a stock exchange will be 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 futures contracts and related
options, will be stated at market value. 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. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Trustees. Such valuations and procedures
will be reviewed periodically by the Trustees.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded 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.
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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 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. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
which was declared in the previous October, November or December to shareholders
of record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
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 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
42
<PAGE> 45
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 such shareholder's 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 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
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 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.
43
<PAGE> 46
ORGANIZATION OF THE FUND
The Fund was organized on May 30, 1986, under the laws of the Commonwealth
of Massachusetts as "Merrill Lynch Retirement Global Bond Fund" and is a
business entity commonly known as a "Massachusetts business trust." Following
the commencement of operations, the Trustees of the Fund approved a change in
the Fund's fiscal year end from July 31 to December 31. On April 25, 1991, the
Fund changed its name to "Merrill Lynch Global Bond Fund for Investment and
Retirement." The Fund is authorized to issue an unlimited number of shares of
beneficial interest of $.10 par value of different classes. At the date of this
Prospectus, the shares of the Fund are divided into four classes designated
Class A, Class B, Class C and Class D shares. Class A, Class B, Class C and
Class D shares represent interests in the assets of the Fund and have identical
voting, dividend, liquidation and other rights and the same terms and conditions
except that expenses related to the account maintenance and/or distribution of a
class of shares are borne solely by such class. Each class has exclusive voting
rights with respect to matters relating to account maintenance and/or
distribution expenditures, as applicable. See "Purchase of Shares." The Trustees
of the Fund may classify and reclassify the shares of the Fund into additional
classes at a future date. Shares issued are fully paid, non-assessable and have
no preemptive rights. Shares have the conversion rights described in this
Prospectus.
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Trustees (to the
extent hereafter provided) and on other matters submitted to the vote of
shareholders. There will normally be no meetings of shareholders for the purpose
of electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees. Shareholders may, in accordance with the Declaration of Trust, as
amended, cause a meeting of shareholders to be held for the purpose of voting on
the removal of Trustees. Except as set forth above, the Trustees shall continue
to hold office and appoint successor trustees.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch 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
1-800-637-3863.
44
<PAGE> 47
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.
------------------
The Declaration of Trust establishing the Fund, dated as of May 28, 1986, a
copy of which, together with all amendments thereto, is on file in the office of
the Secretary of the Commonwealth of Massachusetts, provides that the name
"Merrill Lynch Global Bond Fund for Investment and Retirement" refers to the
Trustees under the Declaration of Trust collectively as Trustees, but not as
individuals or personally; and no Trustee, shareholder, officer, employee or
agent of the Fund shall be held to any personal liability, nor shall resort be
had to their private property for the satisfaction of any obligation or claim of
said Fund but the "Trust Property" only shall be liable.
45
<PAGE> 48
[This page is intentionally left blank.]
46
<PAGE> 49
MERRILL LYNCH GLOBAL BOND FUND FOR INVESTMENT AND
RETIREMENT -- 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 Global Bond Fund for Investment and Retirement 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)
<TABLE>
<S> <C>
Occupation ..................... Name and Address of Employer...................
...............................................
...............................................
................................ ...............................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owners, 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 Bond Fund for Investment and Retirement
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> 50
MERRILL LYNCH GLOBAL BOND FUND FOR INVESTMENT AND
RETIREMENT -- AUTHORIZATION FORM (PART 1) -- (CONTINUED)
- - - - - - - - - - - - - - - - - - - - - - - - - - - -
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Additional Information--Taxes") either because I have not been notified that I
am subject thereto as a result of a failure to report all interest or dividends,
or the Internal Revenue Service ("IRS") has notified me that I am no longer
subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO 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)
<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 Bond Fund for Investment and Retirement 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 Bond Fund for
Investment and Retirement 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 Bond Fund for Investment and Retirement 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 Global Bond Fund for Investment and Retirement
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> 51
MERRILL LYNCH GLOBAL BOND FUND FOR INVESTMENT AND
RETIREMENT -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C>
------------------------------------
Name of Owner.......................................................................
First Name Initial Last Name ------------------------------------
Social Security Number
or Taxpayer Identification No.
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
.................................................................................... Account Number...........................
(Zip Code) (if existing account)
</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 Bond
Fund for Investment and Retirement, 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 ________________ or as soon as
possible thereafter. (month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): [ ]
$________ or [ ] ____% of the current value of [ ] Class A or [ ] Class D shares
in the account.
SPECIFY WITHDRAWAL METHOD: [ ] check or [ ] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
[ ] as indicated in Item 1.
[ ] to the order of..........................................................
Mail to (check one)
[ ] the address indicated in Item 1.
[ ] Name (please print)......................................................
Address.........................................................................
...........................................................................
Signature of Owner
..............................................................................
Date............................................................................
Signature of Co-Owner (if any)..................................................
(b) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of account (check one): [ ] checking [ ] savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number .............................................................
Account Number..................................................................
Bank Address....................................................................
......................................................................
Signature of Depositor
..............................................................................
Date............................................................................
Signature of Depositor..........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
49
<PAGE> 52
MERRILL LYNCH GLOBAL BOND FUND FOR INVESTMENT AND
RETIREMENT -- 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 Bond Fund for Investment and Retirement, 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 Bond Fund for Investment and Retirement, as
indicated below:
Amount of each check or ACH debit $..........................................
Account No...................................................................
Please date and invest ACH debits on the 20th of each month
beginning ________________ or as soon as possible thereafter.
(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 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.
50
<PAGE> 53
INVESTMENT ADVISER
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 08543-9081
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
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 351
225 Franklin Street
Boston, Massachusetts 02101
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> 54
- ------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table...................................... 2
Merrill Lynch Select PricingSM System.......... 3
Financial Highlights........................... 8
Risk Factors and Special Considerations........ 11
Investment Objective and Policies.............. 12
Hedging Techniques........................... 14
Other Investment Policies and Practices...... 19
Management of the Fund......................... 22
Board of Trustees............................ 22
Management and Advisory Arrangements......... 22
Code of Ethics............................... 24
Transfer Agency Services..................... 24
Purchase of Shares............................. 24
Initial Sales Charge Alternatives --
Class A and Class D Shares................. 26
Deferred Sales Charge Alternatives --
Class B and Class C Shares................. 28
Distribution Plans........................... 32
Limitations on the Payment of Deferred
Sales Charges.............................. 33
Redemption of Shares........................... 34
Redemption................................... 34
Repurchase................................... 35
Reinstatement Privilege -- Class A and
Class D Shares............................. 35
Shareholder Services........................... 35
Investment Account........................... 36
Exchange Privilege........................... 36
Automatic Reinvestment of Dividends and
Capital Gains Distributions................ 37
Systematic Withdrawal Plans.................. 38
Automatic Investment Plans................... 38
Fee-Based Programs........................... 38
Performance Data............................... 38
Additional Information......................... 40
Dividends and Distributions.................. 40
Determination of Net Asset Value............. 40
Taxes........................................ 41
Organization of the Fund..................... 44
Shareholder Reports.......................... 44
Shareholder Inquiries........................ 45
Authorization Form............................. 47
Code # 10417-0497
</TABLE>
[MERRILL LYNCH LOGO]
MERRILL LYNCH
GLOBAL BOND FUND
FOR INVESTMENT AND
RETIREMENT
PROSPECTUS [MLYNCH COMPASS]
April 28, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 55
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH GLOBAL BOND FUND
FOR INVESTMENT AND RETIREMENT
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE (609) 282-2800
-------------------------
The investment objective of Merrill Lynch Global Bond Fund for Investment
and Retirement (the "Fund") is to seek a high total investment return by
investing in a global portfolio of debt instruments denominated in various
currencies and multinational currency units. Total investment return is the
aggregate of capital value changes and income. Accordingly, investments may be
shifted among obligations denominated in particular currencies or currency units
depending upon management's expectation of the potential for capital
appreciation in U.S. dollars or relatively high rates of income. The Fund
generally will invest without regard to tax considerations applicable to
distributions to shareholders and therefore may particularly appeal to investors
for whom current tax liability is not a major consideration, such as employee
benefit plans and individual retirement accounts ("IRAs"). The Fund presently
contemplates that it will invest primarily in obligations denominated in the
currencies of the U.S., Japan, Canada, Western European nations, New Zealand and
Australia as well as in European Currency Units ("ECUs"). The Fund may seek to
hedge against interest rate and currency risks through the use of options,
futures and foreign currency transactions.
-------------------------
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 Select Pricing System(SM) 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 April
28, 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 -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
-------------------------
The date of this Statement of Additional Information is April 28, 1997.
<PAGE> 56
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek a high total investment
return by investing in a global portfolio of debt instruments denominated in
various currencies and multinational currency units. Reference is made to
"Investment Objective and Policies" in the Prospectus for a discussion of the
investment objective and policies of the Fund.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P. ("MLAM" or the
"Investment Adviser") 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 due to general market, economic or financial conditions.
The U.S. Government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors such as
the Fund. If such restrictions should be reinstituted, it might become necessary
for the Fund to invest all or substantially all of its assets in U.S.
securities. In such event, the Fund would review its investment objective and
investment policies to determine whether changes are appropriate. Any changes in
the investment objective or fundamental policies set forth under "Investment
Restrictions" below would require the approval of the holders of a majority of
the Fund's outstanding voting securities.
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 on each day the Fund determines its net asset value in U.S. dollars. 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 Fund does
not believe that these considerations will have any significant effect on its
portfolio strategy, although there can be no assurance in this regard.
HEDGING TECHNIQUES
Reference is made to the discussion concerning hedging techniques under the
caption "Hedging Techniques" in the Prospectus.
The Fund may engage in various portfolio strategies to hedge its portfolio
against interest rate and currency risks. These strategies include the use of
options on its portfolio securities, financial and currency futures and options
on such futures and forward foreign currency transactions. While the Fund's use
of hedging strategies is intended to reduce the volatility of the net asset
value of its shares, the net asset value of the Fund's shares will fluctuate.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options and Futures Transactions"), the
Investment Adviser believes that, because the Fund will only engage in these
transactions 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.
The following information relates to the hedging instruments the Fund may
utilize with respect to interest rate and currency risks.
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<PAGE> 57
The Fund is authorized to write (i.e., sell) covered call options on its
portfolio securities, purchase put options on securities and engage in
transactions in financial futures as described below.
Writing Covered Options. The Fund may write call options with respect to
securities which it owns which provide the holder of the option the right to buy
the underlying security covered by the option from the Fund at the stated
exercise price. The Fund writes only covered options, which means that so long
as the Fund is obligated as the writer of a call option, it will own the
underlying securities subject to the options.
The Fund will receive a premium from writing a call option, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. The amount of the premium will
reflect, among other factors, the current market price of the underlying
security, the relationship of the exercise price to the market price, the time
period until the expiration of the option and interest rates. By writing a call,
the Fund limits its opportunity to profit from an increase in the market value
of the underlying security above the exercise price of the option for as long as
the Fund's obligation as a writer continues. Thus, in some periods the Fund will
receive less total return and in other periods greater total return from its
hedged positions than it would have received from its underlying securities
unhedged. To facilitate closing transactions, as described below, the Fund will
ordinarily write only options for which a secondary market exists.
The Fund may engage in closing transactions in order to terminate
outstanding exchange-traded options that it has written. To effect a closing
transaction, the Fund purchases, prior to the exercise of an outstanding option
that it has written, an option of the same series as that on which it desires to
terminate its obligation. Profit or loss from a closing purchase transaction
will depend on whether the cost of such transaction is more or less than the
premium received on the sale of the option plus the related transaction costs.
The Fund may also enter into over-the-counter ("OTC") put and call option
transactions, which are two-party contracts with prices and terms negotiated
between the buyer and seller.
Purchase of Put Options. The Fund is authorized to purchase put options in
connection with its hedging activities. By buying a put, the Fund has the right
to sell the underlying securities at the exercise price, thus limiting the
Fund's risk of loss through a decline in the market value of the security until
the put expires.
Futures Contracts. The Fund is authorized to purchase and sell financial
futures contracts ("futures contracts") as a hedge against adverse changes in
interest rates. A futures contract is an agreement between two parties to buy
and sell a security for a set price on a future date. The Fund may effect
transactions in futures contracts in U.S. and foreign agency and government
securities and corporate debt securities traded on U.S. and foreign exchanges,
as well as in the OTC market.
The Fund may sell futures contracts in anticipation of an increase in the
general level of interest rates. Generally, as interest rates rise, the market
value of the securities held by the Fund will fall, thus reducing the net asset
value of the Fund. This interest rate risk can be reduced without employing
futures as a hedge by selling long-term securities and either reinvesting the
proceeds in securities with shorter maturities or by holding assets in cash.
This strategy, however, entails increased transaction costs in the form of
dealer spreads and brokerage commissions and would typically reduce the Fund's
average yield as a result of the shortening of maturities.
The sale of futures contracts provides an alternative means of hedging
against rising interest rates. As rates increase the value of the Fund's short
position in the futures contracts 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 (which is
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<PAGE> 58
done by taking an opposite position which operates to terminate the position in
the futures contract), commissions on futures transactions are lower than
transaction costs incurred in the purchase and sale of portfolio securities.
The Fund may purchase futures contracts in anticipation of a decline in
interest rates when it is not fully invested in order to gain rapid market
exposure that may in part or entirely offset an increase in the cost of
long-term securities it intends to purchase. As such purchases are made, an
equivalent amount of futures contracts will be closed out. In a substantial
majority of these transactions, the Fund will purchase securities upon
termination of the futures contracts. However, due to changing market conditions
and interest rate forecasts, a futures position may be terminated without a
corresponding purchase of securities.
Options on Financial Futures. The Fund may purchase and write call and put
options on futures contracts in connection with its hedging activities.
Generally, these strategies would be employed under the same market and market
sector conditions as those in which the Fund would enter into futures contracts.
The Fund may purchase put options or write call options on futures contracts
rather than selling the underlying futures contracts in anticipation of an
increase in interest rates. Similarly, the Fund may purchase call options or
write put options on futures contracts as a substitute for the purchase of such
futures to hedge against the increased cost resulting from a decline in interest
rates of securities which the Fund intends to purchase.
RISK FACTORS IN OPTIONS AND FUTURES TRANSACTIONS
Utilization of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts and movements in the
price of the securities which are the subject of the hedge. If the price of the
futures contract moves more or less than the price of the securities, the Fund
will experience a gain or loss which will not be completely offset by movements
in the price of the debt securities which are the subject of the hedge. There is
also a risk of imperfect correlations where the securities underlying futures
contracts have different maturities than the portfolio securities being hedged.
Transactions in currency futures and options on interest rate and currency
futures contracts involve similar risks.
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. Similarly, positions in interest rate and currency futures may be closed
out only on an exchange which provides a secondary market for such futures. 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 option or futures.
However, there can be no assurance that a liquid secondary market will exist for
any particular call or put option or futures contract at any specific time.
Thus, it may not be possible to close an option or futures position. The Fund
will acquire only OTC options for which management believes the Fund can receive
on each business day at least two independent bids or offers (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
instruments or currency 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 its portfolio effectively. There is also the risk of
loss by the Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in a futures contract or related option. The
risk of loss from investing in futures transactions is theoretically unlimited.
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<PAGE> 59
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 (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 Investment Adviser does not believe
that these trading and position limits will have any adverse impact on the
portfolio strategies for hedging the Fund's portfolio.
FORWARD FOREIGN EXCHANGE TRANSACTIONS
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 one-tenth of one percent due to the costs of converting from one currency
to another. However, the Fund has authority to deal in forward foreign exchange
between currencies of the different countries in whose securities it will invest
as a hedge against possible variations in the foreign exchange rates between
these currencies. This is accomplished through contractual agreements to
purchase or sell a specified currency at a specified future date 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 with respect to portfolio security positions denominated or quoted in
such foreign currency. The Fund will not speculate in forward foreign exchange.
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.
Alternatively, no such segregation of funds need be made when the Fund "covers"
its open positions. The position is considered "covered" if the Fund holds
securities denominated in the currency underlying the forward contract, or in a
demonstrably correlated currency, having a value equal to or greater than the
Fund's obligation under the forward contract. 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
currency involved, the length of the contract period and the market conditions
then prevailing. Since transactions in foreign currency exchange are usually
conducted on a principal basis, no fees or commissions are involved.
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<PAGE> 60
OTHER INVESTMENT POLICIES AND PRACTICES
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest
in securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements and purchase and sale contracts may be entered into only
with financial institutions which (i) have, in the opinion of the Investment
Adviser, 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 the case of repurchase agreements, the prices at which the
trades are conducted do not reflect the accrued interest on the underlying
obligations; whereas, in the case of purchase and sale contracts, the prices
take into account accrued interest. Such agreements usually cover short periods,
often less than one week. Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the securities
transferred to the purchaser. In the case of a repurchase agreement, 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; the Fund does not have the right to
seek additional collateral in the case of purchase and sale contracts. 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
constitute only collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with the disposition of the collateral. A purchase and sale
contract differs from a repurchase agreement in that the contract arrangements
stipulate that the securities are owned by the Fund. In the event of a default
under such a repurchase agreement or under a purchase and sale contract, instead
of the contractual fixed rate of return, the rate of return to the Fund would
depend 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 total assets in repurchase
agreements or purchase and sale contracts maturing in more than seven days,
together with all other illiquid investments. While the substance of purchase
and sale contracts is similar to the substance of repurchase agreements, because
of the different treatment with respect to accrued interest and additional
collateral, management believes that purchase and sale contracts are not
repurchase agreements as such term is understood in the banking and brokerage
community.
Lending of Portfolio Securities. Subject to the investment restriction
stated below, the Fund may lend securities from its portfolio with a value not
exceeding 33 1/3% of its total assets to approved borrowers and receive therefor
collateral in cash or securities issued or guaranteed by the U.S. Government.
Such collateral is 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 loan 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. 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.
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<PAGE> 61
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus, 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 of 1940, as amended (the
"Investment Company Act"), means the lesser of (i) 67% of the shares represented
at a meeting at which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares).
Under the fundamental investment restrictions, the Fund may not:
1. Invest more than 25% of its total assets, taken at market value at
the time of each investment, in the securities of corporate issuers in any
particular industry.
2. Make investments for the purpose of exercising control or
management.
3. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the 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.
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<PAGE> 62
In addition, the Fund has adopted non-fundamental restrictions which may be
changed by the Board of Trustees without the approval of shareholders. Under the
non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box."
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Trustees of the Fund has
otherwise determined to be liquid pursuant to applicable law. Securities
purchased in accordance with Rule 144A under the Securities Act and
determined to be liquid by the Fund's Board of Trustees are not subject to
the limitations set forth in this investment restriction.
d. Notwithstanding fundamental investment restriction (6) above,
borrow amounts in excess of 10% of its total assets, taken at market value,
and then only from banks as a temporary measure for extraordinary or
emergency purposes or to meet redemptions.
The Fund has registered as a "non-diversified" investment company under the
Investment Company Act. However, the Fund intends to limit its investments in
order to qualify for the special tax treatment afforded regulated investment
companies ("RICs") under the Internal Revenue Code of 1986, as amended (the
"Code").
The staff of 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 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 exceeds 15% of
the total 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 an 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 Trustees of the Fund without the
approval of the Fund's shareholders. However, the Fund will not change or modify
this policy prior to the change or modification by the Commission staff of its
position.
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
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<PAGE> 63
except for brokerage transactions permitted under the Investment Company Act
involving only usual and customary commissions or transactions pursuant to an
exemptive order under the Investment Company Act. See "Portfolio Transactions
and Brokerage." Without such an exemptive order, the Fund would be prohibited
from engaging in portfolio transactions with Merrill Lynch or any of its
affiliates acting as principal and from purchasing securities in public
offerings which are not registered under the Securities Act in which such firm
or any of its affiliates participate as an underwriter or dealer.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
Information about the Trustees and executive officers 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 Trustee is P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (64) -- President and Trustee(1)(2) -- President of the
Investment Adviser (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; and Director of Merrill Lynch Funds Distributor, Inc. (the "Distributor")
since 1977.
DONALD CECIL (70) -- Trustee(2) -- 1114 Avenue of the Americas, New York,
New York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
EDWARD H. MEYER (70) -- Trustee(2) -- 777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970, and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors Inc. and Harman International Industries, Inc.
CHARLES C. REILLY (65) -- Trustee(2) -- 9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 1990; President
and Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; former
Senior Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990;
Adjunct Professor, Columbia University Graduate School of Business from 1990 to
1991; Adjunct Professor, Wharton School, University of Pennsylvania, from 1989
to 1990; Partner, Small Cities Cable Television since 1986.
RICHARD R. WEST (59) -- Trustee(2) -- Box 604, Genoa, Nevada 89491.
Professor of Finance since 1984, Dean from 1984 to 1993 and currently Dean
Emeritus, New York University Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc. (financial printers), Vornado,
Inc. (real estate holding company), Smith-Corona Corporation (manufacturer of
typewriters and word processors) and Alexander's, Inc. (real estate company).
EDWARD D. ZINBARG (62) -- Trustee(2) -- 5 Hardwell Road, Short Hills, New
Jersey 07078-2117. Executive Vice President of The Prudential Insurance Company
of America from 1988 to 1994; former Director of Prudential Reinsurance Company
and former Trustee of the Prudential Foundation.
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<PAGE> 64
TERRY K. GLENN (56) -- Executive Vice President(1)(2) -- Executive Vice
President of the Investment Adviser 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.
JOSEPH T. MONAGLE, JR. (46) -- Senior Vice President(1)(2) -- Senior Vice
President of the Investment Adviser and FAM since 1990; Vice President of the
Investment Adviser from 1978 to 1990; Senior Vice President of Princeton
Services since 1993.
DONALD C. BURKE (36) -- Vice President(1)(2) -- Vice President and Director
of Taxation of the Investment Adviser since 1990.
SEAN J. CASEY (41) -- Vice President(1) -- Vice President and Senior
Portfolio Manager of the Investment Adviser since 1995; Chief Investment Officer
and Senior Portfolio Manager of Chase Manhattan Asset Management (Western
Hemisphere) Inc. from 1986 to 1995; Vice President of Global Fixed Income for
Irving Trust Company from 1978 to 1986.
GERALD M. RICHARD (47) -- Treasurer(1)(2) -- Senior Vice President and
Treasurer of the Investment Adviser and FAM since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Vice President of the
Distributor since 1981 and Treasurer thereof since 1984.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Trustee or officer is a director, trustee or officer of certain other
investment companies for which the Investment Adviser, or its affiliate,
FAM, acts as investment adviser or manager.
At March 31, 1997, the officers and Trustees of the Fund as a group (11
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Trustee 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 TRUSTEES
The Fund pays each Trustee not affiliated with the Investment Adviser (each
a "non-affiliated Trustee") a fee of $3,500 per year plus $500 per meeting
attended, together with such Trustee's actual out-of-pocket expenses relating to
attendance at meetings. The Fund also compensates members of its Audit and
Nominating Committee (the "Committee"), which consists of all of the
non-affiliated Trustees, at a rate of $500 per Committee meeting attended. The
Chairman of the Committee receives an additional fee of $250 per Committee
meeting attended. For the fiscal year ended December 31, 1996, fees and expenses
paid to the non-affiliated Trustees aggregated $38,298.
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<PAGE> 65
The following table sets forth for the fiscal year ended December 31, 1996,
compensation paid by the Fund to the non-affiliated Trustees and for the year
ended December 31, 1996, the aggregate compensation paid by all registered
investment companies advised by the Investment Adviser and its affiliate, FAM
("MLAM/FAM Advised Funds") to the non-affiliated Trustees.
<TABLE>
<CAPTION>
PENSION OR AGGREGATE COMPENSATION
RETIREMENT FROM FUND AND
BENEFITS ACCRUED OTHER MLAM/FAM
COMPENSATION AS PART OF FUND ADVISED FUNDS PAID TO
NAME OF TRUSTEE FROM FUND EXPENSES TRUSTEES(1)
- -------------------------------------------- ------------ ---------------- ----------------------
<S> <C> <C> <C>
Donald Cecil................................ $8,500 None $268,933
Edward H. Meyer............................. $6,500 None $227,933
Charles C. Reilly........................... $7,500 None $293,833
Richard R. West............................. $7,500 None $269,833
Edward D. Zinbarg........................... $7,500 None $127,333
</TABLE>
- ---------------
(1) The Trustees serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Cecil (32 registered investment companies consisting of 32 portfolios); Mr.
Meyer (32 registered investment companies consisting of 32 portfolios); Mr.
Reilly (41 registered investment companies consisting of 54 portfolios); Mr.
West (41 registered investment companies consisting of 54 portfolios); and
Mr. Zinbarg (18 registered investment companies consisting of 18
portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund -- Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or other investment advisory clients for which the
Investment Adviser 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 Investment Adviser for the Fund or other funds for
which it acts as investment adviser or for its other 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 Investment Adviser 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 (the "Investment
Advisory Agreement") with the Investment Adviser. As discussed in the
Prospectus, the Investment Adviser 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, 1994, 1995 and 1996, the total
advisory fees paid by the Fund to the Investment Adviser aggregated $5,439,841,
$4,455,344 and $3,323,159, respectively.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and to
furnish office space for officers and employees of the Fund connected with
investment and economic research, trading and investment management of the Fund,
as well as the fees of all Trustees of the Fund who are affiliated persons of
the Investment Adviser. The Fund pays all other expenses incurred in its
operation, 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-
11
<PAGE> 66
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 unaffiliated Trustees; accounting and pricing costs (including
the daily calculation of net asset value); insurance; interest; brokerage costs;
litigation and other extraordinary or non-recurring expenses; and other expenses
properly payable by the Fund. Accounting services are provided to the Fund by
the Investment Adviser, and the Fund reimburses the Investment Adviser for its
costs in connection with such services on a semiannual basis. For the fiscal
years ended December 31, 1994, 1995 and 1996, the amount of such reimbursement
was $236,141, $160,161 and $140,282, respectively. As required by the Fund's
distribution agreements, the Distributor will pay certain of the promotional
expenses of the Fund incurred in connection with the offering of its shares.
Certain expenses in connection with the distribution of Class B, Class C and
Class D shares 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."
As described in the Prospectus, the Investment Adviser has also entered
into a sub-advisory agreement with MLAM U.K. pursuant to which MLAM U.K.
provides investment advisory services to the Investment Adviser with respect to
the Fund.
The Investment Adviser is a limited partnership, the partners of which are
ML & Co. and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of the Investment Adviser 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 Investment Advisory Agreement will remain in effect from year to year if
approved annually (a) by the Board of Trustees or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Trustees who are not
parties to such contract or interested persons (as defined in the Investment
Company Act) of any such party. Such 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.
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 identical interests in
the investment portfolio of the Fund and has the same rights, except that Class
B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees and Class B and Class C shares bear the expenses of the ongoing
distribution fees and the additional incremental transfer agency costs resulting
from the deferred sales charge arrangements. 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."
12
<PAGE> 67
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by the Investment Adviser, or its
affiliate, FAM. Funds advised by the Investment Adviser 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 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 Investment Advisory Agreement
described under "Management of the Fund -- Advisory and Management
Arrangements."
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
For the fiscal years ended December 31, 1994, 1995 and 1996 the Fund sold
its Class A shares through the Distributor and Merrill Lynch, as a dealer. The
gross sales charges for the sale of its Class A shares for the fiscal year ended
December 31, 1994, were $177,216, of which the Distributor received $18,126, and
Merrill Lynch received $159,090. During such period, the Distributor received
contingent deferred sales charges ("CDSCs") of $7,628 with respect to
redemptions 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 its
Class A shares for the fiscal year ended December 31, 1995, were $16,044, of
which the Distributor received $1,671, and Merrill Lynch received $14,373.
During such period, the Distributor received CDSCs of $1,116 with respect to
redemptions 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 its
Class A shares for the fiscal year ended December 31, 1996, were $6,333, of
which the Distributor received $656, and Merrill Lynch received $5,677. During
such period, 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. The gross sales charges for the sale of its Class
D shares for the fiscal period October 21, 1994 (commencement of operations) to
December 31, 1994, were $6,079, of which the Distributor received $601, and
Merrill Lynch received $5,478. During such period, the Distributor received no
CDSCs with respect to redemptions within one year after purchase of Class D
shares purchased subject to a front-end sales charge waiver. The gross sales
charges for the sale of its Class D shares for the fiscal year ended December
31, 1995, were $54,945 of which the Distributor received $5,004, and Merrill
Lynch received $49,941. During such period, the Distributor received no CDSCs
with respect to redemptions within one year after purchase of Class D shares
purchased subject to a front-end sales charge waiver. The gross sales charges
for the sale of its Class D shares for the fiscal year ended December 31, 1996,
were $33,228, of which the Distributor received $2,761, and Merrill Lynch
received $30,467. During such period, the Distributor received CDSCs of $786
with respect to redemptions within one year after purchase of Class D shares
purchased subject to a front-end sales charge waiver. For information as to
brokerage commissions received by Merrill Lynch, see "Portfolio Transactions and
Brokerage."
The term "purchase" as used in the Prospectus and this Statement of
Additional Information 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, her or their own account and to
single purchases by a trustee or other fiduciary purchasing
13
<PAGE> 68
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 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 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 of 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
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 Investment Adviser
or FAM who purchased such closed-end fund shares prior to October 21, 1994, and
wish to reinvest the net proceeds from 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 (the date the Merrill Lynch Select Pricing(SM)
System commenced operations), and wish to reinvest the net proceeds from a sale
of their closed-end fund shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund and other MLAM-advised mutual
funds ("Eligible Class D Shares"), if the following conditions are met. First,
the sale of the closed-end fund shares must be made through Merrill Lynch, and
the net proceeds therefrom must be immediately reinvested in Eligible Class A or
Class D Shares. Second, the closed-end fund shares must either have been
acquired in the initial public offering or be shares representing dividends from
shares of common stock acquired in such offering. Third, the closed-end fund
shares must have been continuously maintained in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option.
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 the 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
14
<PAGE> 69
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 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 Class A or Class D shares of the Fund or 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 the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides
plan-participant record-keeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A or Class D shares; however,
its execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and Class
D shares of the Fund and of other MLAM-advised mutual funds presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward
completion of such Letter, but the reduced sales charge applicable to the amount
covered by such Letter will be applied only to new purchases. If the total
amount of shares does not equal the amount stated in the Letter of Intention
(minimum of $25,000), the investor will be notified and must pay, within 20 days
of the expiration of such Letter, the difference between the sales charge on the
Class A or Class D shares purchased at the reduced rate and the sales charge
applicable to the shares actually purchased through the Letter. Class A or Class
D shares equal to 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 would otherwise be subject to a further reduced
sales charge based on the right of accumulation, the purchaser will be entitled
on that purchase and subsequent purchases to 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.
15
<PAGE> 70
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 IRAs and participants in certain
affinity groups such as credit unions, trade associations and benefit plans.
Investors placing orders to purchase Class A or Class D shares of the Fund
through Blueprint will acquire the Class A or Class D shares at net asset value
plus a sales charge calculated in accordance with the Blueprint sales charge
schedule (i.e., up to $5,000 at 3.5%, and $5,000.01 or more at the standard
sales charge rates disclosed in the Prospectus). In addition, Class A or Class D
shares of the Fund are offered at net asset value plus a sales charge of .50% of
1% for corporate or group IRA programs placing orders to purchase their Class A
or Class D shares through Blueprint. Services, including the exchange privilege,
available to Class A and Class D shareholders through Blueprint, however, 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
whose trustee and/or plan sponsor has entered into a Merrill Lynch Directed IRA
Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase 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.
Purchase Privilege of Certain Persons. Trustees of the Fund, members of
the Boards of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries" when used herein with respect to ML & Co.
includes MLAM, FAM 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, 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 the other mutual fund and the shares of such other
fund were subject to a sales charge
16
<PAGE> 71
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 of termination.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
Financial Consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of such shares of
the mutual fund and 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.
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.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may be adjusted in appropriate cases to
reduce possible adverse tax consequences to the Fund 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 objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, 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.
17
<PAGE> 72
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 Trustees shall review quarterly reports of the disbursement of the
account maintenance fees and/or distribution fees paid to the Distributor. In
their consideration of each Distribution Plan, the Trustees must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholders. Each
Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of Trustees who are not
"interested persons" of the Fund, as defined in the Investment Company Act (the
"Independent Trustees"), shall be committed to the discretion of the Independent
Trustees then in office. In approving each Distribution Plan in accordance with
Rule 12b-1, the Independent Trustees concluded that there is 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 Trustees or by the
vote of the holders of a majority of the outstanding related class of voting
securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders, and all material amendments are required to be
approved by the vote of the Trustees, including a majority of the Independent
Trustees who have no direct or indirect financial interest in such Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the 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. (the "NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee. The
maximum sales charge rule is applied separately to each class. As applicable to
the Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fees and the CDSCs).
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.
18
<PAGE> 73
The following table sets forth comparative information as of December 31,
1996, indicating the maximum allowable payments that can be made under the NASD
maximum sales charge rule with respect to Class B and Class C shares and the
Distributor's voluntary maximum with respect to Class B shares, for the periods
indicated.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF DECEMBER 31, 1996
------------------------------------------------------------------------------------------
ANNUAL
ALLOWABLE DISTRIBUTION
ALLOWABLE INTEREST AMOUNTS FEE AT
ELIGIBLE AGGREGATE ON MAXIMUM PREVIOUSLY AGGREGATE 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, for the period
August 29, 1986 (commencement
of operations) to December 31,
1996:
Under NASD Rule As Adopted...... $1,313,747 $ 82,109 $ 43,946 $126,055 $ 38,685 $87,370 $1,738
Under Distributor's Voluntary
Waiver........................ $1,313,747 $ 82,109 $ 6,569 $88,678 $ 38,685 $49,993 $1,738
Class C Shares, for the period
October 21, 1994 (commencement
of operations) to December 31,
1996:
Under NASD Rule As Adopted...... $ 16,812 $ 1,051 $ 145 $ 1,196 $ 113 $ 1,083 $ 51
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B or Class C shares sold during periods
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. Of the
distribution fee payments made with respect to Class B shares prior to July
7, 1993, under the distribution plan in effect at that time, at the 1.0%
rate, 0.75% of average daily net assets has been treated as a distribution
fee and 0.25% of average daily net assets has been deemed to have been a
service fee and not subject to the NASD maximum sales charge rule. See
"Purchase of Shares -- Distribution Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the 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 only for periods during
which trading on the New York Stock Exchange (the "NYSE") is restricted as
determined by the Commission or the NYSE is closed (other than customary weekend
and holiday closings), for any period during which an emergency exists, as
defined by the Commission, as a result of which disposal of portfolio securities
or determination of the net asset value of the Fund is not reasonably
practicable, and for such other periods as the Commission may by order permit
for the protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
Fund at such time.
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<PAGE> 74
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 certain
instances, including in connection with certain post-retirement withdrawals from
an IRA or other retirement plan or 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 distribution following retirement under a
tax-deferred retirement plan or attaining age 59 1/2 in the case of an IRA or
other retirement plan, or part of a series of equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) or any
redemption resulting from the tax-free return of an excess contribution to an
IRA; or (b) any partial or complete redemption following the death or disability
(as defined in the Code) of a Class B shareholder (including one who owns the
Class B shares as joint tenant with his or her spouse), provided the redemption
is requested within one year of the death or initial determination of
disability. For the fiscal years ended December 31, 1994, 1995 and 1996, the
Distributor received CDSCs of $2,016,971, $1,787,977 and $877,464, 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) to December
31, 1994 and for the fiscal years ended December 31, 1995 and 1996 the
Distributor received CDSCs of $217, $5,943 and $5,199, respectively, with
respect to redemptions of Class C shares, all of which were paid to Merrill
Lynch.
Merrill Lynch Blueprint(SM) Program. Class B shares are offered to certain
participants in Blueprint. 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 investors in Class B shares. Orders for purchases
and redemptions of Class B shares of the Fund will be grouped for execution
purposes which, in some circumstances, may involve the execution of such orders
two business days following the day such orders are placed. The minimum initial
purchase 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 the 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
Reference is made to "Investment Objective and Policies -- Other Investment
Policies and Practices" in the Prospectus.
Subject to policies established by the Trustees of the Fund, the Investment
Adviser is primarily responsible for the execution of the Fund's portfolio
transactions. In executing such transactions, the Investment Adviser 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. Subject to obtaining
the best price and execution, brokers who provide supplemental investment
research to the Investment Adviser may receive orders for transactions by the
Fund. Information so received will be in
20
<PAGE> 75
addition to and not in lieu of the services required to be performed by the
Investment Adviser under the Investment Advisory Agreement, and the expenses of
the Investment Adviser will not necessarily be reduced as a result of the
receipt of such supplemental information. It is possible that certain of the
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 Trustees of the Fund, the
Investment Adviser may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions of the Fund.
The Trustees have considered the possibilities 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. After considering all
factors deemed relevant, the Trustees made a determination not to seek such
recapture. The Trustees will reconsider this matter from time to time.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts that 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 disclosing 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 years ended December 31, 1994, 1995 and
1996, Merrill Lynch effected no portfolio transactions for the Fund generating
brokerage commissions.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information -- Determination of Net Asset
Value" in the Prospectus concerning the determination of net asset value. The
net asset value of the shares of the Fund is determined 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, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. 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 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
21
<PAGE> 76
higher transfer agency fees applicable with respect to Class B and Class C
shares of the Fund. The per share net asset value of Class B shares generally
will be higher than the per share net asset value of Class C shares as a result
of the higher distribution fees applicable with respect to 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 among 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 Trustees 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 will be 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 futures contracts and related
options, are stated at market value. 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. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Trustees.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Certain of such services are
not available to investors who place orders for the Fund's shares through
Blueprint. 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. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gain distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases, reinvestment of ordinary income
dividends and long-term capital gain distributions. A shareholder may make
additions to his 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 who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the transfer agent.
22
<PAGE> 77
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the transfer agent for those
Class A or Class D shares. Shareholders interested in transferring their Class B
or Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the transfer agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the transfer agent. If
the new brokerage firm is willing to accommodate the shareholder in this manner,
the shareholder must request that he or she be issued certificates for his or
her shares, and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence. 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 must either redeem the shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm, or such shareholder must continue to maintain a retirement account
at Merrill Lynch for those shares.
AUTOMATIC INVESTMENT PLANS
A U.S. 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. For
investors who buy shares through Blueprint no minimum charge to the investor's
bank account is required. 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 reinvested automatically in additional shares of the Fund.
Such reinvestment will be at the net asset value of shares of the Fund as of the
close of business on the NYSE on the ex-dividend date of such dividend or
distribution. Shareholders may elect in writing to receive either their
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or 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 withdrawals from an
Investment Account on either a monthly or quarterly basis as provided below.
Quarterly withdrawals are available for shareholders who have
23
<PAGE> 78
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 as of
15 minutes after the close of business on the NYSE (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 of the withdrawal payment will be made, on
the next business day following redemption. When a shareholder is making
systematic withdrawals, dividends and distributions on all Class A or Class D
shares in the Investment Account are reinvested automatically in Class A or
Class D shares of the Fund, respectively. 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 with
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 $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 Investment
Program. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
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 his or her account in
which the exchange is made at the time of the exchange or is otherwise eligible
to purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of a second MLAM-advised mutual fund, but
does not hold Class A shares of the second fund in his or her account at the
time of the exchange and is
24
<PAGE> 79
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 for 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 charge paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and Class D shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was paid.
Based on this formula, Class A and Class D shares of the Fund generally may be
exchanged into the Class A or Class D shares of the other funds or into shares
of 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 ("new Class B or
Class C shares"), of another MLAM-advised mutual fund on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund's CDSC schedule if such schedule
is higher than the CDSC schedule relating to the Class B shares of the fund from
which the exchange has been made. For purposes of computing the sales charge
that may be payable on a disposition of the new Class B or Class C shares, the
holding period for the outstanding Class B or Class C shares is "tacked" to the
holding period for the new Class B or Class C shares. For example, an investor
may exchange Class B shares of the Fund for those of Merrill Lynch Special Value
Fund, Inc. ("Special Value Fund") after
25
<PAGE> 80
having held the Fund Class B shares for two and a half years. The 2% CDSC that
generally would apply to a redemption would not apply to the exchange. Three
years later the investor may decide to redeem the Class B shares of Special
Value Fund and receive cash. There will be no CDSC due on this redemption, since
by "tacking" the two and a half year holding period of Fund Class B shares to
the three year holding period for the Special Value Fund Class B shares, the
investor will be deemed to have held the 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 Investment Adviser 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, shareholders should contact their
Merrill Lynch Financial Consultant who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the 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 continuous
offering of their shares 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 of its net investment income and net
realized long- or short-term capital gains, if any, 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 a
Federal income tax requirement 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 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 investors whether
26
<PAGE> 81
received in cash or reinvested in additional shares of the Fund. The per share
dividends and distributions on Class B and Class C shares will be lower than the
per share dividends and distributions on Class A and Class D shares as a result
of the account maintenance, distribution and higher transfer agency fees
applicable with respect to Class B and Class C shares; similarly, the per share
dividends and distributions on Class D shares will be lower than the per share
dividends and distributions on Class A shares as a result of the account
maintenance fees applicable with respect to Class D shares. The per share
dividends and distributions on Class B shares will be higher than the per share
dividends and distributions on Class C shares as a result of the higher
distribution fees applicable with respect to Class C shares. See "Determination
of Net Asset Value."
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded 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 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).
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. Distributions by the Fund, whether from ordinary income or capital
gains, will not be eligible for the dividends received deduction allowed to
corporations under the Code. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of record
on a specified date in one of such months, then such dividend will be treated
for tax purposes as being paid by the RIC 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.
27
<PAGE> 82
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
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 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 (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.
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.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures or forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax
28
<PAGE> 83
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 stock, 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, foreign currency
futures and 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 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
Code 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 the shareholder's basis in
Fund shares assuming the shares were held as a
29
<PAGE> 84
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 fluctuation 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 dividends 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. Total return and yield figures
are based on the Fund's historical performance and are not intended to indicate
future performance. Average annual total return and yield are determined
separately for Class A, Class B, Class C and Class D shares in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charges in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over longer periods of time.
30
<PAGE> 85
Set forth in the tables below is total return 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 CLASS D SHARES
-------------------------- -------------------------- -------------------------- --------------------------
REDEEMABLE REDEEMABLE REDEEMABLE REDEEMABLE
EXPRESSED VALUE OF A EXPRESSED VALUE OF A EXPRESSED VALUE OF A EXPRESSED VALUE OF A
AS A HYPOTHETICAL AS A HYPOTHETICAL AS A HYPOTHETICAL AS A HYPOTHETICAL
PERCENTAGE $1,000 PERCENTAGE $1,000 PERCENTAGE $1,000 PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
$1,000 OF THE $1,000 OF THE $1,000 OF THE $1,000 OF THE
INVESTMENT PERIOD INVESTMENT PERIOD INVESTMENT PERIOD INVESTMENT PERIOD
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
PERIOD
- ------------------
One Year Ended
December 31,
1996............ 2.16% $ 1,021.60 1.60% $ 1,016.00 4.51% $ 1,045.10 1.80% $ 1,018.00
Five Years Ended
December 31,
1996............ 6.02% $ 1,339.40 6.05% $ 1,341.60 -- -- -- --
Ten Years Ended
December 31,
1996............ -- -- 9.19% $ 2,407.90 -- -- -- --
Inception (October
21, 1994) to
December 31,
1996............ -- -- -- -- 7.24% $ 1,165.80 5.85% $ 1,132.80
Inception (October
25, 1988) to
December 31,
1996............ 8.70% $ 1,978.50 -- -- -- -- -- --
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Year Ended
December 31,
1996.............. 6.42% $ 1,064.20 5.60% $ 1,056.00 5.51% $ 1,055.10 6.05% $ 1,060.50
Year Ended
December 31,
1995.............. 13.39% $ 1,133.90 12.52% $ 1,125.20 12.44% $ 1,124.40 13.11% $ 1,131.10
Year Ended
December 31,
1994............ (5.29)% $ 947.10 (6.01)% $ 939.90 -- -- -- --
Inception (October
21, 1994) to
December 31,
1994............ -- -- -- -- (1.73)% $ 982.70 (1.62)% $ 983.80
Year Ended
December 31,
1993............ 13.21% $ 1,132.10 12.36% $ 1,123.60 -- -- -- --
Year Ended
December 31,
1992............ 7.83% $ 1,078.30 6.91% $ 1,069.10 -- -- -- --
Year Ended
December 31,
1991............ 16.00% $ 1,160.00 15.23% $ 1,152.30 -- -- -- --
Year Ended
December 31,
1990............ 15.64% $ 1,156.40 14.76% $ 1,147.60 -- -- -- --
Year Ended
December 31,
1989............ 7.27% $ 1,072.70 6.45% $ 1,064.50 -- -- -- --
Year Ended
December 31,
1988............ -- -- 3.82% $ 1,038.20 -- -- -- --
Inception (October
25, 1988) to
December 31,
1988............ 2.66% $ 1,026.60 -- -- -- -- -- --
Year Ended
December 31,
1987............ -- -- 22.85% $ 1,228.50 -- -- -- --
Inception (August
29, 1986) to
December 31,
1986............ -- -- 3.93% $ 1,039.30 -- -- -- --
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (October
21, 1994) to
December 31,
1996............ -- -- -- -- 16.58% $ 1,165.80 13.28% $ 1,132.80
Inception (October
21, 1988) to
December 31,
1996............ 97.85% $ 1,978.50 -- -- -- -- -- --
Inception (August
29, 1986) to
December 31,
1996............ -- -- 150.24% $ 2,502.40 -- -- -- --
YIELD
30 Days Ended
December 31,
1996............ 5.02% -- 4.45% -- 4.36% -- 4.79% --
</TABLE>
31
<PAGE> 86
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 CDSCs, a lower amount of expenses may be deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Declaration of Trust of the Fund permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest, par value
$0.10 per share, of different classes and to divide or combine the shares of
each class into a greater or lesser number of shares without thereby changing
the proportionate beneficial interest in the Fund. At the date of this Statement
of Additional Information, the shares of the Fund are divided into Class A,
Class B, Class C and Class D shares. Under the Declaration of Trust, the
Trustees have the authority to issue separate classes of shares which would
represent interests in the assets of the Fund and have identical voting,
dividend, liquidation and other rights and the same terms and conditions except
that (i) expenses related to the account maintenance and/or distribution of the
shares of a class may be borne solely by such class, (ii) a class may have
exclusive voting rights with respect to matters relating to the expenses being
borne only by such class and (iii) classes may have different conversion rights.
The Board of Trustees of the Fund may classify and reclassify the shares of the
Fund into additional classes of shares at a future date. Upon liquidation of the
Fund, shareholders of each class are entitled to share pro rata in the net
assets of the Fund available for distribution to shareholders, except for any
expenses which may be attributable only to one class. Shares have no pre-emptive
rights. The rights of redemption, conversion and exchange are described
elsewhere herein and in the Prospectus. Shares are fully paid and non-assessable
by the Fund.
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held in the election of Trustees (to the
extent hereafter provided) and on other matters submitted to a vote of
shareholders, except that shareholders of the class bearing account maintenance
and/or distribution expenses as provided above shall have exclusive voting
rights with respect to matters relating to such account maintenance and/or
distribution expenditures. Voting rights are not cumulative, so that the holders
of more than 50% of the shares voting in the election of Trustees can, if they
choose to do so, elect all the Trustees of the Fund, in which event the holders
of the remaining shares are unable to elect any person as a Trustee. No
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the outstanding shares of the Fund.
32
<PAGE> 87
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 December 31, 1996, 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.......................... $72,875,535 $347,529,477 $9,350,823 $45,684,770
========== =========== ========= ==========
Number of Shares Outstanding........ 7,626,885 36,362,368 978,595 4,782,133
========== =========== ========= ==========
Net Asset Value Per Share (net
assets divided by number of shares
outstanding)...................... $ 9.56 $ 9.56 $ 9.56 $ 9.55
Sales Charge (for Class A and Class
D shares: 4.00% of offering price
(4.17% of net asset value per
share))*.......................... .40 ** ** .40
----------- ------------ ---------- -----------
Offering Price...................... $ 9.96 $ 9.56 $ 9.56 $ 9.95
========== =========== ========= ==========
</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, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the independent Trustees of the
Fund. The independent auditors are responsible for auditing the annual financial
statements of the Fund.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 351, 225 Franklin Street,
Boston, Massachusetts 02101 (the "Custodian"), acts as the custodian of the
Fund's assets. Under its contract with the Fund, the Custodian is authorized to
establish separate accounts in foreign currencies and to cause foreign
securities owned by the Fund to be held in its offices outside the U.S. 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"). 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.
33
<PAGE> 88
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 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 Merrill Lynch, under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by Merrill Lynch.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on March 31, 1997.
------------------------------
The Declaration of Trust establishing the Fund, dated as of May 28, 1986, a
copy of which, together with all amendments thereto, is on file in the office of
the Secretary of the Commonwealth of Massachusetts, provides that the name
"Merrill Lynch Global Bond Fund for Investment and Retirement" refers to the
Trustees under the Declaration of Trust collectively as Trustees, but not as
individuals or personally; and no Trustee, shareholder, officer, employee or
agent of the Trust shall be held to any personal liability, nor shall resort be
had to their private property for the satisfaction of any obligation or claim of
said Fund, but the "Trust Property" only shall be liable.
34
<PAGE> 89
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
Merrill Lynch Global Bond Fund
for Investment and Retirement:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Global Bond Fund for Investment
and Retirement as of December 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 December
31, 1996 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
Bond Fund for Investment and Retirement as of December 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
February 3, 1997
35
<PAGE> 90
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
Face Interest Maturity Value Percent of
Amount Long-Term Obligations Rate Date (Note 1a) Net Assets
<S> <S> <C> <S> <C> <S> <C> <C>
Australia
Sovereign A$ 29,000,000 Government of Australia 6.75 % 11/15/2006 $ 22,040,972 4.64%
Government 11,500,000 New South Wales Treasury Corp. 7.00 4/01/2004 8,890,354 1.87
Obligations 18,400,000 Queensland Treasury Corp. 8.00 5/14/2003 15,098,733 3.17
28,500,000 Queensland Treasury Corp. 8.00 9/14/2007 23,201,926 4.88
Total Investments in Australia
(Cost--$70,884,756) 69,231,985 14.56
Canada
Sovereign C$ 19,000,000 Canadian Government Bond 8.00 6/01/2023 15,477,372 3.25
Government 32,000,000 Province of Quebec 9.375 1/16/2023 27,994,161 5.89
Obligations
Total Investments in Canada
(Cost--$45,131,568) 43,471,533 9.14
Denmark
Financial Dkr 138,471,000 Nykredit 6.00 10/01/2026 20,404,396 4.29
Services
Sovereign 164,600,000 Danish Government Bond 8.00 3/15/2006 30,748,068 6.47
Government
Obligations
Total Investments in Denmark
(Cost--$50,388,482) 51,152,464 10.76
Germany
Financial DM 8,000,000 KFW International Finance Inc. 6.25 10/15/2003 5,423,464 1.14
Services 8,000,000 KFW International Finance Inc. 6.75 6/20/2005 5,497,823 1.16
Sovereign 3,000,000 Bundes Obligations 5.25 2/21/2001 2,005,915 0.42
Government 6,400,000 Bundesrepublik Deutschland 6.25 4/26/2006 4,299,669 0.90
Obligations 8,000,000 Deutschland Republic 6.75 4/22/2003 5,605,460 1.18
Total Investments in Germany
(Cost--$22,729,460) 22,832,331 4.80
Italy
Sovereign Lit 1,000,000,000 Buoni Poliennali Del Tesoro
Government (Italian Government Bond) 10.50 11/01/1998 704,034 0.15
Obligations 15,000,000,000 Buoni Poliennali Del Tesoro
(Italian Government Bond) 9.50 2/01/2006 11,212,580 2.36
21,000,000,000 Buoni Poliennali Del Tesoro
(Italian Government Bond) 8.75 7/01/2006 15,071,036 3.17
18,000,000,000 Government of Italy 9.50 4/15/1999 12,647,719 2.66
400,000,000 Government of Italy 3.75 6/08/2005 3,715,026 0.78
Total Investments in Italy
(Cost--$42,528,482) 43,350,395 9.12
</TABLE>
36
<PAGE> 91
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued)
Face Interest Maturity Value Percent of
Amount Long-Term Obligations Rate Date (Note 1a) Net Assets
<S> <S> <C> <S> <C> <S> <C> <C>
Japan
Financial YEN 850,000,000 Export Import Bank Japan 4.375% 10/01/2003 $ 8,268,782 1.74%
Services 1,120,000,000 IBRD World Bank 4.75 12/20/2004 11,244,490 2.36
550,000,000 World Bank 4.50 3/20/2003 5,405,959 1.14
Total Investments in Japan
(Cost--$25,892,835) 24,919,231 5.24
New Zealand
Sovereign NZ$ 31,600,000 New Zealand Government Bond 8.00 2/15/2001 23,119,735 4.86
Government
Obligations
Total Investments in New Zealand
(Cost--$23,054,367) 23,119,735 4.86
Spain
Sovereign Pta 2,418,000,000 Government of Spain 8.00 5/30/2004 20,191,892 4.25
Government
Obligations
Total Investments in Spain
(Cost--$19,458,244) 20,191,892 4.25
Sweden
Sovereign Skr 186,000,000 Government of Sweden 6.00 2/09/2005 26,460,308 5.57
Government
Obligations
Total Investments in Sweden
(Cost--$25,903,013) 26,460,308 5.57
United Kingdom
Financial Pound 9,900,000 Abbey National PLC 8.00 4/02/2003 17,121,532 3.60
Services Sterling 9,200,000 Beneficial Bank 5.914 6/17/1998 15,718,899 3.31
16,000,000 Depfa Bank 7.75 12/27/2001 27,400,173 5.76
8,000,000 Swedish Export Credit Corp. 7.625 12/27/2001 13,705,561 2.88
Sovereign 14,400,000 United Kingdom Gilt 7.50 12/07/2006 24,604,726 5.18
Government
Obligations
Total Investments in the United
Kingdom (Cost--$95,513,272) 98,550,891 20.73
United States
US US$ 18,400,000 United States Treasury Note 6.50 10/15/2006 18,500,648 3.89
Government
Obligations
Total Investments in the
United States (Cost--$18,693,250) 18,500,648 3.89
Total Investments in Long-Term
Obligations (Cost--$440,177,729) 441,781,413 92.92
</TABLE>
37
<PAGE> 92
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded)
Face Interest Maturity Value Percent of
Amount Short-Term Obligations Rate Date (Note 1a) Net Assets
<S> <S> <C> <S> <C> <S> <C> <C>
Commercial US$ 22,128,000 General Motors Acceptance Corp. 7.50% 1/02/1997 $ 22,128,000 4.65%
Paper*
US Government 3,500,000 United States Treasury Bill (a) 5.27 3/13/1997 3,466,190 0.73
Obligations*
Total Investments in Short-Term
Obligations (Cost--$25,592,135) 25,594,190 5.38
Total Investments (Cost--$465,769,864) 467,375,603 98.30
Unrealized Depreciation on Forward Foreign Exchange Contracts** (652,308) (0.13)
Variation Margin on Financial Futures Contracts*** (89,189) (0.02)
Other Assets Less Liabilities 8,806,499 1.85
------------ -------
Net Assets $475,440,605 100.00%
============ =======
<FN>
(a)Security held as collateral in connection with open financial
futures contracts.
*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 December 31, 1996 were as
follows:
Unrealized
Expiration Depreciation
Foreign Currency Sold Date (Note 1b)
Dkr 248,000,000 January 1997 $ (409,259)
DM 40,000,000 January 1997 (32,052)
Lit 31,000,000 January 1997 (169,587)
Skr 85,000,000 January 1997 (30,504)
YEN 4,020,000,000 January 1997 (10,906)
Total Unrealized Depreciation on
Forward Foreign Exchange Contracts
(US$ Commitment--$167,756,863) $ (652,308)
============
***Financial futures contracts sold as of December 31, 1996 were as
follows:
Number of Expiration Value
Contracts Issue Exchange Date (Notes 1a & 1b)
75 Italian BTP LIFFE March 1997 $ 12,784,456
530 UK Gilts LIFFE March 1997 49,841,485
(Total Contract Price--($62,115,968) $ 62,625,941
============
</TABLE>
See Notes to Financial Statements.
38
<PAGE> 93
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statement of Assets and Liabilities as of December 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$465,769,864)
(Note 1a) $ 467,375,603
Cash 10,632
Foreign cash (Note 1c) 2,455,159
Receivables:
Securities sold $ 17,124,878
Interest 11,172,347
Beneficial interest sold 1,487,899
Forward foreign exchange contracts (Note 1b) 1,051,735 30,836,859
--------------
Prepaid registration fees and other assets (Note 1f) 64,381
--------------
Total assets 500,742,634
--------------
Liabilities: Unrealized depreciation on forward foreign exchange
contracts (Note 1b) 652,308
Payables:
Securities purchased 18,956,107
Beneficial interest redeemed 3,750,105
Dividends to shareholders (Note 1g) 984,100
Investment adviser (Note 2) 244,458
Distributor (Note 2) 240,485
Variation margin (Note 1b) 89,189 24,264,444
--------------
Accrued expenses and other liabilities 385,277
--------------
Total liabilities 25,302,029
--------------
Net Assets: Net assets $ 475,440,605
==============
Net Assets Class A Shares of beneficial interest, $0.10 par value,
Consist of: unlimited number of shares authorized $ 762,688
Class B Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 3,636,237
Class C Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 97,860
Class D Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 478,213
Paid-in capital in excess of par 499,914,314
Accumulated realized capital losses on investments and
foreign currency transactions--net (Note 6) (29,915,740)
Unrealized appreciation on investments and foreign
currency transactions--net 467,033
--------------
Net assets $ 475,440,605
==============
Net Asset Value: Class A--Based on net assets of $72,875,535 and 7,626,885
shares of beneficial interest outstanding $ 9.56
==============
Class B--Based on net assets of $347,529,477 and
36,362,368 shares of beneficial interest
outstanding $ 9.56
==============
Class C--Based on net assets of $9,350,823 and 978,595
shares of beneficial interest outstanding $ 9.56
==============
Class D--Based on net assets of $45,684,770 and 4,782,133
shares of beneficial interest outstanding $ 9.55
==============
</TABLE>
See Notes to Financial Statements.
39
<PAGE> 94
<TABLE>
<CAPTION>
FINANCIAL INFORMATION (continued)
Statement of Operations for the Year Ended December 31, 1996
<S> <S> <C> <C>
Investment Income Interest and discount earned (net of $513,941 foreign
(Notes 1d & 1e): withholding tax) $ 38,314,878
Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 3,344,107
Investment advisory fees (Note 2) 3,323,159
Transfer agent fees--Class B (Note 2) 807,954
Custodian fees 193,902
Accounting services (Note 2) 140,282
Printing and shareholder reports 130,927
Transfer agent fees--Class A (Note 2) 121,896
Registration fees (Note 1f) 99,499
Account maintenance and distribution fees--Class C (Note 2) 78,131
Professional fees 72,697
Account maintenance fees--Class D (Note 2) 44,099
Trustees' fees and expenses 38,298
Transfer agent fees--Class D (Note 2) 22,768
Transfer agent fees--Class C (Note 2) 20,966
Other 8,131
--------------
Total expenses 8,446,816
--------------
Investment income--net 29,868,062
--------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 8,171,550
(Loss) on Foreign currency transactions--net (6,799,860) 1,371,690
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net (5,909,310)
(Notes 1b, 1c, Foreign currency transactions--net 1,894,884 (4,014,426)
1e & 3): -------------- --------------
Net realized and unrealized loss on investments and
foreign currency transactions (2,642,736)
--------------
Net Increase in Net Assets Resulting from Operations $ 27,225,326
==============
</TABLE>
See Notes to Financial Statements.
40
<PAGE> 95
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended
December 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 29,868,062 $ 42,003,844
Realized gain on investments and foreign currency
transactions--net 1,371,690 18,709,618
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net (4,014,426) 25,169,899
-------------- --------------
Net increase in net assets resulting from operations 27,225,326 85,883,361
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (4,866,475) (3,973,225)
Shareholders Class B (23,481,682) (23,553,473)
(Note 1f): Class C (505,409) (302,479)
Class D (1,014,496) (159,774)
Return of capital--net:
Class A -- (1,989,511)
Class B -- (11,793,918)
Class C -- (151,461)
Class D -- (80,003)
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (29,868,062) (42,003,844)
-------------- --------------
Beneficial Net decrease in net assets derived from beneficial interest
Interest transactions (162,547,147) (200,436,449)
Transactions -------------- --------------
(Note 4):
Net Assets: Total decrease in net assets (165,189,883) (156,556,932)
Beginning of year 640,630,488 797,187,420
-------------- --------------
End of year $ 475,440,605 $ 640,630,488
============== ==============
</TABLE>
See Notes to Financial Statements.
41
<PAGE> 96
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Financial Highlights
The following per share data and ratios have been derived Class A
from information provided in the financial statements.
For the Year Ended December 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 9.54 $ 8.96 $ 10.03 $ 9.79 $ 10.38
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .56 .59 .55 .70 .77
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net .02 .58 (1.07) .56 .01
--------- --------- --------- --------- ---------
Total from investment operations .58 1.17 (.52) 1.26 .78
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net (.56) (.39) (.24) (.67) (1.14)
Realized gain on investments--net -- -- -- (.30) (.23)
Return of capital--net -- (.20) (.28) -- --
In excess of realized gain on
investments--net -- -- (.03) (.05) --
--------- --------- --------- --------- ---------
Total dividends and distributions (.56) (.59) (.55) (1.02) (1.37)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 9.56 $ 9.54 $ 8.96 $ 10.03 $ 9.79
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 6.42% 13.39% (5.29%) 13.21% 7.83%
Return:* ========= ========= ========= ========= =========
Ratios to Average Expenses .87% .86% .84% .82% .84%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 6.02% 6.31% 5.84% 6.44% 12.24%
========= ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $ 72,876 $ 85,610 $ 90,823 $ 108,241 $ 61,131
Data: ========= ========= ========= ========= =========
Portfolio turnover 1234.05% 512.75% 405.00% 419.99% 235.11%
========= ========= ========= ========= =========
<FN>
*Total investment returns exclude the effects of sales
loads.
</TABLE>
See Notes to Financial Statements.
42
<PAGE> 97
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Financial Highlights (continued)
The following per share data and ratios have been derived Class B
from information provided in the financial statements.
For the Year Ended December 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 9.54 $ 8.96 $ 10.03 $ 9.79 $ 10.39
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .49 .51 .47 .60 .70
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net .02 .58 (1.07) .58 (.01)
--------- --------- --------- --------- ---------
Total from investment operations .51 1.09 (.60) 1.18 .69
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net (.49) (.34) (.20) (.59) (1.06)
Realized gain on investments--net -- -- -- (.30) (.23)
Return of capital--net -- (.17) (.24) -- --
In excess of realized gain on
investments--net -- -- (.03) (.05) --
--------- --------- --------- --------- ---------
Total dividends and distributions (.49) (.51) (.47) (.94) (1.29)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 9.56 $ 9.54 $ 8.96 $ 10.03 $ 9.79
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 5.60% 12.52% (6.01%) 12.36% 6.91%
Return:* ========= ========= ========= ========= =========
Ratios to Average Expenses 1.65% 1.64% 1.61% 1.58% 1.61%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 5.25% 5.56% 5.06% 5.72% 11.67%
========= ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $ 347,529 $ 540,887 $ 700,995 $ 897,150 $ 637,834
Data: ========= ========= ========= ========= =========
Portfolio turnover 1234.05% 512.75% 405.00% 419.99% 235.11%
========= ========= ========= ========= =========
<FN>
*Total investment returns exclude the effects of sales loads.
</TABLE>
See Notes to Financial Statements.
43
<PAGE> 98
FINANCIAL INFORMATION (concluded)
<TABLE>
<CAPTION>
Financial Highlights (concluded)
Class C Class D
For the For the
The following per share data and ratios have Period Period
been derived from information provided in the Oct. 21, Oct. 21,
financial statements. For the Year 1994++ to For the Year 1994++ to
Ended December 31, Dec. 31, Ended December 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 9.54 $ 8.96 $ 9.21 $ 9.54 $ 8.96 $ 9.21
Performance: -------- -------- -------- -------- -------- --------
Investment income--net .48 .51 .09 .54 .56 .10
Realized and unrealized gain
(loss) on investments and
foreign currency transactions
--net .02 .58 (.25) .01 .58 (.25)
-------- -------- -------- -------- -------- --------
Total from investment
operations .50 1.09 (.16) .55 1.14 (.15)
-------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment income--net (.48) (.34) (.03) (.54) (.37) (.04)
Return of capital--net -- (.17) (.05) -- (.19) (.05)
In excess of realized
gain on investments--net -- -- (.01) -- -- (.01)
-------- -------- -------- -------- -------- --------
Total dividends and
distributions (.48) (.51) (.09) (.54) (.56) (.10)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period $ 9.56 $ 9.54 $ 8.96 $ 9.55 $ 9.54 $ 8.96
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value
Return:** per share 5.51% 12.44% (1.73%)+++ 6.05% 13.11% (1.62%)+++
======== ======== ======== ======== ======== ========
Ratios to Average Expenses 1.73% 1.71% 1.69%* 1.08% 1.11% 1.12%*
Net Assets: ======== ======== ======== ======== ======== ========
Investment income--net 5.16% 5.44% 5.20%* 5.74% 6.07% 5.81%*
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 9,351 $ 8,468 $ 3,614 $ 45,685 $ 5,665 $ 1,755
======== ======== ======== ======== ======== ========
Portfolio turnover 1234.05% 512.75% 405.00% 1234.05% 512.75% 405.00%
======== ======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
44
<PAGE> 99
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Global Bond Fund for Investment and Retirement (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 securities--Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. 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. 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 Trustees of the
primary 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. Other investments, including
futures contracts and related options, are stated at market value or
otherwise at the fair value at which it is expected they may be
resold, as determined in good faith by or under the direction of the
Board of Trustees. 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 Fund's Board of
Trustees.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt and currency mar-
kets. 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.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts as
a hedge against adverse changes in interest rates. A futures
contract is an agreement between two parties to buy and sell a
security, respectively, for a set price on a future date. 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 marked to market to reflect the current market value of
the option written.
45
<PAGE> 100
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.
(c) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign curren-
cies 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 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). 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 from net investment
income are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates. A portion of the
ordinary income distributions paid by the Fund during the fiscal
year ended December 31, 1995 is characterized as a return of
capital.
(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
$6,599,997 have been reclassified between accumulated net realized
capital losses 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 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 of 0.60%, on an annual basis,
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% 0.50%
Class C 0.25% 0.55%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
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.
46
<PAGE> 101
NOTES TO FINANCIAL STATEMENTS (concluded)
For the year ended December 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 $ 656 $ 5,677
Class D $2,761 $30,467
For the year ended December 31, 1996, MLPF&S received contingent
deferred sales charges of $877,464 and $5,199 relating to
transactions in Class B and Class C Shares, respectively.
Furthermore, MLPF&S received contingent deferred sales charges of
$786 relating to transactions subject to front-end sales charge
waivers in Class D Shares.
During the year ended December 31, 1996, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $212 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 trustees of the Fund are officers and/or
directors of MLPF&S, PSI, MLFD, MLAM, MLFDS, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1996 were $6,431,445,070 and
$6,581,083,032, respectively.
Net realized and unrealized gains (losses) as of December 31, 1996
were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Investments:
Long-term $ 15,022,553 $ 1,603,684
Short-term 55,223 2,055
Financial futures (6,906,226) (509,973)
------------ ------------
Total investments 8,171,550 1,095,766
------------ ------------
Currency transactions:
Foreign currency
transactions (4,816,159) 23,575
Forward foreign exchange
contracts (1,983,701) (652,308)
------------ ------------
Total currency transactions (6,799,860) (628,733)
------------ ------------
Total $ 1,371,690 $ 467,033
============ ============
As of December 31, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $948,836 of which $6,431,120 related
to appreciated securities and $5,482,284 related to depreciated
securities. The aggregate cost of investments at December 31, 1996
for Federal income tax purposes was $466,426,767.
4. Beneficial Interest Transactions:
Net decrease in net assets derived from beneficial interest
transactions was $162,547,147 and $200,436,449 for the years ended
December 31, 1996 and December 31, 1995, respectively.
Transactions in shares of capital for each class were as follows:
Class A Shares for the
Year Ended Dollar
December 31, 1996 Shares Amount
Shares sold 2,910,360 $ 27,329,155
Shares issued to share-
holdersin reinvestment of
dividends 403,800 3,774,617
------------ ------------
Total issued 3,314,160 31,103,772
Shares redeemed (4,664,565) (43,674,353)
------------ ------------
Net decrease (1,350,405) $(12,570,581)
============ ============
Class A Shares for the
Year Ended Dollar
December 31, 1995 Shares Amount
Shares sold 6,380,202 $ 59,357,067
Shares issued to shareholders
in reinvestment of dividends
and distributions 478,488 4,434,234
------------ ------------
Total issued 6,858,690 63,791,301
Shares redeemed (8,019,897) (73,711,712)
------------ ------------
Net decrease (1,161,207) $ (9,920,411)
============ ============
Class B Shares for the
Year Ended Dollar
December 31, 1996 Shares Amount
Shares sold 3,714,398 $ 34,748,286
Shares issued to share-
holders in reinvestment of
dividends 1,569,779 14,672,504
------------- -------------
Total issued 5,284,177 49,420,790
Automatic conversion
of shares (4,849,489) (41,935,909)
Shares redeemed (20,778,347) (197,284,755)
------------- -------------
Net decrease (20,343,659) $(189,799,874)
============= =============
47
<PAGE> 102
Class B Shares for the
Year Ended Dollar
December 31, 1995 Shares Amount
Shares sold 8,688,182 $ 80,200,982
Shares issued to shareholders
in reinvestment of dividends
and distributions 2,401,329 22,257,416
------------- -------------
Total issued 11,089,511 102,458,398
Automatic conversion
of shares (99,679) (930,011)
Shares redeemed (32,517,042) (300,199,532)
------------- -------------
Net decrease (21,527,210) $(198,671,145)
============= =============
Class C Shares for the
Year Ended Dollar
December 31, 1996 Shares Amount
Shares sold 601,459 $ 5,622,361
Shares issued to share-
holders in reinvestment of
dividends 42,299 395,340
------------ ------------
Total issued 643,758 6,017,701
Shares redeemed (553,137) (5,161,461)
------------ ------------
Net increase 90,621 $ 856,240
============ ============
Class C Shares for the
Year Ended Dollar
December 31, 1995 Shares Amount
Shares sold 1,343,650 $ 12,395,671
Shares issued to shareholders
in reinvestment of dividends
and distributions 40,142 372,733
------------ ------------
Total issued 1,383,792 12,768,404
Shares redeemed (899,232) (8,300,388)
------------ ------------
Net increase 484,560 $ 4,468,016
============ ============
Class D Shares for the
Year Ended Dollar
December 31, 1996 Shares Amount
Shares sold 1,000,673 $ 9,338,179
Automatic conversion
of shares 4,503,683 41,935,909
Shares issued to shareholders
in reinvestment of dividends 82,130 775,174
------------ ------------
Total issued 5,586,486 52,049,262
Shares redeemed (1,398,232) (13,082,194)
------------ ------------
Net increase 4,188,254 $ 38,967,068
============ ============
Class D Shares for the Year Dollar
Ended December 31, 1995 Shares Amount
Shares sold 1,149,953 $ 10,597,667
Automatic conversion
of shares 99,678 930,011
Shares issued to shareholders
in reinvestment of dividends
and distributions 21,410 199,176
------------ ------------
Total issued 1,271,041 11,726,854
Shares redeemed (873,032) (8,039,763)
------------ ------------
Net increase 398,009 $ 3,687,091
============ ============
5. Commitments:
On December 31, 1996, the Fund had entered into foreign exchange
contracts, in addition to the contracts listed on the Schedule of
Investments, under which it had agreed to sell foreign currency with
the approximate value of $15,956,000.
6. Capital Loss Carryforward:
At December 31, 1996, the Fund had a net capital loss carryforward
of approximately $27,693,000, all of which expires in 2002. This
amount will be available to offset like amounts of any future
taxable gains.
48
<PAGE> 103
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objective and Policies....... 2
Hedging Techniques.................... 2
Risk Factors in Options and Futures
Transactions........................ 4
Forward Foreign Exchange
Transactions........................ 5
Other Investment Policies and
Practices........................... 6
Investment Restrictions............... 7
Management of the Fund.................. 9
Trustees and Officers................. 9
Compensation of Trustees.............. 10
Management and Advisory
Arrangements........................ 11
Purchase of Shares...................... 12
Initial Sales Charge
Alternatives -- Class A and Class D
Shares.............................. 13
Reduced Initial Sales Charges......... 15
Employer-Sponsored Retirement or
Savings Plans and Certain Other
Arrangements........................ 17
Distribution Plans.................... 18
Limitations on the Payment of Deferred
Sales Charges....................... 18
Redemption of Shares.................... 19
Deferred Sales Charges -- Class B and
Class C Shares...................... 20
Portfolio Transactions and Brokerage.... 20
Determination of Net Asset Value........ 21
Shareholder Services.................... 22
Investment Account.................... 22
Automatic Investment Plans............ 23
Automatic Reinvestment of Dividends
and Capital Gains Distributions..... 23
Systematic Withdrawal Plans -- Class A
and Class D Shares.................. 23
Exchange Privilege.................... 24
Dividends, Distributions and Taxes...... 26
Dividends and Distributions........... 26
Taxes................................. 27
Tax Treatment of Options, Futures and
Forward Foreign Exchange
Transactions........................ 28
Special Rules for Certain Foreign
Currency Transactions............... 29
Performance Data........................ 30
General Information..................... 32
Description of Shares................. 32
Computation of Offering Price Per
Share............................... 33
Independent Auditors.................. 33
Custodian............................. 33
Transfer Agent........................ 33
Legal Counsel......................... 34
Reports to Shareholders............... 34
Additional Information................ 34
Security Ownership of Certain
Beneficial Owners................... 34
Independent Auditors' Report............ 35
Financial Statements.................... 36
Code # 10418-0497
</TABLE>
[MERRILL LYNCH LOGO]
MERRILL LYNCH
GLOBAL BOND FUND
FOR INVESTMENT AND
RETIREMENT
[MLYNCH COMPASS]
STATEMENT OF
ADDITIONAL
INFORMATION
April 28, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 104
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> 105
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for each of the periods in the ten-year period
ended December 31, 1996.
Contained in Part B:
Schedule of Investments, as of December 31, 1996.
Statement of Assets and Liabilities as of December 31, 1996.
Statement of Operations for the year ended December 31, 1996.
Statements of Changes in Net Assets for each of the years in the
two-year period ended December 31, 1996.
Financial Highlights for each of the years in the five-year period
ended December 31, 1996.
(b) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------
<S> <C>
1 (a) -- Declaration of Trust of the Registrant, dated May 28, 1986.(a)
(b) -- Amendment to Declaration of Trust of the Registrant, dated July 7, 1986.(a)
(c) -- Amendment to Declaration of Trust of the Registrant, dated October 3, 1988.(a)
(d) -- Instrument establishing Class A shares and Class B shares of the Registrant, dated
October 3, 1988.(a)
(e) -- Amendment to Declaration of Trust of the Registrant, dated April 25, 1991.(a)
(f) -- Certification of Amendment to Declaration of Trust and Establishment and Designation
of Classes, dated October 17, 1994.(a)
2 -- By-Laws of the Registrant.(a)
3 -- None.
4 -- Copies of Instruments defining the rights of shareholders, including the relevant
portions of the Declaration of Trust, as amended, and the By-Laws of the
Registrant.(b)
5 (a) -- Investment Advisory Agreement between Registrant and Merrill Lynch Asset Management,
Inc.(a)
(b) -- Supplement to Investment Advisory Agreement between the Registrant and Merrill Lynch
Asset Management, L.P.(c)
(c) -- Form of Sub-Advisory Agreement between Merrill Lynch Asset Management, L.P. and
Merrill Lynch Asset Management U.K. Limited.
6 (a) -- Class A Shares Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc.(a)
(b) -- Class B Shares Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc.(a)
(c) -- Letter Agreement between the Registrant and Merrill Lynch Funds Distributor, Inc.
with respect to the Merrill Lynch Mutual Fund Adviser Program.(c)
(d) -- Class C Shares Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc.(a)
(e) -- Class D Shares Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc.(a)
</TABLE>
C-1
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------
<S> <C> <C>
7 -- None.
8 -- Custody Agreement between the Registrant and State Street Bank and Trust Company.(a)
9 -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between the Registrant and Merrill Lynch Financial Data Services, Inc.(a)
10 -- Opinion of Brown & Wood LLP, Counsel for the Registrant.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
12 -- None.
13 -- Certificate of Merrill Lynch Asset Management, Inc.(a)
14 -- None.
15 (a) -- Amended and Restated Class B Shares Distribution Plan and Class B Shares Distribution
Plan Sub-Agreement of the Registrant.(c)
(b) -- Class C Shares Distribution Plan and Class C Shares Distribution Plan Sub-Agreement
of the Registrant.(a)
(c) -- Class D Shares Distribution Plan and Class D Shares Distribution Plan Sub-Agreement
of the Registrant.(a)
16 (a) -- Schedule for computation of each performance quotation provided in the Registration
Statement in response to Item 22 relating to Class A shares.(d)
(b) -- Schedule for computation of each performance quotation provided in the Registration
Statement in response to Item 22 relating to Class B shares.(d)
(c) -- Schedule for computation of each performance quotation provided in the Registration
Statement in response to Item 22 relating to Class C shares.(a)
(d) -- Schedule for computation of each performance quotation provided in the Registration
Statement in response to Item 22 relating to Class D shares.(a)
17 (a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
(d) -- Financial Data Schedule for Class D Shares.
18 -- Merrill Lynch Select Pricing(SM) System Plan pursuant to Rule 18f-3.(e)
</TABLE>
- ---------------
(a) Filed on April 28, 1995, as an Exhibit to Post-Effective Amendment No. 13 to
the Registrant's Registration Statement on Form N-1A as amended (File No.
33-6091) (the "Registration Statement") under the Securities Act of 1933.
(b) Reference is made to Article I (Sections 1 and 2), Article II (Sections 1,
3, 4 and 7), Article III (Sections 1, 4, 9 and 10), Article IV, Article V
(Sections 1, 2, 3 and 5), Article VI (Sections 1, 2, 3, 4, 5, 7 and 8),
Article VII, Article VIII, Article IX, Article X, Article XI (Sections 2,
3, 4 and 5) and Article XII (Sections 3 and 6) of the Registrant's
Declaration of Trust, as amended, filed as Exhibits 1(a), 1(b), 1(c), 1(d),
1(e) and 1(f) to this Registration Statement; and Article I, Article V and
Article VI of the Registrant's By-Laws filed as Exhibit 2 to the
Registration Statement.
(c) Filed on April 29, 1994, as an Exhibit to Post-Effective Amendment No. 11 to
the Registration Statement.
(d) Filed on April 26, 1996, as an Exhibit to Post Effective Amendment No. 14 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).
C-2
<PAGE> 107
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS MARCH 31, 1997
- ------------------------------------------------------------------------------- --------------
<S> <C>
Class A Shares of Beneficial Interest, par value $0.10 per share............... 11,378
Class B Shares of Beneficial Interest, par value $0.10 per share............... 28,836
Class C Shares of Beneficial Interest, par value $0.10 per share............... 1,740
Class D Shares of Beneficial Interest, par value $0.10 per share............... 5,063
</TABLE>
- ---------------
Note: The number of holders shown above includes holders of record plus
beneficial owners whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
ITEM 27. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees, and
agents (including persons who serve at its request as directors, officers or
trustees of another organization in which it has any interest as a shareholder,
creditor or otherwise) against all liabilities and expenses (including amounts
paid in satisfaction of judgments, in compromise, as fines and penalties, and as
counsel fees) reasonably incurred by him in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which he may be involved or with which he may be threatened, while in office
or thereafter, by reason of his being or having been such a trustee, officer,
employee or agent, except with respect to any matter as to which he shall have
been adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties; provided, however, that as to
any matter disposed of by a compromise payment by such person, pursuant to a
consent decree or otherwise, no indemnification either for said payment or for
any other expenses shall be provided unless the Trust shall have received a
written opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence or
reckless disregard of duty, or the matter of good faith and reasonable belief as
to the best interests of the Trust, had been adjudicated, it would have been
adjudicated in favor of such person. The rights accruing to any Person under
these provisions shall not exclude any other right to which he may be lawfully
entitled; provided that no Person may satisfy any right of indemnity or
reimbursement granted herein or in Section 5.1 or to which he may be otherwise
entitled except out of the property of the Trust, and no Shareholder shall be
personally liable to any Person with respect to any claim for indemnity or
reimbursement or otherwise. The Trustees may make advance payments in connection
with indemnification under this Section 5.3, provided that the indemnified
person shall have given a written undertaking to reimburse the Trust in the
event it is subsequently determined that he is not entitled to such
indemnification".
Insofar as the conditional advancing of indemnification moneys for actions
based upon the Investment Company Act of 1940 may be concerned, such payments
will be made only on the following conditions: (i) the advances must be limited
to amounts used, or to be used, for the preparation or presentation of a defense
to the action, including costs connected with the preparation of a settlement;
(ii) advances may be made only upon receipt of a written promise by, or on
behalf of, the recipient to repay that amount of the advance which exceeds the
amount to which it is ultimately determined that he is entitled to receive from
the Registrant by reason of indemnification; and (iii) (a) such promise must be
secured by a surety bond, other suitable insurance or an equivalent form of
security which assures that any repayments may be obtained by the Registrant
without delay or litigation, which bond, insurance or other form of security
must be provided by the recipient of the advance, or (b) a majority of a quorum
of the Registrant's disinterested, non-party Trustees, or an independent legal
counsel in a written opinion, shall determine, based upon a review of readily
available facts, that the recipient of the advance ultimately will be found
entitled to indemnification.
C-3
<PAGE> 108
In Section 9 of the Class A, Class B, Class C and Class D Shares
Distribution Agreements relating to the securities being offered hereby, the
Registrant agrees to indemnify the Distributor and each person, if any, who
controls the Distributor within the meaning of the Securities Act of 1933,
against certain types of civil liabilities arising in connection with the
Registration Statement or Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to Trustees, officers and controlling persons of the
Registrant and the principal underwriter pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
(a) Merrill Lynch Asset Management, L.P. ("MLAM" or the "Investment
Adviser"), acts as investment adviser for the following open-end investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund for Tomorrow, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund,
Inc. and Merrill Lynch Variable Series Funds, Inc., and for the following
closed-end investment companies: Convertible Holdings, Inc., Merrill Lynch High
Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund,
Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions
Series, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund,
Inc., Merrill Lynch World Income Fund, Inc., and The Municipal Fund Accumulation
Program, Inc., and for the following closed-end investment companies: Apex
Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund
II, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., Merrill Lynch Municipal Strategy Fund, Inc.,
C-4
<PAGE> 109
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest
Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan
Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc.,
MuniYield California Insured Fund, Inc., MuniYield California Insured Fund II,
Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund,
Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New
York Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund,
Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc.,
Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and
Worldwide DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series is One Financial Center, 15th Floor, Boston,
Massachusetts 02111-2646. The address of the Manager, FAM, Princeton Services,
Inc. ("Princeton Services") and Princeton Administrators L.P. is also P.O. Box
9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds
Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial Center,
North Tower, 250 Vesey Street, New York, New York 10281. The address of Merrill
Lynch Financial Data Services, Inc. ("MLFDS") is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged
since January 1, 1995, for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President, Mr.
Richard is Treasurer and Mr. Glenn is Executive Vice President of substantially
all of the investment companies listed in the first two paragraphs of this Item
28 and Messrs. Giordano, Harvey, Kirstein and Monagle are directors, trustees or
officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME THE INVESTMENT ADVISER VOCATION OR EMPLOYMENT
- --------------------------- ----------------------- -----------------------------------------
<S> <C> <C>
ML & Co. .................. Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services......... General Partner General Partner of FAM
Arthur Zeikel.............. President President of FAM; President and Director
of Princeton Services; Director of MLFD;
Executive Vice President of ML & Co.
Terry K. Glenn............. Executive Vice Executive Vice President of FAM;
President Executive Vice President and Director of
Princeton Services; President and
Director of MLFD; Director of MLFDS;
President of Princeton Administrators,
L.P.
Vincent R. Giordano........ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Elizabeth Griffin.......... Senior Vice President Senior Vice President of FAM
Michael J. Hennewinkel..... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Philip L. Kirstein......... Senior Vice President, Senior Vice President, General Counsel
General Counsel and and Secretary of FAM; Senior Vice
Secretary President, General Counsel, Director
and Secretary of Princeton Services;
Director of MLFD
</TABLE>
C-5
<PAGE> 110
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME THE INVESTMENT ADVISER VOCATION OR EMPLOYMENT
- --------------------------- ----------------------- -----------------------------------------
<S> <C> <C>
Ronald M. Kloss............ Senior Vice President Senior Vice President and Controller of
and Controller FAM; Senior Vice President and Controller
of Princeton Services
Stephen M.M. Miller........ Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr. .... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Michael L. Quinn........... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services;
Manager, Director and First Vice
President of Merrill Lynch from 1989 to
1995
Gerald M. Richard.......... Senior Vice President Senior Vice President and Treasurer of
and Treasurer FAM; Senior Vice President and Treasurer
of Princeton Services; Vice President
and Treasurer of MLFD
Ronald L. Welburn.......... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Anthony Wiseman............ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Americas Income
Fund Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth
Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults
International Portfolio, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Developing Capital Markets, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental
Growth Fund Inc., Merrill Lynch Fund for Tomorrow, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare
Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch Latin America
Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Pacific
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Series Fund, Inc.,
Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology
Fund, Inc., Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable
Series Funds, Inc., Merrill Lynch World Income Fund, Inc. and Worldwide
DollarVest Fund, Inc. The address of each of these investment companies is P.O.
Box 9011, Princeton, New Jersey 08543-9011. The address of MLAM U.K. is Milton
Gate, 1 Moor Lane, London EC2Y 9HA, England.
C-6
<PAGE> 111
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since January 1,
1995, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert, Bascand, Glenn, Holmes,
Richard and Yardley are officers of one or more of the registered investment
companies listed in the first two paragraphs of this Item 28:
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ----------------------- ---------------------------- --------------------------------------
<S> <C> <C>
Arthur Ziekel.......... Director and Chairman President of the Investment Adviser
and FAM; President and Director of
Princeton Services; Director of
MLFD; Executive Vice President of ML
& Co.
Alan J. Albert......... Senior Managing Director Vice President of the Investment
Adviser
Terry K. Glenn......... Director Executive Vice President of the
Investment Adviser and FAM; Executive
Vice President and Director of
Princeton Services; President and
Director of MLFD; Director of MLFDS;
President of Princeton
Administrators, L.P.
Adrian Holmes.......... Managing Director Director of Merrill Lynch Global Asset
Management
Andrew John Bascand.... Director Director of Merrill Lynch Global Asset
Management
Edward Gobora.......... Director Director of Merrill Lynch Global Asset
Management
Richard Kilbride....... Director Managing Director of Merrill Lynch
Global Asset Management
Robert M. Ryan......... Director Vice President, Institutional
Marketing, Debt and Equity Group,
Merrill Lynch Capital Markets from
1989 to 1994
Gerald M. Richard...... Senior Vice President Senior Vice President and Treasurer of
the Investment Adviser and FAM; Senior
Vice President and Treasurer of
Princeton Services; Vice President
and Treasurer of MLFD
Stephen J. Yardley..... Director Director of Merrill Lynch Global Asset
Management
Carol Ann Langham...... Company Secretary None
Debra Anne Searle...... Assistant Company Secretary None
</TABLE>
(c) Not Applicable.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc., and The Municipal Fund
Accumulation Program, Inc., and MLFD also acts as the principal underwriter for
the following closed-end investment companies: Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc., and
Merrill Lynch Senior Floating Rate Fund, Inc.
C-7
<PAGE> 112
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Crook,
Aldrich, Brady, Breen, Fatseas and Wasel is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH REGISTRANT
- ------------------------------------------ ----------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn............................ President and Director Executive Vice President
Arthur Zeikel............................. Director President and Trustee
Philip L. Kirstein........................ Director None
William E. Aldrich........................ Senior Vice President None
Robert W. Crook........................... Senior Vice President None
Kevin P. Boman............................ Vice President None
Michael J. Brady.......................... Vice President None
William M. Breen.......................... Vice President None
Michael G. Clark.......................... Vice President None
Mark A. DeSario........................... Vice President None
James T. Fatseas.......................... Vice President None
Debra W. Landsman-Yaros................... Vice President None
Michelle T. Lau........................... Vice President None
Gerald M. Richard......................... Vice President and Treasurer Treasurer
Salvatore Venezia......................... Vice President None
William Wasel............................. Vice President None
Robert Harris............................. Secretary None
</TABLE>
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Registrant, (800 Scudders Mill
Road, Plainsboro, New Jersey 08536), and its transfer agent, Merrill Lynch
Financial Data Services, Inc., (4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484).
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the
Fund -- Management and Advisory Arrangements" in the Prospectus constituting
Part A of the Registration Statement and under "Management of the
Fund -- Management and Advisory Arrangements" in the Statement of Additional
Information constituting Part B of the Registration Statement, the Registrant is
not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not Applicable.
(b) Not Applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-8
<PAGE> 113
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
township of Plainsboro, and the State of New Jersey, on the 25th day of April
1997.
MERRILL LYNCH GLOBAL BOND FUND
FOR INVESTMENT AND RETIREMENT
(Registrant)
By: /s/ GERALD M. RICHARD
------------------------------------
(Gerald M. Richard, Treasurer)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE(S)
- ----------------------------------- ----------------------------------- ----------------
<S> <C> <C>
ARTHUR ZEIKEL* President and Trustee (Principal
- ----------------------------------- Executive Officer)
(Arthur Zeikel)
GERALD M. RICHARD* Treasurer (Principal Financial and
- ----------------------------------- Accounting Officer)
(Gerald M. Richard)
DONALD CECIL* Trustee
- -----------------------------------
(Donald Cecil)
EDWARD H. MEYER* Trustee
- -----------------------------------
(Edward H. Meyer)
CHARLES C. REILLY* Trustee
- -----------------------------------
(Charles C. Reilly)
RICHARD R. WEST* Trustee
- -----------------------------------
(Richard R. West)
EDWARD D. ZINBARG* Trustee
- -----------------------------------
(Edward D. Zinbarg)
*By: /s/ GERALD M. RICHARD April 25, 1997
- -----------------------------------
(Gerald M. Richard,
Attorney-in-Fact)
</TABLE>
C-9
<PAGE> 114
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<S> <C> <C> <C>
5 (c) -- Form of Sub-Advisory Agreement between Merrill Lynch Asset Management, L.P.
and Merrill Lynch Asset Management U.K. Limited.
10 -- Opinion of Brown & Wood LLP, Counsel for the Registrant.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
17 (a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
(d) -- Financial Data Schedule for Class D Shares.
</TABLE>
<PAGE> 1
Exhibit 5(c)
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the ___ day of _________________, by and between
MERRILL LYNCH ASSET MANAGEMENT, L.P., a Delaware limited partnership
(hereinafter referred to as "MLAM"), and MERRILL LYNCH ASSET MANAGEMENT U.K.
LIMITED, a corporation organized under the laws of England and Wales
(hereinafter referred to as "MLAM U.K.").
W I T N E S S E T H:
WHEREAS, MERRILL LYNCH GLOBAL BOND FUND FOR INVESTMENT AND RETIREMENT
(the "Fund") is a Massachusetts business trust engaged in business as a
non-diversified, open-end investment company registered under the Investment
Company Act of 1940, as amended (hereinafter referred to as the "Investment
Company Act"); and
WHEREAS, MLAM and MLAM U.K. are engaged principally in rendering
investment advisory services and are registered as investment advisers under the
Investment Advisers Act of 1940, as amended; and
WHEREAS, MLAM U.K. is a member of the Investment Management Regulatory
Organization, a self-regulating organization recognized under the Financial
Services Act of 1986 of the United Kingdom (hereinafter referred to as "IMRO"),
and the conduct of its investment business is regulated by IMRO; and
WHEREAS, MLAM has entered into an investment advisory agreement (the
"Investment Advisory Agreement") dated July 17, 1986, pursuant to which MLAM
provides management and investment and advisory services to the Fund; and
<PAGE> 2
WHEREAS, MLAM U.K. is willing to provide investment advisory services to
MLAM in connection with the Fund's operations on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, MLAM U.K. and MLAM hereby agree as follows:
ARTICLE I
Duties of MLAM U.K.
MLAM hereby employs MLAM U.K. to act as investment adviser to MLAM and
to furnish, or arrange for affiliates to furnish, the investment advisory
services described below, subject to the broad supervision of MLAM and the Fund,
for the period and on the terms and conditions set forth in this Agreement. MLAM
U.K. hereby accepts such employment and agrees during such period, at its own
expense, to render, or arrange for the rendering of, such services and to assume
the obligations herein set forth for the compensation provided for herein. MLAM
and its affiliates shall for all purposes herein be deemed a Professional
Investor as defined under the rules promulgated by IMRO (hereinafter referred to
as the "IMRO Rules"). MLAM U.K. and its affiliates shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent the Fund in
any way or otherwise be deemed an agent of the Fund.
MLAM U.K. shall have the right to make unsolicited calls on MLAM and
shall provide MLAM with such investment research, advice
2
<PAGE> 3
and supervision as the latter may from time to time consider necessary for the
proper supervision of the assets of the Fund; shall furnish continuously an
investment program for the Fund and shall make recommendations from time to time
as to which securities shall be purchased, sold or exchanged and what portion of
the assets of the Fund shall be held in the various securities in which the Fund
invests, options, futures, options on futures or cash; all of the foregoing
subject always to the restrictions of the Declaration of Trust and By-Laws of
the Fund, as they may be amended and/or restated from time to time, the
provisions of the Investment Company Act and the statements relating to the
Fund's investment objective, investment policies and investment restrictions as
the same are set forth in the currently effective prospectus and statement of
additional information relating to the shares of the Fund under the Securities
Act of 1933, as amended (the "Prospectus" and "Statement of Additional
Information", respectively). MLAM U.K. shall make recommendations and effect
transactions with respect to foreign currency matters, including foreign
exchange contracts, foreign currency options, foreign currency futures and
related options on foreign currency futures and forward foreign currency
transactions. MLAM U.K. shall also make recommendations or take action as to the
manner in which voting rights, rights to consent to corporate action and any
other rights pertaining to the portfolio securities of the Fund shall be
exercised.
3
<PAGE> 4
MLAM U.K. will not hold money on behalf of MLAM or the Fund, nor will
MLAM U.K. be the registered holder of the registered investments of MLAM or the
Fund or be the custodian of documents or other evidence of title.
ARTICLE II
Allocation of Charges and Expenses
MLAM U.K. assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall at its own
expense provide the office space, equipment and facilities which it is obligated
to provide under Article I hereof and shall pay all compensation of officers of
the Fund and all Trustees of the Fund who are affiliated persons of MLAM U.K.
ARTICLE III
Compensation of MLAM U.K.
For the services rendered, the facilities furnished and expenses
assumed by MLAM U.K., MLAM shall pay to MLAM U.K. a fee 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 that MLAM actually receives for providing services to the Fund
pursuant to the Investment Advisory Agreement.
ARTICLE IV
Limitation of Liability of MLAM U.K.
MLAM U.K. shall not be liable for any error of judgment or mistake of
law or for any loss arising out of any investment or for any act or omission in
the performance of sub-advisory
4
<PAGE> 5
services rendered with respect to the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties hereunder. As used in this
Article IV, MLAM U.K. shall include any affiliates of MLAM U.K. performing
services for MLAM contemplated hereby and directors, officers and employees of
MLAM U.K. and such affiliates.
ARTICLE V
Activities of MLAM U.K.
The services of MLAM U.K. to the Fund are not to be deemed to be
exclusive, MLAM U.K. and any person controlled by or under common control with
MLAM U.K. (for purposes of this Article V referred to as "affiliates") being
free to render services to others. It is understood that Trustees, officers,
employees and shareholders of the Fund are or may become interested in MLAM U.K.
and its affiliates, as directors, officers, employees and shareholders or
otherwise and that directors, officers, employees and shareholders of MLAM U.K.
and its affiliates are or may become similarly interested in the Fund, and that
MLAM U.K. and directors, officers, employees, partners and shareholders of its
affiliates may become interested in the Fund as shareholders or otherwise.
ARTICLE VI
MLAM U.K. Statements Pursuant to IMRO Rules
Any complaints concerning MLAM U.K. should be in writing addressed to
the attention of the Managing Director of MLAM U.K.
5
<PAGE> 6
MLAM has the right to obtain from MLAM U.K. a copy of the IMRO complaints
procedure and to approach IMRO directly.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding Investments Not Readily
Realisable (as that term is used in the IMRO Rules) or investments denominated
in a currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by MLAM U.K. may be subject to exchange rate fluctuations which may
have favorable or unfavorable effects on investments.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding options, futures or
contracts for differences. Markets can be highly volatile and such investments
carry a high degree of risk of loss exceeding the original investment and any
margin on deposit.
ARTICLE VII
Duration and Termination of this Agreement
This Agreement shall become effective as of the date first above
written and shall remain in force until the date of termination of the
Investment Advisory Agreement (but not later than two years after the date
hereof) and thereafter, but only so long as such continuance is specifically
approved at least annually by (i) the Trustees of the Fund or by the vote of a
6
<PAGE> 7
majority of the outstanding voting securities of the Fund and (ii) a majority of
those Trustees who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by MLAM or by vote of a majority of the outstanding voting
securities of the Fund, or by MLAM U.K., on sixty days' written notice to the
other party. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Investment Advisory
Agreement. Any termination shall be without prejudice to the completion of
transactions already initiated.
ARTICLE VIII
Amendments of this Agreement
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Trustees of the Fund or by the vote of a
majority of outstanding voting securities of the Fund and (ii) a majority of
those Trustees who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval.
ARTICLE IX
Definitions of Certain Terms
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective
7
<PAGE> 8
meanings specified in the Investment Company Act and the rules and regulations
thereunder, subject, however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
ARTICLE X
Governing Law
This Agreement shall be construed in accordance with the laws of the
State of New York and the applicable provisions of the Investment Company Act.
To the extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By
--------------------------
Title:
MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED
By
--------------------------
Title:
9
<PAGE> 1
Exhibit 10
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
TELEPHONE: (212) 839-5300
FACSIMILE: (212) 839-5599
April 28, 1997
Merrill Lynch Global Bond Fund
for Investment and Retirement
P.O. Box 9011
Princeton, New Jersey 08543-9011
Ladies and Gentlemen:
This opinion is furnished in connection with the registration by
Merrill Lynch Global Bond Fund for Investment and Retirement, a Massachusetts
business trust (the "Trust"), of shares of beneficial interest, par value $0.10
per share, of the Trust (the "Shares"), under the Securities Act of 1933, as
amended, pursuant to the Trust's registration statement on Form N-1A (File No.
33-6091), as amended (the "Registration Statement"), in the amount set forth
under "Amount Being Registered" on the facing page of the Registration
Statement.
As counsel for the Trust, we are familiar with the proceedings taken by
it in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Declaration of Trust of the
Trust, as amended, the By-Laws of the Trust and such other documents as we have
deemed relevant to the matters referred to in this opinion.
<PAGE> 2
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par value thereof, will be legally issued, fully
paid and non-assessable shares of beneficial interest, except that shareholders
of the Trust may under certain circumstances be held personally liable for the
Trust's obligations.
In rendering this opinion, we have relied as to matters of
Massachusetts law upon an opinion of Bingham, Dana & Gould rendered to the
Trust.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus and
Statement of Additional Information constituting parts thereof.
Very truly yours,
/s/ Brown & Wood LLP
2
<PAGE> 1
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Global Bond Fund for Investment and Retirement:
We consent to the use in Post-Effective Amendment No. 15 to Registration
Statement No. 33-6091 of our report dated February 3, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
April 25, 1997
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<PERIOD-END> DEC-31-1996
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<INVESTMENTS-AT-VALUE> 467375603
<RECEIVABLES> 30836859
<ASSETS-OTHER> 2530172
<OTHER-ITEMS-ASSETS> 0
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<NET-ASSETS> 347529477
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<DISTRIBUTIONS-OF-INCOME> (23481682)
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<NUMBER-OF-SHARES-SOLD> 3714398
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<NET-INVESTMENT-INCOME> 29868062
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<NAME> MERRILL LYNCH GLOBAL BOND FUND FOR INVESTMENT AND RETIREMENT
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