PROSPECTUS
[LOGO] Merrill Lynch
Merrill Lynch Intermediate Government Bond Fund
March 9, 1999
(Revised as of May 21, 1999)
This Prospectus contains information you should know before investing, including
information about risks. Please read it before you invest and keep it for future
reference.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
Table of Contents
PAGE
[CLIPART] KEY FACTS
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The Merrill Lynch Intermediate Government Fund at a Glance....... 3
Risk/Return Bar Chart............................................ 4
Fees and Expenses................................................ 5
[CLIPART] DETAILS ABOUT THE FUND
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How the Fund Invests............................................. 7
Investment Risks................................................. 8
[CLIPART] YOUR ACCOUNT
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Merrill Lynch Select Pricing(SM) System.......................... 10
How to Buy, Sell, Transfer and Exchange Shares................... 15
Participation in Merrill Lynch Fee-Based Programs................ 19
[CLIPART] MANAGEMENT OF THE FUND
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Merrill Lynch Asset Management................................... 21
Financial Highlights............................................. 22
[CLIPART] FOR MORE INFORMATION
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Shareholder Reports...................................... Back Cover
Statement of Additional Information...................... Back Cover
MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND
<PAGE>
Key Facts [CLIPART]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
Intermediate-term debt
securities -- bonds that have a final maturity ranging from five to fifteen
years.
Current Income -- income from interest or dividends.
THE MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND AT A GLANCE
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What is the Fund's investment objective?
The Fund's investment objective is to seek the highest possible current income
consistent with the protection of capital afforded by investing primarily in
intermediate-term debt securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities. We cannot guarantee that the Fund will
achieve its goals.
What are the Fund's main investment strategies?
The Fund invests in a portfolio of bonds and other debt securities that are
issued or guaranteed by the U.S. Government or U.S. Government agencies and
organizations. The Fund may invest a portion of its portfolio in mortgage-backed
securities issued or guaranteed by government sponsored enterprises. The Fund
may also invest in securities linked to an interest rate or other index. The
Fund may loan portfolio securities and enter into securities repurchase
agreements and purchase securities on a when-issued or forward commitment basis.
Under normal circumstances, the Fund will maintain a dollar-weighted average
maturity of six to eight years.
What are the main risks of investing in the Fund?
As with any mutual fund, the value of the Fund's investments - and therefore the
value of Fund shares - may fluctuate. These changes may occur in response to
interest rate changes or other factors that may affect a particular issuer or
obligation. Generally, when interest rates go up, the value of debt instruments
goes down. If the value of the Fund's investments goes down, you may lose money.
Mortgage-backed securities may be more volatile than other government debt
securities and carry the risk of prepayment before maturity.
Who should invest?
The Fund may be an appropriate investment for you if you:
o Are looking for current income.
o Are investing with medium term goals in mind and want to focus on U.S.
Government securities.
MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND 3
<PAGE>
Key Facts [CLIPART]
RISK/RETURN BAR CHART*
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The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance for
Class D shares for the past ten calendar years. Sales charges are not reflected
in the bar chart. If these amounts were reflected, returns would be less than
those shown. The table compares the average annual total returns of the Fund's
Class D shares for one, five and ten years with those of the Merrill Lynch U.S.
Treasury Bond Index and the Merrill Lynch U.S. Treasury & Government Agency Bond
Index. How the Fund performed in the past is not necessarily an indication of
how the Fund will perform in the future.
[The following information was depicted in a bar chart in the printed material]
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
10.67% 9.19% 13.91% 6.54% 7.23% (1.71%) 11.33% 3.54% 7.27% 8.69%
During the ten-year period shown in the bar chart, the highest return for a
quarter was 5.63% (quarter ended September 30, 1998) and the lowest return for a
quarter was -1.57% (quarter ended March 31, 1994).
Average Annual Total Returns
(for the calendar year ended Past Past Past
December 31, 1998) One Year Five Years Ten Years
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Merrill Lynch
Intermediate Government Bond Fund** D 7.60% 5.51% 7.47%
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ML US Treasury Bond Index*** 10.54% 7.25% 9.51%
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ML US Treasury & Government
Agency Bond Index**** 10.09% 7.18% 9.47%
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* At the close of business on February 14, 1997, there was a reorganization
of the Fund in which the Fund changed its investment objective. As a
result, the performance information for operations of the Fund prior to
its reorganization, may not be indicative of its performance following its
reorganization. See the Financial Highlights on page 22 of this prospectus
and page 34 of the Statement of Additional Information.
** Includes sales charge.
*** This unmanaged Index is comprised of US Treasury securities maturing in
five to seven years. Past performance is not predictive of future
performance.
**** This unmanaged Index is comprised of US Treasury and Government agency
securities maturing in five to seven years. Past performance is not
predictive of future performance.
4 MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND
<PAGE>
UNDERSTANDING
EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
Expenses paid directly by the shareholder:
Shareholder fees -- these include sales charges which you may pay when you buy
or sell shares of the Fund.
Expenses paid indirectly by the shareholder (These costs are deducted from the
Fund's total assets): Annual Fund Operating Expenses -- expenses that cover the
costs of operating the Fund.
Management Fee -- a fee paid to the Investment Adviser for managing the Fund.
Distribution Fees -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants.
Service (Account Maintenance) Fees -- fees used to compensate securities dealers
for account maintenance activities.
FEES AND EXPENSES
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The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your Merrill Lynch Financial
Consultant can help you with this decision.
This table shows the different fees and expenses that you may pay if you buy and
hold the different classes of shares of the Fund. Future expenses may be greater
or less than those indicated below.
Shareholder Fees (fees paid directly from
your investment): Class A Class B(a) Class C Class D(h)
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Maximum Sales Charge (Load)
imposed on purchases (as a
percentage of offering price) 1.00%(b) None None 1.00%(b)
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Maximum Deferred Sales Charge
(Load) (as a percentage of
original purchase price or
redemption proceeds, whichever
is lower) None(c) 1.0%(b) 1.0%(b) None(c)
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Maximum Sales Charge (Load)
imposed on Dividend Reinvestments None None None None
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Redemption Fee None None None None
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Exchange Fee None None None None
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Maximum Account Fee None None None None
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Annual Fund Operating Expenses
(expenses that are deducted from
Fund assets):
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Management Fee(f) 0.40% 0.40% 0.40% 0.40%
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Distribution and/or Service
(12b-1) Fees(d) None 0.50% 0.50% 0.10%
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Other Expenses (including
transfer agency fees) (e) 0.69% 0.64% 0.61% 0.72%
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Total Annual Fund Operating
Expenses (f)(g) 1.09% 1.54% 1.51% 1.22%
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(a) Class B shares automatically convert to Class D shares about ten years after
you buy them and will no longer be subject to distribution fees.
(b) Some investors may qualify for reductions in the sales charge (load).
(c) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(d) The Fund calls the "Service Fee" an "Account Maintenance Fee."Account
Maintenance is the term used in this Prospectus and in other Fund materials.
If you hold Class B or Class C shares for a long time, it may cost you more
in distribution (12b-1) fees than the maximum sales charge that you would
have paid if you had bought one of the other classes. Distribution and
Account Maintenance Fees reflect the maximum amount the Fund would
contractually be subject to pay. The Distributor voluntarily waived Class C
distribution fees for the fiscal year ended October 31, 1998.
(e) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The Fund
pays a 0.10% fee for certain accounts that participate in the Merrill Lynch
Mutual Fund Advisor program. The Fund also pays a $0.20 monthly closed
account charge, which is assessed upon all accounts that close during the
year. This fee begins the month following the month the account is closed
and ends at the end of the calendar year. For the fiscal year ended October
31, 1998, the Fund paid the Transfer Agent fees totaling $9,518. The
Investment Adviser provides accounting services to the Fund at its cost. For
the fiscal year ended October 31, 1998, the Fund reimbursed the Investment
Adviser $37,878 for these services.
(f) For the fiscal year ended October 31, 1998, Merrill Lynch Asset Management,
L.P. ("MLAM") voluntarily waived a portion of the management fee due from
the Fund and reimbursed the Fund for a portion of other expenses. As MLAM
may discontinue its waiver of such fees and reimbursement of expenses, the
table above has been restated to assume the absence of any such waiver or
reimbursement. During the fiscal year ended October 31, 1998, MLAM waived
management fees and reimbursed expenses totaling 0.33% for Class A shares,
0.31% for Class B shares, 0.31% for Class C shares, and 0.33% for Class D
shares after which the Fund's total expense ratio was 0.76% for Class A
shares, 1.23% for Class B shares, 0.95% for Class C shares and 0.89% for
Class D shares.
(g) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.
(h) The shares of the Fund in existence prior to its reorganization at the close
of business on February 14, 1997 have been reclassified as Class D shares.
MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND 5
<PAGE>
Key Facts [CLIPART]
Examples:
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate you
will receive a 5% annual rate of return. Your annual return may be more or less
than the 5% used in this example. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
1 Year 3 Years 5 Years 10 Years
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Class A $210 $443 $695 $1,415
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Class B $257 $486 $839 $1,835
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Class C $254 $477 $824 $1,802
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Class D $223 $483 $764 $1,563
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EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
1 Year 3 Years 5 Years 10 Years
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Class A $210 $443 $695 $1,415
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Class B $157 $486 $839 $1,835
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Class C $154 $477 $824 $1,802
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Class D $223 $483 $764 $1,563
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6 MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND
<PAGE>
Details About the Fund [CLIPART]
ABOUT THE
PORTFOLIO MANAGER
Ralph A. DeCesare is a Vice President and the portfolio manager of the Fund.
Mr. DeCesare has been a Director of the Investment Adviser since 1998 and was a
Vice President of the Investment Adviser from 1993 to 1997.
ABOUT THE
INVESTMENT ADVISER
The Fund is managed by
Merrill Lynch Asset Management.
HOW THE FUND INVESTS
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The Fund's investment objective is to seek the highest possible current income
consistent with the protection of capital afforded by investing primarily in
intermediate-term debt securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities. In other words, the Fund's main goal is to
generate current income. The Fund tries to do this by investing in bonds and
other debt securities that are issued or guaranteed by the U.S. Government or
U.S. Government agencies and organizations. Under normal circumstances all or
substantially all of the Fund's assets will be invested in those securities.
Under normal circumstances, the Fund will maintain a dollar-weighted average
maturity of six to eight years. We cannot guarantee that the Fund will achieve
its goals.
The Fund will invest in a variety of government securities. Certain securities,
such as U.S. Treasury obligations are direct obligations of the U.S. Government.
The Fund also invests in securities that are issued by government-sponsored
enterprises or agencies but are not direct obligations of the U.S. Government.
These securities are, however, backed by the credit of the particular agency or
government-sponsored enterprise that issued the securities and are generally
considered to have a low risk of default by the issuer.
The Fund may invest a portion of its assets in various types of mortgage-backed
securities issued or guaranteed by government-sponsored enterprises such as the
Federal National Mortgage Association. Mortgage-backed securities are backed by
and are repaid from a pool of mortgage loans on residential or commercial real
estate. The actual yield and maturity of many mortgage-backed securities will
vary as the underlying mortgages are paid off more rapidly in response to
falling interest rates or more slowly in response to rising interest rates.
The Fund may also invest in securities that provide a return based on an
interest rate or index. For example, the Fund may invest in a security that
increases in value with a rise in the price of a particular index. In some
cases, the return of the security may be inversely related to the price of the
index. This means that the value of the security will rise as the price of the
index falls and vice versa. Certain indexed securities can provide a degree of
leverage because they may increase or decrease at a greater rate than the price
of the index on which the security is based. Indexed securities also are subject
to the risks related to the underlying index.
MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND 7
<PAGE>
[CLIPART] Details About the Fund
The Fund may lend its portfolio securities under lending arrangements with
brokers, dealers and financial institutions. When lending portfolio securities,
the Fund will receive collateral in cash or securities issued or guaranteed by
the U.S. government equal to at least 100% of the market value of the loaned
securities plus accrued interest. This collateral will be invested by the Fund
in short-term securities and the Fund will retain the income earned from these
investments. The Fund may enter into repurchase agreements with a member bank of
the Federal Reserve System or a primary dealer in the U.S. Government securities
or an affiliate of such dealer. The Fund may also purchase securities on a
when-issued basis or forward commitment basis or sell such securities for
delayed delivery.
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
the Fund. As with any mutual fund, there can be no guarantee that the Fund will
meet its goals or that the Fund's performance will be positive for any period of
time.
Interest Rate Risk -- Prices of bonds generally increase when interest rates
decline and decrease when interest rates increase. This risk is known as
interest rate risk. Prices of longer term securities generally fluctuate more in
response to interest rate changes than do prices of shorter term securities.
Mortgage-Backed Securities -- The value of mortgage-backed securities, like that
of traditional fixed-income securities, typically increases when interest rates
fall and decreases when interest rates rise. However, mortgage-backed securities
are also subject to the risk of prepayment. In a period of declining interest
rates, borrowers may pay what they owe on the underlying assets more quickly
than anticipated, which will reduce the yield to maturity and the average life
of the mortgage-backed securities. In addition, when the Fund reinvests the
proceeds of a prepayment it will likely receive an interest rate lower than the
rate on the security that was prepaid. In a period of rising interest rates,
prepayments may occur at a slower than expected rate. As a result, the average
maturity of the Fund's portfolio will increase. The value of long-term
securities generally changes more widely in response to changes in interest
rates than short-term securities.
8 MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND
<PAGE>
Indexed and Inverse-Indexed Securities -- The Fund may invest in securities
whose potential returns are directly related to changes in an underlying index
or interest rate, known as indexed securities. The return on indexed securities
will rise when the underlying index or interest rate rises and fall when the
index or interest rate falls. The Fund may also invest in securities whose
return is inversely related to changes in an interest rate. In general,
inverse-indexed securities change in value in a manner that is opposite to most
bonds-that is, interest rates on these securities will decrease when interest
rates increase in value and increase in value when interest rates decrease.
Investments in inverse-indexed securities may subject the Fund to the risks of
reduced or eliminated interest payments and losses of principal. In addition,
certain indexed securities and inverse-indexed securities may increase or
decrease in value at a greater rate than the underlying interest rate, which
effectively leverages the Fund's investment. As a result, the market value of
such securities will generally be more volatile than that of fixed rate
securities.
Securities Lending -- Securities lending involves the risk that the borrower to
which the Fund has loaned its securities may not return the securities in a
timely manner or at all. As a result, the Fund may suffer costs and delay in
recovering the loaned securities. In addition, if the Fund does not get back the
securities it loaned and the value of the collateral the Fund received in return
or the loaned securities falls, the Fund could lose money.
When-Issued and Delayed-Delivery Securities -- When-issued and delayed-delivery
securities involve the risk that the security the Fund buys will lose value
prior to its delivery to the Fund. There also is the risk that the security will
not be issued or that the other party will not meet its obligation, in which
case the Fund may lose the investment opportunity for the assets it has set
aside to pay for the security and any gain in the security's price.
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND 9
<PAGE>
Your Account [CLIPART]
MERRILL LYNCH SELECT PRICING (SM) SYSTEM
- --------------------------------------------------------------------------------
The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. It
should be noted that Class C shares are available only through the Exchange
Privilege and may not be purchased except through exchange of Class C shares of
another Fund advised by the Investment Adviser. Each share class represents an
ownership interest in the same investment portfolio. When you choose your class
of shares you should consider the size of your investment and how long you plan
to hold your shares. Your Merrill Lynch Financial Consultant can help you
determine which share class is best suited to your personal financial goals.
For example, if you select Class A or D shares, you pay a sales charge at the
time of purchase. If you buy Class D shares, you also pay an ongoing account
maintenance fee of 0.10%. If you select Class B or C shares, you can invest the
full amount of your purchase price, but you will be subject to a distribution
fee and account maintenance fee payable over time and possibly a deferred sales
charge when you sell shares. You may be eligible for a sales charge waiver. See
below.
If you purchase Class B or C shares, you pay a distribution fee of 0.25% and an
account maintenance fee of 0.25% on an ongoing basis. Because these fees are
paid out of the Fund's assets on an ongoing basis, over time these fees increase
the cost of your investment and may cost you more than paying an initial sales
charge.
The Fund's shares are distributed by Merrill Lynch Funds Distributor, a division
of Princeton Funds Distributor, Inc., an affiliate of Merrill Lynch.
10 MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND
<PAGE>
The table below summarizes key features of the Merrill Lynch Select Pricing(SM)
System.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Availability Limited to certain Generally Available Generally Available Available through
investors including: through Merrill Lynch. through Merrill Lynch. Merrill Lynch. Limited
o Current Class A Limited availability Limited availability availability through
shareholders through other through other other securities
o Certain Retirement securities dealers. securities dealers. dealers.
Plans Class C shares are
o Participants in available only through
certain Merrill the Exchange Privilege.
Lynch sponsored
programs
o Certain affiliates of
Merrill Lynch.
- ------------------------------------------------------------------------------------------------------------------------
Initial Sales Yes. Payable at time No. Entire purchase No. Entire purchase Yes. Payable at time
Charge? of purchase. Lower price is invested in price is invested in of purchase. Lower
sales charges shares of the Fund. shares of the Fund. sales charges
available for larger available for larger
investments. investments.
- ------------------------------------------------------------------------------------------------------------------------
Deferred Sales No. (May be charged Yes. Payable if you Yes. Payable if you No. (May be charged
Charge? for purchases over redeem within four redeem within one for purchases over
$1 million that are years of purchase. year of purchase. $1 million that are
redeemed within redeemed within
one year.) one year.)
- ------------------------------------------------------------------------------------------------------------------------
Account Maintenance No. 0.25% Account 0.25% Account 0.25% Account
and Distribution Maintenance Fee Maintenance Fee Maintenance Fee
Fees? 0.50% Distribution 0.55% Distribution No Distribution Fee.
Fee. Fee.
- ------------------------------------------------------------------------------------------------------------------------
Conversion to No. Yes, automatically No. No.
Class D shares? after approximately
ten years.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The shares of the Fund in existence prior to its reorganization at the close
of business on February 14, 1997 have been reclassified as Class D shares.
Although purchasers of Class D shares generally will pay an initial sales
charge, if you have held shares of the Fund since prior to its reorganization,
you will not pay any sales charge with respect to either your "reclassified"
Class D shares or any Class D shares you may purchase in the future. See page 11
of the Fund's Statement of Additional Information.
MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND 11
<PAGE>
Your Account [CLIPART]
Right of Accumulation -- permits you to
pay the sales charge that would apply to
the cost or value (whichever is higher)
of all shares you own in the Merrill
Lynch mutual funds that offer Select
Pricing options.
Letter of Intent -- permits you to pay
the sales charge that would be
applicable if you add up all shares of
Merrill Lynch Select Pricing System
funds that you agree to buy within a 13
month period. Certain restrictions
apply.
Class A and Class D Shares -- Initial Sales Charge Options
If you select Class A or Class D shares, you will pay a sales charge at the time
of purchase.
Dealer
Compensation
As a % of As a % of as a % of
Your Investment Offering Price Your Investment* Offering Price
- --------------------------------------------------------------------------------
Less than $100,000 1.00% 1.01% 0.95%
- --------------------------------------------------------------------------------
$100,000 but less than
$250,000 0.75% 0.76% 0.70%
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$250,000 but less than
$500,000 0.50% 0.50% 0.45%
- --------------------------------------------------------------------------------
$500,000 but less than
$1,000,000 0.30% 0.30% 0.27%
- --------------------------------------------------------------------------------
$1,000,000 and over** 0.00% 0.00% 0.00%
- --------------------------------------------------------------------------------
* Rounded to the nearest one-hundredth percent.
** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This charge
is 0.20% of the lesser of the original cost of the shares being redeemed or
your redemption proceeds. A sales charge of 0.30% will be charged on
purchases of $1,000,000 or more of Class A or Class D shares by certain
employer sponsored retirement or savings plans.
No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends or distributions.
A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:
o Purchases under a Right of Accumulation or Letter of Intent.
o TMA(SM) Managed Trusts.
o Certain Merrill Lynch investment or central asset accounts.
o Certain employer-sponsored retirement or savings plans.
o Purchases using proceeds from the sale of certain Merrill Lynch
closed-end funds under certain circumstances.
12 MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND
<PAGE>
o Certain investors, including directors of Merrill Lynch mutual funds and
Merrill Lynch employees.
o Certain Merrill Lynch fee-based programs.
Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Consultant can help you determine whether you are eligible to buy
Class A shares or to participate in any of these programs.
If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class A and Class D shares, you should buy Class A
since Class D shares are subject to an account maintenance fee, while Class A
shares are not.
If you redeem Class A or Class D shares and within 30 days buy new shares of the
same class, you will not pay a sales charge on the new purchase amount. The
amount eligible for this "Reinstatement Privilege" may not exceed the amount of
your redemption proceeds. To exercise the privilege, contact your Merrill Lynch
Financial Consultant or the Fund's Transfer Agent at 1-800-MER-FUND.
Class B and Class C Shares -- Deferred Sales Charge Options
If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares or your
Class C shares within one year after purchase, you may be required to pay a
deferred sales charge. You will also pay distribution fees of 0.25% and account
maintenance fees of 0.25% each year. Because these fees are paid out of the
Fund's assets on an ongoing basis, over time these fees increase the cost of
your investment and may cost you more than paying an initial sales charge. The
Distributor uses the money that it receives from the deferred sales charges and
the distribution fees to cover the costs of marketing, advertising and
compensating the Merrill Lynch Financial Consultant or other securities dealer
who assists you in purchasing Fund shares.
If you redeem Class B or Class C shares within one year after purchase, you may
be charged a deferred sales charge of 1.00%. The percentage charge will apply to
the lesser of the original cost of the shares being redeemed or the proceeds of
your redemption. Shares acquired through reinvestment of dividends or
distributions are not subject to a deferred sales charge. Not all
MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND 13
<PAGE>
Your Account [CLIPART]
Merrill Lynch funds have identical deferred sales charge schedules. If you
exchange your shares for shares of another fund, the higher charge will apply.
Class B Shares
The deferred sales charge relating to Class B shares will be reduced or waived
in certain circumstances, such as:
o Certain post-retirement withdrawals from an IRA or other retirement plan
if you are over 59 1/2 years old.
o Redemption by certain eligible 401(a) and 401(k) plans and group plans
participating in certain retirement plan rollovers.
o Redemption in connection with participation in certain Merrill Lynch
fee-based programs.
o Withdrawals resulting from shareholder death or disability as long as
the waiver request is made within one year of death or disability or, if
later, reasonably promptly following completion of probate, or in
connection with involuntary temination of an account in which Fund
shares are held.
o Withdrawal through the Merrill Lynch Systematic Withdrawal Plan of up to
10% per year of your Class B account value at the time the plan is
established.
Your Class B shares convert automatically into Class D shares approximately ten
years after purchase. Any Class B shares received through reinvestment of
dividends or distributions paid on converting shares will also convert at that
time. Class D shares are subject to lower annual expenses than Class B shares.
The conversion of Class B to Class D shares is not a taxable event for Federal
income tax purposes.
Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund convert
approximately ten years after purchase compared to approximately eight years for
equity funds. If you exchange Class B shares with a ten-year conversion schedule
for Class B shares with an eight year conversion
14 MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND
<PAGE>
schedule, or vice versa, the conversion schedule applicable to the Class B
shares acquired in the exchange will apply. If you acquire your Class B shares
in an exchange from another fund, the Fund's ten-year conversion schedule will
apply. If you exchange your Class B shares in the Fund for Class B shares of
another fund, the other fund's conversion schedule will apply. The length of
time that you hold both the original and exchanged Class B shares in both funds
will count toward the conversion schedule. The conversion schedule may be
modified in certain other cases as well.
Class C Shares
The deferred sales charge relating to Class C shares may be reduced or waived in
connection with participation in certain Merrill Lynch fee-based programs,
involuntary termination of an account in which Fund shares are held and
withdrawals though the Merrill Lynch Systematic Withdrawal Plan. The deferred
sales charge relating to Class C shares may also be reduced or waived for
withdrawal through the Merrill Lynch Systematic Withdrawal Plan of up to 10% per
year of the account value at the time the plan is established and in connection
with involuntary termination of an account in which Fund shares are held.
Class C shares do not offer a conversion privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- --------------------------------------------------------------------------------
The following chart summarizes how to buy, sell, transfer and exchange shares
through Merrill Lynch or other securities dealers. You may also buy shares
through the Transfer Agent. To learn more about buying shares through the
Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund
involves many considerations, your Merrill Lynch Financial Consultant may help
you with this decision.
MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND 15
<PAGE>
[CLIPART] Your Account
<TABLE>
<CAPTION>
If You Want to Your Choices Information Important for You to Know
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Buy Shares First, select the share class Refer to the Merrill Lynch Select Pricing table on page 10. Be sure
appropriate for you to read this prospectus carefully.
-------------------------------------------------------------------------------------------------------
Next, determine the amount of The minimum initial investment for the Fund is $1,000 for all
your investment accounts except:
o $500 for Employee Access(SM) Accounts
o $250 for certain Merrill Lynch fee-based programs
o $100 for retirement plans
(The minimums for initial investments may be waived or reduced
under certain circumstances.)
------------------------------------------------------------------------------------------------------
Have your Merrill Lynch The price of your shares is based on the next calculation of net
Financial Consultant or asset value after your order is placed. Any purchase orders placed
securities dealer submit your within fifteen minutes after the close of business on the New York
purchase order Stock Exchange will be priced at the net asset value determined
that day.
Purchase orders received after that time will be priced at the net
asset value determined on the next business day. The Fund may
reject any order to buy shares and may suspend the sale of shares
at any time. Merrill Lynch may charge a processing fee to confirm a
purchase. This fee is currently $5.35.
------------------------------------------------------------------------------------------------------
Or contact the Transfer Agent To purchase shares directly, call the Transfer Agent at 1-800-MER-FUND
and request a purchase application. Mail the completed purchase
application to the Transfer Agent at the address on the inside back
cover of this Prospectus.
- ----------------------------------------------------------------------------------------------------------------------------
Add to Your Purchase additional shares The minimum investment for additional purchases is $50 for all
Investment accounts except that retirement plans have a minimum additional
purchase of $1.
(The minimums for additional purchases may be waived under
certain circumstances.)
------------------------------------------------------------------------------------------------------
Acquire additional shares All dividends and capital gains distributions are automatically
through the automatic reinvested without a sales charge.
dividend reinvestment plan
------------------------------------------------------------------------------------------------------
Participate in the automatic You may invest a specific amount on a periodic basis through
investment plan certain Merrill Lynch investment or central asset accounts.
- ----------------------------------------------------------------------------------------------------------------------------
Transfer Shares to Transfer to a participating You may transfer your Fund shares only to another securities
Another Securities securities dealer dealer that has entered into an agreement with Merrill Lynch. All
Dealer shareholder services will be available for the transferred shares.
You may only purchase additional shares of funds previously
owned before the transfer. All future trading of these assets must
be coordinated by the receiving firm.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
16 MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND
<PAGE>
<TABLE>
<CAPTION>
If You Want to Your Choices Information Important for You to Know
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Transfer Shares to Transfer to a non-participating You must either:
Another Securities securities dealer o Transfer your shares to an account with the Transfer Agent; or
Dealer (contintued) o Sell your shares.
- ----------------------------------------------------------------------------------------------------------------------------
Sell Your Shares Have your Merrill Lynch The price of your shares is based on the next calculation of net
Financial Consultant or asset value after your order is placed. For your request, you
securities dealer submit your must submit your request to your dealer within fifteen minutes
sales order after that day's close of business on the New York Stock Exchange
(generally 4:00 p.m. Eastern time). Any redemption request placed
from a dealer after that time will be priced at the net asset value
at the close of business on the next business day. Dealers must
submit redemption requests to the Fund not more than thirty minutes
after the close of business on the New York Stock Exchange.
Securities dealers, including Merrill Lynch, may charge a fee to
process a redemption of shares. Merrill Lynch currently charges a
fee of $5.35. No processing fee is charged if you redeem shares
directly through the Transfer Agent.
The Fund may reject an order to sell shares under certain
circumstances.
------------------------------------------------------------------------------------------------------
Sell through the Transfer You may sell shares held at the Transfer Agent by writing to the
Agent Transfer Agent at the address on the inside back cover of this
prospectus. All shareholders on the account must sign the letter
and signatures must be guaranteed. If you hold stock certficiates,
return the certificates with the letter. The Transfer Agent will
normally mail redemption proceeds within seven days following
receipt of a properly completed request. If you make a redemption
request before the Fund has collected payment for the purchase of
shares, the Fund or the Transfer Agent may delay mailing your
proceeds. This delay will usually not exceed ten days.
If you hold share certificates, they must be delivered to the
Transfer Agent before they can be converted. Check with the
Transfer Agent or your Merrill Lynch Financial Consultant for
details.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND 17
<PAGE>
[CLIPART] Your Account
<TABLE>
<CAPTION>
If You Want to Your Choices Information Important for You to Know
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sell Shares Participate in the Fund's You can choose to receive systematic payments from your Fund
Systematically Systematic Withdrawal Plan account either by check or through direct deposit to your bank
account on a monthly or quarterly basis. If you have a Merrill Lynch
CMA(R), CBA(R) or Retirement Account you can arrange for
systematic redemptions of a fixed dollar amount on a monthly,
bi-monthly, quarterly, semi-annual or annual basis, subject to
certain conditions. Under either method you must have dividends
and other distributions automatically reinvested. For Class B and C
shares your total annual withdrawals cannot be more than 10%
per year of the value of your shares at the time your plan is
established. The deferred sales charge is waived for systematic
redemption. Ask your Merrill Lynch Financial Consultant for
details.
- ---------------------------------------------------------------------------------------------------------------------------
Exchange Your Select the fund into which you You can exchange your shares of the Fund for shares of many
Shares want to exchange. Be sure to other Merrill Lynch mutual funds. You must have held the shares
read that fund's prospectus used in the exchange for at least 15 calendar days before you
can exchange to another fund.
Each class of Fund shares is generally exchangeable for shares of
the same class of another fund. If you own Class A shares and wish
to exchange into a fund in which you have no Class A shares, you
will exchange into Class D shares.
Some of the Merrill Lynch mutual funds impose a different initial
or deferred sales charge schedule. If you exchange Class A or D
shares for shares of a fund with a higher initial sales charge than
you originally paid, you will be charged the difference at the time
of exchange. If you exchange Class B shares for shares of a fund
with a different deferred sales charge schedule, the higher
schedule will apply. The time you hold Class B or C shares in both
funds will count when determining your holding period for
calculating a deferred sales charge at redemption. If you exchange
Class A or D shares for money market fund shares, you will receive
Class A shares of Summit Cash Reserves Fund. Class B or C shares of
the Fund will be exchanged for Class B shares of Summit.
Although there is currently no limit on the number of exchanges
that you can make, the exchange privilege may be modified or
terminated at any time in the future.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
18 MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND
<PAGE>
Net Asset Value -- the market value of
the Fund's total assets after deducting
liabilities, divided by the number of
shares outstanding.
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
When you buy shares, you pay the net asset value, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. The Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, fifteen minutes after the close of business on the Exchange
(the Exchange generally closes at 4:00 p.m. Eastern time). The net asset value
used in determining your price is the one calculated after your purchase or
redemption order is placed. Foreign securities owned by the Fund may trade on
weekends or other days when the Fund does not price its shares. As a result, the
Fund's net asset value may change on days when you will not be able to purchase
or redeem the Fund's shares.
Generally, Class A shares will have the highest net asset value because that
class has the lowest expenses, and Class D shares will have a higher net asset
value than Class B or Class C shares. Also dividends paid on Class A and Class D
shares will generally be higher than dividends paid on Class B and Class C
shares because Class A and Class D shares have lower expenses.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- --------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by Merrill Lynch, you
may be able to buy Class A shares at net asset value, including by exchanges
from other share classes. Sales charges on the shares being exchanged may be
reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of Fund shares or into a money market fund. The
class you receive may be the class you originally owned when you entered the
program, or in certain cases, a different class. If the exchange is into Class B
shares, the period before conversion to Class D shares may be modified. Any
redemption or exchange will be at net asset value. However, if you participate
in the program for less than a specified period, you may be charged a fee in
accordance with the terms of the program.
MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND 19
<PAGE>
[CLIPART] Your Account
Dividends--ordinary income and capital
gains paid to shareholders. Dividends
may be reinvested in additional Fund
shares as they are paid.
"BUYING A DIVIDEND"
Unless your investment is in a
tax-deferred account, you may want to
avoid buying shares shortly before the
Fund pays a dividend. The reason?
If you buy shares when a fund has
realized but not yet distributed income
or capital gains, you will pay the full
price for the shares and then receive
a portion of the price back in the
form of a taxable dividend. Before
investing you may want to consult
your tax adviser.
Details about these features and the relevant charges are included in the client
agreement for each fee-based program and are available from your Merrill Lynch
Financial Consultant.
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
The Fund will distribute any net investment income monthly, and any net realized
capital gains annually. If your account is with Merrill Lynch and you would like
to receive dividends in cash, contact your Merrill Lynch Financial Consultant.
If your account is with the Transfer Agent and you would like to receive
dividends in cash, contact the Transfer Agent.
You will pay tax on dividends from the Fund whether you receive them in cash or
additional shares. If you redeem Fund shares or exchange them for shares of
another fund, any gain on the transaction may be subject to tax. The Fund
intends to make distributions that will either be taxed as ordinary income or
capital gains. Under normal circumstances, the Fund expects that its
distributions will consist primarily of ordinaty income. Capital gain dividends
are generally taxed at different rates than ordinary dividends.
If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include
distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
By law, the Fund must withhold 31% of your dividends and proceeds if you have
not provided a taxpayer identification number or social security number.
This section summarizes some of the consequences under current federal tax law
of an investment in the Fund. It is not a substitute for personal tax advice.
Consult your personal tax adviser about the potential tax consequences of an
investment in the Fund under all applicable tax laws.
20 MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND
<PAGE>
Management of the Fund [CLIPART]
MERRILL LYNCH ASSET MANAGEMENT
- --------------------------------------------------------------------------------
Merrill Lynch Asset Management, the Fund's Investment Adviser, manages
the Fund's investments and its business operations under the overall supervision
of the Fund's Board of Trustees. The Investment Adviser has the responsibility
for making all investment decisions for the Fund. The Investment Adviser has a
sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited, an
affiliate, under which the Investment Adviser may pay a fee for services it
receives. The Fund pays the Investment Adviser a fee at the annual rate of 0.40%
of the average daily net assets of the Fund. For the fiscal year ended October
31, 1998 the Investment Adviser received a management fee of $150,322 (based on
average daily net assets of approximately $37.7 million), $122,202 of which the
Investment Adviser voluntarily reimbursed to the Fund.
Merrill Lynch Asset Management is part of Merrill Lynch Asset Management Group,
which had approximately $507 billion in investment company and other portfolio
assets under management as of January 1999. This amount includes assets managed
for Merrill Lynch affiliates.
A Note About Year 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund management that they also
expect to resolve the Year 2000 Problem, and the Fund's management will continue
to monitor the situation as the Year 2000 approaches. However, if the problem
has not been fully addressed, the Fund could be negatively affected. The Year
2000 Problem could also have a negative impact on the companies in which the
Fund invests, and this could hurt the Fund's investment returns.
MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND 21
<PAGE>
Management of the Fund [CLIPART]
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned on an investment in the
Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along with
the Fund's financial statements, are included in the Fund's annual report to
shareholders, which is available upon request.
In connection with its reorganization at the close of business on February 14,
1997, the Fund changed its investment objective. For the period from the
commencement of the Fund's operations through its reorganization at the close of
business on February 14, 1997, the portfolio of the Fund has consisted primarily
of securities issued by the U.S. Government and its agencies and
instrumentalities. The average maturity of the Fund's portfolio during this
period (generally ranging from two to five years) has been somewhat shorter than
the average maturity of the Fund of six to eight years following the change in
its investment objective upon its reorganization. As a result, the financial
information in the table below for operations of the Fund prior to its
reorganization may not be indicative of its performance following its
reorganization.
<TABLE>
<CAPTION>
Class A Class B Class C
------------------------------- ------------------------------- --------------------------------
For the For the period For the For the period For the For the period
Increase (Decrease) in Year Ended Feb. 18, 1997+ Year Ended Feb. 18, 1997+ Year Ended Feb. 18, 1997+
Net Asset Value: Oct. 31, 1998 to Oct. 31, 1997 Oct. 31, 1998 to Oct. 31, 1997 Oct. 31, 1998 to Oct. 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $9.74 $9.66 $9.74 $9.66 $ 9.73 $9.66
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income--net .59 .39 .54 .37 .57 .36
- -----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized
gain on investments--net .37 .08 .37 .08 .38 .07
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .96 .47 .91 .45 .95 .43
- -----------------------------------------------------------------------------------------------------------------------------------
Less dividends from investment
income--net (.59) (.39) (.54) (.37) (.57) (.36)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $10.11 $9.74 $10.11 $9.74 $10.11 $9.73
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investment Return**:
- -----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 10.23% 5.04%# 9.68% 4.81%# 10.05% 4.57%#
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement .76% 1.12%* 1.23% 1.39%* .95% 1.47%*
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses 1.09% 2.08%* 1.54% 2.42%* 1.26% 2.64%*
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income--net 5.99% 5.95%* 5.34% 5.69%* 5.54% 5.55%*
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year
(in thousands) $1,905 $ 425 $39,975 $ 829 $4,674 $ 47
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 108.06% 201.55% 108.06% 201.55% 108.06% 201.55%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
22 MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND
<PAGE>
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class D
-----------------------------------------------------------
For the Year Ended October 31,
-----------------------------------------------------------
Increase (Decrease) in
Net Asset Value: 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
- --------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 9.74 $ 9.68 $ 9.82 $ 9.60 $ 10.31
- --------------------------------------------------------------------------------------------------
Investment income--net .58 .55 .61 .62 .55
- --------------------------------------------------------------------------------------------------
Realized and unrealized
gain (loss) on investments--net .37 .06 (.14) .22 (.71)
- --------------------------------------------------------------------------------------------------
Total from investment operations .95 .61 .47 .84 (.16)
- --------------------------------------------------------------------------------------------------
Less dividends from investment
income--net (.58) (.55) (.61) (.62) (.55)
- --------------------------------------------------------------------------------------------------
Net asset value, end of year $ 10.11 $ 9.74 $ 9.68 $ 9.82 $ 9.60
- --------------------------------------------------------------------------------------------------
Total Investment Return*:
- --------------------------------------------------------------------------------------------------
Based on net asset value per share 10.12% 6.60% 4.87% 9.00% (1.54)%
- --------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- --------------------------------------------------------------------------------------------------
Expenses, net of reimbursement .89% 1.25% .97% .96% .83%
- --------------------------------------------------------------------------------------------------
Expenses 1.22% 1.69% .97% .96% .83%
- --------------------------------------------------------------------------------------------------
Investment income--net 5.94% 5.71% 6.19% 6.38% 5.55%
- --------------------------------------------------------------------------------------------------
Supplemental Data:
- --------------------------------------------------------------------------------------------------
Net assets,end of year
(in thousands) $34,408 $28,805 $47,281 $65,139 $81,407
- --------------------------------------------------------------------------------------------------
Portfolio turnover 108.06% 201.55% 51.44% 47.90% 172.51%
- --------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND 23
<PAGE>
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MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND
<PAGE>
(This page intentionally left blank)
MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND
<PAGE>
(This page intentionally left blank)
MERRILL LYNCH INTERMEDIATE GOVERNMENT BOND FUND
<PAGE>
---------------------------------
POTENTIAL
INVESTORS
Open an account (two options)
---------------------------------
(1) (2)
- ---------------------------- -----------------------------------
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT Financial Data Services, Inc.
OR SECURITIES DEALER P.O. Box 45289
Jacksonville, Florida 32232-5289
Advises shareholders on
their fund investments. Performs recordkeeping and
- ---------------------------- reporting services.
-----------------------------------
----------------------------------------------------
DISTRIBUTOR
Merrill Lynch Funds Distributor,
a division of Princeton Funds Distributor, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of fund shares.
----------------------------------------------------
- ------------------------ ---------------------------------
COUNSEL CUSTODIAN
------------------
Rogers & Wells LLP THE FUND State Street Bank and
200 Park Avenue Trust Company
New York, New York 10166 The Board of P.O. Box 351
Trustees oversees Boston, Massachusetts 02101
Provides legal advice the Fund.
to the Fund. ------------------ Holds the Fund's
- ------------------------ assets for safekeeping.
---------------------------------
- ----------------------------------- ------------------------------------
INDEPENDENT AUDITORS INVESTMENT ADVISER
Deloitte & Touche LLP Merrill Lynch Asset Management, L.P.
117 Campus Drive
Princeton, New Jersey 08540-6400 ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Audits the financial Plainsboro, New Jersey 08536
statements of the Fund on behalf of
the shareholders. MAILING ADDRESS
- ----------------------------------- P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's
day-to-day activities.
------------------------------------
<PAGE>
For More Information [CLIPART]
Shareholder Reports
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. You
may obtain these reports at no cost by calling 1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your Merrill Lynch Financial
Consultant or write to the Transfer Agent at its mailing address. Include your
name, address, tax identification number and Merrill Lynch brokerage or mutual
fund account number. If you have any questions, please call your Merrill Lynch
Financial Consultant or the Transfer Agent at 1-800-MER-FUND.
Statement of Additional Information
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc. P.O. Box 45289 Jacksonville, Florida 32232-5289 or
by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund at the telephone
number or address indicated on the inside back cover of this prospectus if you
have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by writing the Public Reference Section of the SEC, Washington, D.C. 20549-6009.
You should rely only on the information contained in this prospectus. No one is
authorized to provide you with information that is different from information
contained in this Prospectus.
Investment Company Act file #811-4839
Code #10431-0399R
(C)Fund Asset Management, L.P.
[LOGO] Merrill Lynch
Merrill Lynch Intermediate
Government Bond Fund
March 9, 1999
(Revised as of May 21, 1999)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Merrill Lynch Intermediate Government Bond Fund
P.O. Box 9011, Princeton, New Jersey 08543-9011 o Phone No. (609) 282-2800
----------
Merrill Lynch Intermediate Government Bond Fund (the "Fund") is a
diversified mutual fund that seeks the highest possible current income
consistent with the protection of capital afforded by investing primarily in
intermediate- term debt securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities. Under normal circumstances, all or
substantially all of the Fund's assets will be invested in such securities.
Under normal market conditions, the Fund will maintain a dollar-weighted average
maturity of six to eight years. There can be no assurance that the Fund's
investment objective will be achieved.
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. Class C shares of the Fund are available only
through the Exchange Privilege. 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
"Purchase of Shares."
----------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the Prospectus of the Fund (the
"Prospectus") dated March 9, 1999, (revised as of May 21, 1999) which has been
filed with the Securities and Exchange Commission (the "Commission") and can be
obtained, without charge, by calling (800) 637-3863 or by writing the Fund at
the above address. The Prospectus is incorporated by reference into this
Statement of Additional Information, and this Statement of Additional
Information is incorporated into the Prospectus.
----------
Merrill Lynch Asset Management -- Investment Adviser
Merrill Lynch Funds Distributor -- Distributor
----------
The date of this Statement of Additional Information is March 9, 1999
(revised as of May 21, 1999)
<PAGE>
TABLE OF CONTENTS
Investment Objectives and Policies ........................................ 2
Risk Factors and Special Considerations ................................... 3
Investment Restrictions ................................................. 3
Management of the Fund .................................................... 6
Trustees and Officers ................................................... 6
Compensation of Trustees .................................................. 7
Management and Advisory Arrangements ...................................... 8
Code of Ethics .......................................................... 9
Purchase of Shares ........................................................ 10
Initial Sales Charge Alternatives-- Class A and Class D Shares .......... 11
Reduced Initial Sales Charges ........................................... 12
Deferred Sales Charge Alternatives-- Class B and Class C Shares ......... 15
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements .......................................................... 17
Distribution Plans ...................................................... 18
Limitations on the Payment of Deferred Sales Charges .................... 19
Redemption of Shares ...................................................... 20
Redemption .............................................................. 21
Repurchase .............................................................. 21
Reinstatement Privilege ................................................. 21
Pricing of Shares ......................................................... 22
Determination of Net Asset Value ........................................ 22
Computation of Offering Price Per Share ................................. 23
Portfolio Transactions and Brokerage ...................................... 23
Transactions in Portfolio Securities .................................... 23
Portfolio Turnover ........................................................ 24
Shareholder Services ...................................................... 24
Investment Account ...................................................... 24
Fee-Based Programs ...................................................... 25
Retirement Plans ........................................................ 25
Exchange Privilege ...................................................... 26
Automatic Investment Plans .............................................. 28
Automatic Dividend Program .............................................. 28
Systematic Withdrawal Plan .............................................. 28
Dividends and Taxes ....................................................... 29
Dividends ............................................................... 29
Taxes ................................................................... 30
Performance Data .......................................................... 32
General Information ....................................................... 35
Description of Shares ................................................... 35
Independent Auditors .................................................... 36
Custodian ............................................................... 36
Transfer Agent .......................................................... 36
Legal Counsel ........................................................... 36
Reports to Shareholders ................................................. 36
Shareholder Inquiries ................................................... 37
Additional Information .................................................. 37
Financial Statements ...................................................... 37
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Fund is a diversified, open-end management investment company. The
investment objective of the Fund is to seek the highest possible current income
consistent with the protection of capital afforded by investing primarily in
intermediate-term debt securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities. Under normal circumstances, all or
substantially all of the Fund's assets will be invested in such securities.
Under normal market conditions, the Fund will maintain a dollar-weighted average
maturity of six to eight years. For purposes of applying these limits, the Fund
will consider a fixed-income security's maturity to be its stated maturity (the
date the issuer is scheduled to make its final payment of principal), except
that
o for a security with an unconditional put entitling a Fund to receive
the security's approximate amortized cost, the maturity will be
considered to be the next put date;
o for mortgage-backed and other amortizing securities, the maturity will
be considered to be the average life remaining (the length of time it
is expected to take to retire half of the remaining principal through
amortizing payments) based on prepayment assumptions that the Fund
manager believes to be reasonable;
o for a variable or floating rate investment grade security that the Fund
manager believes will have a market value approximating amortized cost
on the next interest reset date, the maturity will be considered to be
the next reset date; and
o for a Fund that operates under SEC rules that specifically define the
maturity of a security, the maturity of a security will be the maturity
determined in a manner consistent with the SEC rules.
Certain of the securities in which the Fund invests are supported by the
full faith and credit of the U.S. Government, such as U.S. Treasury obligations.
Other of the securities in which the Fund invests are not supported by the full
faith and credit of the U.S. Government but are issued by U.S. Government
agencies, instrumentalities or government-sponsored enterprises. Such securities
are generally supported only by the credit of the agency, instrumentality or
enterprise issuing the security and are generally considered to have a low
principal risk. However, because of the longer-term maturities of the securities
in which the Fund will invest, interest rate fluctuations may adversely affect
the market value of such securities. As interest rates rise, the value of
fixed-income securities will fall, adversely affecting the net asset value of
the Fund.
Mortgaged-Backed Securities. The value of mortgage-backed securities, like
that of traditional fixed-income securities, typically increases when interest
rates fall and decreases when interest rates rise. However, mortgage-backed
securities are also subject to the risk of prepayment. In a period of declining
interest rates, borrowers may pay what they owe on the underlying assets more
quickly than anticipated, which will reduce the yield to maturity and the
average life of the mortgage-backed securities. In addition, when the Fund
reinvests the proceeds of a prepayment it will likely receive an interest rate
lower than the rate on the security that was prepaid. In a period of rising
interest rates, prepayments may occur at a slower than expected rate. As a
result, the average maturity of the Funds portfolio will increase. The value of
long-term securities generally changes more widely in response to changes in
interest rates than short-term securities.
Indexed and Inverse Securities. The Fund may invest in securities whose
potential return is based on the changes in particular measurements of value or
an interest rate (an "index"). As an illustration, the Fund may invest in a
security that pays interest and returns of principal based on the change in an
index of interest rates or on the value of an index. Interest and principal
payable on a security may also be based on relative changes among particular
indices. In addition, the Fund may invest in securities whose potential
investment return is inversely based on the change in particular indices. For
example, the Fund may invest in securities that pay a higher rate of interest
and principal when a particular index decreases and pay a lower rate of interest
and principal when the value of the index increases. To the extent that the Fund
invests in such types of securities, it will be subject to the risks associated
with changes in the particular indices, which may include reduced or eliminated
interest payments and losses of invested principal.
Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities will
generally be more volatile than the market
2
<PAGE>
values of fixed-rate securities. The Fund believes that indexed securities,
including inverse securities, represent flexible portfolio management
instruments that may allow the Fund to seek potential investment rewards, hedge
other portfolio positions, or vary the degree of portfolio leverage relatively
efficiently under different market conditions.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment Restrictions
The Fund has adopted the following 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
(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. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or management.
4. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 331/3% of its total
assets (including the amount borrowed), (ii) the Fund may, to the extent
permitted by applicable law, borrow up to an additional 5% of its total
assets for temporary purposes, (iii) the Fund may obtain such short-term
credit as may be necessary for the clearance of purchases and sales of
portfolio securities and (iv) the Fund may purchase securities on margin to
the extent permitted by applicable law. The Fund may not pledge its assets
other than to secure such borrowings or, to the extent permitted by the
Fund's investment policies as set forth in its Prospectus and Statement of
Additional Information, as they may be amended from time to time, in
connection with hedging transactions, short sales, when-issued and forward
commitment transactions and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933, as
amended (the "Securities Act") in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and the
Fund's Prospectus and Statement of Additional Information, as they may be
amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
3
<PAGE>
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. As a matter of policy,
however, the Fund will not purchase shares of any registered open-end
investment company or registered unit investment trust, in reliance on
Section 12(d) (1) (F) or (G) (the "fund of funds" provisions) of the
Investment Company Act at any time the Fund's shares are owned by another
investment company that is part of the same group of investment companies as
the Fund.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. 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.
d. Notwithstanding fundamental investment restriction (7) above, the
Fund will not borrow amounts in excess of 5% of the total assets of the Fund,
taken at market value, and then only from banks as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares. In
addition, the Fund will not purchase securities while borrowings are
outstanding.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving Merrill Lynch except pursuant to an
exemptive order or otherwise in compliance with the provisions of the Investment
Company Act and the rules and regulations thereunder. Included among such
restricted transactions are (i) purchases from or sales to Merrill Lynch of
securities in transactions in which Merrill Lynch acts as principal, and (ii)
purchases of securities from underwriting syndicates of which Merrill Lynch is a
member.
Mortgage-Backed Securities. Mortgage-backed securities are "pass-through"
securities, meaning that principal and interest payments made by the borrower on
the underlying mortgages are passed through to the Fund. The value of
mortgage-backed securities, like that of traditional fixed-income securities,
typically increases when interest rates fall and decreases when interest rates
rise. However, mortgage-backed securities differ from traditional fixed-income
securities because of their potential for prepayment without penalty. The price
paid by the Fund for its mortgage-backed securities, the yield the Fund expects
to receive from such securities and the average life of the securities are based
on a number of factors, including the anticipated rate of prepayment of the
underlying mortgages. In a period of declining interest rates, borrowers may
prepay the underlying mortgages more quickly than anticipated, thereby reducing
the yield to maturity and the average life of the mortgage-backed securities.
Moreover, when the Fund reinvests the proceeds of a prepayment in these
circumstances, it will likely receive a rate of interest that is lower than the
rate on the security that was prepaid. To the extent that the Fund purchases
mortgaged-backed securities at a premium, mortgage foreclosures and principal
prepayments may result in a loss to the extent of the premium paid. If the Fund
buys such securities at a discount, both scheduled payments of principal and
unscheduled prepayments will increase current and total returns and will
accelerate the recognition of income which, when distributed to shareholders,
will be taxable as ordinary income. In a period of rising interest rates,
prepayments of the underlying mortgages may occur at a slower than expected
rate, creating maturity extension risk. This particular risk may effectively
change a security that was considered short or intermediate-term at the time of
purchase into a long-term security. Since long-term securities generally
fluctuate more widely in response to changes in interest rates than shorter-term
securities, maturity extension risk could increase the inherent volatility of
the Fund.
Indexed and Inverse-Indexed Securities. The Fund may invest in securities
whose potential returns are directly related to changes in an underlying index
or interest rate, known as indexed securities. The return on indexed securities
will rise when the underlying index or interest rate rises and fall when the
index or interest rate falls. The Fund may also invest in securities whose
return is inversely related to changes in an interest rate. In general,
inverse-indexed securities change in value in a manner that is opposite to most
bonds -- that is, interest
4
<PAGE>
rates on these securities will decrease when interest rates increase in value
and increase in value when interest rates decrease. Investments in
inverse-indexed securities may subject the Fund to the risks of reduced or
eliminated interest payments and losses of principal. In addition, certain
indexed securities and inverse-indexed securities may increase or decrease in
value at a greater rate than the underlying interest rate, which effectively
leverages the Fund's investment. As a result, the market value of such
securities will generally be more volatile than that of fixed rate securities.
Lending of Portfolio Securities. Subject to investment restriction (5)
above, the Fund from time to time may lend securities from its portfolio to
brokers, dealers and financial institutions and receive as collateral cash or
United States Treasury securities which at all times while the loan is
outstanding will be maintained in amounts equal to at least 100% of the current
market value of the loaned securities. Any cash collateral will be invested in
short-term securities, which will increase the current income of the Fund. Such
loans, which will not have terms longer than 30 days, will be terminable at any
time. 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 of dividends, interest or other distributions. The Fund may
pay reasonable fees to persons unaffiliated with the Fund for services in
arranging such loans. In the event of a default by the borrower, the Fund may
suffer time delays and incur costs or possible losses in connection with the
disposition of the collateral.
Forward Commitments. U.S. Government securities and corporate debt
obligations may be purchased on a forward commitment basis at fixed purchase
terms with periods of up to 45 days between the commitment and settlement dates.
The purchase will be recorded on the date the Fund enters into the commitment
and the value of the security will thereafter be reflected in the calculation of
the Fund's net asset value. The value of the security on the delivery date may
be more or less than its purchase price. A separate account of the Fund will be
established with the Custodian consisting of cash or liquid high grade debt
obligations having a market value at all times until the delivery date at least
equal to the amount of the forward commitment. Although the Fund will generally
enter into forward commitments with the intention of acquiring securities for
its portfolio, the Fund may dispose of a commitment prior to settlement if the
Investment Adviser deems it appropriate to do so. There can, of course, be no
assurance that the judgments upon which these techniques are based will be
accurate or that such techniques when applied will be effective. The Fund will
enter into forward commitment arrangements only with respect to securities in
which it may otherwise invest.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Under such agreements, the seller agrees, upon entering
into the contract, to repurchase the security at a mutually agreed-upon time and
price, thereby determining the yield during the term of the agreement. This
results in a fixed rate of return insulated from market fluctuations during such
period. Such agreements usually cover short periods, such as under one week.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
The Fund will require the seller to provide additional collateral if the market
value of the securities falls below the repurchase price at any time during the
term of the repurchase agreement. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. Instead of the contractual fixed rate of return,
the rate of return to the Fund will be dependent upon intervening fluctuations
of the market value of such security and the accrued interest on the security.
In such event, the Fund would have rights against the seller for breach of
contract with respect to any losses arising from market fluctuations following
the failure of the seller to perform. From time to time, the Fund also may
invest in securities pursuant to purchase and sale contracts. While the
substance of purchase and sale contracts is similar to 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. As a matter of operating policy, the Fund will not enter
into repurchase agreements or purchase and sale contracts with greater than
seven days to maturity if, at the time of such investment, more than 10% of the
total assets of the Fund would be so invested.
5
<PAGE>
MANAGEMENT OF THE FUND
Trustees and Officers
The Trustees and officers of the Fund, their ages, principal occupations
for at least the last five years and the public companies for which they serve
as directors are set forth below. Unless otherwise stated, the address of each
Trustee and officer is One Financial Center, 23rd Floor, Boston, Massachusetts
02111-2646.
ROBERT W. CROOK (63) -- President and Trustee(1)(2) -- Senior Vice
President of Merrill Lynch Asset Management, L.P. ("MLAM") and of Princeton
Funds Distributor, Inc. ("PFD") since 1990.
A. BRUCE BRACKENRIDGE (69) -- Trustee(2) -- 9 Elm Lane, Bronxville, New
York 10708. Group Executive of J.P. Morgan & Co., Inc. (banking) and Morgan
Guaranty Trust Company from 1979 to 1991 and an employee of J.P. Morgan in
various capacities from 1952 to 1991.
CHARLES C. CABOT, JR. (68) -- Trustee(2) -- One Post Office Square, Boston,
Massachusetts 02119. Partner of the law firm Sullivan & Worcester and associated
with that firm since 1966.
JAMES T. FLYNN (59) -- Trustee(2) -- 340 East 72nd Street, New York, New
York 10021. Chief Financial Officer of J.P. Morgan & Co., Inc. from 1990 to 1995
and an employee of J.P. Morgan in various capacities from 1967 to 1995.
TERRY K. GLENN (58) -- Trustee(1)(2) -- P.O. Box 9011, Princeton, New
Jersey 08543-9011. Executive Vice President of MLAM and FAM since 1983;
Executive Vice President and Director of Princeton Services, Inc. ("Princeton
Services") since 1993; President of PFD since 1986 and Director thereof since
1991; President of Princeton Administrators, L.P. since 1988.
TODD GOODWIN (67) -- Trustee -- 600 Madison Avenue, New York, New York,
10022; General Partner of Gibbons, Goodwin, van Amerongen (investment banking
firm) since 1984; Director of Wells Aluminum Co. (aluminum extrusions), The
Rival Company (electrical appliance manufacturer), U.S. Energy Systems
(independent power producer) and Johns Manville Corporation (building
materials).
GEORGE W. HOLBROOK, JR. (68) -- Trustee(2) -- 107 John Street, Southport,
Connecticut 06490. Managing Partner of Bradley Resources Company (private
investment company) and associated with that firm and its predecessors since
1953; Director of Canyon Resources Corporation (mineral exploration company);
Director of Thoratec Laboratories Corporation (medical device manufacturer).
W. CARL KESTER (47) -- Trustee(2) -- Harvard Business School, Morgan Hall
393, Soldiers Field, Boston, Massachusetts 02163; James R. Williston Professor
of Business Administration of Harvard University Graduate School of business
since 1997, MBA Class of 1958 Professor of Business Administration of Harvard
University Graduate School of Business Administration from 1981 to 1997;
Independent Consultant since 1978.
MICHAEL J. BRADY (40)-- Senior Vice President(2) -- Vice President of MLAM
since 1993; Vice President of PFD since 1990.
WILLIAM M. BREEN (44) -- Senior Vice President and Assistant Treasurer(2)
- -- Vice President of MLAM since 1993; Vice President of PFD since 1990.
JAMES J. FATSEAS (43)-- Senior Vice President(2) -- Vice President of MLAM
since 1993; Vice President of PFD since 1990.
JOSEPH T. MONAGLE, JR. (50) -- Senior Vice President(2) -- Senior Vice
President of MLAM and FAM since 1983; Department Head of the Global Fixed Income
Division of MLAM and FAM since 1997; Senior Vice President of Princeton Services
since 1993.
WILLIAM WASEL (40) -- Senior Vice President(2) -- Vice President of MLAM
since 1993; Vice President of PFD since 1990.
DONALD C. BURKE (38) -- Vice President and Treasurer(2) -- P.O. Box 9011,
Princeton, New Jersey 08543-9011. Senior Vice President and Treasurer of MLAM
and FAM since 1999; Senior Vice President and Treasurer of Princeton Services
since 1999; Vice President of PFD since 1999; First Vice President of MLAM from
1997 to 1999; Vice President of MLAM from 1990 to 1997; Director of Taxation of
MLAM since 1990.
6
<PAGE>
ANN CATLIN (37) -- Vice President(2) -- Employee of PFD since 1986.
DIANA FRANKLAND (63) -- Vice President(2) -- Employee of PFD since 1979.
RALPH A. DECESARE (38) -- Vice President and Portfolio Manager -- Director
(Global Fixed Income) of MLAM since 1998; Vice President of MLAM from 1993 to
1998.
MARK E. MAGUIRE (38) -- Vice President(2) -- Assistant Vice President of
PFD since 1990.
PATRICIA A. SCHENA (41) -- Vice President(2) -- Assistant Vice President of
PFD since 1990.
BARRY F. X. SMITH (33) -- Vice President(2) -- Employee of PFD since 1987.
KAREN D. YOUNG (34) -- Vice President(2) -- Employee of MLFD since 1982.
DIANNE F. MCDONOUGH (37) -- Vice President(2) -- Employee of MLFD since
1983.
PHILLIP S. GILLESPIE (35) -- Secretary -- P.O. Box 9011, Princeton, New
Jersey 08543-9011. Vice President of MLAM since 1999, attorney with MLAM from
1998 to 1999. Prior to 1998, Mr. Gillespie was Assistant General Counsel of
Chancellor LGT Asset Management, Inc. and from 1993 to 1997 was a Senior Counsel
and Attorney in the Division of Investment Management and the Office of General
Counsel at the U.S. Securities and Exchange Commission.
- -----------------
(1) These Trustees may be deemed to be "interested persons" of the Fund as that
term is defined in the Investment Company Act of 1940. Mr. Crook and Mr.
Glenn are officers of MLFD and MLAM.
(2) Director/trustee or officer of certain other investment companies for which
FAM or MLAM acts as investment adviser.
COMPENSATION OF TRUSTEES
Set forth below is a chart showing, for the fiscal year ended October 31, 1998,
compensation paid by the Fund to the non-affiliated Trustees and, for the
calendar year ending December 31, 1998, the aggregate compensation paid by all
investment companies advised by MLAM and its affiliates, FAM (collectively, the
"Fund Complex") and Mercury Asset Management to the non-affiliated Trustees.
Aggregate
Compensation
Pension or from Fund and
Retirement Benefits FAM/MLAM
Compensation Accrued as Part of Advised Funds
Name of Trustee from Fund Fund Expenses Paid to Trustee
--------------- --------- ------------- ---------------
A. Bruce Brackenridge(1) .... $6,000 None $39,000
Charles C. Cabot, Jr.(1) .... 6,000 None 39,000
James T. Flynn(1) ........... 6,000 None 49,000
Todd Goodwin ................ 1,500 None 21,000
George W. Holbrook, Jr.(1) .. 6,000 None 49,000
W. Carl Kester(1) ........... 6,000 None 39,000
- --------------
(1) Inaddition to the Fund, the Trustees serve on other FAM/MLAM Advised Funds
as follows: Mr. Brackenridge (2) registered investment companies consisting
of (6) portfolios; Mr. Cabot (2) registered investment companies consisting
of (6) portfolios; Mr. Flynn (2) registered investment companies consisting
of (6) portfolios; Mr. Goodwin (2) registered investment companies
consisting of (7) portfolios; Mr. Holbrook (2) registered investment
companies consisting of (6) portfolios; and Mr. Kester (2) registered
investment companies consisting of (6) portfolios.
At December 1, 1998, the officers and trustees of the Fund as a group
(twenty-five persons) owned an aggregate of less than 1% of the outstanding
shares of common stock of Merrill Lynch & Co., Inc. ("ML & Co.") and owned less
than 1% of the outstanding shares of the Fund.
The trustees have an Audit and Nominating Committee, the members of which
are Messrs. Brackenridge, Cabot, Flynn, Holbrook and Kester.
Each Trustee who is not an officer or employee of ML & Co. or its
subsidiaries will be paid $6,000 annually in his capacity as Trustee. All
Trustees will be reimbursed for any expenses incurred in attending meetings of
the Board of Trustees of the Fund or of any committee thereof. No officer or
employee of ML & Co. or its subsidiaries will receive any compensation from the
Fund for acting as a Trustee or officer of the Fund.
7
<PAGE>
MANAGEMENT AND INVESTMENT ADVISORY ARRANGEMENTS
The Investment Adviser to the Fund is MLAM, an indirect wholly owned
subsidiary of Merrill Lynch & Co., Inc. The Investment Adviser acts as the
investment adviser for the Fund and provides the Fund with management services.
The Investment Adviser (the general partner of which is Princeton Services Inc.,
a wholly owned subsidiary of ML & Co.) has its principal place of business at
800 Scudders Mill Road, Plainsboro, New Jersey 08536 (mailing address: P.O. Box
9011, Princeton, New Jersey 08543-9011). ML & Co. has its principal place of
business at 250 Vesey Street, New York, New York 10281. The Investment Adviser
or its affiliate, Fund Asset Management, L.P. ("FAM"), acts as the investment
adviser for more than 140 registered investment companies. The Investment
Adviser also offers portfolio management and portfolio analysis services to
individual and institutional accounts. As of December 31, 1998, the Investment
Adviser and FAM had a total of $501 billion in investment company and other
portfolio assets under management, including accounts of certain affiliates of
the Investment Adviser.
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. Similarly,
the following entities may be considered "controlling persons" of MLAM U.K.:
Merrill Lynch Europe Limited (MLAM U.K.'s parent), a subsidiary of ML
International Holdings, a subsidiary of Merrill Lynch International, Inc.,
subsidiary of ML & Co.
The Investment Adviser has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with 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 that the Investment Adviser actually receives for
providing services to the Fund pursuant to the Investment Advisory Agreement.
The address of the sub-adviser is Milton Gate, 1 Moor Lane, London EC2Y 9HA,
England.
Pursuant to the terms of the Investment Advisory Agreement, the Investment
Adviser, subject to the general supervision of the Trustees of the Fund and in
conformance with the stated policies of the Fund, renders investment supervisory
and administrative services to the Fund. In this regard, it is the
responsibility of the Investment Adviser to make investment decisions for the
Fund and to place the purchase and sale orders for the portfolio transactions of
the Fund. In addition the Investment Adviser performs, or supervises the
performance of, administrative services in connection with the Fund, including
(i) supervision of all aspects of the Fund's administration and operations,
including processing services related to the purchase and redemption of Fund
shares, the general handling of shareholder relations, and portfolio management;
(ii) providing the Fund, at the Investment Adviser's expense, with the services
of persons competent to perform such administrative and clerical functions as
are necessary in order to provide effective administration of the Fund; and
(iii) providing the Fund, at the Investment Adviser's expense, with adequate
office space and related services. The Investment Adviser may arrange for the
provision of these administrative services and functions by MLFD or another
affiliate of ML & Co.
The Investment Advisory Agreement obligates the Investment Adviser to pay
all compensation of and furnish office space for officers and employees of the
Fund connected with investment and economic research, trading and investment
management of the Fund, as well as compensation of all Trustees of the Fund who
are affiliated persons of ML & Co. or any of its subsidiaries. The Fund pays all
other expenses incurred in the operation of the Fund including, among other
things, taxes, expenses for legal and auditing services, costs of printing
proxies, stock certificates, shareholder reports, prospectuses and statements of
additional information (except to the extent paid by the Distributor), charges
of the custodian and the transfer agent, expenses of redemption of shares,
Securities and Exchange Commission fees, expenses of registering the shares
under Federal and state securities 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 for the Fund by the Investment
Adviser, and the Fund reimburses the Investment Adviser for its costs in
connection with those services. MLFD pays certain of the expenses of the Fund in
connection with the continuous offering of Fund
8
<PAGE>
shares. Certain distribution expenses will be financed by the Fund pursuant to
the Distribution Plans in compliance with Rule 12b-1 under the Investment
Company Act of 1940. See "Distribution Plans."
As compensation for the services rendered under the Investment Advisory
Agreement, the Fund pays the Investment Adviser a fee, payable monthly, at an
annual rate of 0.40% of the Fund's average daily net assets. MLAM received
$150,322 (based on average daily net assets of approximately $37.7 million) in
investment advisory fees from the Fund during the Fund's fiscal year ended
October 31, 1998, of which $122,202 was voluntarily waived. MLAM also
voluntarily reimbursed the Fund for additional expenses of $1,011. For the same
period, the ratio of total expenses to average net assets was 1.09% for Class A
shares, 1.54% for Class B shares, 1.26% for Class C shares and 1.22% for Class D
shares. Accounting services are provided to the Fund by MLAM, and the Fund
reimburses MLAM for its costs in connection with such services. For the fiscal
years ended October 31, 1998, 1997 and 1996, the amount of such reimbursement
was $37,878, $231,551 and $152,873, respectively.
Duration and Termination
The Investment Advisory Agreement is effective as of October 31, 1986 and,
unless earlier terminated as described below, will continue in effect from year
to year if approved annually (a) by the Board of Trustees of the Fund or by a
majority of the outstanding shares of the Fund, and (b) by a majority of the
trustees who are not parties to that contract or interested persons (as defined
in the Investment Company Act of 1940) of any such party. The Investment
Advisory Agreement will terminate automatically upon its assignment and is
terminable at any time without penalty by the trustees of the Fund or by a vote
of a majority of the Fund's outstanding shares (as defined under "Investment
Restrictions" herein) or by the Investment Adviser on 60 days' written notice to
the other party. The Investment Advisory Agreement was last renewed by the
Fund's Board of Trustees on September 8, 1998.
The investment advisory services of the Investment Adviser to the Fund are
not exclusive under the terms of the Investment Advisory Agreement and the
Investment Adviser is also free to, and does, render such services to others.
Transfer Agency Serivices. Financial Data Services, Inc. (the "Transfer
Agent"), a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant to
a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives a fee of
$11.00 per Class A or Class D account and $14.00 per Class B or Class C account
and is entitled to reimbursement for certain transaction charges and
out-of-pocket expenses incurred by the Transfer Agent under the Transfer Agency
Agreement. Additionally, a $.20 monthly closed account charge will be assessed
on all accounts which close during the calendar year. Application of this fee
will commence the month following the month the account is closed. At the end of
the calendar year, no further fees will be due. For purposes of the Transfer
Agency Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing the beneficial
interest of a person in the relevant share class on a recordkeeping system,
provided the recordkeeping system is maintained by a subsidiary of ML & Co.
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 of 1940 (the "Investment Company Act") which
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
9
<PAGE>
in securities. In addition, no employee may purchase or sell any security that
at the time is being purchased or sold (as the case may be), or to the knowledge
of the employee is being considered for purchase or sale, by any fund advised by
the 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).
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System: Class A and Class D shares are sold to investors choosing
the initial sales charge alternatives and Class B and Class C shares are sold to
investors choosing the deferred sales charge alternatives. Each Class A, Class
B, Class C and Class D share represents an identical interest in the same
portfolio of investments 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 the Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. The deferred sales
charges and account maintenance fees that are imposed on Class B and Class C
shares, as well as the account maintenance fees that are imposed on Class D
shares, will be imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges will not affect the net asset
value of any other class or have any impact on investors choosing another sales
charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares of the Fund each have exclusive
voting rights with respect to the Rule 12b-1 distribution plan adopted with
respect to such class pursuant to which account maintenance and/or distribution
fees are paid (except that Class B shareholders may vote upon any material
changes to expenses charged under the Class D Distribution Plan). See
"Distribution Plans" below. Each class has different exchange privileges. See
"Shareholder Services -- Exchange Privilege." Class C shares are available only
through the 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 contingent deferred sales charge ("CDSC") and distribution fees with
respect to Class B and Class C shares in that the sales charges and distribution
fees applicable to each class provide for the financing of the distribution of
the shares of the Fund. The distribution-related revenues paid with respect to a
class will not be used to finance the distribution expenditures of another
class. Sales personnel may receive different compensation for selling different
classes of shares. Investors are advised that only Class A and Class D shares
may be available for purchase through securities dealers, other than Merrill
Lynch, that are eligible to sell shares.
Alternative Sales Arrangements
The alternative sales arrangements available for the Fund's shares permit
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 his shares and other relevant circumstances.
Investors should determine whether under their particular circumstances it is
more advantageous to incur an initial sales charge and not be subject to ongoing
charges, as discussed below, or to have the entire initial purchase price
invested in the Fund with the investment thereafter being subject to ongoing
charges.
The Merrill Lynch Select PricingSM System is used by more than 50
registered investment companies advised by MLAM or its affiliate, the Investment
Adviser. Funds advised by MLAM or the Investment Adviser that use the Merrill
Lynch Select PricingSM System are referred to herein as "Select Pricing Funds.
The Fund has entered into separate distribution agreements (the
"Distribution Agreements") with the Distributor in connection with the
continuous offering of each class of shares. The Distribution Agreements
10
<PAGE>
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 above.
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. Neither the Distributor nor dealers are permitted to withhold
placing orders to benefit themselves by a price change. Merrill Lynch may charge
its customers a processing fee (presently $5.35) to confirm a sale of shares to
such customers. Purchases made directly through the Transfer Agent are not
subject to the processing fee.
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.
Sales charges for purchases of Class A and Class D shares of the Fund, computed
as indicated in the Prospectus, are reduced on larger purchases. The Distributor
may reallow discounts to selected securities 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 within the meaning of the Securities Act of 1933. The
proceeds from the account maintenance fees are used to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities. The Distributor will retain the
entire sales charge on orders placed directly with it.
A reduced sales charge is available for any purchase of Class A or Class D
shares of the Fund in excess of $100,000. The term "purchase," as used in the
Prospectus and this Statement of Additional Information in connection with an
investment in Class A and Class D shares of the Fund, refers to a single
purchase by an individual, or to concurrent purchases, which in the aggregate
are at least equal to the prescribed amounts, by an individual, his spouse and
their children under the age of 21 years purchasing shares for his or their own
account and to single purchases by a trustee or other fiduciary purchasing
shares for a single trust estate or single fiduciary account (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 by employees or by employers on behalf of
employees, by means of a payroll deduction plan or otherwise, of shares of the
Fund. Purchases by such a company or non-qualified employee benefit plan will
qualify for the quantity discounts discussed above only if the Fund and the
Distributor are able to realize economies of scale in sales effort and sales
related expense by means of the company, employer or plan making the Fund's
Prospectus available to individual investors or employees and forwarding
investments by such persons to the Fund and by any such employer or plan bearing
the expense of any payroll deduction plan.
For the fiscal year ended October 31, 1998, there were no gross sales
charges for the sale of Class A shares. For the fiscal year ended October 31,
1998, the Distributor received no CDSC proceeds with respect to redemption
within one year after purchase of Class A shares purchased subject to an initial
sales charge waiver.
11
<PAGE>
For the fiscal year ended October 31, 1998, the gross sales charges for the
sale of Class D shares were $6,509, of which $570 was received by the
Distributor and $5,939 was received by Merrill Lynch. For the fiscal year ended
October 31, 1998, the Distributor received no CDSC proceeds with respect to
redemption within one year after purchase of Class D shares purchased subject to
an initial 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 from
outstanding Class A shares. Investors that currently own Class A shares in a
shareholder account, including participants in the Merrill Lynch BlueprintSM
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 of the Fund 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(Service Mark) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services, collective investment trusts for which Merrill
Lynch Trust Company serves as trustee and purchases made in connection with
certain fee-based programs. In addition, Class A shares will be 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 or Class D shares of the Fund if certain conditions set
forth below under "Reduced Initial Sales Charges -- Closed-End Fund Investment
Option" are met.
Reduced Initial Sales Charges
Reinvested Dividends and Capital Gains. No initial sales charges are
imposed upon Class A and Class D shares issued as a result of the automatic
reinvestment of dividends. 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."
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase Class A
or Class D shares of the Fund subject to 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 any other Select Pricing Fund. 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, and
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
through any dealer aggregating $100,000 or more of Class A shares of the Fund or
any other Select Pricing Funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided by the
Distributor. 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 a binding obligation to purchase any amount of Class A or Class D shares,
but its execution will result in the purchaser's 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 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 or of other MLAM-advised mutual funds presently held, at cost or
maximum offering price (whichever is higher), on the date of the first purchase
under the Letter of Intention, may be included as a credit toward the completion
of such Letter. The reduced sales charge applicable to the amount covered by the
Letter of Intention will be applied only to new purchases. If the total amount
of shares
12
<PAGE>
purchased does not equal the amount stated in the Letter of Intention, the
investor will be notified and must pay, within 20 days of the expiration of such
Letter, the difference between the sales charge on Class A or Class D shares of
the Fund 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). The first
purchase under the Letter of Intention must be five percent of the dollar amount
of such Letter. If during the term of such Letter, a purchase brings the total
amount invested to an amount equal to or in excess of the amount indicated in
the Letter, the purchaser will be entitled on that purchase and subsequent
purchases to the reduced percentage sales charge which would be applicable to a
single purchase equal to the total dollar value of the Class A or Class D shares
of the Fund 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 in the Fund.
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 AccessSM 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.
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Purchase Privileges of Certain Persons. Trustees of the Fund, directors and
trustees of other MLAM-advised mutual funds, ML & Co. and its subsidiaries (the
term "subsidiaries," when used herein with respect to ML & Co., includes MLAM,
FAM and certain other entities directly or indirectly wholly-owned and
controlled by ML & Co.), and their directors or 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.
The shares of the Fund in existence prior to its reorganization at the
close of business on February 14, 1997 have been reclassified as Class D shares.
Although purchasers of Class D shares generally will be subject to a 1% initial
sales charge, those shareholders of the Fund who have held shares of the Fund
since prior to its reorganization at the close of business on February 14, 1997,
will not be subject to any sales charge with respect to either their
reclassified Class D shares or any Class D shares that they may purchase in the
future.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Investment
Adviser or MLAM who purchased such closed-end fund shares prior to October 21,
1994 (the date the Merrill Lynch Select PricingSM System commenced operations)
and wish to reinvest the net proceeds from a sale of their closed-end fund
shares of common stock in Eligible Class A Shares of the Fund. Alternatively,
closed-end fund shareholders who purchased such shares on or after October 21,
1994 and wish to reinvest the net proceeds from a sale of their closed-end fund
shares are offered Class A shares (if eligible to buy Class A shares) or Class D
shares of the Fund and other MLAM-advised mutual funds ("Eligible Class D
Shares"). In order to exercise this investment option, closed-end fund
shareholders must (i) sell their closed-end fund shares through Merrill Lynch
and reinvest the proceeds immediately in the Eligible Class A or Class D Shares
of the Fund, (ii) either have acquired the shares in the closed-end fund's
initial public offering or through reinvestment of dividends earned on shares
purchased in such offering, (iii) have maintained their closed-end fund shares
continuously in a Merrill Lynch account, and (iv) purchase a minimum of $250
worth of Fund shares. 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,
13
<PAGE>
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 fund in connection with a
tender offer conducted by the eligible fund and reinvest the proceeds
immediately in the designated class of shares of the Fund. This investment
option is available only with respect to eligible shares as to which no Early
Withdrawal Charge or CDSC (each as defined in the eligible fund's prospectus) is
applicable. Purchase orders from eligible fund shareholders wishing to exercise
this investment option will be accepted only on the day that the related tender
offer terminates and will be effected at the net asset value of the designated
class of the Fund on such day.
Class D shares of the Fund are offered at the net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund 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 he or she will
purchase Class D shares of the Fund with proceeds from a redemption of such
shares of other mutual funds and that such shares have been outstanding for a
period of no less than six months. Second, such purchase of Class D shares must
be made within 60 days after the redemption and the proceeds from the redemption
must have been maintained in the interim in cash or a money market fund.
Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: First, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and such fund was
subject to a sales charge either at the time of purchase or on a deferred basis.
Second, such purchase of Class D shares must be made within 90 days after such
notice.
Class D shares of the Fund are offered at net asset value, without 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 with proceeds from a redemption of shares of a
mutual fund that was sponsored by the financial consultant's previous firm and
imposed a sales charge either at the time of purchase or on a deferred basis.
Second, the investor also must establish that such redemption had been made
within 60 days prior to the investment in the Fund, and the proceeds from the
redemption had been maintained in the interim in cash or a money market fund.
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 investors.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares of the Fund may be reduced to the net asset value per Class D
share in connection with the acquisition of the assets of or merger or
consolidation with a personal holding company or a public or private investment
company. The value of the assets or company acquired in a tax-free transaction
may in appropriate cases be adjusted to reduce possible adverse tax consequences
to the Fund which might result from an acquisition of assets having net
unrealized appreciation which is disproportionately higher at the time of
acquisition than the realized or unrealized appreciation of the Fund.
The issuance of Class D shares for consideration other than cash is limited
to bona fide reorganizations, statutory mergers or other acquisitions of
portfolio securities which (i) meet the investment objectives and policies of
the Fund; (ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the value
of which is readily ascertainable, which are not restricted as to transfer
either by law or liquidity of market (except that the Fund may acquire through
such transactions restricted or illiquid securities to the extent the Fund does
not exceed the applicable limits on acquisition of such securities set forth
under "Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales charge are due
to the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
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<PAGE>
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. Class C shares,
however, are available only through the Exchange Privilege.
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.
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." Both Class B and Class C shares are subject to an ongoing account
maintenance fee and distribution fees; however, the ongoing account maintenance
fee and distribution fee potentially may be offset to the extent any return is
realized on the additional funds initially invested in Class B or Class C
shares.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to Financial Consultants for selling
Class B and Class C shares, from the dealers' own funds. The combination of the
CDSC and the ongoing distribution fee facilitates the ability of the Fund to
sell the Class B and Class C shares without a sales charge being deducted at the
time of purchase. Approximately ten years after issuance, Class B shares will
convert automatically into Class D shares, 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 one year 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 CDSC on Class B shares:
Contingent Deferred Sales
Charge as a Percentage
of Dollar Amount
Year Since Purchase Payment Made Subject to Charge
-------------------------------- -------------------------
0-1 ..................................... 1.0%
Thereafter .............................. None
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
applicable rate being charged. Therefore, it will be assumed that the redemption
is 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 CDSC 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.
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<PAGE>
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share (at a cost of $1,000) and in the eighth month after purchase, the
net asset value per share is $12 and, during such time, the investor has
acquired 10 additional shares upon dividend reinvestment. If at such time the
investor makes his first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to charge 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 to a CDSC at a rate of 1.0%
(the applicable rate in the first year after purchase).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Code) of a shareholder (including one who owns the Class B shares
as a joint tenant with his or her spouse) provided the redemption is requested
within one year of death or initial determination of disability. The CDSC may be
waived on redemption of shares by certain eligible 401(a) and eligible 401(k)
plans. The CDSC is also waived for any Class B shares which are purchased by an
eligible 401(k) or eligible 401(a) plan and are rolled over into a Merrill
Lynch, Pierce, Fenner & Smith Incorporated or Merrill Lynch Trust Company
custodied IRA and held in such account at the time of redemption and for any
Class B shares that were acquired and held at the time of the redemption in an
Employee AccessSM Account available through employers providing eligible 401(k)
plans. The Class B CDSC also is waived for any Class B shares that are purchased
by a Merrill Lynch rollover IRA that was funded by a rollover from a terminated
401(k) plan managed by the MLAM Private Portfolio Group and held in such account
at the time of redemption. The Class B CDSC is also waived for any Class B
shares that are purchased within qualifying Employee AccessSM Accounts. The
terms of the CDSC may be waived or its terms may be modified for redemptions
made in connection with fund participation in certain fee-based programs. The
Class B CDSC may also be waived in connection with involuntary termination of an
account in which Fund shares are held or for withdrawals through the Merrill
Lynch Systematic Withdrawal Plan. See "Shareholder Services -Fee-Based
Programs," and "Systematic Withdrawal Plan."
Contingent Deferred Sales Charges -- Class C Shares.
Class C shares which are redeemed within one year of 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, involuntary
termination of an account in which Fund shares are held and withdrawals through
the Merrill Lynch Systematic Withdrawal Plan. See "Shareholder Services --
Fee-Based Programs."
The deferred sales charge relating to Class B and C shares may be reduced
or waived for withdrawal through the Merrill Lynch Systematic Withdrawal Plan of
up to 10% per year of the account value at the time the plan is established and
in connection with involuntary termination of an account in which Fund shares
are held.
Class B Sales Charge Information
Class B Shares*
---------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended March 31 by Distributor Merrill Lynch
-------------- -------------- -------------
1998 $10,778 $10,778
1997 $ 210 $ 210
- --------------
* Additional Class B CDSCs payable to the Distributor with respect to the
fiscal years ended October 31, 1997 and 1998 may have been waived or
converted to a contingent obligation in connection with a shareholder's
participation in certain fee-based programs.
For the fiscal years ended October 31, 1997 and 1998, the Distributor
received no CDSCs with respect to redemptions of Class C shares.
In determining whether a Class C CDSC is applicable to 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
16
<PAGE>
redemption is first of shares held 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. Class D shares are subject to an ongoing account
maintenance fee at an annual rate of 0.10% of average daily 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 into 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.
Class B shareholders holding certificates must deliver such certificates to
the Transfer Agent at least one week prior to the Conversion Date applicable to
those shares. Shares evidenced by certificates that are not received by the
Transfer Agent at least one week prior to the Conversion Date will be converted
into Class D shares on the next scheduled Conversion Date after such
certificates are delivered.
In general, Class B shares of MLAM-advised equity mutual funds will convert
approximately eight years after initial purchase, and Class B shares of
MLAM-advised taxable and tax-exempt fixed income 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 per
share.
In the event that all Class B shares held in a single account are converted
to Class D shares on a Conversion Date, shares representing reinvestment of
declared but unpaid dividends on those Class B shares also will be converted to
Class D shares; otherwise, only Class B shares purchased through reinvestment of
dividends paid will convert to Class D shares on the Conversion Date.
The Conversion Period may also be modified for retirement plan investors
who participate in certain fee-based programs. See "Shareholder Services --
Fee-Based Programs."
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
17
<PAGE>
purchase requirements may be waived or varied for such plans. Additional
information regarding purchases by employer-sponsored retirement or savings
plans and certain other arrangements is available toll-free from Merrill Lynch
Business Financial Services at (800) 237-7777.
Distribution Plans
Reference is made to "Fees and Expenses" in the Prospectus for certain
information with respect to the separate distribution plans of the Fund 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 or payable by the Fund to the Distributor with
respect to such classes.
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 of the Fund's shares, accrued daily and paid
monthly, at the annual rate of 0.25% of average daily net assets of the relevant
class for Class B and Class C shares, and 0.10% of average daily net assets
attributable to the relevant class for Class D shares in order to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) in connection with
account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.25% of
average daily net assets attributable to the relevant class for Class B and
Class C shares, 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. 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 CDSC and ongoing distribution fees provide for the financing of the
distribution of the Fund's Class B and Class C shares.
For the fiscal year ended October 31, 1998, the Fund paid the Distributor
$38,868 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $7.8 million),
all of which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class B shares.
For the fiscal year ended October 31, 1998, the Fund paid the Distributor $1,938
pursuant to the Class C Distribution Plan (based on average daily net assets
subject to such Class C Distribution Plan of approximately $0.8 million), all of
which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class C shares.
For the fiscal year ended October 31, 1998, the Fund paid the Distributor
$28,168 pursuant to the Class D Distribution Plan (based on average daily net
assets subject to such Class D Distribution Plan of approximately $28.2
million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with the Class D shares.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the relevant shares regardless of the
amount of expenses incurred and, accordingly, distribution-related revenues from
the Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Trustees for their consideration in connection with their
deliberations as to the continuance of the Distribution Plans. This information
is to be presented annually as of December 31 of each year on a "fully allocated
accrual" basis and quarterly on a "direct expense and/revenue/cash" basis. On
the fully allocated accrual basis, revenues consist of the account maintenance
fees, distribution fees, the CDSC and certain other related revenues, and
expenses consist of financial consultant 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 the CDSC and the expenses consist of financial
consultation compensation.
18
<PAGE>
Direct cash revenues attributable to Class B shares for the period from
February 18, 1997 (commencement of operations) to October 31, 1998 exceeded
direct expenses for such period by $28,627 (representing .072% of net assets
attributable to Class B shares at that date. Direct cash revenues attributable
to Class C shares for the period from February 18, 1997 (commencement of
operations) to October 31, 1998 exceeded direct expenses for such period by
$1,594 (representing .034% of net assets attributable to Class C shares at that
date). Direct cash revenues attributable to Class D shares for the period from
November 11, 1996 to October 31, 1998 exceeded direct expenses for such period
by $690,841 (representing 2.00% of net assets attributable to Class D shares at
that date).
The Fund has no obligation with respect to distributions and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with the Class B, Class C and Class D shares, and there is no
assurance that the Board of 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.
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 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. A Distribution Plan cannot be amended to increase materially the
amount to be spent without the approval of the related class of shareholders,
and all material amendments are required to be approved by the vote of Trustees,
including a majority of the Independent Trustees who have no direct or indirect
financial interest in such Distribution Plan, cast in person at a meeting called
for that purpose. Rule 12b-1 further requires that the 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 NASD imposes a
limitation on certain asset-based sales charges, such as the Fund's distribution
fee and the CDSC borne by the Class B and Class C shares but not the account
maintenance fees. The maximum sales charge rule is applied separately by each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable to the sum of (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 reinvestment
and exchanges) and (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 the eligible gross sales. Consequently, the
maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with Class B shares is 6.75% of eligible gross sales.
The Distributor retains the right to stop waiving the interest charge 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,
19
<PAGE>
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.
The table below sets forth comparative information for the period February
18, 1997 (commencement of Class B operations) to October 31, 1998 with respect
to the Class B shares of the Fund, indicating allowable payments that can be
made under the NASD maximum sales charge rule and the Distributor's voluntary
maximum. No information is presented for the Class C shares of the Fund because
Class C shares are not available for purchase but will be issued only pursuant
to the Exchange Privilege to holders of Class C shares of other MLAM-advised
mutual funds who elect to exchange Class C shares of such other MLAM-advised
mutual funds for Class C shares of the Fund.
<TABLE>
<CAPTION>
Data Calculated as of October 31, 1998
-----------------------------------------------------------------------------------------
(in thousands)
Annual
Distribution
Allowable Amounts Fee at
Eligible Allowable Interest on Maximum Previously Aggregate Current Net
Gross Aggregate Unpaid Amount Paid to Unpaid Asset
Sales(1) Sales Charges(2) Balance(3) Payable Distributor(4) Balance Level(5)
-------- ---------------- ---------- ------- -------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as Adopted ............ $3,638 $227 $ 6 $233 $32 $201 $100
Under Distributor's Voluntary Waiver .. $3,638 $227 $19 $246 $32 $214 $100
</TABLE>
- -------------------
(1) Purchase price of all eligible Class B shares sold since February 18, 1997
(commencement of Class B operations) other than shares acquired through
dividend reinvestment and the Exchange Privilege.
(2) Includes amounts attributable to exchanges from Summit Cash Reserves Fund
("Summit") which are not reflected in Eligible Gross Sales. Shares of
Summit can only be purchased by exchange from another fund (the "redeemed
fund"). Upon such an exchange, the maximum allowable sales charge payment
to the redeemed fund is reduced in accordance with the amount of the
redemption. This amount is then added to the maximum allowable sales charge
payment with respect to Summit. Upon an exchange out of Summit, the
remaining balance of this amount is deducted from the maximum allowable
sales charge payment to Summit and added to the maximum allowable sales
charge payment to the fund into which the exchange is made.
(3) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD
Rule.
(4) Consists of CDSC payments, distribution fee payments and accruals. This
figure may include CDSCs that were deferred when a shareholder redeemed
shares prior to the expiration of the applicable CDSC period and invested
the proceeds, without imposition of a sales charge, in Class A shares in
conjunction with the shareholder's participation in the Merrill Lynch Fund
Adviser (Merrill Lynch MFASM) Program (the "MFA Program"). The CDSC is
booked as a contingent obligation that may be payable when the shareholder
terminates participation in the MFA Program.
(5) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum or the NASD
maximum.
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive 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 in
part on the market value of the securities held by the Fund at such time.
The right to redeem shares or to receive payment with respect to any
redemption may only be suspended for any period during which trading on the NYSE
is restricted as determined by the Commission or such Exchange is closed (other
than customary weekend and holiday closings), for any period during which an
emergency exists as defined by the Commission as a result of which disposal of
portfolio securities or determination of the net asset value of the Fund is not
reasonably practicable, and for such other periods as the Commission may by
order permit for the protection of shareholders of the Fund.
20
<PAGE>
Redemption
A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Proper notice of redemption in the case of shares deposited with the
Transfer Agent may be accomplished by a written letter requesting redemption.
Proper notice of redemption in the case of shares for which certificates have
been issued may be accomplished by a written letter as noted above accompanied
by certificates for the shares to be redeemed. Redemption requests should not be
sent to the Fund. The redemption request in either event requires the
signature(s) of all persons in whose name(s) the shares are registered, signed
exactly as such name(s) appear(s) on the Transfer Agent's register. The
signature(s) on the redemption requests must be guaranteed by an "eligible
guarantor institution" as such is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), 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 time the Fund may be requested to redeem shares for which it has
not yet received good payment (e.g., cash, Federal funds or certified check
drawn on a United States bank). The 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, Federal funds or certified check drawn on a United States
bank) has been collected for the purchase of such Fund shares, which will not
exceed 10 days.
Repurchase
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 fifteen minutes prior to the regular close
of business on the NYSE on the day received and is received by the Fund from
such dealer not later than 30 minutes after the close of business on the NYSE
(generally 4:00 p.m., Eastern time), 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 (generally 4:00 p.m., Eastern
time), 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). Securities firms that do not have selected dealer agreements with the
Distributor may impose a transaction charge on the shareholder for transmitting
the notice of repurchase to the Fund. Merrill Lynch may charge its customers a
processing fee (presently $5.35) to confirm a repurchase of shares to such
customers. Repurchases made directly through the Fund's Transfer Agent are not
subject to the processing fee. The Fund reserves the right to reject any order
for repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. A shareholder whose order
for repurchase is rejected by the Fund, however, may redeem shares as set forth
above.
For shareholders submitting their shares for repurchase through listed
securities dealers, payment for fractional shares will be made by the Transfer
Agent directly to the shareholder and payment for full shares will be made by
the securities dealer 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 in the Prospectus.
Reinstatement Privilege
Shareholders who have redeemed Class A or Class D shares, including
redemption through repurchase by the Fund, have a privilege to reinstate their
accounts by purchasing Class A or Class D shares, as the case may be, at the net
asset value of such shares without a sales charge up to the dollar amount
redeemed. The reinstatement privilege may
21
<PAGE>
be exercised as follows. A notice to exercise this privilege along with a check
for the amount to be reinstated must be received by 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 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.
If a shareholder disposes of shares within 90 days of their acquisition and
subsequently reacquires shares of the Fund pursuant to the reinstatement
privilege, then the shareholder's tax basis in those shares disposed of will be
reduced to the extent the load charge paid to the Fund upon the shareholder's
initial purchase reduces any load charge such shareholder would have been
required to pay on the subsequent acquisition in absence of the reinstatement
privilege. Instead, such load charge will be treated as an amount paid for the
subsequently acquired shares and will be included in the shareholder's tax basis
for such shares.
PRICING OF SHARES
Determination of New Asset Value
Reference is made to "How Shares are Priced" in the Prospectus. The net
asset value of the shares of the Fund is determined once daily by MLAM
immediately after the declaration of dividends as of 15 minutes after the close
of business on the New York Stock Exchange (the "NYSE") (generally 4:00 p.m.,
Eastern time) on days that the NYSE is open for business and on any other day on
which there is sufficient trading in the Fund's portfolio securities that net
asset value might be materially affected but only if on any such day the Fund is
required to sell or redeem shares. The NYSE is not open for business on the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. The net asset value per share of the Fund is computed by
dividing the sum of the value of the securities held by the Fund plus any cash
or other assets minus all liabilities by the total number of shares of the Fund
outstanding at such time, rounded to the nearest cent. Expenses, including the
investment advisory fee payable to MLAM and any account maintenance and/or
distribution fees payable to the Distributor, are accrued daily. The Fund
employs Merrill Lynch Securities Pricing Service ("MLSPS"), an affiliate of the
Investment Adviser, to provide certain securities prices for the Fund. For the
fiscal year ended October 31, 1998, the Fund paid MLSPS $1,305 for securities
price quotations to compute the net asset value of the Fund.
The per share net asset value of Class A shares generally will be higher
than the per share net asset value of shares of the other classes, reflecting
the daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares and
the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; moreover, the per share net asset value of Class D
shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the
classes will tend to converge (although not necessarily meet) immediately after
the payment of dividends or distributions which will differ by approximately the
amount of the expense accrual differentials between the classes.
Portfolio securities that are traded in the over-the-counter market are
valued at the last available bid price as obtained from dealers who make a
market in the securities. Securities with remaining maturities of sixty days or
less are valued at amortized cost, which approximates market value. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Trustees of the Fund.
22
<PAGE>
Computation of Offering Price Per Share
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets and number of shares outstanding on October 31, 1998 is set forth below.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Assets $1,904,433 $39,975,361 $4,674,312 $34,407,480
========== =========== ========== ===========
Number of Shares Outstanding 188,385 3,953,488 462,570 3,403,232
========== =========== ========== ===========
Net Asset Value Per Share (net assets divided
by number of shares outstanding) ................ $ 10.11 $ 10.11 $ 10.11 $ 10.11
Sales Charge (for Class A and Class D shares:
1.00% of offering price 1.01% of net asset
value per share)* ............................... .10 ** ** .10
---------- ----------- ---------- -----------
Offering Price .................................... $ 10.21 $ 10.11 $ 10.11 $ 10.21
========== =========== ========== ===========
</TABLE>
- -------------
* Rounded to the nearest one-hundreth 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 Shared --
Contingent Deferred Sales Charge -- Class B Shares" and " -- Contingent
Deferred Sales Charge -- Class C Shares" herein
PORTFOLIO TRANSACTIONS AND BROKERAGE
Transactions in Portfolio Securities
Subject to policies established by the board of Trustees of the fund, the
Investment Adviser is responsible for the Fund's portfolio decisions and the
placing of the Fund's portfolio transactions. The Fund has no obligation to deal
with any dealer or group of dealers in the execution of transactions in
portfolio securities. Subject to the policy established by the Board of
Trustees, the Investment Adviser is primarily responsible for the portfolio
decisions of the Fund and the placing of its portfolio transactions. In placing
orders, it is the policy of the Fund to obtain the best price and execution for
its transactions. Affiliated persons of the Fund, including Merrill Lynch, may
serve as its broker in over-the-counter transactions conducted on an agency
basis.
For the fiscal years ending December 31, 1998, 1997 and 1996 the Fund paid
no brokerage commissions to Merrill Lynch.
The obligations in which the Fund invests are traded primarily in the
over-the-counter market but may be traded on an exchange. 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. The
cost of executing portfolio transactions of the Fund will primarily consist of
dealer spreads and underwriting commissions.
Under the Investment Company Act, persons affiliated with the Fund 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 Securities and Exchange Commission. Since over-the-counter ("OTC")
transactions are usually principal transactions, affiliated persons of the Fund,
including Merrill Lynch, may not serve as dealer in connection with transactions
with the Fund. Affiliated persons of the Fund may serve as broker for the Fund
in OTC transactions conducted on an agency basis. Certain court decisions have
raised questions as to the extent to which investment companies should seek
exemptions under the Investment Company Act in order to seek to recapture
underwriting and dealer spreads from affiliated entities. The Trustees have
considered all factors deemed relevant, and have made a determination not to
seek such recapture at this time. The Trustees will reconsider this matter from
time to time.
In placing orders, it is the policy of the Fund to obtain the best net
results taking into account such factors as price (including the applicable
dealer spread), the size, type and difficulty of the transaction involved, the
firm's general execution and operational facilities, the firm's risk in
positioning the securities involved and the firm's provision of supplemental
investment research (such as economic data and market forecasts). Information so
received will be in addition to and not in lieu of the services required to be
performed by the Investment
23
<PAGE>
Adviser under its 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. In some cases, the Investment Adviser may use
such supplemental research in providing investment advice to its other
investment advisory accounts. While the Investment Adviser generally seeks
reasonably competitive spreads or commissions, the Fund will not necessarily be
paying the lowest spread or commission available.
Securities held by the Fund may also be held by or be appropriate
investments for other funds for which the Investment Adviser or its affiliates
act as an adviser or by investment advisory clients of the Investment 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 for the Fund or other funds for
which they act as investment adviser or for their advisory clients arise for
consideration at or about the same time, transactions in such securities will be
made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more than
one client of the 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.
PORTFOLIO TURNOVER
The Investment Adviser effects portfolio transactions without regard to
holding period if, in its judgment, such transactions are advisable in light of
a change in circumstances in general market, economic or financial conditions.
As a result of its investment policies, the Fund may engage in a substantial
number of portfolio transactions. 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. High portfolio turnover
involves correspondingly greater transaction costs in the form of dealer spread
and brokerage commissions, which are borne directly by the Fund, and may
increase the percentage of the Fund's distributions which are taxable to
shareholders as ordinary income.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of such
services and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
Investment Account
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gains 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 and the reinvestment of ordinary
income dividends and long-term capital gains 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. 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 Fund's Transfer Agent.
Shareholders considering transferring their Class A shares from Merrill
Lynch to another brokerage firm or financial institution should be aware that,
if the firm to which the Class A or Class D shares are to be transferred will
not take delivery of shares of the Fund, a shareholder either must redeem the
Class A or Class D shares (paying any applicable CDSC) so that the cash proceeds
can be transferred to the account at the new firm or such shareholder must
continue to maintain an Investment Account at the Transfer Agent for those Class
A or Class D shares. Shareholders interested in transferring their Class B or
Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the transfer agent may request
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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 shares, and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence. Shareholders considering
transferring a tax-deferred retirement account such as an individual retirement
account from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Fund, a shareholder must
either redeem the shares (paying any applicable CDSC) so that the cash proceeds
can be transferred to the account at the new firm, or such shareholder must
continue to maintain a retirement account with Merrill Lynch for those shares.
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 the Transfer Agent at
(800) MER-FUND or (800) 637-3863.
Retirement Plans
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and certain of the other mutual funds sponsored by Merrill Lynch as well as
in other securities. Merrill Lynch charges an initial establishment fee and an
annual custodial fee for each account. Information with respect to these plans
is available upon request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $100 and the minimum subsequent purchase is $1.
Any Retirement Plan which does not meet the qualifications to purchase
Class A or Class D shares at net asset value may purchase Class B shares with a
waiver of the CDSC upon redemption if the following qualifications are met. The
CDSC is waived for any Eligible 401(k) Plan redeeming Class B shares and is also
waived for Class B redemptions from a 401(a) plan qualified under the Code,
provided that each such plan has the same or an affiliated sponsoring employer
as an Eligible 401(k) Plan purchasing Class B shares ("Eligible 401(a) Plan").
Other tax qualified retirement plans within the meaning of Section 401(a) and
403(b) of the Code which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a menu of
investments) by independent administration firms contracted through Merrill
Lynch may also purchase Class B shares with a waiver of the CDSC. The CDSC is
also waived for any Class B shares which are purchased by an Eligible 401(k)
Plan or Eligible 401(a) Plan and are rolled over into a Merrill Lynch or Merrill
Lynch Trust Company custodied IRA and held in such account at the time of
redemption. The Class B CDSC is also waived for shares 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. The minimum initial and subsequent purchase requirements are
waived in connection with all the above-referenced Retirement Plans.
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Exchange Privilege
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves Fund
("Summit"), a series of Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market mutual fund specifically designated for exchange by
holders of Class A, Class B, Class C and Class D shares of Select Pricing Funds.
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. Before effecting an exchange, shareholders
should obtain a currently effective prospectus of the fund into which the
exchange is to be made. Exercise of the exchange privilege is treated as a sale
of the exchanged shares and a purchase of the acquired shares for Federal income
tax purposes.
Exchanges of Class A and Class D Shares. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing 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 want to exchange Class A shares for shares of a second Select
Pricing Fund, but does not hold Class A shares of the second fund in his or her
account at the time of the exchange and is not otherwise eligible to acquire
Class A shares of the second fund, the shareholder will receive Class D shares
of the second fund as a result of the exchange. Class D shares also may be
exchanged for Class A shares of a second Select Pricing 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 D shares are
exchangeable with shares of the same class of other Select Pricing Funds.
Exchanges of Class A and Class D shares outstanding ("outstanding Class A
or Class D shares") for Class A or Class D shares of other Select Pricing Funds
or Class A shares of Summit ("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 and Class D shares. With
respect to outstanding Class A or Class D shares as to which previous exchanges
have taken place, the "sales charge previously paid" shall include the aggregate
of the sales charges paid with respect to such Class A or Class D shares in the
initial purchase and any subsequent exchange. Class A or Class D shares issued
pursuant to dividend reinvestment are sold on a no-load basis in each of the
funds offering Class A or Class D shares. For purposes of the exchange
privilege, Class A or Class D shares acquired through dividend reinvestment
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 generally may be exchanged
into the Class A or Class D shares, respectively, of the other funds with a
reduced shares charge or without a sales charge.
Exchanges of Class B and Class C Shares. Each Select Pricing Fund with
Class B or Class C shares outstanding ("outstanding Class B or Class C shares")
offers to exchange its Class B or Class C shares for Class B or Class C shares,
respectively, of another Select Pricing Fund or for Class B shares of Summit
("new Class B or Class C shares") on the basis of relative net asset value per
Class B or Class C share, without the payment of any CDSC that might otherwise
be due on redemption of the outstanding shares. Class B shareholders of the Fund
exercising the exchange privilege will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the new
Class B shares acquired through use of the exchange privilege. In addition,
Class B shares of the Fund acquired through use of the exchange privilege will
be subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the fund from which the exchange has
been made. For purposes of computing the CDSC that may be payable on a
disposition of the new Class B or Class C shares, the holding period for the
outstanding Class B or Class C shares is "tacked" to the holding period of the
new Class B or Class C shares. For example, an investor may exchange Class B or
Class C shares of the Fund for those of Merrill Lynch Special Value Fund, Inc.
("Special Value Fund") after having held the Fund's Class B shares for two and a
half years. The 2% CDSC that generally would apply to a redemption would not
apply to the exchange. Three years later the investor may decide to redeem the
Class B shares of Special Value Fund and receive cash. There will be no CDSC due
on this redemption, since by "tacking" the two and a half year holding period of
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.
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Exchanges for Shares of a Money Market Fund. Class A and Class D shares are
exchangeable for Class A shares of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of Select Pricing Funds;
Class B shares of Summit have an exchange privilege back into Class B or Class C
shares of Select Pricing Funds and, in the event of such an exchange, the period
of time that Class B shares of Summit are held will count toward satisfaction of
the holding period requirement for purposes of reducing any CDSC and toward
satisfaction of any Conversion Period with respect to Class B shares. Class B
shares of Summit will be subject to a distribution fee at an annual rate of
0.75% of average daily net assets and such Class B shares. This exchange
privilege does not apply with respect to certain Merrill Lynch fee-based
programs for which alternative exchange arrangements may exist. Please see your
Merrill Lynch Financial Consultant for further information.
Prior to October 12, 1998, exchanges from the Fund and other Select Pricing
Funds into a money market Fund were directed to certain Merrill Lynch-sponsored
money market funds other than Summit. Shareholders who have exchange Select
Pricing Funds shares for shares of such other money market funds and
subsequently wish to exchange those money market fund shares for shares of the
Fund will be subject to the CDSC schedule applicable to such Fund shares, if
any. The holding period for those money market fund shares will not count toward
satisfaction of the holding period requirement for reduction of the CDSC imposed
on such shares, if any, and, with respect to Class B shares, toward satisfaction
of the Conversion Period. However, the holding period for Class B or Class C
shares received in exchange for such money market fund shares will be aggregated
with the holding period for the original Select Pricing Fund shares for purposes
of reducing the CDSC or satisfying the Conversion Period.
Exchanges by Participants in the MFA Program. The Fund's exchange privilege
is modified with respect to purchases of Class A and Class D shares by
non-retirement plan investors under the MFA Program. First, the initial
allocation of assets is made under the MFA Program. Then, any subsequent
exchange under the MFA Program of Class A or Class D shares of a Select Pricing
Fund for Class A or Class D shares of the Fund will be made solely on the basis
of the relative net asset values of the shares being exchanged. Therefore, there
will not be a charge for any difference between the sales charge previously paid
on the shares of the other Select Pricing Fund and the sales charge payable on
the shares of the Fund being acquired in the exchange under the MFA Program.
Exercise of the Exchange Privilege. To exercise the exchange privilege, a
shareholder should contact his or her Merrill Lynch Financial Consultant, who
will advise the Fund of the exchange. Shareholders of the Fund, and shareholders
of the other Select Pricing 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 to the general
public at any time and may thereafter resume such offering from time to time.
The exchange privilege is available only to U.S. shareholders in states where
the exchange legally is made. It is contemplated that the exchange privilege may
be applicable to other new mutual funds whose shares may be distributed by the
Distributor.
Automatic Investment Plans
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B or Class D shares at the applicable
public offering price either through the shareholder's securities dealer or by
mail directly to the Fund's Transfer Agent, acting as agent for such securities
dealer. Voluntary accumulation also can be made through a service known as the
Fund's Automatic Investment Plan whereby the Fund is authorized through
pre-authorized checks or automated clearing house debits of $50 or more to
charge the regular bank account of the shareholder on a regular basis to provide
systematic additions to the Investment Account of such shareholder. An investor
whose shares of the Fund are held within a CMA(R) or CBA(R) account may arrange
to have periodic investments made in the Fund in amounts of $100 or more ($1 for
retirement accounts) through the CMA(R)/CBA(R) Automated Investment Program.
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Automatic Dividend Program
Unless specific instructions to the contrary are given as to the method of
payment of dividends, dividends will be reinvested automatically in additional
shares of the Fund. Such reinvestment will be at the net asset value of shares
of the Fund as of the close of business on the monthly payment date of the
dividend. Shareholders may elect in writing to receive either their dividends,
in cash, in which event payment will be mailed or direct deposited on or about
the payment date. No CDSC will be imposed on redemptions of shares issued as a
result of the automatic reinvestment of dividends.
Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch or notify the Transfer
Agent, if the shareholders' account is maintained with the Transfer Agent, in
writing or by telephone (1-800-MER-FUND) that they no longer wish to have their
dividends reinvested in shares of the Fund or vice versa, and commencing ten
days after receipt by the transfer agent of such notice, those instructions will
be effected. The Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed distribution or redemption checks
Systematic Withdrawal Plan
A shareholder of the Fund may elect to receive systematic withdrawal
payments from an Investment Account of Class A, Class B, Class C or Class D
shares in the form of payments by check or through automatic payment by direct
deposit to his bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders who have acquired
shares of the Fund having a value, based upon the current net asset value, of
$5,000 or more, and monthly withdrawals are available for shareholders with
shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A, Class B, Class
C 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 the dollar amount and class of shares to be
redeemed. Redemptions will be made at net asset value as determined once by MLAM
immediately after the declaration of dividends as of 15 minutes after the close
of business on the NYSE (generally 4:00 p.m., Eastern 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 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 shares in the Investment Account are reinvested automatically in shares
of the Fund. A shareholder's Systematic Withdrawal Plan may be terminated at any
time, without charge or penalty, by the shareholder, the Fund, the Transfer
Agent or the Distributor.
Withdrawal payments should not be considered as dividends, yields or
income. Each withdrawal is a taxable event. If periodic withdrawals continuously
exceed reinvested dividends, the shareholder's original investment may be
correspondingly reduced. Purchases of additional shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase orders
for shares of the Fund from investors who maintain a Systematic Withdrawal Plan
unless such purchase is equal to at least one year's scheduled withdrawals or
$1,200, whichever is greater. Periodic investments may not be made into an
Investment Account from which the shareholder has elected to make systematic
withdrawals.
Alternatively, a shareholder whose shares are held within a CMA(R), CBA(R)
or Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R)/CBA(R) Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $50. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. All redemptions are
made at net asset value. A shareholder may elect to have his or her shares
redeemed on the first, second, third or fourth Monday of each month, in the case
of monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the
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redemption is to be made on the first, second, third or fourth Monday of the
month. If the Monday selected is not a business day, the redemption will be
processed at net asset value on the next business day. The CMA(R)/CBA(R)
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the CMA(R)/CBA(R) Systematic Redemption Program, eligible
shareholders should contact their Merrill Lynch Financial Consultant.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares --
Deferred Sales Charge Alternatives -- Class B and Class C Shares -- Contingent
Deferred Sales Charges -- Class B Shares" and " -- Contingent Deferred Sales
Charges -- Class C Shares." Where the systematic withdrawal plan is applied to
Class B shares, upon conversion of the last Class B shares in an account to
Class D shares, the systematic withdrawal plan will automatically be applied
thereafter to Class D shares. If an investor wishes to change the amount being
withdrawn in a systematic withdrawal plan the investor should contact his or her
Financial Consultant.
DIVIDENDS AND TAXES
Dividends
It is the Fund's intention to distribute substantially all of the net
investment income of the Fund, if any. The net investment income of the Fund is
declared as dividends daily immediately prior to the determination of the net
asset value of the Fund on that day and reinvested monthly in additional full
and fractional shares of the Fund at net asset value unless the shareholder
elects to receive such dividends in cash. The net investment income of the Fund
for dividend purposes consists of interest and dividends earned on portfolio
securities, less expenses, in each case computed since the most recent
determination of net asset value. Expenses of the Fund, including the advisory
fee and any account maintenance and/or distribution fees (if applicable), are
accrued daily. Shares will accrue dividends as long as they are issued and
outstanding. The per share dividends on Class B and Class C shares will be lower
than the per share dividends on Class A and Class D shares as a result of the
account maintenance, distribution and higher transfer agency fees applicable to
the Class B and Class C share. Similarly, the per share dividends on Class D
shares will be lower than the per share dividends on Class A shares as result of
the account maintenance fees applicable with respect to the Class D shares. See
"Pricing of Shares -- Determination of Net Asset Value." Shares are issued and
outstanding as of the settlement date of a purchase order to the settlement date
of a redemption order.
Taxes
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). As a RIC, in any fiscal year with respect to
which the Fund distributes at least 90% of its investment company taxable income
(which includes, among other items, dividends and interest but excludes net
long-term capital gains in excess of net short-term capital losses), the Fund
(but not its shareholders) generally will be relieved of Federal income tax on
the part of its net ordinary income and net realized capital gains (net
long-term capital gains in excess of the sum of net short-term capital losses
and capital loss carryovers from prior years, if any) which it distributes to
Class A, Class B, Class C and Class D shareholders. The Fund intends to
distribute substantially all of such income. To the extent the Fund retains its
net capital gains for investment, it will be subject under current tax rates to
a federal income tax at a maximum effective rate of 35% on the amount retained.
The Code imposes a 4% nondeductible excise tax on a regulated investment
company, such as the Fund, if it does not distribute to its shareholders during
the calendar year an amount equal to the sum of (1) 98 percent of the Fund's
investment company income, with certain adjustments, for such calendar year, (2)
98 percent of the Fund's capital gain net income for the one-year period ending
on October 31, of such calendar year, and
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(3) all ordinary income and capital gains for previous years that were not
distributed during such years. While the Fund intends to distribute its income
and capital gains in the manner necessary to avoid 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. The excise tax is imposed on the amount by which the regulated
investment company does not meet the foregoing distribution requirements.
If in any taxable year the Fund fails to qualify as a RIC under the Code,
the Fund will be taxed in the same manner as an ordinary corporation, and any
ordinary income or capital gains paid to its shareholders will not be deductible
by the Fund in computing its taxable income. In addition, in the event of
failure to qualify, the Fund's distributions, to the extent derived from the
Fund's current or accumulated earnings and profits, will constitute dividends
(eligible for the corporate dividends-received deduction, subject to certain
requirements) which are taxable to shareholders as ordinary income, even though
those distributions might otherwise (at least in part) have been treated in the
shareholders' hands as long-term capital gains.
If the Fund fails to qualify as a RIC for any year, it generally must pay
out its earnings and profits accumulated in that year less an interest charge to
the U.S. Treasury on 50% of such earnings and profits before it can again
qualify as a regulated investment company.
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. Dividends will be taxable to shareholders as
ordinary income or capital gains, whether received in cash or reinvested in
additional shares of the Fund. Financial Data Services, Inc., the Fund's
transfer agent, will send each shareholder a monthly dividend statement which
will include the amount of dividends paid and identify whether such dividend
represent ordinary income or capital gains. Distributions made from an excess of
net long-term capital gains over net short-term capital losses ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholders has owned Fund shares. 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). Although the Fund may invest in certain municipal
securities, it is not anticipated that any portion of the dividends paid by the
Fund will qualify for tax-exempt treatment to shareholders.
Generally, distributions paid by the Fund are treated as received in the
taxable year in which such distribution is made; however, any dividend declared
by the Fund in October, November or December of any calendar year, payable to
shareholders or recorded on specified date in such a month and actually paid
during January of the following year, will be treated as received on December 31
of the year in which declared.
A shareholder will realize gain or loss on the sale or exchange of shares
of the Fund in an amount equal to the difference between the shareholder's
adjusted basis in the shares sold or exchanged and the amount realized on their
disposition. Generally, gain recognized by a shareholder on the sale of shares
held for more than one year will be taxable as long-term capital gain. If a
shareholder holds shares primarily for sale to customers in the ordinary course
of business rather than for investment, any gain recognized on the sale of those
shares would be taxable as ordinary income. Any loss recognized on a sale or
exchange will be disallowed to the extent the shares disposed of are replaced
within a period of 61 days beginning 30 days before and ending 30 days after the
shares are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss recognized by a shareholder on
a disposition of Fund shares held by the shareholder for six months or less will
be treated as a long-term capital loss to the extent of any distributions of
capital gains dividends received or treated as having been received by the
shareholder with respect to such shares. Shareholders who acquire shares on
multiple dates should consult their tax advisers to determine how to allocate
the cost of stock for basis purposes.
The maximum tax rates applicable to net capital gains recognized by
individuals and other non-corporate taxpayers are (i) the same as ordinary
income rates for capital assets held for one year or less and (ii) 20% for
capital assets held for more than one year. Shareholders should consult their
own tax advisers regarding the availability and effect of a certain tax election
to mark-to-market shares of the Fund held on January 1, 2001. Capital gains or
losses recognized by corporate shareholders are subject to tax at the ordinary
income tax rates
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applicable to corporations. The capital gains rates described above apply to
distributions of capital gain dividends by regulated investment companies
("RICs") such as the Fund as well as to sales and exchanges of shares in RICs
such as the Fund. With respect to capital losses recognized on dispositions of
Fund shares held six months or less where such losses are treated as long-term
capital losses to the extent of prior capital gain dividends received on such
shares, it is unclear how such capital losses offset the capital gains referred
to above. Shareholders should consult their own tax advisers as to the
application of the capital gains rates to their particular circumstances.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares for 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 of the converted Class B shares.
Only dividends paid by the Fund which are attributable to dividends
received by the Fund will qualify for the 70% dividends-received deduction for
corporations. In addition, corporate shareholders must have held their shares in
the Fund for more than 45 days to qualify for the deduction on dividends paid by
the Fund. Because most of the Fund's income will be interest income, rather than
dividends on common or preferred stock, it is unlikely that any substantial
proportion of its distributions will be eligible for the dividends-received
deduction available for corporations under the Code.
Ordinary income dividends paid to shareholders who are nonresident aliens,
trusts, estates, partnerships or corporations will be subject to a 30% United
States withholding tax under existing provisions of the Code 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 advisors
concerning the applicability of the United States withholding tax.
Some shareholders may be subject to a 31% withholding tax on reportable
dividends, capital gains distributions and redemption payments ("backup
withholding"). Generally, shareholders subject to backup withholding will be
those for whom a certified taxpayer identification number is not 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 penalties of
perjury that such number is correct and that he is not otherwise subject to
backup withholding. Any amounts withheld may be credited against the
shareholder's U.S. federal income tax liability.
The U.S. Internal Revenue Service has issued Treasury Regulations
("Regulations"), generally effective for payments made after December 31, 1998,
concerning the withholding of tax and reporting for certain amounts paid to
nonresident aliens and foreign corporations. Among other things, these
Regulations may require shareholders that are not United States persons within
the meaning of the Code to furnish new certification of their foreign status
after December 31, 1998. Shareholders should consult their own tax advisers
concerning the applicability and effect of such Regulations on an investment in
shares of the Fund.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
In the event the Fund retains any net capital gains, it may designate such
retained amounts as undistributed capital gains in a notice to its shareholders.
In the event such a designation is made, shareholders subject to U.S. tax would
include in income, as long-term capital gains, their proportionate share of such
undistributed amounts, but would be allowed a credit or refund, as the case may
be, for their proportionate share of the 35% tax paid by the Fund. If the
designation is made, for U.S. federal income tax purposes, the tax basis of
shares owned by a shareholder would be increased by an amount equal to the
difference between (i) the amount included in such shareholder's income as
long-term capital gains and (ii) such shareholder's proportionate share of the
35% tax paid by the Fund.
At October 31, 1998, the Fund had a net capital loss carry-forward of
approximately $7,075,000 ($3,224,000 expires in 2002, $1,996,000 expires in
2003, $977,000 expires in 2004 and $878,000 expires in 2005), which will be
available to offset like amounts of any future taxable gains. Expired capital
loss carryforward in the amount of $3,938,679 has been reclassified to paid-in
capital in excess of par.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Regulations presently in effect. For the complete
provisions, reference should be made to the pertinent sections
31
<PAGE>
of the Code and the Regulations promulgated thereunder. The Code and Regulations
are subject to change by legislative, judicial or administrative action either
prospectively or retroactively.
Shareholders are advised to consult their own tax advisers with respect to
the application to their own circumstances of the above-described general
taxation rules and with respect to the federal, state, local or foreign tax
consequences to them of an investment in shares of 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 SEC and take into account the maximum applicable sales charge.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance
fees and distribution charges and any incremental transfer agency costs relating
to each class of shares will be borne exclusively by that class. The Fund will
include performance data for all classes of shares in any advertisement or
information including performance data of the Fund.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) the rates of return calculated will not be average annual rates,
but rather, actual annual, annualized or aggregate rate of return and (2) the
maximum applicable sales charge 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 charge, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time. 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 contingent deferred sales charges and therefore may
reflect greater total return since, due to the reduced sales charges or waiver
of the contingent deferred sales charge, a lower amount of expenses is deducted.
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 investment in
the Fund at the beginning of each specified period.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield to maturity of each security earned during the
period by (b) the average daily number of shares outstanding during the period
that were entitled to receive dividends multiplied by the maximum offering price
per share on the last day of the period. The yield for the 30-day period ended
October 31, 1998 was: 3.71% for Class A shares, 3.51% for Class B shares, 3.79%
for Class C shares and 3.93% for Class D shares.
In connection with its reorganization at the close of business on February
14, 1997, the Fund changed its investment objective from investing only in
assets which would permit shares of the Fund to qualify both as "liquid assets"
under the regulations of the Office of Thrift Supervision and as an investment
permitted by the regulations of the National Credit Union Association to seeking
the highest possible current income consistent with the protection of capital
afforded by investing in intermediate-term debt securities issued or guaranteed
by
32
<PAGE>
the U.S. Government, its agencies or instrumentalities with a maximum maturity
not to exceed fifteen years and, under normal market conditions, a
dollar-weighted average maturity of six to eight years. For the period from the
commencement of the Fund's operations through its reorganization at the close of
business on February 14, 1997, the portfolio of the Fund has consisted primarily
of securities issued by the U.S. government and its agencies and
instrumentalities. The average maturity of the Fund's portfolio during this
period (generally ranging from two to five years) has been somewhat shorter than
the average maturity of the Fund of six to eight years following the change in
its investment objective upon its reorganization. As a result, financial
information for operations of the Fund prior to its reorganization may not be
indicative of its performance following its reorganization.
Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and yield will vary depending on market conditions, the securities
held by the Fund, 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.
Set forth on the next page is total return information relating to the
periods prior and subsequent to the reorganization of the Fund. In connection
with its reorganization at the close of business on February 14, 1997, the Fund
changed its investment objective from investing only in assets which would
permit shares of the Fund to qualify both as "liquid assets" under the
regulations of the Office of Thrift Supervision and as an investment permitted
by the regulations of the National Credit Union Association to seeking the
highest possible current income consistent with the protection of capital
afforded by investing in intermediate-term debt securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities with a maximum
maturity not to exceed fifteen years and, under normal market conditions, a
dollar-weighted average maturity of six to eight years. For the period from the
commencement of the Fund's operations through its reorganization at the close of
business on February 14, 1997, the portfolio of the Fund consisted primarily of
securities issued by the U.S. government and its agencies and instrumentalities.
The average maturity of the Fund's portfolio during this period (generally
ranging from two to five years) has been somewhat shorter than the average
maturity of the Fund of six to eight years following the change in its
investment objective upon its reorganization. As a result, the financial
information in the table below for operations of the Fund prior to its
reorganization may not be indicative of its performance following its
reorganization.
<TABLE>
<CAPTION>
Expressed as Redeemable Value
a percentage of a hypothetical
based on a $1,000 investment
hypothetical at the end of
Prior to the Reorganization on February 14, 1997 $1,000 investment the period
- ------------------------------------------- ---------------- ---------------
Period Average Annual Total Return
------
<S> <C> <C>
One Year Ended October 31, 1996 .......................... 4.87% $1,048.70
1995 ..................................................... 9.00% $1,090.00
1994 ..................................................... (1.54)% $ 984.60
1993 ..................................................... 8.07% $1,080.70
1992 ..................................................... 9.66% $1,096.60
1991 ..................................................... 12.62% $1,126.20
1990 ..................................................... 7.75% $1,077.50
1989 ..................................................... 9.12% $1,091.20
1988 ..................................................... 7.29% $1,072.90
Inception (November 6, 1986) to October 31, 1987 ........ 3.18% $1,031.80
</TABLE>
<TABLE>
<CAPTION>
Expressed as Redeemable Value
a percentage of a hypothetical
based on a $1,000 investment
hypothetical at the end of
Class A Shares $1,000 investment the period
- -------------- ----------------- ----------
Period Average Annual Total Return
------ (including maximum applicable sales charges)
<S> <C> <C>
One Year Ended October 31, 1998 .......................... 9.13% $ 1,091.30
Inception (February 18, 1997) to October 31, 1998 ........ 8.37% $ 1,146.30
One Year Ended October 31, 1998 .......................... 10.23% $ 1,102.30
Inception (February 18, 1997) to October 31, 1998 ........ 5.04% $ 1,050.40
Inception (February 18, 1997) to October 31, 1998 ........ 14.63% $ 1,146.30
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Expressed as Redeemable Value
a percentage of a hypothetical
based on a $1,000 investment
hypothetical at the end of
Class B Shares $1,000 investment the period
- -------------- ----------------- ----------
Period Average Annual Total Return
------ (including maximum applicable sales charges)
<S> <C> <C>
One Year Ended October 31, 1998 .......................... 8.68% $ 1,086.80
Inception (February 18, 1997) to October 31, 1998 ........ 8.55% $ 1,149.60
One Year Ended October 31, 1998 .......................... 9.68% $ 1,096.80
Inception (February 18, 1997) to October 31, 1998 ........ 4.81% $ 1,048.10
Inception (February 18, 1997) to October 31, 1998 ........ 14.96% $ 1,149.60
</TABLE>
<TABLE>
<CAPTION>
Expressed as Redeemable Value
a percentage of a hypothetical
based on a $1,000 investment
hypothetical at the end of
Class C Shares $1,000 investment the period
- -------------- ----------------- ----------
Period Average Annual Total Return
------ (including maximum applicable sales charges)
<S> <C> <C>
One Year Ended October 31, 1998 .......................... 9.05% $ 1,090.50
Inception (February 18, 1997) to October 31, 1998 ....... 8.63% $ 1,150.90
One Year Ended October 31, 1998 10.05% $ 1,100.50
Inception (February 18, 1997) to October 31, 1998 ........ 4.57% $ 1,045.70
Inception (February 18, 1997) to October 31, 1998 ....... 15.09% $ 1,150.90
</TABLE>
<TABLE>
<CAPTION>
Expressed as Redeemable Value
a percentage of a hypothetical
based on a $1,000 investment
hypothetical at the end of
Class D Shares $1,000 investment the period
- -------------- ----------------- ----------
Period Average Annual Total Return
------ (including maximum applicable sales charges)
<S> <C> <C>
One Year Ended October 31, 1998 .......................... 9.02% $ 1,090.20
Five Years Ended October 31, 1998 ........................ 5.52% $ 1,308.00
Ten Years Ended October 31, 1998 ......................... 7.46% $ 2,052.40
One Year Ended October 31, 1998 .......................... 10.12% $ 1,101.20
Inception (November 6, 1986) to October 31, 1998 ......... 127.21% $ 2,272.10
</TABLE>
In order to reflect the reduced sales charges applicable to certain
investors, as described under "Purchase of Shares," the total return data quoted
by the Fund in advertisements directed to such investors whose purchases are
subject to reduced sales load, in the case of Class A and Class D shares, or
waiver of the contingent deferred sales charge in the case of Class B and Class
C shares, may take into account the reduced, and not the maximum, sales charge
or may not take into account the contingent deferred sales charge and therefore
may reflect greater total return since, due to the reduced sales charge, a lower
amount of expenses is deducted.
On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 Index, the Dow Jones Industrial Average or performance data published
by Lipper Analytical Services, Inc., Morningstar Publications, Inc., Money
Magazine, U.S. Magazine, U.S. News & World Report, Business Week, CDA Investment
Technology, Inc., Forbes Magazine and Fortune Magazine or other industry
publications. When comparing its performance to a market index, the Fund may
refer to various statistical measures derived from the historic performance of
the Fund and the index, such as standard deviation and beta. As with other
performance data, performance comparisons should not be considered indicative of
the Fund's relative performance for any future period. 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.
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.
34
<PAGE>
GENERAL INFORMATION
Description of Shares
The Fund was organized as an unincorporated business trust under the laws
of Massachusetts under the name "Merrill Lynch Institutional Intermediate Fund"
on September 10, 1986. At the close of business on February 14, 1997, the Fund
was reorganized and changed its name to "Merrill Lynch Intermediate Government
Bond Fund." Its executive offices are located at One Financial Center, 23rd
Floor, Boston, Massachusetts 02111-2646 (telephone toll free 800-225-1576).
Under the Declaration of Trust, the Trustees are authorized to issue an
indefinite number of shares of $0.10 par value of one or more classes, and the
Trustees have designated four classes: "Class A Common Stock," "Class B Common
Stock," "Class C Common Stock" and "Class D Common Stock." Each Class A, Class
B, Class C and Class D share of Common Stock has equal voting rights, and each
such issued and outstanding share is entitled to one vote and to participate
equally in dividends and distributions declared by the Fund and in net assets of
the Fund upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities. The shares of the Fund, when issued, will be fully paid
and non-assessable, be freely transferable and have no preference, preemptive,
conversion or similar rights, except that the Class B, Class C and Class D
shares bear certain expenses related to the account maintenance fees associated
with such shares, and Class B and Class C shares bear certain expenses related
to the distribution of such shares. Each class has exclusive voting rights with
respect to matters relating to such account maintenance and distribution
expenditures, as applicable. See "Purchase of Shares." The Trustees are
authorized to divide or combine such shares into a greater or lesser number of
shares and to classify and reclassify the shares of the Fund into additional
classes of Common Stock at a future date. Shares of the Fund outstanding on the
date the Fund was reorganized were reclassified as Class D shares.
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, cause a
meeting of shareholders to be held for the purpose of voting on the removal of
Trustees. Meetings of the shareholders will be called upon written request of
shareholders holding in the aggregate not less than 10% of the outstanding
shares having voting rights. Except as set forth above, the Trustees will
continue to hold office and appoint successor trustees. Shares do not have
cumulative voting rights and the holders of more than 50% of the shares of the
Fund voting for the election of Trustees can elect all of the Trustees of the
Fund if they choose to do so and in such event the holders of the remaining
shares would not be able to elect any Trustees. Holders of shares of the Fund
are entitled to redeem their shares as set forth under "Redemption of Shares."
No amendment may be made to the Declaration of Trust without the affirmative
vote of a majority of the outstanding shares of the Fund.
The Declaration of Trust establishing the Fund, dated September 10, 1986, a
copy of which, together with all amendments thereto (the "Declaration"), is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name of the Fund refers to the trustees under the Declaration
collectively as trustees, but not as individuals or personally, and no trustee,
shareholder, officer, employee or agent of the Fund may be held to any personal
liability, nor may resort be had to their private property for the satisfaction
of any obligation or claim otherwise in connection with the affairs of the Fund
but the Fund's property only shall be liable.
Under a separate agreement Merrill Lynch 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.
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 ratification by the shareholders of the Fund.
The independent auditors are responsible for auditing the annual financial
statements of the Fund.
35
<PAGE>
Custodian
State Street Bank and Trust Company, P.O. Box 351, 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
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484 (the "Transfer Agent"), acts as of the Fund's Transfer Agent.
The Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts.
Legal Counsel
Rogers & Wells LLP, 200 Park Avenue, New York, New York 10166, is counsel
for the Fund.
Reports to Shareholders
The fiscal year of the Fund ends on October 31st 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.
Shareholder Inquiries
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
Additional Information
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares as of February 2, 1998 with the exception of Mr.
Howard L. Simons and Mrs. Jesse O. Simons TIC, 2759 Porter Ct., Glenview, IL
60025, 8.5% of Class C; Thomas C. Wajnert & Teresa Altmis Wajnert JTWROS c/o TPS
Administrative Group, P.O. Box 7560, Garden City, NY 11530, 7.6% of Class C;
Hiway Federal Credit Union, 111 Empire Drive, St. Paul, MN 55103, 5.6% of Class
D; William C. Schiefley Exec. Est. of Esther W. Ephlin DCSD, P.O. Box 678,
Sugarland, TX 77487, 5.2% of Class D.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
36
<PAGE>
CODE #: 10432-0399R
