<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 24, 1994
SECURITIES ACT FILE NO. 33-18720
INVESTMENT COMPANY ACT FILE NO. 811-5395
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 8
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 9
(CHECK APPROPRIATE BOX OR BOXES)
----------------
MERRILL LYNCH GLOBAL
CONVERTIBLE FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[Ximmediately]upon filing pursuant to
paragraph (b), or
[_] on (date) pursuant to paragraph (b), or
[_60]days after filing pursuant to
paragraph (a), or
[_on](date) pursuant to paragraph (a) of
rule 485.
----------------
The Registrant has registered an indefinite number of its Class A and Class B
shares under the Securities Act of 1933 pursuant to Rule 24f-2 under the
Investment Company Act of 1940. The notice required by such rule for the
Registrant's most recent fiscal year was filed on December 20, 1993.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM
NO. LOCATION
----------- --------
<C> <S> <C>
PART A
Item 1. Cover Page................. Cover Page
Item 2. Synopsis................... Fee Table
Item 3. Condensed Financial Infor- Financial Highlights; Performance
mation.................... Data
Item 4. General Description of Reg- Cover Page; Investment Objective and
istrant................... Policies; Additional Information
Item 5. Management of the Fund..... Fee Table; Management of the Fund;
Inside Back Cover Page
Item 6. Capital Stock and Other Se- Cover Page; Additional Information
curities..................
Item 7. Purchase of Securities Be- Cover Page; Fee Table; Alternative
ing Offered............... Sales Arrangements; Purchase of
Shares; Shareholder Services; Addi-
tional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase... Fee Table; Alternative Sales Ar-
rangements; Purchase of Shares; Re-
demption of Shares
Item 9. Pending Legal Proceedings.. Not Applicable
PART B
Item 10. Cover Page................. Cover Page
Item 11. Table of Contents.......... Back Cover Page
Item 12. General Information and Not Applicable
History...................
Item 13. Investment Objectives and Investment Objective and Policies
Policies..................
Item 14. Management of the Fund..... Management of the Fund
Item 15. Control Persons and Princi-
pal Holders of Securities. Management of the Fund; Additional
Information
Item 16. Investment Advisory and Management of the Fund; Purchase of
Other Services............ Shares; General Information
Item 17. Brokerage Allocation and
Other Practices........... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Se- General Information
curities..................
Item 19. Purchase, Redemption and
Pricing of Securities Be- Purchase of Shares; Redemption of
ing Offered............... Shares; Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status................. Dividends, Distributions and Taxes
Item 21. Underwriters............... Purchase of Shares
Item 22. Calculation of Performance Performance Data
Data......................
Item 23. Financial Statements....... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
FEBRUARY 24, 1994
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Global Convertible Fund, Inc. (the "Fund") is a mutual fund
seeking to provide shareholders with high total return by investing primarily
in an internationally diversified portfolio of convertible debt securities,
convertible preferred stocks and "synthetic" convertible securities consisting
of a combination of debt securities or preferred stock and warrants or options.
The investment philosophy of the Fund is based on the belief that the
characteristics of convertible securities make them appropriate investments for
an investment company seeking a high total return from capital appreciation and
investment income. There can be no assurance that the investment objective of
the Fund will be realized.
----------------
The Fund offers two classes of shares which may be purchased at a price equal
to the next determined net asset value per share, plus a sales charge which, at
the election of the purchaser, may be imposed (i) at the time of purchase (the
"Class A shares"), or (ii) on a deferred basis (the "Class B shares"). The
deferred charges to which the Class B shares are subject shall consist of a
contingent deferred sales charge which may be imposed on redemptions made
within four years of purchase and ongoing account maintenance and distribution
fees. These alternatives permit an investor to choose the method of purchasing
shares that is most beneficial given the amount of the purchase, the length of
time the investor expects to hold the shares and other circumstances. Investors
should understand that the purpose and function of the deferred sales charges
with respect to the Class B shares are the same as those of the initial sales
charge with respect to the Class A shares. Investors should also understand
that over time the deferred charges with respect to the Class B shares may
exceed the initial sales charge with respect to Class A shares. See
"Alternative Sales Arrangements" on page 3.
Each Class A share and Class B share represents an identical interest in the
investment portfolio of the Fund and has the same rights, except that Class B
shares bear the expenses of the account maintenance fee and distribution fee
and certain other costs resulting from the deferred sales charge arrangement,
which will cause Class B shares to have a higher expense ratio and to pay lower
dividends than Class A shares, and that Class B shares have exclusive voting
rights with respect to the account maintenance fee and distribution fee. The
two classes also have different exchange privileges.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), Box 9011, Princeton, New Jersey 08543-9011 [(609) 282-
2800], or from securities dealers which have entered into selected dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000
and the minimum subsequent purchase is $50, except that for retirement plans
the minimum initial purchase is $250 and the minimum subsequent purchase is $1.
Merrill Lynch may charge its customers a processing fee (presently $4.85) for
confirming purchases and repurchases. Purchases and redemptions directly
through the Fund's transfer agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares".
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated February 24, 1994 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission and
is available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to Class A shares and Class B shares follows:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
INITIAL SALES DEFERRED SALES
CHARGE CHARGE
ALTERNATIVE(A) ALTERNATIVE
-------------- --------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price)................. 4.00%(b) None
Sales Charge Imposed on Dividend
Reinvestments................... None None
Deferred Sales Charge (as a per-
centage of original purchase None 4.0% during the first
price or redemption proceeds, year, decreasing 1.0%
whichever is lower)............. annually to 0.0% after
the fourth year(c)
Exchange Fee..................... None None
ANNUAL FUND OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE NET AS-
SETS), FOR THE YEAR ENDED OCTOBER
31, 1993:
Management Fees(d)............... 0.65% 0.65%
Rule 12b-1 Fees.................. None 1.00%(e)
Other Expenses...................
Custodial Fees................. 0.10% 0.10%
Shareholder Servicing Costs(f). 0.09% 0.13%
Miscellaneous.................. 1.38% 1.38%
---- ----
Total Other Expenses......... 1.57% 1.61%
---- ----
Total Fund Operating Expenses..... 2.22% 3.26%
==== ====
</TABLE>
- --------
(a) Prior to November 4, 1988, no Class A shares of the Fund were publicly
issued.
(b) Reduced for purchases of $25,000 and over, decreasing to 0.50% for
purchases of $1,000,000 and over. Certain purchasers of Class A shares
investing $1,000,000 or more may, in lieu of a front-end sales load, be
assessed a deferred sales charge on redemptions within the first year of
such investments. See "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares"--page 23.
(c) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares"--page 24.
(d) See "Management of the Fund--Management and Advisory Arrangements"--page
20.
(e) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares--Distribution Plan"--page 25.
(f) See "Management of the Fund--Transfer Agency Services"--page 20.
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
EXAMPLE: ----------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
An investor would pay the fol-
lowing expenses on a $1,000
investment including, for
Class A shares, the maximum
$40 front-end sales charge and
assuming (1) an operating ex-
pense ratio, of 2.22% for
Class A shares and 3.26% for
Class B shares, (2) a 5% an-
nual return throughout the pe-
riods and (3) redemption at
the end of the period:
Class A....................... $ 61.61 $ 106.64 $ 154.22 $ 285.22
Class B....................... $ 72.88 $ 120.38 $ 170.24 $ 355.82
An investor would pay the fol-
lowing expenses on the same
$1,000 investment assuming no
redemption at the end of the
period:
Class A....................... $ 61.61 $ 106.64 $ 154.22 $ 285.22
Class B....................... $ 32.88 $ 100.38 $ 170.24 $ 355.82
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATE OF
RETURN, AND ACTUAL EXPENSES OR ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B shareholders who hold their
shares for an extended period of time may pay more in Rule 12b-1 distribution
fees than the economic equivalent of the maximum front-end sales charge
permitted under the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. Merrill Lynch may charge its customers a processing
fee (presently $4.85) for confirming purchases and repurchases. Purchases and
redemptions directly through the Fund's transfer agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares".
2
<PAGE>
ALTERNATIVE SALES ARRANGEMENTS
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
purchaser, may be imposed either (i) at the time of the purchase (the "initial
sales charge alternative") or (ii) on a deferred basis (the "deferred sales
charge alternative").
Class A Shares. An investor who elects the initial sales charge alternative
acquires Class A shares. Although Class A shares incur a sales charge when they
are purchased, they enjoy the benefit of not being subject to any ongoing
account maintenance and distribution fees or any sales charge when they are
redeemed. Certain purchasers of Class A shares qualify for reduced initial
sales charges. See "Purchase of Shares".
Class B Shares. An investor who elects the deferred sales charge alternative
acquires Class B shares. Class B shares do not incur a sales charge when they
are purchased, but they are subject to ongoing account maintenance and
distribution fees and a sales charge if they are redeemed within four years of
purchase. Class B shares provide the benefit of permitting all of the
investor's dollars to work from the time the investment is made. The ongoing
account maintenance and distribution fees paid by Class B shares will cause
such shares to have a higher expense ratio and to pay lower dividends than
those related to Class A shares. Payment of the distribution fee is subject to
certain limits as set forth under "Purchase of Shares--Deferred Sales Charge
Alternative--Class B Shares".
As an illustration, investors who qualify for significantly reduced sales
charges might elect the initial sales charge alternative because similar charge
reductions are not available for purchases under the deferred sales charge
alternative. Moreover, shares acquired under the initial sales charge
alternative are not subject to ongoing account maintenance and distribution
fees. However, because initial sales charges are deducted at the time of
purchase, such investors would not have all their funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also might elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees may exceed the initial sales charge.
Again, however, such investors must weigh this consideration against the fact
that not all their funds will be invested initially. Furthermore, the ongoing
account maintenance and distribution fees will be offset to the extent any
return is realized on the additional funds initially invested under the
deferred sales charge alternative. However, there can be no assurance as to the
return, if any, which will be realized on such additional funds. Certain other
investors might determine it to be more advantageous to have all their funds
invested initially, although remaining subject to continued account maintenance
and distribution fees and, for a four-year period of time, a contingent
deferred sales charge.
The distribution expenses incurred by the Distributor and dealers (primarily
Merrill Lynch) in connection with the sale of the shares will be paid, in the
case of the Class A shares, from the proceeds of the initial sales charge. In
the case of the Class B shares, such distribution expenses will be paid from
the proceeds of the ongoing distribution fee and, if applicable, the contingent
deferred sales charge incurred upon redemption within four years of purchase.
Sales personnel may receive different compensation for selling Class A or Class
B shares. Investors should understand that the purpose and function of the
deferred sales charges with respect to the Class B shares are the same as those
of the initial sales charge with respect to the Class A shares.
Dividends paid by the Fund with respect to Class A and Class B shares, to the
extent any dividends are paid, will be calculated in the same manner at the
same time on the same day and will be in the same amount,
3
<PAGE>
except that account maintenance and distribution fees and any incremental
transfer agency costs relating to Class B shares will be borne exclusively by
that class. See "Additional Information--Determination of Net Asset Value".
Class A and Class B shareholders of the Fund each have an exchange privilege
for Class A and Class B shares, respectively, with certain other mutual funds
sponsored by Merrill Lynch. Class A and Class B shareholders of the Fund also
may exchange their shares for shares of certain money market funds sponsored by
Merrill Lynch.
The Directors of the Fund have determined that currently no conflict of
interest exists between the Class A and Class B shares. On an ongoing basis,
the Directors of the Fund, pursuant to their fiduciary duties under the
Investment Company Act of 1940, as amended (the "Investment Company Act") and
state laws, will seek to assure that no such conflict arises.
THE ALTERNATIVE SALES ARRANGEMENTS PERMIT AN INVESTOR TO CHOOSE THE
METHOD OF PURCHASING SHARES THAT IS MOST BENEFICIAL GIVEN THE AMOUNT OF
THE PURCHASE, THE LENGTH OF TIME THE INVESTOR EXPECTS TO HOLD THE SHARES
AND OTHER 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, OR TO HAVE THE ENTIRE
INITIAL PURCHASE PRICE INVESTED IN THE FUND WITH THE INVESTMENT THEREAFTER
BEING SUBJECT TO ONGOING ACCOUNT MAINTENANCE AND DISTRIBUTION FEES. TO
ASSIST INVESTORS IN MAKING THIS DETERMINATION, THE FEE TABLE ON PAGE 2
SETS FORTH THE CHARGES APPLICABLE TO EACH CLASS OF SHARES AND A DISCUSSION
OF RELEVANT FACTORS IN MAKING SUCH DETERMINATION IS SET FORTH UNDER
"PURCHASE OF SHARES--ALTERNATIVE SALES ARRANGEMENTS" ON PAGE 22.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche, independent auditors. Financial statements for the year ended October
31, 1993 and the independent auditors' report thereon are included in the
Statement of Additional Information. Further information about the performance
of the Fund is contained in the Fund's most recent annual report to
shareholders which may be obtained, without charge, by calling or by writing
the Fund at the telephone number or address on the front cover of this
Prospectus.
The following per share data and ratios have been derived from information
provided in the Financial Statements:
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------------- ----------------------------------------------------
FOR THE YEAR ENDED FOR THE YEAR ENDED
OCTOBER 31, OCTOBER 31,
-------------------------------------- ----------------------------------------------------
1993 1992 1991 1990 1989+ 1993 1992 1991 1990 1989 1988++
------ ------ ------ ------ ------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of period.... $ 9.79 $ 9.39 $ 8.37 $ 9.95 $ 9.97 $ 9.84 $ 9.44 $ 8.39 $ 9.95 $ 9.94 $ 10.00
------ ------ ------ ------ ------ ------- ------- ------- ------- ------- -------
Investment income--net. .23 .21 .25 .38 .39 .13 .12 .18 .29 .37 .27
Realized and unrealized
gain (loss) on
investments and
foreign currency
transactions--net+++.. 1.45 .68 1.22 (1.11) .21 1.46 .67 1.20 (1.10) .17 (.10)
------ ------ ------ ------ ------ ------- ------- ------- ------- ------- -------
Total from investment
operations............. 1.68 .89 1.47 (.73) .60 1.59 .79 1.38 (.81) .54 .17
------ ------ ------ ------ ------ ------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income--net. (.23) (.25) (.37) (.42) (.45) (.14) (.15) (.25) (.32) (.36) (.23)
Realized gain on
investments--net...... (.16) (.24) (.08) (.43) (.17) (.16) (.24) (.08) (.43) (.17) --
------ ------ ------ ------ ------ ------- ------- ------- ------- ------- -------
Total dividends and
distributions.......... (.39) (.49) (.45) (.85) (.62) (.30) (.39) (.33) (.75) (.53) (.23)
------ ------ ------ ------ ------ ------- ------- ------- ------- ------- -------
Net asset value, end of
period.................. $11.08 $ 9.79 $ 9.39 $ 8.37 $ 9.95 $ 11.13 $ 9.84 $ 9.44 $ 8.39 $ 9.95 $ 9.94
====== ====== ====== ====== ====== ======= ======= ======= ======= ======= =======
Total Investment
Return:**
Based on net asset value
per share.............. 17.64% 10.00% 18.09% (7.86%) 6.29%# 16.45% 8.77% 16.79% (8.68%) 5.58% 1.70%#
====== ====== ====== ====== ====== ======= ======= ======= ======= ======= =======
Ratios to Average Net
Assets:
Expenses, excluding
distribution fees and
net of reimbursement... 2.22% 2.47% 2.47% 2.39% 1.77%* 2.26% 2.49% 2.50% 2.41% 1.63% 1.48%*
====== ====== ====== ====== ====== ======= ======= ======= ======= ======= =======
Expenses, net of
reimbursement.......... 2.22% 2.47% 2.47% 2.39% 1.77%* 3.26% 3.49% 3.50% 3.41% 2.63% 2.48%*
====== ====== ====== ====== ====== ======= ======= ======= ======= ======= =======
Expenses................ 2.22% 2.86% 2.87% 2.39% 1.77%* 3.26% 3.96% 3.88% 3.41% 2.97% 2.60%*
====== ====== ====== ====== ====== ======= ======= ======= ======= ======= =======
Investment income--net.. 2.36% 2.61% 3.16% 4.55% 5.62%* 1.32% 1.53% 2.25% 3.51% 3.62% 3.74%*
====== ====== ====== ====== ====== ======= ======= ======= ======= ======= =======
Supplemental Data:
Net assets, end of
period
(in thousands)......... $4,557 $2,283 $ 448 $ 162 $ 194 $29,831 $13,975 $14,973 $18,296 $30,813 $41,232
====== ====== ====== ====== ====== ======= ======= ======= ======= ======= =======
Portfolio turnover...... 26.02% 4.91% 18.02% 22.76% 15.91% 26.02% 4.91% 18.02% 22.76% 15.91% 20.24%
====== ====== ====== ====== ====== ======= ======= ======= ======= ======= =======
</TABLE>
- --------
+ Class A shares commenced operations on November 4, 1988.
++ Class B shares commenced operations on February 26, 1988.
+++ Foreign currency transaction amounts have been reclassified to conform with
1993 presentation.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
5
<PAGE>
SPECIAL CONSIDERATIONS
As a global fund, the Fund may invest in United States and foreign
securities. Investments in securities of foreign entities and securities
denominated in foreign currencies involve risks not typically involved in
domestic investment, including fluctuations in foreign exchange rates, future
foreign political and economic developments, and the possible imposition of
exchange controls or other foreign or United States governmental laws or
restrictions applicable to such investments. Since the Fund may invest in
securities denominated or quoted in currencies other than the United States
dollar, changes in foreign currency exchange rates may affect the value of
investments in the portfolio and the unrealized appreciation or depreciation of
investments insofar as United States investors are concerned. Changes in
foreign currency exchange rates relative to the U.S. dollar will affect the
U.S. dollar value of the Fund's assets denominated in that currency and the
Fund's yield on such assets. Foreign currency exchange rates are determined by
forces of supply and demand on the foreign exchange markets. These forces are,
in turn, affected by the international balance of payments and other economic
and financial conditions, government intervention, speculation, and other
factors. Moreover, individual foreign economies may differ favorably or
unfavorably from the United States economy in such respects as growth of
national product, rate of inflation, capital reinvestment, resources, self-
sufficiency and balance of payments position.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign financial
instrument than about a United States instrument, and foreign entities may not
be subject to accounting, auditing and financial reporting standards and
requirements comparable to those of United States entities. In addition,
certain foreign investments may be subject to foreign withholding taxes. See
"Taxes". Foreign financial markets, while growing in volume, have, for the most
part, substantially less volume than United States markets, and securities of
many foreign companies are less liquid and their prices more volatile than
securities of comparable domestic companies. The foreign markets also have
different clearance and settlement procedures and in certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the
Fund to miss attractive investment opportunities. Inability to dispose of a
portfolio security due to settlement problems could result either in losses to
the Fund due to subsequent declines in value of such portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. Costs associated with transactions in
foreign securities are generally higher than with transactions in United States
securities. There is generally less government supervision and regulation of
exchanges, financial institutions and issuers in foreign countries than there
is in the United States.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in United States securities
since the expenses of the Fund, such as custodial costs, are higher.
The Fund may engage in various portfolio strategies to seek to increase its
return through the use of options on portfolio securities and to hedge its
portfolio against movements in the equity markets, interest
6
<PAGE>
rates and exchange rates between currencies by the use of options, futures and
options thereon. Utilization of options and futures transactions involves the
risk of imperfect correlation in movements in the price of options and futures
and movements in the price of the securities, interest rates or currencies
which are the subject of the hedge. There can be no assurance that a liquid
secondary market for options and futures contracts will exist at any specific
time. See "Investment Objective and Policies--Portfolio Strategies Involving
Options and Futures". The Fund may also purchase call options and stock index
call options as an element of synthetic convertible securities. See "Investment
Objective and Policies--Convertible Securities".
The Fund has established no rating criteria for the convertible securities
and other debt securities in which it may invest, and such securities may not
be rated at all for creditworthiness. Securities rated in the medium to lower
rating categories of nationally recognized statistical rating organizations are
predominately speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the security and generally
involve a greater volatility of price than securities in higher rating
categories. The Fund does not intend to purchase debt securities that are in
default.
The Fund may borrow up to 20% of its total assets taken at market value, but
only from banks as a temporary measure for extraordinary or emergency purposes
including to meet redemptions or to settle securities transactions. The Fund
will not purchase securities while borrowings are outstanding except (a) to
honor prior commitments or (b) to exercise subscription rights where
outstanding borrowings have been obtained exclusively for settlements of other
securities transactions. The purchase of securities while borrowings are
outstanding will have the effect of leveraging the Fund. Such leveraging
increases the Fund's exposure to capital risk and borrowed funds are subject to
interest costs that will reduce net income.
7
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek high total return from a
combination of capital appreciation and investment income. The Fund will seek
to achieve its objective by investing primarily in an internationally
diversified portfolio of convertible debt securities, convertible preferred
stocks and "synthetic" convertible securities consisting of a combination of
debt securities or preferred stock and warrants or options. Under normal
circumstances, the Fund will invest at least 65% of its total assets in
convertible securities and 80% of its assets in convertible securities and
synthetic convertible securities of at least three different countries
including the United States. The investment objective described in this
paragraph is a fundamental policy of the Fund and may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities.
The convertible securities to be held by the Fund include any corporate debt
security or preferred stock that may be converted into underlying shares of
common stock. The common stock underlying convertible securities may be issued
by a different entity than the issuer of the convertible securities.
Convertible securities entitle the holder to receive interest payments paid on
corporate debt securities or the dividend preference on a preferred stock until
such time as the convertible security matures or is redeemed or until the
holder elects to exercise the conversion privilege. "Synthetic" convertible
securities, as such term is used herein, are created by combining separate
securities which possess the two principal characteristics of a true
convertible security and the right to acquire equity securities. See
"Convertible Securities" below for additional information concerning
convertible securities and synthetic convertible securities eligible for
purchase by the Fund.
The Fund believes that the characteristics of convertible securities make
them appropriate investments for an investment company seeking a high total
return from capital appreciation and investment income. These characteristics
include the potential for capital appreciation as the value of the underlying
common stock increases, the relatively high yield received from dividend or
interest payments as compared to common stock dividends and decreased risks of
decline in value relative to the underlying common stock due to their fixed
income nature. As a result of the conversion feature, however, the interest
rate or dividend preference on a convertible security is generally less than
would be the case if the securities were issued in nonconvertible form.
Although the Fund may invest in securities denominated in any currency that
are convertible into common stocks of companies located throughout the world,
it is expected that a majority of its assets will be invested in securities
denominated in United States dollars, currencies of Pacific Basin countries
(such as Japan, Australia, Hong Kong and Singapore), and currencies of Western
European countries (such as the United Kingdom, Germany, the Netherlands,
Switzerland, Sweden, France, Italy, Belgium, Norway, Denmark, Austria and
Spain) and convertible into equity securities of United States, Pacific Basin
or Western European corporations. To the extent the Fund acquires synthetic
convertible securities, it is expected that the debt securities or preferred
stock will principally be denominated in United States dollars, Pacific Basin
currencies or Western European currencies and the warrants or options will
principally be exercisable to purchase equity securities of United States,
Pacific Basin or Western European issuers.
Under normal circumstances, the Fund may invest up to 20% of its assets in
other types of securities including equity securities and nonconvertible debt
securities of United States and non-United States issuers.
The Fund has established no rating criteria for the debt securities in which
it may invest and such securities may not be rated at all for creditworthiness.
Securities rated in the medium to lower rating
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categories of nationally recognized statistical rating organizations and
unrated securities of comparable quality are predominantly speculative with
respect to the capacity to pay interest and repay principal in accordance with
the terms of the security and generally involve a greater volatility of price
than securities in higher rating categories. See the Statement of Additional
Information for additional information regarding ratings of debt securities. In
purchasing such securities, the Fund will rely on the Manager's judgment,
analysis and experience in evaluating the creditworthiness of an issuer of such
securities. The Manager will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management and
regulatory matters. The Fund does not intend to purchase debt securities that
are in default or which the Manager believes will be in default.
The Fund reserves the right as a temporary defensive measure to hold money
market securities, including repurchase agreements and purchase and sale
contracts, of United States and non-United States issuers, or cash (foreign
currencies or United States dollars), in such proportions as in the opinion of
the Manager prevailing market, economic or political conditions warrant. The
Fund has established no rating criteria for money market securities that it may
hold as a defensive measure. For this purpose, investments made for defensive
purposes will be maintained only during periods in which the Manager determines
that economic or financial conditions are adverse for holding or being fully
invested in convertible and synthetic convertible securities of United States
and non-United States issuers. A portion of the portfolio normally will be held
in dollars or dollar-denominated money market securities, including repurchase
agreements and purchase and sale contracts, to provide for possible
redemptions.
In evaluating proposed investments, the Manager will seek to maximize the
total return on the Fund's portfolio in terms of United States dollars. In this
regard, the Manager will consider factors that relate both to various
securities markets and to specific securities traded in those markets. In
evaluating markets, the Manager will consider such factors as the condition and
growth potential of various economies and securities markets, currency and
taxation factors (including the applicability and rate of withholding taxes)
and other pertinent financial, social, national and political factors. In
analyzing convertible securities, the Manager will consider both the yield on
the convertible security and the potential capital appreciation that is offered
by the underlying common stock. There can be no assurance that the Fund will
achieve its investment objective.
CONVERTIBLE SECURITIES
Set forth below is additional information concerning traditional convertible
securities and "synthetic" convertible securities.
Convertible securities are issued and traded in a number of securities
markets. For the past several years, the principal markets have been the United
States, the Euromarket and Japan. Issuers during this period have included
major corporations domiciled in the United States, Japan, France, Switzerland,
Canada and the United Kingdom. Since the Fund will invest a substantial portion
of its assets in the United States market and the Euromarket, where convertible
bonds have been primarily denominated in the United States dollar, it is
expected that ordinarily a substantial portion of the convertible securities
held by the Fund will be denominated in United States dollars. However, the
underlying equity securities typically will be quoted in the currency of the
country where the issuer is domiciled. With respect to convertible securities
denominated in a currency different from that of the underlying equity
securities, the conversion price may be based on a fixed exchange rate
established at the time the security is issued. As a result, fluctuations in
the exchange rate between the currency in which the debt security is
denominated and the currency in which the share price is
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quoted will affect the value of the convertible security. As described below,
the Fund is authorized to enter into foreign currency hedging transactions in
which it may seek to reduce the impact of such fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion value," which is the
market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock. If, because of a low price of the
common stock, the conversion value is substantially below the investment value
of the convertible security, the price of the convertible security is governed
principally by its investment value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common
stock while holding a fixed income security. The yield and conversion premium
of convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value.
Holders of convertible securities have a claim on the assets of the issuer
prior to the common stockholders but may be subordinated to similar non-
convertible securities of the same issuer. A convertible security may be
subject to redemption at the option of the issuer at a price established in the
charter provision, indenture or other governing instrument pursuant to which
the convertible security was issued. If a convertible security held by the Fund
is called for redemption, the Fund will be required to redeem the security,
convert it into the underlying common stock or sell it to a third party.
Certain convertible debt securities may provide a put option to the holder
which entitles the holder to cause the security to be redeemed by the issuer at
a premium over the stated principal amount of the debt security.
As indicated above, "synthetic" convertible securities, for purposes of this
Prospectus, are created by combining separate securities that possess the two
principal characteristics of a true convertible security, i.e., fixed income
("fixed-income component") and the right to acquire equity securities
("convertibility component"). The fixed-income component is achieved by
investing in nonconvertible fixed income securities such as nonconvertible
bonds, preferred stocks and money market instruments. The convertibility
component is achieved by investing in warrants, exchanges or NASDAQ listed call
options or stock index call options granting the holder the right to purchase a
specified quantity of securities within a specified period of time at a
specified price or to receive cash in the case of stock index options.
A warrant is an instrument issued by a corporation that gives a holder the
right to subscribe to a specified amount of capital stock at a set price for a
specified period of time. Warrants involve the risk that the price of the
security underlying the warrant may not exceed the exercise price of the
warrant and the warrant may expire without any value. The Fund has not
established any limits on the purchase of warrants in connection with the
creation of synthetic convertible securities. See "Portfolio Strategies
Involving Options and Futures" for a discussion of call options and stock index
call options.
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The synthetic convertible security differs from the true convertible security
in several respects. Unlike a true convertible security, which is a single
security having a unitary market value, a synthetic convertible security is
comprised of two or more separate securities, each with its own market value.
Therefore, the "market value" of a synthetic convertible security is the sum of
the values of its fixed-income component and its convertibility component. For
this reason, the values of a synthetic convertible security and a true
convertible security will respond differently to market fluctuations.
More flexibility is possible in the assembly of a synthetic convertible
security than in the purchase of a convertible security. While synthetic
convertible securities may be selected where the two components represent one
issuer or are issued by a single issuer, thus making the synthetic convertible
security similar to the true convertible security, the character of a synthetic
convertible security allows the combination of components representing distinct
issuers, when management believes that such a combination would better promote
the Fund's investment objective. A synthetic convertible security also is a
more flexible investment in that its two components may be purchased
separately. For example, the Fund may purchase a warrant for inclusion in a
synthetic convertible security but temporarily hold short-term investments
while postponing the purchase of a corresponding bond pending development of
more favorable market conditions.
A holder of a synthetic convertible security faces the risk of a decline in
the price of the stock or the level of the index involved in the convertibility
component, causing a decline in the value of the call option or warrant. Should
the price of the stock fall below the exercise price and remain there
throughout the exercise period, the entire amount paid for the call option or
warrant would be lost. Since a synthetic convertible security includes the
fixed-income component as well, the holder of a synthetic convertible security
also faces the risk that interest rates will rise, causing a decline in the
value of the fixed-income instrument.
Debt securities with attached equity warrants have been issued in the United
States, the Euromarket and Japan. These securities have been sold with
detachable warrants in the United States, Europe and Japan. In Japan, however,
warrant bonds (the term used to refer to these securities) were only issued
with non-detachable warrants prior to December 1986. Eurobonds with warrants
have been denominated in several currencies, including the United States
dollar, Japanese yen, German mark, Dutch guilder and British pound. However,
the exercise price of the warrants is typically expressed in the currency of
the country where the issuer is domiciled.
OTHER FACTORS
While it is the policy of the Fund generally not to engage in trading for
short-term gains, the Manager will effect portfolio transactions without regard
to holding period, if, in its judgment, such transactions are advisable in the
light of a change in circumstances of a particular company or within a
particular industry or in the general market, economic or financial conditions.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
The Fund may engage in various portfolio strategies to seek to increase its
return through the use of options on portfolio securities and to hedge its
portfolio against movements in the equity markets, interest rates and exchange
rates between currencies. This use of options and futures transactions is in
addition to the Fund's ability to purchase call options and stock index call
options as an element of synthetic convertible securities. The Fund has
authority to write (i.e., sell) covered call options on its portfolio
securities, purchase put and call options on securities and engage in
transactions in stock index options, stock index futures and
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financial futures, and related options on such futures. The Fund may also deal
in forward foreign exchange transactions and foreign currency options and
futures, and related options on such futures. Each of these portfolio
strategies is described below. Although certain risks are involved in options
and futures transactions (as discussed below in "Risk Factors in Options and
Futures Transactions"), the Manager believes that, because the Fund will (i)
write only covered call options on portfolio securities, (ii) in connection
with the formation of synthetic convertible securities, purchase call options
or stock index call options only as an element of synthetic convertibles, and
(iii) engage in other options and futures transactions only for hedging
purposes, the options and futures portfolio strategies of the Fund will not
subject the Fund to the risks frequently associated with the speculative use of
options and futures transactions. While the Fund's use of hedging strategies is
intended to reduce the volatility of the net asset value of Fund shares, the
Fund's net asset value will fluctuate. There can be no assurance that the
Fund's hedging transactions will be effective. Furthermore, the Fund will only
engage in hedging activities from time to time and may not necessarily be
engaging in hedging activities when movements in the equity markets, interest
rates or currency exchange rates occur. Reference is made to the Statement of
Additional Information for further information concerning these strategies.
Writing Covered Call Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A
covered call option is an option where the Fund in return for a premium gives
another party a right to buy specified securities owned by the Fund at a
specified future date and price set at the time of the contract. The principal
reason for writing call options is to attempt to realize, through the receipt
of premiums, a greater return than would be realized on the securities alone.
By writing covered call options, the Fund gives up the opportunity, while the
option is in effect, to profit from any price increase in the underlying
security above the option exercise price. In addition, the Fund's ability to
sell the underlying security will be limited while the option is in effect
unless the Fund effects a closing purchase transaction. A closing purchase
transaction cancels out the Fund's position as the writer of an option by means
of an offsetting purchase of an identical option prior to the expiration of the
option it has written. Covered call options serve as a partial hedge against
the price of the underlying security declining. The Fund may not write covered
call options in underlying securities in an amount exceeding 15% of the market
value of its total assets.
Purchasing Options. The Fund is authorized to purchase put options to hedge
against a decline in the market value of its securities. By buying a put option
the Fund has a right to sell the underlying security at the exercise price,
thus limiting the Fund's risk of loss through a decline in the market value of
the security until the put option expires. The amount of any appreciation in
the value of the underlying security will be partially offset by the amount of
the premium paid for the put option and any related transaction costs. Prior to
its expiration, a put option may be sold in a closing sale transaction and
profit or loss from the sale will depend on whether the amount received is more
or less than the premium paid for the put option plus the related transaction
costs. A closing sale transaction cancels out the Fund's position as the
purchaser of an option by means of an offsetting sale of an identical option
prior to the expiration of the option it has purchased. In certain
circumstances, the Fund may purchase call options on securities held in its
portfolio on which it has written call options or on securities which it
intends to purchase or, as discussed above, as an element of synthetic
convertible securities. The Fund will not purchase options on securities
(including options purchased as an element of synthetic convertible securities)
if, as a result of such purchase, the aggregate cost of all outstanding options
on securities held by the Fund would exceed 5% of the market value of the
Fund's total assets.
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Stock Index Options and Futures and Financial Futures. The Fund is authorized
to engage in transactions in stock index options and futures and financial
futures, and related options on such futures. In addition to the purchase of
stock index call options as an element of synthetic convertible securities as
discussed above, the Fund may purchase or write call options and purchase put
options on stock indexes to hedge against the risks of market-wide stock price
movements in the securities in which the Fund invests. The effectiveness of the
hedge will depend on the degree of diversification of the Fund's portfolio and
the sensitivity of the securities comprising the portfolio to factors
influencing the market as a whole. Because the value of an index option depends
upon movements in the level of the index rather than the price of a particular
stock, whether the Fund will realize a gain or loss on the purchase or sale of
an option on an index depends upon movements in the level of prices in the
stock market generally or in an industry or market segment rather than
movements in the price of a particular stock. Currently, stock index options
traded include the S&P 100 Index, the S&P 500 Index, the NYSE Composite Index,
the AMEX Market Value Index, the National Over-the-Counter Index, the FT Index
and other standard, broadly based stock market indices in the United States and
in foreign countries.
The Fund may also purchase and sell stock index futures contracts and
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities and interest rates, as
described below. A futures contract is an agreement between two parties which
obligates the purchaser of the futures contract to buy and the seller of a
futures contract to sell a security for a set price on a future date. Unlike
most other futures contracts, a stock index futures contract does not require
actual delivery of securities, but results in cash settlement based upon the
difference in value of the index between the time the contract was entered into
and the time of its settlement. The Fund may effect transactions in stock index
futures contracts in connection with equity securities in which it invests and
in financial futures contracts in securities issued or guaranteed by the
government of any country which is a member of the Organization for Economic
Cooperation and Development, United States government and agency securities and
corporate debt securities. Transactions by the Fund in stock index futures and
financial futures are subject to limitations as described below under
"Restrictions on the Use of Futures Transactions".
The Fund may sell stock index futures contracts in anticipation of or during
a market decline to attempt to offset the decrease in market value of the
Fund's securities portfolio that might otherwise result. When the Fund is not
fully invested in the securities markets and anticipates a significant market
advance, it may purchase stock index futures in order to gain rapid market
exposure that may in part or entirely offset increases in the cost of
securities that the Fund intends to purchase. As such purchases are made, an
equivalent amount of stock index futures contracts will be terminated by
offsetting sales. The Fund does not consider purchases of futures contracts to
be a speculative practice under these circumstances. It is anticipated that, in
a substantial majority of these transactions, the Fund will purchase such
securities upon termination of the long futures position, whether the long
position is the purchase of a stock index futures contract or the purchase of a
call option on a stock index future, but under unusual circumstances (e.g., the
Fund experiences a significant amount of redemptions), a long futures position
may be terminated without the corresponding purchase of securities.
The Fund may sell financial futures contracts in anticipation of an increase
in the general level of interest rates. Generally, as interest rates rise, the
market value of debt securities which may be held by the Fund will fall, thus
reducing the net asset value of the Fund. However, as interest rates rise, the
value of the Fund's short position in the futures contract will also tend to
increase, thus offsetting all or a portion of the depreciation in the market
value of the Fund's investments which are being hedged. While the Fund will
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incur commission expenses in selling and closing out futures positions, these
commissions are generally less than the transaction expenses which would have
been incurred had the Fund sold portfolio securities in order to reduce its
exposure to increases in interest rates. The Fund also may purchase financial
futures contracts in anticipation of a decline in interest rates when it is not
fully invested in a particular market in which it intends to make investments
to gain market exposure that may in part or entirely offset an increase in the
cost of securities it intends to purchase. It is anticipated that, in a
substantial majority of these transactions, the Fund will purchase securities
upon termination of the futures contract.
The Fund also has authority to purchase and write call and put options on
futures contracts in connection with its hedging activities. Generally, these
strategies are utilized under the same market and market sector conditions
(i.e., conditions relating to specific types of investments) in which the Fund
enters into futures transactions. The fund may purchase put options or write
call options on futures contracts rather than selling the underlying futures
contract in anticipation of a decrease in the market value of a security or an
increase in interest rates. Similarly, the Fund may purchase call options, or
write put options on futures contracts, as a substitute for the purchase of
such futures to hedge against the increased cost resulting from an increase in
the market value or a decline in interest rates of securities which the Fund
intends to purchase.
The Fund may engage in options and futures transactions on exchanges and in
options in the over-the-counter markets ("OTC options"). In general, exchange-
traded contracts are third-party contracts (i.e., performance of the parties'
obligations is guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. OTC options transactions are
two-party contracts with price and terms negotiated by the buyer and seller.
See "Restrictions on OTC Options" below for information as to restrictions on
the use of OTC options.
Foreign Currency Hedging. The Fund has authority to deal in forward foreign
exchange among currencies of the different countries in which it will invest
and multinational currency units as a hedge against possible variations in the
foreign exchange rates among these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date (up to one year) and price set at the time of the contract. The
Fund's dealings in forward foreign exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward foreign currency with respect to
specific receivables or payables of the Fund accruing in connection with the
purchase and sale of its portfolio securities, the sale and redemption of
shares of the Fund or the payment of dividends and distributions by the Fund.
Position hedging is the sale of forward foreign currency with respect to
portfolio security positions denominated or quoted in such foreign currency.
The Fund will not speculate in foreign forward exchange. The Fund will not
attempt to hedge all of its foreign portfolio positions. The Fund may not
commit more than 15% of its total assets to position hedging contracts. Hedging
against a decline in the value of a currency does not eliminate fluctuations in
the prices of portfolio securities or prevent losses if the prices of such
securities decline. Such transactions also preclude the opportunity for gain if
the value of the hedged currency should rise. Moreover, it may not be possible
for the Fund to hedge against a devaluation that is so generally anticipated
that the Fund is not able to contract to sell the currency at a price above the
devaluation level it anticipates.
The Fund is also authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations
in foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the
Fund but not yet delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques
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<PAGE>
to hedge the stated value in United States dollars of an investment in a yen
denominated security. In such circumstances, for example, the Fund may purchase
a foreign currency put option enabling it to sell a specified amount of yen for
dollars at a specified price by a future date. To the extent the hedge is
successful, a loss in the value of the yen relative to the dollar will tend to
be offset by an increase in the value of the put option. To offset, in whole or
in part, the cost of acquiring such a put option, the Fund may also sell a call
option which, if exercised, requires it to sell a specified amount of pounds
for dollars at a specified price by a future date (a technique called a
"straddle"). By selling such call option in this illustration, the Fund gives
up the opportunity to profit without limit from increases in the relative value
of the yen to the dollar. The Manager believes that "straddles" of the type
which may be utilized by the Fund constitute hedging transactions and are
consistent with the policies described above.
Certain differences exist between these foreign currency hedging instruments.
Foreign currency options provide the holder thereof the right to buy or sell a
currency at a fixed price on a future date (with exchange-traded contracts and
OTC options having the characteristics described above). A futures contract on
a foreign currency is an agreement between two parties to buy and sell a
specified amount of a currency for a set price on a future date. Futures
contracts and options on futures contracts are traded on boards of trade of
futures exchanges. The Fund will not speculate in foreign currency options,
futures or related options. Accordingly, the Fund will not hedge a currency
substantially in excess of the market value of securities that it has committed
or anticipates to purchase that are denominated in such currency, and in the
case of securities that have been sold by the Fund but not yet delivered, the
proceeds thereof in its denominated currency. The Fund may not incur potential
net liabilities of more than 20% of its total assets from foreign currency
options, futures or related options.
Restrictions on the Use of Futures Transactions. Under regulations of the
Commodity Futures Trading Commission ("CFTC"), the futures trading activities
described herein will not result in the Fund being deemed to be a "commodity
pool", as defined under such regulations, provided that the Fund adheres to
certain restrictions. In particular, the Fund may purchase and sell futures
contracts and options thereon (i) only for bona fide hedging purposes, and (ii)
for non-hedging purposes, if the aggregate initial margins and premiums
required to establish positions in such contracts and options does not exceed
5% of the liquidation value of the Fund's portfolio assets after taking into
account unrealized profits and unrealized losses on any such contracts and
options. (However, as stated above, the Fund intends to engage in options and
futures transactions only for hedging purposes.) Margin deposits may consist of
cash or securities acceptable to the broker and the relevant contract market.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund's Custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
insuring that the use of such futures is unleveraged.
Restrictions on OTC Options. The Fund will engage in OTC options, including
over-the-counter foreign currency options and options on foreign currency
futures, only with member banks of the Federal Reserve System and primary
dealers in United States Government securities or with affiliates of such banks
or dealers that have capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of at least $50 million. The Fund will
acquire only those OTC options for which the Manager believes the Fund can
receive on each business day at least two independent bids or offers (one of
which will be from an entity other than a party to the option).
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The staff of the Securities and Exchange Commission (the "Commission") has
taken the position that purchased OTC options and the assets used as cover for
written OTC options are illiquid securities. Therefore, the Fund has adopted an
investment policy pursuant to which it will not purchase or sell OTC options
(including OTC options on futures contracts) if, as a result of such
transactions, the sum of the market value of OTC options currently outstanding
that are held by the Fund, the market value of the underlying securities
covered by OTC call options currently outstanding that were sold by the Fund
and margin deposits on the Fund's existing OTC options on futures contracts
exceed 10% of the net assets of the Fund, taken at market value, together with
all other assets of the Fund that are illiquid or are not otherwise readily
marketable. However, if the OTC option is sold by the Fund to a primary U.S.
Government securities dealer recognized by the Federal Reserve Bank of New York
and the Fund has the unconditional contractual right to repurchase such OTC
option from the dealer at a predetermined price, then the Fund will treat as
illiquid such amount of the underlying securities as is equal to the repurchase
price less the amount by which the option is "in-the-money" (i.e., current
market value of the underlying security minus the option's strike price). The
repurchase price with the primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option, plus the
amount by which the option is "in-the-money". This policy as to OTC options is
not a fundamental policy of the Fund and may be amended by the Directors of the
Fund without the approval of the Fund's shareholders. However, the Fund will
not change or modify this policy prior to the change or modification by the
Commission staff of its position.
Risk Factors in Options and Futures Transactions. Utilization of options and
futures transactions to hedge the portfolio involves the risk of imperfect
correlation in movements in the price of options and futures and movements in
the price of the securities, interest rates or currencies that are the subject
of the hedge. If the price of the options or futures moves more or less than
the price of the subject of the hedge, the Fund will experience a gain or loss
which will not be completely offset by movements in the price of the subject of
the hedge. The successful use of options and futures also depends on the
Manager's ability to predict correctly price movements in the market involved
in a particular options or futures transaction.
The Fund intends to enter into options and futures transactions on an
exchange or in the over-the-counter market, only if there appears to be a
liquid secondary market for such options or futures or, in the case of over-
the-counter transactions, the Manager believes the Fund can receive on each
business day at least two independent bids or offers. However, there can be no
assurance that a liquid secondary market will exist at any specific time. Thus,
it may not be possible to close an options or futures position. The inability
to close options and futures positions also could have an adverse impact on the
Fund's ability to hedge effectively its portfolio. There is also the risk of
loss by the Fund of margin deposits or collateral in the event of bankruptcy of
a broker with whom the Fund has an open position in an option, a futures
contract or related option.
The exchanges on which the Fund intends to conduct options transactions have
generally established limitations governing the maximum number of call or put
options on the same underlying security or currency (whether or not covered)
that may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts that any person may trade on a particular trading day. The Manager
does not believe that these trading and position limits will have any adverse
impact on the portfolio strategies for hedging the Fund's portfolio.
16
<PAGE>
OTHER INVESTMENT POLICIES AND PRACTICES
Portfolio Transactions. In executing portfolio transactions, the Fund seeks
to obtain the best net results, taking into account such factors as price
(including the applicable brokerage commissions or dealer spread), size of
order, difficulty of execution, operation facilities of the firm involved and
the firm's risk in positioning a block of securities. While the Fund generally
seeks reasonably competitive commission rates, the Fund does not necessarily
pay the lowest commission or spread available. The Fund contemplates that,
consistent with its policy of obtaining the best net results, it will place
orders for transactions with a number of brokers and dealers, including Merrill
Lynch, an affiliate of the Manager. Subject to obtaining the best price and
execution, brokers who provide supplemental investment research to the Fund may
receive orders for transactions by the Fund. Information so received will be in
addition to, and not in lieu of, the services required to be performed by the
Manager and the expenses of the Manager will not necessarily be reduced as a
result of the receipt of such supplemental information. See "Management of the
Fund--Management and Advisory Arrangements". In addition, consistent with the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.,
the Manager may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions for the Fund.
It is expected that the majority of the shares of the Fund will be sold by
Merrill Lynch.
The Fund anticipates that its brokerage transactions involving securities of
companies domiciled in countries other than the United States will be conducted
primarily on the principal stock exchanges of such countries. Brokerage
commissions and other transaction costs on foreign securities exchanges are
generally higher than in the United States, although the Fund will endeavor to
achieve the best net results in effecting such transactions.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in
money market securities pursuant to repurchase agreements or purchase and sale
contracts. Repurchase agreements and purchase and sale contracts may be entered
into only with a member bank of the Federal Reserve System or primary dealer in
United States Government securities. Under such agreements, the bank or primary
dealer agrees, upon entering into the contract, to repurchase the security at a
mutually agreed upon time and price, thereby determining the yield during the
term of the agreement. This results in a fixed rate of return insulated from
market fluctuations during such period. In the case of repurchase agreements,
the prices at which the trades are conducted do not reflect accrued interest on
the underlying obligation; whereas, in the case of purchase and sale contracts,
the prices take into account accrued interest. Such agreements usually cover
short periods, such as under one week. Repurchase agreements may be construed
to be collateralized loans by the purchaser to the seller secured by the
securities transferred to the purchaser. In the case of a repurchase agreement,
the Fund will require the seller to provide additional collateral if the market
value of the securities falls below the repurchase price at any time during the
term of the repurchase agreement; the Fund does not have the right to seek
additional collateral in the case of purchase and sale contracts. In the event
of default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with disposition of the collateral. A purchase and sale
contract differs from a repurchase agreement in that the contract arrangements
stipulate that the securities are owned by the Fund. In the event of a default
under such a repurchase agreement or under a purchase and sale contract,
instead of the contractual fixed rate, the rate of return to the Fund shall be
dependent upon intervening fluctuations of the market value of such security
and the accrued interest on the security. In such event, the Fund would have
rights against the seller for breach of contract with respect to any losses
arising from market fluctuations following the failure of the seller to
perform. The Fund may not invest more than 10% of its net assets in repurchase
agreements or purchase and sale contracts maturing in more than seven days.
17
<PAGE>
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio with a value not exceeding 33 1/3% of its total
assets to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the United States
Government. Such collateral will be maintained at all times in an amount equal
to at least 100% of the current market value of the loaned securities. This
limitation is a fundamental policy, and it may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities, as defined in the Investment Company Act. During the period of such
a loan, the Fund receives the income on the loaned securities and either
receives the income on the collateral or other compensation, i.e., negotiated
loan premium or fee, for entering into the loan and thereby increases its
yield. In the event that the borrower defaults on its obligation to return
borrowed securities, because of insolvency or otherwise, the Fund could
experience delays and costs in gaining access to the collateral and could
suffer a loss to the extent that the value of the collateral falls below the
market value of the borrowed securities.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
Among the more significant restrictions, the Fund may not:
--Invest in the securities of any one issuer if, immediately after and as
a result of such investment, the value of the holdings of the Fund in the
securities of such issuer exceeds 5% of the Fund's total assets, taken at
market value, except that such restriction shall not apply to securities
issued or guaranteed by the Government of the United States or any of its
agencies or instrumentalities or, with respect to 25% of the Fund's total
assets, to securities issued or guaranteed by the government of any country
which is a member of the Organization for Economic Cooperation and
Development or any such country's agencies or instrumentalities or
supranational institutions or organizations.
--Invest in the securities of any single issuer if, immediately after and
as a result of such investment, the Fund owns more than 10% of the
outstanding voting securities of such issuer.
Other fundamental policies include policies which limit investments in
securities which cannot be readily resold because of legal or contractual
restrictions or which are not otherwise readily marketable, if, regarding all
such securities, more than 10% of the Fund's net assets, taken at market value,
would be invested in such securities. While the Fund will not purchase illiquid
securities in an amount exceeding 10% of its net assets, the Fund may purchase,
without regard to that limitation, securities that are not registered under the
Securities Act of 1933, as amended (the "Securities Act"), but that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act, provided that the Fund's Board of Directors continuously
determines, based on the trading markets for the specific Rule 144A security,
that it is liquid. The Board of Directors may adopt guidelines and delegate to
the Manager the daily function of determining and monitoring liquidity of
restricted securities. The Board of Directors, however, will retain sufficient
oversight and be ultimately responsible for the determinations.
Since it is not possible to predict with assurance exactly how the market for
restricted securities sold and offered under Rule 144A will develop, the Board
of Directors will carefully monitor the Fund's investments in these securities,
focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
18
<PAGE>
Nothing in the foregoing investment restrictions shall be deemed to prohibit
the Fund from purchasing the securities of any issuer pursuant to the exercise
of subscription rights distributed to the Fund by the issuer, except that no
such purchase may be made if as a result the Fund will no longer be a
diversified investment company as defined in the Investment Company Act or will
fail to meet the diversification requirements of the Internal Revenue Code of
1986, as amended (the "Code").
Also, the Fund may not invest more than 25% of its total assets (taken at
market value at the time of each investment) in the securities of issuers in
any particular industry. Among other restrictions, the Fund may not borrow
amounts in excess of 20% of its total assets taken at market value (including
the amount borrowed), and then only from banks as a temporary measure for
extraordinary or emergency purposes including to meet redemptions or to settle
securities transactions. The Fund will not purchase securities while borrowings
are outstanding except (a) to honor prior commitments or (b) to exercise
subscription rights where outstanding borrowings have been obtained exclusively
for settlements of other securities transactions. The purchase of securities
while borrowings are outstanding will have the effect of leveraging the Fund.
Such leveraging or borrowings increase the Fund's exposure to capital risk and
borrowed funds are subject to interest costs which will reduce net income.
Other fundamental policies include policies which (i) limit the Fund's
authority to mortgage, pledge, hypothecate or in any manner transfer as
security for indebtedness any securities owned or held by the Fund so as not to
exceed 10% of assets (collateral arrangements with respect to options and
futures transactions are not deemed to be a pledge of assets); and (ii) limit
investments in securities which cannot be readily resold because of legal or
contractual restrictions or which are not otherwise readily marketable,
including repurchase agreements and purchase and sale contracts maturing in
more than seven days, if, regarding all such securities, more than 10% of its
net assets, taken at market value, would be invested in such securities.
Although not a fundamental policy, the Fund will include OTC options and the
securities underlying such options in calculating the amount of its total
assets subject to the limitation set forth in clause (ii) above. However, as
discussed above, the Fund may treat the securities it uses as cover for written
OTC options as liquid, and, therefore, will be excluded from this restriction,
provided it follows a specified procedure. The Fund will not change or modify
this policy prior to the change or modification by the Commission staff of its
position regarding OTC options, as discussed above.
MANAGEMENT OF THE FUND
DIRECTORS
The Directors of the Fund consist of six individuals, five of whom are not
"interested persons" of the Fund as defined in the Investment Company Act. The
Directors are responsible for the overall supervision of the operations of the
Fund and perform the various duties imposed on the directors or trustees of
investment companies by the Investment Company Act.
The Directors are:
Arthur Zeikel*--President and Chief Investment Officer of the Manager and
Fund Asset Management, L.P. ("FAM"); President and Director of Princeton
Services, Inc.; Executive Vice President of Merrill Lynch & Co., Inc. since
1990; Executive Vice President of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") since 1990 and a Senior Vice President
thereof from 1985 to 1990; Director of the Distributor.
Kenneth S. Axelson--Former Executive Vice President and Director, J.C.
Penney Company, Inc.
Herbert I. London--Former Dean, Gallatin Division of New York University.
- --------
* Interested person, as defined by the Investment Company Act, of the Fund.
19
<PAGE>
Robert R. Martin--Former Chairman, Kinnard Investments, Inc.
Joseph L. May--Attorney in private practice.
Andre F. Perold--Professor, Harvard Business School.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Fund's manager is Merrill Lynch Asset Management, L.P., which does
business as Merrill Lynch Asset Management (the "Manager"). The Manager is
owned and controlled by Merrill Lynch & Co., Inc., a financial services holding
company and the parent of Merrill Lynch. The Manager, or an affiliate of the
Manager, Fund Asset Management, L.P. ("FAM"), acts as the investment adviser
for more than 90 registered investment companies. The Manager also offers
portfolio management and portfolio analysis services to individuals and
institutions. As of January 31, 1994, the Manager and FAM had a total of
approximately $167.1 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Manager.
The management agreement with the Manager (the "Management Agreement")
provides that, subject to the direction of the Directors of the Fund, the
Manager is responsible for the actual management of the Fund's portfolio. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Manager, subject to review by the Directors. The Manager
provides the portfolio manager for the Fund who considers analyses from various
sources (including brokerage firms with which the Fund does business), makes
the necessary decisions, and places transactions accordingly. The Manager also
is obligated to provide administrative services necessary for the operation of
the Fund and all of the office space, facilities, equipment and necessary
personnel for management of the Fund.
Harry E. Dewdney is the Portfolio Manager of the Fund. Mr. Dewdney has been a
Vice President and Portfolio Manager of the Manager since 1986. From 1978 to
1986, he was Senior Vice President of the International Trading and Foreign
Exchange Department of Prescott, Ball & Turben, Inc.
The Fund pays the Manager a monthly fee at the annual rate of 0.65% of the
average daily net assets of the Fund. For the year ended October 31, 1993 the
fee paid by the Fund to the Manager was $139,948 (based upon average net assets
of approximately $21.6 million). Of this amount, none was reimbursed by the
Manager to the Fund pursuant to certain operating expense limitations. In
addition, the Management Agreement obligates the Fund to pay certain expenses
incurred in its operations including, among other things, the management fee,
legal and audit fees, registration fees, unaffiliated Directors' fees and
expenses, custodian and transfer fees, accounting costs, the costs of issuing
and redeeming shares and certain of the costs of printing proxies, shareholder
reports, prospectuses and statements of additional information distributed to
shareholders. Accounting services are provided to the Fund by the Manager and
the Fund reimburses the Manager for its costs in connection with such services.
For the year ended October 31, 1993, the Fund reimbursed the Manager $49,224
for accounting services. For the year ended October 31, 1993, the annualized
ratio of total expenses, net of distribution fees, to average net assets was
2.22% for the Class A shares and 2.26% for the Class B shares.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a wholly-owned
subsidiary of Merrill Lynch & Co., Inc., acts as the Fund's transfer agent
pursuant to a transfer agency, dividend disbursing agency
20
<PAGE>
and shareholder servicing agency agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency Agreement,
the Fund pays the Transfer Agent a fee of $7.00 per Class A shareholder account
and $9.00 per Class B shareholder account and the Transfer Agent is entitled to
reimbursement from the Fund for out-of-pocket expenses incurred by the Transfer
Agent under the Transfer Agency Agreement. For the year ended October 31, 1993,
the Fund paid the Transfer Agent $28,221 pursuant to the Transfer Agency
Agreement for providing transfer agency services.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
the Manager and an affiliate of Merrill Lynch, acts as the distributor of the
shares of the Fund. Class A and Class B shares of the Fund are offered
continuously for sale by the Distributor and other eligible securities dealers
(including Merrill Lynch). Shares of the Fund may be purchased from securities
dealers or by mailing a purchase order directly to the Transfer Agent. The
minimum initial purchase is $1,000 and the minimum subsequent purchase is $50.
The Fund is offering its shares at a public offering price equal to the next
determined net asset value per share plus sales charges which, at the option of
the purchaser, may be imposed either at the time of purchase (the "initial
sales charge alternative") or on a deferred basis (the "deferred sales charge
alternative"), as described below. The applicable offering price for purchase
orders is based upon the net asset value of the Fund next determined after
receipt of the purchase order by the Distributor. As to purchase orders
received by securities dealers prior to 4:15 P.M., New York time, which
includes orders received after the determination of net asset value on the
previous day, the applicable offering price will be based on the net asset
value determined as of 4:15 P.M. on the day the order is placed with the
Distributor, provided the order is received by the Distributor prior to 4:30
P.M., New York time, on that day. If the purchase orders are not received by
the Distributor prior to 4:30 P.M., New York time, such orders shall be deemed
received on the next business day. Any order may be rejected by the Distributor
or the Fund. The Fund or the Distributor may suspend the continuous offering of
the Fund's shares to the general public at any time in response to conditions
in the securities markets or otherwise and may thereafter resume such offering
from time to time. Neither the Distributor nor the dealers are permitted to
withhold placing orders to benefit themselves by a price change. Merrill Lynch
may charge its customers a processing fee (presently $4.85) to confirm a sale
of shares to such customers. Purchases directly through the Fund's Transfer
Agent are not subject to the processing fee.
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative and Class B shares are sold to
investors choosing the deferred sales charge alternative. Each class of shares
represents an interest in the same portfolio of investments of the Fund, has
the same rights and is identical to the other class in all respects, except
that Class B shares bear the expenses of the deferred sales arrangements, any
expenses (including incremental transfer agency costs) resulting from such
sales arrangements, and the expenses paid by the account maintenance fee and
have exclusive voting rights with respect to the Rule 12b-1 distribution plan
pursuant to which the account maintenance and distribution fees are paid. The
two classes also have different exchange privileges. See "Shareholder
Services--Exchange Privilege". The net income attributable to Class B shares
and the dividends payable on Class B shares will be
21
<PAGE>
reduced by the amount of the account maintenance and distribution fees and
incremental transfer agency costs relating to the Class B shares; accordingly,
the net asset value of the Class B shares will be reduced by such amount to the
extent the Fund has undistributed net income. Sales personnel may receive
different compensation for selling Class A or Class B shares. Also, Directors
of Merrill Lynch & Co., Inc. may purchase Class A shares of the Fund at net
asset value. Investors are advised that only Class A 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 of the Fund permit investors to choose the
method of purchasing shares that is most beneficial given the amount of their
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.
As an illustration, investors who qualify for significantly reduced sales
charges, as described below, might elect the initial sales charge alternative
because similar sales charge reductions are not available for purchases under
the deferred sales charge alternative. Moreover, shares acquired under the
initial sales charge alternative would not be subject to ongoing account
maintenance and distribution fees as described below. However, because initial
sales charges are deducted at the time of purchase, such investors would not
have all their funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also might elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees may exceed the initial sales charge.
Again, however, such investors must weigh this consideration against the fact
that not all their funds will be invested initially. Furthermore, the ongoing
account maintenance and distribution fees will be offset to the extent any
return is realized on the additional funds initially invested under the
deferred alternative. Another factor that may be applicable under certain
circumstances is that the payment of the Class B distribution fee and
contingent deferred sales charge ("CDSC") is subject to certain limits as set
forth below under "Deferred Sales Charge Alternative--Class B Shares."
Certain other investors might determine it to be more advantageous to have
all their funds invested initially, although remaining subject to continued
account maintenance and distribution fees and, for a four-year period of time,
a CDSC as described below. For example, an investor subject to the 4.0% initial
sales charge will have to hold his investment at least 4 years for the .25%
account maintenance fee and .75% distribution fee to exceed the initial sales
charge of Class A shares. This example does not take into account the time
value of money, which further reduces the impact of the ongoing account
maintenance and distribution fees on the investment, fluctuations in the net
asset value, the effect of the return on the investment over this period of
time or the effect of any limits that may be imposed upon the payment of the
distribution fee and the CDSC.
22
<PAGE>
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The public offering price of Class A shares for purchasers choosing the
initial sales charge alternative is the next determined net asset value plus
varying sales charges (i.e., sales loads), as set forth below:
<TABLE>
<CAPTION>
DISCOUNT TO
SALES CHARGE AS SELECTED DEALERS
SALES CHARGE AS PERCENTAGE* OF AS PERCENTAGE OF
PERCENTAGE OF THE NET AMOUNT THE OFFERING
AMOUNT OF PURCHASE OFFERING PRICE INVESTED PRICE
- ------------------ --------------- --------------- ----------------
<S> <C> <C> <C>
Less than $25,000............. 4.00% 4.17% 3.75%
$25,000 but less than $50,000. 3.75 3.90 3.50
$50,000 but less than
$100,000..................... 3.25 3.36 3.00
$100,000 but less than
$250,000..................... 2.50 2.56 2.25
$250,000 but less than
$1,000,000................... 1.50 1.52 1.25
$1,000,000 and over........... .50 .50 .40
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
Initial sales charges will be waived for shareholders purchasing $1 million
or more in a single transaction (other than an employer sponsored retirement or
savings plan, such as a tax qualified retirement plan under Section 401 of the
Code or a deferred compensation plan under Section 403(b) and Section 457 of
the Code, other deferred compensation arrangements, VEBA plans and non-
qualified After Tax Savings and Investment programs maintained on the Merrill
Lynch Group Employee Services system herein referred to as "Employer Sponsored
Retirement or Savings Plans"), or a purchase by a TMA SM Managed Trust, of
Class A shares of the Fund. In addition, purchases of Class A shares of the
Fund made in connection with a single investment of $1 million or more under
the Merrill Lynch Mutual Fund Adviser Program will not be subject to an initial
sales charge. Purchases described in this paragraph will be subject to a CDSC
if the shares are redeemed within one year after purchase at the following
rates:
<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE OF
AMOUNT OF PURCHASE DOLLAR AMOUNT OF PURCHASE
------------------ -------------------------
<S> <C>
$1 million up to $2.5 million...................... 0.75%
Over $2.5 million up to $3.5 million............... 0.40%
Over $3.5 million up to $5 million................. 0.25%
Over $5 million.................................... 0.20%
</TABLE>
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A shares
of the Fund will receive a concession equal to most of the sales charge, they
may be deemed to be underwriters under the Securities Act.
Reduced Initial Sales Charges. Sales charges are reduced under a Right of
Accumulation and a Letter of Intention. Class A shares of the Fund are offered
at net asset value to Directors of the Fund, to directors or Trustees of
certain other Merrill Lynch-sponsored investment companies, 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 if certain conditions set forth in the Statement of Additional
Information are met, to directors of Merrill Lynch & Co., Inc. and to employees
of Merrill Lynch & Co., Inc. and its subsidiaries. Also, Class A shares may be
offered at net asset value in connection with the acquisition of assets
23
<PAGE>
of other investment companies. No initial sales charges are imposed upon Class
A shares issued as a result of the automatic reinvestment of dividends or
capital gains distributions. Class A shares are offered with reduced sales
charges and, in certain circumstances, at net asset value, to participants in
the Merrill Lynch Blueprint SM Program. Class A shares are offered at net
asset value to certain Employer Sponsored Retirement or Savings Plans,
provided such plans meet the required number of eligible employees or required
amount of assets advised by the Manager or any of its affiliates. Class A
shares of the Fund are also offered at net asset value to shareholders of
certain closed-end funds advised by the Manager or FAM who wish to reinvest
the net proceeds from a sale of their closed-end fund shares of common stock
in shares of the Fund, provided certain conditions are met. Thus, for example,
Class A shares of the Fund are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate Fund (formerly known as Merrill Lynch Prime
Fund, Inc.) ("Senior Floating Rate Fund") who wish to reinvest the net
proceeds from a sale of certain of their shares of common stock of Senior
Floating Rate Fund in shares of the Fund. In order to exercise this investment
option, Senior Floating Rate Fund shareholders must sell their Senior Floating
Rate Fund shares to the Senior Floating Rate Fund in connection with a tender
offer conducted by the Senior Floating Rate Fund and reinvest the proceeds
immediately in the Fund. This investment option is available only with respect
to the proceeds of Senior Floating Rate Fund shares as to which no Early
Withdrawal Charge (as defined in the Senior Floating Rate Fund prospectus) is
applicable. Purchase orders from Senior Floating Rate Fund shareholders
wishing to exercise this investment option will be accepted only on the day
that the related Senior Floating Rate Fund tender offer terminates and will be
effected at the net asset value of the Fund at such day.
Class A shares are offered at net asset value, with a waiver of the front-
end sales charge, to participants in the Merrill Lynch Blueprint Program
through the Merrill Lynch Directed IRA Rollover Program available from Merrill
Lynch Business Financial Services, a business unit of Merrill Lynch.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Investors choosing the deferred sales charge alternative purchase Class B
shares at net asset value per share without the imposition of a sales charge
at the time of purchase. The Class B shares are being 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 shares at the time of purchase from its own funds. The
proceeds of the CDSC and the ongoing distribution fee discussed below are used
to defray Merrill Lynch's distribution expenses, including compensating its
financial consultants. The proceeds from the ongoing account maintenance fee
are used to compensate Merrill Lynch for providing continuing account
maintenance activities.
Proceeds from the CDSC 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 shares, such as the payment of
compensation to financial consultants for selling Class B shares. Payments by
the Fund to the Distributor of the distribution fee under the distribution
plan described below also may be used in whole or in part by the Distributor
for this purpose. The combination of the CDSC and the ongoing distribution fee
facilitates the ability of the Fund to sell the Class B shares without a sales
charge being deducted at the time of purchase. 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 deferred sales charge schedule relating to
the Class B shares acquired as a result of the exchange.
24
<PAGE>
CDSC. Class B shares that are redeemed within four years of purchase may be
subject to a CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. The charge will be assessed on an amount equal
to the lesser of the current market value or the cost of the shares being
redeemed. Accordingly, no sales charge will be imposed on increases in net
asset value above the initial purchase price. In addition, no charge will be
assessed on shares derived from reinvestment of dividends or capital gains
distributions. For the year ended October 31, 1993 the Distributor received
CDSCs of $23,432 with respect to redemptions of Class B shares, all of which
was paid to Merrill Lynch.
The following table sets forth the rates of the CDSC:
<TABLE>
<CAPTION>
CDSC AS A
YEAR SINCE PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------ -----------------
<S> <C>
0-1.................................................... 4.0%
1-2.................................................... 3.0%
2-3.................................................... 2.0%
3-4.................................................... 1.0%
4 and thereafter....................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest applicable rate
being charged. Therefore, it will be assumed that the redemption is first of
shares until such time as the CDSC is no longer applicable or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares held
longest during the four-year period. The charge will not be applied to dollar
amounts representing an increase in the net asset value since the time of
purchase. A transfer of shares from a shareholder's account to another account
will be assumed to be made in the same order as a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
10 additional shares through dividend reinvestment. If at such time the
investor makes his first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the charge because of dividend reinvestment. With
respect to the remaining 40 shares, the charge is applied only to the original
cost of $10 per share and not to the increase in net asset value of $2 per
share. Therefore, $400 of the $600 redemption proceeds will be charged at a
rate of 2.0% (the applicable rate in the third year after purchase). The CDSC
is waived on redemptions of shares following the death or disability (as
defined in the Code) of a shareholder.
The CDSC also is waived on redemptions of shares by certain eligible 401(a)
and eligible 401(k) plans and in connection with certain group plans placing
orders through the Merrill Lynch Blueprint SM Program. The contingent deferred
sales charge is also waived for any Class B shares which are purchased by an
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. Additional information concerning the waiver of the CDSC is set
forth in the Statement of Additional Information.
Distribution Plan. Pursuant to a distribution plan (the "Distribution Plan")
adopted by the Fund under Rule 12b-1 under the Investment Company Act, the
Fund pays the Distributor ongoing account maintenance and distribution fees
which are accrued daily and paid monthly, at the annual rates of 0.25% and
0.75%, respectively, of the average daily net assets of the Class B shares of
the Fund. Pursuant to a sub-agreement
25
<PAGE>
with the Distributor, Merrill Lynch also provides account maintenance and
distribution service to the Fund. The ongoing account maintenance fee
compensates the Distributor and Merrill Lynch for providing account maintenance
services to Class B shareholders. The ongoing distribution fee compensates the
Distributor and Merrill Lynch for providing distribution services and bearing
certain distribution-related expenses of the Fund, including payments to
financial consultants for selling Class B shares of the Fund. For the year
ended October 31, 1993, the Fund paid the Distributor $189,770 pursuant to the
Distribution Plan, all of which was paid to Merrill Lynch.
The Distribution Plan is designed to permit an investor to purchase Class B
shares through dealers without the assessment of a front-end sales charge and
at the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B shares. In this regard, the purpose and
function of the distribution fee and the CDSC are the same as those of the
initial sales charge with respect to the Class A shares of the Fund in that the
deferred sales charges provide for the financing of the distribution of the
Fund's Class B shares.
The payments under the Distribution Plan are based on a percentage of average
daily net assets of Class B shares regardless of the amount of expenses
incurred and, accordingly, distribution-related revenues may be more or less
than distribution-related expenses. Information with respect to the
distribution-related revenues and expenses is presented to the Directors for
their consideration in connection with their deliberations as to the
continuance of the Distribution Plan. This information is presented annually as
of December 31 of each year on a "fully allocated accrual" basis and quarterly
on a "direct expense and revenue/cash" basis. On the fully allocated accrual
basis, revenues consist of the account maintenance fees, distribution fees, the
CDSCs and certain other related revenues, and expenses consist of financial
consultant compensation, branch office and regional operation center selling
and transaction processing expenses, advertising, sales promotion and marketing
expenses, corporate overhead and interest expense. On the direct expense and
revenue/cash basis, revenues consist of the account maintenance fees,
distribution fees and CDSCs and the expenses consist of financial consultant
compensation. As of December 31, 1992, the last date at which fully allocated
data is available, the fully allocated accrual revenues incurred by the
Distributor and Merrill Lynch exceeded fully allocated accrual expenses for
such period by approximately $23,000 (.16% of Class B net assets at that date).
As of December 31, 1992 direct cash revenues for the period since the
commencement of operations exceeded direct cash expenses by approximately
$1,134,062 (8.1% of Class B net assets at that date). As of October 31, 1993
direct cash revenues for the period since the commencement of operations
exceeded direct cash expenses by $1,101,543 (3.7% of Class B net assets at that
date).
The Fund has no obligation with respect to distribution-related expenses
incurred by the Distributor and Merrill Lynch in connection with the Class B
shares, and there is no assurance that the Directors of the Fund will approve
the continuance of the Distribution Plan from year to year. However, the
Distributor intends to seek annual continuation of the Distribution Plan. In
their review of the Distribution Plan, the Directors will not be asked to take
into consideration expenses incurred in connection with the distribution of
Class A shares or of shares of other funds for which the Distributor acts as a
distributor. The distribution fee and the CDSCs in the case of Class B shares
will not be used to subsidize the sale of Class A shares.
Limitations on the Payment of Deferred Sales Charges. The maximum sales
charge rule in the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. imposes a limitation on certain asset-based sales
charges such as the Fund's distribution fee and the CDSC but not the account
maintenance fee.
26
<PAGE>
As applicable to the Fund, the maximum sales charge rule limits the aggregate
of distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares (defined to exclude shares issued
pursuant to dividend reinvestments and exchanges) plus (2) interest on the
unpaid balance 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). The Distributor has voluntarily agreed to waive interest
charges on the unpaid balance in excess of 0.50% of eligible gross sales.
Consequently, the maximum amount payable to the Distributor (referred to as
the "voluntary maximum") is 6.75% of eligible gross sales. The Distributor
retains the right to stop waiving the interest charges at any time. To the
extent payments would exceed the voluntary maximum, the Fund will not make
further payments of the distribution fee and any CDSCs will be paid to the
Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payments in excess of the amount
payable under the NASD formula will not be made.
The following table sets forth comparative information as of October 31,
1993, with respect to the Class B shares of the Fund indicating the maximum
allowable payments that can be made under the NASD maximum sales charge rule
and the Distributor's voluntary maximum for the fiscal period ended October
31, 1993.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF OCTOBER 31, 1993
-----------------------------------------------------------------------------------
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
----------- ---------- ---------- ---------- -------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $62,945,701 $3,934,106 $1,306,200 $5,240,306 $1,703,326 $3,536,980 $223,735
Under Distributor's
Voluntary Waiver....... $62,945,701 $3,934,106 $ 314,729 $4,248,835 $1,703,326 $2,545,508 $223,735
</TABLE>
- --------
(1) Purchase price of all eligible Class B shares sold since February 26, 1988
(commencement of operations) other than shares acquired through dividend
reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the
NASD Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made prior to July 6, 1993 under the Prior Plan
at the 1.00% rate, .75% of average daily net assets has been treated as a
distribution fee and .25% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum or the NASD
maximum.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all full and fractional shares of
the Fund on receipt of a written request in proper form. The redemption price
is the net asset value per share next determined after the initial receipt of
proper notice of redemption. Except for any CDSC which may be applicable to
Class B shares, there will be no charge for redemption if the redemption
request is sent directly to the Transfer Agent. Shareholders liquidating their
holdings will receive on redemption all dividends declared through the date of
27
<PAGE>
redemption. The value of shares at the time of redemption may be more or less
than the shareholder's cost, depending on the market value of the securities
held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Fund's Transfer Agent, Financial Data Services, Inc., Transfer
Agency Mutual Fund Operations, P.O. Box 45289, Jacksonville, Florida 32232-
5289. Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations, 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. The notice in either event requires the signature(s)
of all persons in whose name(s) the shares are registered, signed exactly as
such name(s) appear(s) on the Transfer Agent's register or on the certificate,
as the case may be. The signature(s) on the redemption request must be
guaranteed by an "eligible guarantor institution" as such term is defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, the existence and
validity of which may be verified by the Transfer Agent through the use of
industry publications. Notarized signatures are not sufficient. In certain
instances, the Transfer Agent may require additional documents such as, but not
limited to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, payments will be mailed within
seven days of receipt of a proper notice of redemption (except as provided
below).
At various times, the Fund may be requested to redeem shares for which it has
not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that
good payment (e.g., cash or certified check drawn on a United States bank) has
been collected for the purchase of such shares. Normally, this delay will not
exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund will normally accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request
for repurchase is received by the dealer prior to the regular close of business
on the New York Stock Exchange on the day received and is received by the Fund
from such dealer not later than 4:30 P.M., New York time, on the same day.
Dealers have the responsibility of submitting such repurchase requests to the
Fund not later than 4:30 P.M., New York time, in order to obtain that day's
closing price.
These repurchase arrangements are for the convenience of shareholders and do
not involve a charge by the Fund (other than any applicable CDSC in the case of
Class B shares); however, securities dealers may impose a charge on the
shareholder for transmitting the notice of repurchase to the Fund. Merrill
Lynch charges its customers a processing fee (presently $4.85) to confirm a
repurchase of shares. Redemptions directly through the Fund's Transfer Agent
are not subject to the processing fee. The Fund reserves the right to reject
any order for repurchase, which right of rejection might affect adversely
shareholders seeking redemption through the repurchase procedure. However, a
shareholder whose order for repurchase is rejected by the Fund may redeem
shares as set forth above.
28
<PAGE>
REINSTATEMENT PRIVILEGE--CLASS A SHARES
Shareholders who have redeemed their Class A shares have a one-time
privilege to reinstate their accounts by purchasing Class A shares of the Fund
at net asset value without a sales charge up to the dollar amount redeemed.
The reinstatement privilege may be exercised by sending a notice of exercise
along with a check for the amount to be reinstated to the Transfer Agent
without 30 days after the date the request for redemption was accepted by the
Transfer Agent or the Distributor. The reinstatement will be made at the net
asset value per share next determined after the notice of reinstatement is
received and cannot exceed the amount of the redemption proceeds. The
reinstatement privilege is a one-time privilege and may be exercised by the
Class A shareholder only the first time such shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Certain of such services are
not available to investors who place orders for the Fund through the Merrill
Lynch Blueprint SM Program. Full details as to each of such services and
instructions as to how to participate in the various plans and services, or to
change options with respect thereto, can be obtained from the Fund by calling
the telephone number on the cover page hereof or from the Distributor or
Merrill Lynch. Included in such services are the following:
Investment Account. Each shareholder whose account (an "Investment Account")
is maintained at the Transfer Agent has an Investment Account and will receive
monthly statements from the Transfer Agent showing any reinvestments of
dividends and capital gains distributions and any other activity in the
account since the preceding statement. Shareholders also will receive separate
confirmations for each purchase or sale transaction other than reinvestments
of dividends and capital gains distributions. Shareholders may make additions
to their Investment Accounts at any time by mailing a check directly to the
Transfer Agent. Shareholders may also maintain their accounts through Merrill
Lynch. Upon the transfer of shares out of a Merrill Lynch brokerage account,
an Investment Account in the transferring shareholders' name may be opened at
the 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 shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A shares so that the cash proceeds can be transferred to the account
at the new firm or such shareholder must continue to maintain an Investment
Account at the Transfer Agent for those Class A shares. Shareholders
interested in transferring their Class B shares from Merrill Lynch and who do
not wish to have an Investment Account maintained for such shares at the
Transfer Agent may request their new brokerage firm to maintain such shares in
an account registered in the name of the brokerage firm for the benefit of the
shareholder. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he 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.
Exchange Privilege. Shareholders of the Fund each have an exchange privilege
with certain other mutual funds sponsored by Merrill Lynch. There is currently
no limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated in accordance
with the rules of the Commission. Class A shareholders of the Fund may
exchange their shares ("outstanding Class A shares") for Class A shares of
another fund ("new Class A shares") on the basis of
29
<PAGE>
relative net asset value per Class A share, plus an amount equal to the
difference, if any, between the sales charge previously paid on the
outstanding Class A shares and the sales charge payable at the time of the
exchange on the new Class A shares. However, the Fund's exchange privilege is
modified with respect to purchases of Class A shares under the Merrill Lynch
Mutual Fund Adviser program. First, the initial allocation of assets is made
under the program. Then, any subsequent exchange under the program of Class A
shares of a fund for Class A 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 fund and the sales charge
payable on the shares of the Fund being acquired in the exchange under this
program.
Class B shareholders of the Fund may exchange their shares ("outstanding
Class B shares") for Class B shares of another fund ("new Class B shares") on
the basis of relative net asset value per share, without the payment of any
CDSC that might otherwise be due upon redemption of the outstanding Class B
shares. Class B shareholders of the Fund exercising the exchange privilege
will continue to be subject to the Fund's CDSC schedule if such schedule is
higher than the deferred sales charge schedule relating to the new Class B
shares. In addition, Class B shares of the Fund acquired through the use of
the exchange privilege will be subject to the Fund's CDSC schedule if such
schedule is higher than the deferred sales charge schedule relating to the
Class B shares of the fund from which the exchange has been made. For purposes
of computing the CDSC that may be payable upon a disposition of the new Class
B shares, the holding period for the outstanding Class B shares is "tacked" to
the holding period for the new Class B shares. Class A and Class B
shareholders of the Fund may also exchange their shares for shares of certain
money market funds, but in the case of an exchange from Class B shares the
period of time that shares are held in a money market fund will not count
toward satisfaction of the holding period requirement for purposes of reducing
the CDSC. Exercise of the exchange privilege is treated as a sale for Federal
income tax purposes. The exchange privilege is available only in states where
the exchange legally may be made. For further information, see "Shareholder
Services--Exchange Privilege" in the Statement of Additional Information.
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund, without a sales charge, at the net asset
value per share next determined on the ex-dividend date of such dividend or
distribution. A shareholder may at any time, by written notification or by
telephone (1-800-MER-FUND) to the Transfer Agent, elect to have subsequent
dividends or capital gains distributions, or both, paid in cash, rather than
reinvested, in which event payment will be mailed on or about the payment
date. No deferred sales charge will be imposed upon redemption of shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions.
Systematic Withdrawal and Automatic Investment Plans. A Class A shareholder
may elect to receive systematic withdrawal payments from his Investment
Account through automatic payment by check or through automatic payment by
direct deposit to his bank account on either a monthly or quarterly basis. A
Class A shareholder whose shares are held within a CMA (R), CBA (R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the Systematic Redemption
Program, subject to certain conditions. Regular additions of both Class A and
Class B shares may be made to an investor's Investment Account by pre-arranged
charges of $50 or more to his regular bank account. The Fund's Automatic
Investment Program is not available to shareholders whose shares are held in a
brokerage account with Merrill Lynch. Alternately, investors who maintain
CMA (R) accounts may arrange to have periodic investments made in the Fund in
their CMA (R) account or in certain related accounts in amounts of $100 or
more through the CMA (R) Automatic Investment Program.
30
<PAGE>
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. If it so
qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital
gains which it distributes to Class A and Class B shareholders (together, the
"shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible
for the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S.
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
U.S. withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Fund's
election
31
<PAGE>
described in this paragraph but may not be able to claim a credit or deduction
against such U.S. tax for the foreign taxes treated as having been paid by such
shareholder. The Fund will report annually to its shareholders the amount per
share of such withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on certain ordinary income dividends and capital gain
dividends and on redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, certain forward contracts, from futures contracts that are not
"regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary dividend distributions, and any distributions made before the losses
were realized but in the same taxable year would be recharacterized as a return
of capital to shareholders, thereby reducing the basis of each shareholder's
Fund shares.
If a Class A shareholder exercises the exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
the purchase of the new Class A shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid for the
new Class A shares.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action
either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A and Class B shares in accordance with formulas specified
by the Commission.
32
<PAGE>
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A 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
shares. Dividends paid by the Fund with respect to Class A and Class B shares,
to the extent any dividends are paid, will be calculated in the same manner at
the same time on the same day and will be in the same amount, except that
account maintenance and distribution charges and any incremental transfer
agency costs relating to Class B shares will be borne exclusively by that
class. The Fund will include performance data for both Class A and Class B
shares of the Fund in any advertisement or information including performance
data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual
or annualized total return data generally will be lower than average annual
total return data since the average annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over a
longer period of time. In advertisements distributed to investors whose
purchases are subject to reduced sales charges in the case of Class A shares or
waiver of the CDSC in the case of Class B shares (such as investors in certain
retirement plans), the performance data may take into account the reduced, and
not the maximum, sales charge or may not take into account the CDSC and
therefore may reflect greater total return since, due to the reduced sales
charges or waiver of the CDSC, a lower amount of expenses is deducted. See
"Purchase of Shares". The Fund's total return may be expressed either as a
percentage or as a dollar amount in order to illustrate such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average or
performance data published by Lipper Analytical Services, Inc. and Morningstar
Publications, Inc. ("Morningstar"). From time to time, the Fund may include the
Fund's Morningstar risk-adjusted performance ratings in advertisements or
supplemental sales literature. As with other performance data, performance
comparisons should not be considered representative of the Fund's relative
performance for any future period.
33
<PAGE>
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all its net investment income.
Dividends from such net investment income are paid quarterly. All net realized
long- or short-term capital gains, if any, are distributed to the Fund's
shareholders at least annually. From time to time, the Fund may declare a
special distribution at or about the end of the calendar year in order to
comply with a Federal income tax requirement that certain percentages of its
ordinary income and capital gains be distributed during the calendar year.
Certain gains or losses attributable to foreign currency gains or losses from
certain forward contracts may increase or decrease the amount of the Fund's
income available for distribution to shareholders. If such losses exceed other
income during a taxable year, (a) the Fund would not be able to make any
ordinary dividend distributions, and (b) distributions made before the losses
were realized would be recharacterized as a return of capital to shareholders,
rather than as an ordinary dividend, reducing each shareholder's tax basis in
the Fund shares for Federal income tax purposes. See "Taxes". If in any fiscal
year, the Fund has net income from certain foreign currency transactions, such
income will be distributed annually. Dividends may be reinvested automatically
in shares of the Fund at net asset value. Shareholders may elect in writing to
receive any such dividends or distributions, or both, in cash. Dividends and
distributions are taxable to shareholders as discussed under "Taxes" whether
they are reinvested in shares of the Fund or received in cash.
The per share dividends and distributions on Class B shares will be lower
than the per share dividends and distributions on Class A shares as a result of
the account maintenance, distribution and transfer agency fees applicable with
respect to the Class B shares. See "Additional Information--Determination of
Net Asset Value".
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined by the Manager once daily at
4:15 P.M., New York time, on each day during which the New York Stock Exchange
is open for trading. Any assets or liabilities initially expressed in terms of
non-U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of valuation.
The net asset value per share is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time,
rounded to the nearest cent. Expenses, including the fees payable to the
Manager and the Distributor, are accrued daily.
The per share net asset value of the Class B shares generally will be lower
than the per share net asset value of the Class A shares reflecting the daily
expense accruals of the distribution and transfer agency fees applicable with
respect to the Class B shares. It is expected, however, that the per share net
asset value of the two classes will tend to converge immediately after the
payment of dividends or distributions, which will differ by approximately the
amount of the expense accrual differential between the classes.
Portfolio securities that are securities traded on stock exchanges are valued
at the last sale price (regular way) on the exchange on which such securities
are traded as of the close of business on the day the securities are being
valued or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Directors as the
primary market. Securities traded in the over-the-counter market are valued at
the last available quoted bid price in the over-the-counter market prior to the
time of valuation. Securities traded on
34
<PAGE>
a stock exchange and the over-the-counter market will be valued according to
the broadest and most representative market. Options that are traded on
exchanges are valued at their last sale price as of the close of such exchanges
or, if there are no sales, then the price is the last available bid price.
Where there is no market quotation on securities or options, fair market
value will be determined in good faith by or under the direction of the Fund's
Directors. Such valuations and procedures will be reviewed periodically by the
Directors.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on October 22, 1987. It has an
authorized capital of 200,000,000 shares of Common Stock, par value $0.10 per
share, divided into two classes, designated Class A and Class B Common Stock,
each of which consists of 100,000,000 shares. Both Class A and Class B Common
Stock represent an interest in the same assets of the Fund and are identical in
all respects except that the Class B shares bear certain expenses related to
the account maintenance and distribution of such shares and have exclusive
voting rights with respect to matters relating to such expenditures. See
"Purchase of Shares". The Fund has received an order from the Commission
permitting the issuance and sale of two classes of Common Stock. The Directors
of the Fund may classify and reclassify the shares of the Fund into additional
classes of Common Stock at a future date. The creation of additional classes
would require an additional order from the Commission. There is no assurance
that such an additional order will be issued.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
of 1940 does not require shareholders to act upon any of the following matters:
(i) election of Directors; (ii) approval of an investment advisory agreement;
(iii) approval of a distribution agreement, and (iv) ratification of selection
of independent accountants. Also, the by-laws of the Fund require that a
special meeting of stockholders be held upon the written request of at least
10% of the outstanding shares of the Fund entitled to vote at such meeting.
Voting rights for Directors are not cumulative. Shares issued are fully paid
and non-assessable and have no preemptive or conversion rights. Each share of
Class B Common Stock is entitled to participate equally in dividends and
distributions declared by the Fund and in the net assets of the Fund upon
liquidation or dissolution after satisfaction of outstanding liabilities.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: Document Evaluation Unit
P.O. Box 45290
Jacksonville, Florida 32232-5290
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch financial consultant or Financial Data Services,
Inc. at 800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
35
<PAGE>
[This page is intentionally left blank.]
36
<PAGE>
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.--AUTHORIZATION FORM
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT SM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT SM PROGRAM
APPLICATION BY CALLING (800) 637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase .......... Class A shares or
.......... Class B shares (choose one) of Merrill Lynch Global Convertible
Fund, Inc. and establish an Investment Account as described in the Prospectus.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Financial Data
Services, Inc., as an initial investment (minimum $1,000) (subsequent
investments $50 or more). I understand that this purchase will be executed
at the applicable offering price next to be determined after this
Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information:
4. .................................
1. .....................................
5. .................................
2. .....................................
6. .................................
3. .....................................
(Please list all Funds. Use a separate sheet of paper if necessary.)
Until you are notified by me in writing, the following options with
respect to dividends and distributions are elected:
Elect[_] reinvest Elect[_] reinvest capital
Distributiondividends gains
Options One[_] pay dividends in One[_] pay capital gains
cash in cash
If no election is made, dividends and capital gains will be reinvested
automatically at net asset value without a sales charge.
(Please Print)
Name ...............................................
First Name Initial Last Name
Social Security
Name of Co-Owner (if any) .......................... No. or Taxpayer
First NameInitialLast Name Identification
No.
Address ........................................
............. , 19. .
................................................ Date
(Zip Code)
Occupation ............... Name and Address.................................
of Employer......................................
.....................................
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security No. or Taxpayer Identification No. and (2) that I am
not subject to backup withholding (as discussed under "Distribution and Taxes--
Taxes" in the Prospectus) either because I have not been notified that I am
subject thereto as a result of a failure to report all interest or dividends,
or the Internal Revenue Service ("IRS") has notified me that I am no longer
subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING, AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED.
SIGNATURE OF OWNER ............. SIGNATURE OF CO-OWNER (IF ANY) ..........
In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.
- --------------------------------------------------------------------------------
2. LETTER OF INTENTION--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN THE
STATEMENT OF ADDITIONAL INFORMATION)
.............., 19.
Date of initial
purchase
Gentlemen:
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Global Convertible Fund, Inc. or any other investment company with an
initial sales charge or deferred sales charge for which the Merrill Lynch Funds
Distributor, Inc. acts as a distributor over the next 13-month period which
will equal or exceed:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Fund prospectus.
I agree to the terms and conditions of the Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Global Convertible Fund, Inc. held as security.
By ................................... ....................................
Signature of Owner Signature (If registered in joint
names, both must sign)
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
(1) Name ............................. (2) Name ...........................
37
<PAGE>
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.--AUTHORIZATION FORM
- --------------------------------------------------------------------------------
3.SYSTEMATIC WITHDRAWAL PLAN--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN
THE STATEMENT OF ADDITIONAL INFORMATION)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of shares in Merrill Lynch Global Convertible Fund, Inc. at cost or
current offering price.
Begin systematic withdrawal on . . . . . . . . . , 19. .
[date]
Withdrawals to be made either (check one) [_] Monthly [_] Quarterly. Quarterly
withdrawals are made on the 24th day of March, June, September and December.
Specify withdrawal amount (check one): [_] $ . . . . . . . or [_] . . . . .% of
the current value of Class A shares in the account
Specify withdrawal method: [_] check or [_] direct deposit to bank account
(CHECK ONE AND COMPLETE PART (A) OR (B) BELOW):
(A) I HEREBY AUTHORIZE PAYMENT BY (B) I HEREBY AUTHORIZE PAYMENT BY
CHECK DIRECT DEPOSIT TO BANK ACCOUNT and
(if necessary) debit entries and
adjustments for any credit entries
made in error to my account
Draw checks payable
(check one)
[_] as indicated in item 1.
[_] to the order of ................ Specify type of account (check
one): [_] checking [_] savings
Mail to (check one) I agree that this authorization will
[_] the address indicated in item 1. remain in effect until I provide
written notification to Financial
Data Services, Inc. amending or
terminating this service.
Name on your Account ..................
[_] Name (Please Print) ............ Bank .................................
Bank # ...............................
Account # .........
Bank Address .........................
Address ..............................
Signature of Depositor ...............
Date ....
Signature of Owner.................... Signature of Depositor (if joint
account) .............................
Signature of Co-Owner (if any)........
NOTE: IF AUTOMATIC DIRECT DEPOSIT IS
ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM
YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY
THIS APPLICATION.
- --------------------------------------------------------------------------------
4. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw a check or an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase . . . . . Class A shares or . . . . . Class B
shares of Merrill Lynch Global Convertible Fund, Inc. subject to the terms set
forth below.
FINANCIAL DATA SERVICES, INC. AUTHORIZATION TO HONOR CHECKS OR ACH
DEBITS DRAWN BY FINANCIAL DATA
SERVICES, INC.
You are hereby authorized to draw a
check or an ACH debit each month on
my bank account for investment in
Merrill Lynch Global Convertible
Fund, Inc. as indicated below:
To ...............................Bank
(Investor's Bank)
Bank Address .........................
Amount of each check or ACH debit $ ..
Account No. ....................
Please date and invest checks City ........ State .... Zip Code.....
or draw ACH debits on the 20th As a convenience to me, I hereby re-
of each month beginning ........ quest and authorize you to pay and
charge to my account checks or ACH
(Month) debits drawn on my account by and
or as soon thereafter as payable to Financial Data Services,
possible. Inc. I agree that your rights in re-
spect to each such check or debit
I agree that you are preparing these shall be the same as if it were a
checks or drawing these debits volun- check drawn on you and signed person-
tarily at my request and that you ally by me. This authority is to re-
shall not be liable for any loss main in effect until revoked person-
arising from any delay in preparing ally by me in writing. Until you re-
or failure to prepare any such check ceive such notice, you shall be fully
or debit. If I change banks or desire protected in honoring any such check
to terminate or suspend this program, or debit. I further agree that if any
I agree to notify you promptly in such check or debit be dishonored,
writing. whether with or without cause and
I further agree that if a check or whether intentionally or inadvertent-
debit is not honored upon ly, you shall be under no liability.
presentation, Financial Data
Services, Inc. is authorized to
discontinue immediately the Automatic
Investment Plan and to liquidate
sufficient shares held in my account
to offset the purchase made with the
returned check or dishonored debit.
........... .......................
Date Signature of Depositor
........... .......................
Bank Signature of Depositor
........... ........................ Account (If joint account,
Date Signature of Depositor Number both must sign)
........................ NOTE: IF AUTOMATIC INVESTMENT PLAN IS
Signature of Depositor ELECTED, YOUR BLANK, UNSIGNED CHECK
(If joint account, both MARKED "VOID" SHOULD ACCOMPANY THIS
must sign) APPLICATION.
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as our
- - agent in connection with transactions
under this authorization form and
agree to notify the Distributor of any
purchases made under a Letter of In-
tention or Systematic Withdrawal Plan.
We guarantee the Shareholder's Signa-
ture.
- -
This form when completed should be
mailed to:
Merrill Lynch Global .......................................
Convertible Fund, Inc. Dealer Name and Address
c/o Financial Data Services,
Inc. By ....................................
Transfer Agency Mutual Fund Authorized Signature of Dealer
Operations
P.O. Box 45289
Jacksonville, FL 32232-5289 [_][_][_] [_][_][_][_]
Branch- F/C No. ..................
Code F/C Last Name
[_][_][_] [_][_][_][_][_]
Dealer's Customer A/C No.
38
<PAGE>
Manager
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011
Distributor
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
Transfer Agent
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
Independent Auditors
Deloitte & Touche
117 Campus Drive
Princeton, New Jersey 08540
Counsel
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMA-
TION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Alternative Sales Arrangements............................................. 3
Financial Highlights....................................................... 5
Special Considerations..................................................... 6
Investment Objective and Policies.......................................... 8
Management of the Fund..................................................... 19
Directors................................................................. 19
Management and Advisory Arrangements...................................... 20
Transfer Agency Services.................................................. 20
Purchase of Shares......................................................... 21
Alternative Sales Arrangements............................................ 22
Initial Sales Charge Alternative--Class A Shares.......................... 23
Deferred Sales Charge Alternative--Class B Shares......................... 24
Redemption of Shares....................................................... 27
Redemption................................................................ 28
Repurchase................................................................ 28
Reinstatement Privilege--Class A Shares................................... 29
Shareholder Services....................................................... 29
Taxes...................................................................... 31
Performance Data........................................................... 32
Additional Information..................................................... 34
Dividends and Distributions............................................... 34
Determination of Net Asset Value.......................................... 34
Organization of the Fund.................................................. 35
Shareholder Reports....................................................... 35
Shareholder Inquiries..................................................... 35
Authorization Form......................................................... 37
</TABLE>
Code #10665
Prospectus
(ART)
- -------------------------------------------------------------------------------
MERRILL LYNCH
GLOBAL CONVERTIBLE
FUND, INC.
February 24, 1994
Distributor: Merrill Lynch Funds Distributor, Inc.
This prospectus should be retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
- -----------------------------------
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Global Convertible Fund, Inc. (the "Fund") is a mutual fund
seeking to provide shareholders with high total return by investing primarily
in an internationally diversified portfolio of convertible debt securities,
convertible preferred stocks and "synthetic" convertible securities consisting
of a combination of debt securities or preferred stock and warrants or options.
The investment philosophy of the Fund is based on the belief that the
characteristics of convertible securities make them appropriate investments for
an investment company seeking a high total return from capital appreciation and
investment income. There can be no assurance that the investment objective of
the Fund will be realized.
The Fund offers two classes of shares which may be purchased at a price equal
to the next determined net asset value per share, plus a sales charge which, at
the election of the purchaser, may be imposed (i) at the time of purchase (the
"Class A shares"), or (ii) on a deferred basis (the "Class B shares"). These
alternatives permit an investor to choose the method of purchasing shares that
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other circumstances. Investors should
understand that the purpose and function of the deferred sales charges with
respect to the Class B shares are the same as those of the initial sales charge
with respect to the Class A shares. Each Class A share and Class B share
represents identical interests in the investment portfolio of the Fund and has
the same rights, except that Class B shares bear the expenses of the account
maintenance and distribution fees and certain other costs resulting from the
deferred sales charge arrangement and have exclusive voting rights with respect
to the account maintenance and distribution fees. The two classes also have
different exchange privileges.
----------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated February
24, 1994 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling or by
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
----------------
The date of this Statement of Additional Information is February 24, 1994.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek high total return from a
combination of capital appreciation and investment income. The Fund will seek
to achieve its objective by investing primarily in an internationally
diversified portfolio of convertible debt securities, convertible preferred
stocks and "synthetic" convertible securities consisting of a combination of
debt securities or preferred stock and warrants or options. Reference is made
to "Investment Objective and Policies" in the Prospectus for a discussion of
the investment objective and policies of the Fund.
While the Fund generally does not expect to engage in trading for short-term
gains, it will effect portfolio transactions without regard to holding period
if, in its management's judgment, such transactions are advisable in light of a
change in circumstances of a particular company or within a particular industry
or in general market, economic or financial conditions. Accordingly, while the
Fund anticipates that its annual turnover rate should not exceed 100% under
normal conditions, it is impossible to predict portfolio turnover rates. The
portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of all securities whose maturities at the time of acquisition were one
year or less) by the monthly average value of the securities in the portfolio
during the year. For the years ended October 31, 1992 and 1993, the portfolio
turnover rates were 4.91% and 26.02%, respectively.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion under the caption "Investment Objective
and Policies--Portfolio Strategies Involving Options and Futures" in the
Prospectus for information with respect to various portfolio strategies
involving options and futures. The Fund may seek to increase its return through
the use of options on portfolio securities and to hedge its portfolio against
movements in the equity markets, interest rates and exchange rates between
currencies. This use of options and futures transactions is in addition to the
Fund's ability to purchase call options and stock index call options as an
element of synthetic convertible securities. The Fund has authority to write
(i.e., sell) covered call options on its portfolio securities, purchase put and
call options on securities and engage in transactions in stock index options,
stock index futures and financial futures, and related options on such futures.
The Fund may also deal in forward foreign exchange transactions and foreign
currency options and futures, and related options on such futures. Each of such
portfolio strategies is described in the Prospectus. Although certain risks are
involved in options and futures transactions (as discussed in the Prospectus
and below), Merrill Lynch Asset Management, L.P. (doing business as Merrill
Lynch Asset Management ("MLAM")) or (the "Manager") believes that, because the
Fund will (i) write only covered call options on portfolio securities, (ii) in
connection with the formation of synthetic convertible securities, purchase
only call options or stock index call options as an element of synthetic
convertibles, and (iii) engage in other options and futures transactions only
for hedging purposes, the options and futures portfolio strategies of the Fund
will not subject the Fund to the risk frequently associated with the
speculative use of options and futures transactions. While the Fund's use of
hedging strategies is intended to reduce the volatility of the net asset value
of Fund shares, the Fund's net asset value will fluctuate. There can be no
assurance that the Fund's hedging transactions will be effective. The following
is further information relating to portfolio strategies involving options and
futures the Fund may utilize.
Writing Covered Call Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of
2
<PAGE>
such options. A covered call option is an option where the Fund, in return for
a premium, gives another party a right to buy specified securities owned by the
Fund at a specified future date and price set at the time of the contract. The
principal reason for writing call options is to attempt to realize, through the
receipt of premiums, a greater return than would be realized on the securities
alone. By writing covered call options, the Fund gives up the opportunity,
while the option is in effect, to profit from any price increase in the
underlying security above the option exercise price. In addition, the Fund's
ability to sell the underlying security will be limited while the option is in
effect unless the Fund effects a closing purchase transaction. A closing
purchase transaction cancels out the Fund's position as the writer of an option
by means of an offsetting purchase of an identical option prior to the
expiration of the option it has written. Covered call options serve as a
particular hedge against the price of the underlying security declining. The
Fund may not write covered call options on underlying securities in an amount
exceeding 15% of the market value of its total assets.
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised,
the writer realizes a gain or loss from the sale of the underlying security.
Options referred to herein and in the Fund's Prospectus may be options issued
by The Options Clearing Corporation (the "Clearing Corporation"), which are
currently traded on the Chicago Board Options Exchange, American Stock
Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange or New York Stock
Exchange. Options referred to herein and in the Fund's Prospectus may also be
options traded on foreign securities exchanges such as the London Stock
Exchange and the Amsterdam Stock Exchange. An option position may be closed out
only on an exchange that provides a secondary market for an option of the same
series. If a secondary market does not exist, it might not be possible to
effect closing transactions in particular options, with the result, in the case
of a covered call option, that the Fund will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in
certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both, (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or the Clearing Corporation may not at all times be
adequate to handle current trading volume; or (vi) one or more exchanges could,
for economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in that
class or series of options) would cease to exist, although outstanding options
on that exchange that had been issued by the Clearing Corporation as a result
of trades on that exchange would continue to be exercisable in accordance with
their terms.
The Fund may also enter into over-the-counter call option transactions ("OTC
options"), which are two party contracts with price and terms negotiated
between the buyer and seller. The Fund will only enter into over-the-counter
option transactions with respect to portfolio securities for which management
believes the Fund can receive on each business day at least two independent
bids or offers (one of which will be from an entity other than a party to the
option). The staff of the Securities and Exchange Commission (the "Commission")
has taken the position that OTC options and the assets used as cover for
written OTC options are illiquid securities.
3
<PAGE>
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price, thus
limiting the Fund's risk of loss through a decline in the market value of the
security until the put option expires. The amount of any appreciation in the
value of the underlying security will be offset partially by the amount of the
premium paid for the put option and any related transaction costs. Prior to its
expiration, a put option may be sold in a closing sale transaction; profit or
loss from the sale will depend on whether the amount received is more or less
than the premium paid for the put option plus the related transaction cost. A
closing sale transaction cancels out the Fund's position as the purchaser of an
option by means of an offsetting sale of an identical option prior to the
expiration of the option it has purchased. In certain circumstances, the Fund
may purchase call options on securities held in its portfolio on which it has
written call options or on securities which it intends to purchase or, as
discussed above, as an element of synthetic convertible securities. The Fund
may purchase either exchange traded options or OTC options. The Fund will not
purchase options on securities if, as a result of such purchase, the aggregate
cost of all outstanding options on securities held by the Fund would exceed 5%
of the market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
options and futures and financial futures, and related options on such futures.
Set forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security or, in the case of an index-based futures contract, to make and accept
a cash settlement for a set price on a future date. A majority of transactions
in futures contracts, however, do not result in the actual delivery of the
underlying instrument or cash settlement, but are settled through liquidation,
i.e., by entering into an offsetting transaction. Futures contracts and options
on futures contracts are traded on boards of trade which have been designated
"contracts markets" for the trading thereof by the Commodity Futures Trading
Commission ("CFTC").
The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the
purchaser and seller under the futures contract. Subsequent payments to and
from the broker, called "variation margin", are required to be made on a daily
basis as the price of the futures contract fluctuates, making the long and
short positions in the futures contract more or less valuable, a process known
as "mark to the market". At any time prior to the settlement date of the
futures contract, the position may be closed out by taking an opposite position
which will operate to terminate the position, in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
An order has been obtained from the Commission exempting the Fund from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act in
connection with its strategy of investing in futures contracts. Section 17(f)
relates to the custody of securities and other assets of an investment company
and may be deemed to prohibit certain arrangements between the Fund and
commodities brokers with respect to
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initial and variation margin. Section 18(f) of the Investment Company Act
prohibits an open-end investment company such as the Fund from issuing a
"senior security" other than a borrowing from a bank. The staff of the
Commission has in the past indicated that a futures contract may be a "senior
security" under the Investment Company Act.
Foreign Currency Hedging. Generally, the foreign exchange transactions of the
Fund will be conducted on a spot, i.e., cash basis at the spot rate for
purchasing or selling currency prevailing in the foreign exchange market. This
rate under normal market conditions differs from the prevailing exchange rate
in an amount generally less than 0.15% of one percent due to the costs of
converting from one currency to another. However, the Fund has authority to
deal in forward foreign exchange among currencies of the different countries in
which it will invest as a hedge against possible variations in the foreign
exchange rate among these currencies. This is accomplished through contractual
agreements to purchase or sell a specified currency at a specified future date
and price set at the time of the contract. The Fund's dealings in forward
foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or
sale of forward foreign currency with respect to specific receivables or
payables of the Fund accruing in connection with the purchase and sale of its
portfolio securities, the sale and redemption of shares of the Fund or the
payment of dividends and distributions by the Fund. Position hedging is the
sale of forward foreign currency with respect to portfolio security positions
denominated or quoted in such foreign currency. The Fund will not speculate in
forward foreign exchange. The Fund may not position hedge with respect to the
currency of a particular country to an extent greater than the aggregate market
value (at the time of making such sale) of the securities held in its portfolio
denominated or quoted in that particular foreign currency. If the Fund enters
into a position hedging transaction, its custodian bank will place cash or
liquid debt securities in a separate account of the Fund in an amount equal to
the value of the Fund's total assets committed to the consummation of such
forward contract. If the value of the securities placed in the separate account
declines, additional cash or securities will be placed in the account so that
the value of the account will equal the amount of the Fund's commitment with
respect to such contracts. The Fund will not attempt to hedge all of its
foreign portfolio positions and will enter into such transactions only to the
extent, if any, deemed appropriate by the Manager. The Fund will not enter into
a position hedging commitment if, as a result thereof, the Fund would have more
than 15% of the value of its total assets committed to such contracts. The Fund
will not enter into a forward contract with a term of more than one year.
The Fund is also authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations
in foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the
Fund but not yet delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques to hedge the stated
value in United States dollars of an investment in a yen denominated security.
In such circumstances, for example, the Fund may purchase a foreign currency
put option enabling it to sell a specified amount of Japanese yen for dollars
at a specified price by a future date. To the extent the hedge is successful, a
loss in the value of the yen relative to the dollar will tend to be offset by
an increase in the value of the put option. To offset, in whole or part, the
cost of acquiring such a put option, the Fund may also sell a call option
which, if exercised, requires it to sell a specified amount of yen for dollars
at a specified price by a future date (a technique called a "straddle"). By
selling such call option in this illustration, the Fund gives up the
opportunity to profit without limit from increases in the relative value of the
yen to the dollar. The Manager believes that "straddles" of the type which may
be utilized by the Fund constitute hedging transactions and are consistent with
the policies described above.
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Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the
currency at a price above the devaluation level it anticipates. The cost to the
Fund of engaging in foreign currency transactions varies with such factors as
the currencies involved, the length of the contract period and the market
conditions then prevailing. Since transactions in foreign currency exchange
usually are conducted on a principal basis, no fees or commissions are
involved.
Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
prices of futures contracts and movements in the price of the underlying
security which is the subject of the hedge. If the price of the futures
contract moves more or less than the price of the underlying security, the Fund
will experience a gain or loss which will not be completely offset by movements
in the price of the underlying security which is the subject of the hedge. The
successful use of options and futures also depends on the Manager's ability to
predict correctly price movements in the market involved in a particular
options or futures transaction.
Prior to exercise or expiration, an exchange-traded option position can only
be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. The Fund will enter into an option or futures transaction on an
exchange only if there appears to be a liquid secondary market for such options
or futures. However, there can be no assurance that a liquid secondary market
will exist for any particular call or put option or futures contract at any
specified time. Thus, it may not be possible to close an option or futures
position. The Fund will acquire only over-the-counter options for which
management believes the Fund can receive on each business day at least two
independent bids or offers (one of which will be from an entity other than a
party to the option). In the case of a futures position or an option on a
futures position written by the Fund in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so. In addition, the Fund may be required
to take or make delivery of the security underlying futures contracts it holds.
The inability to close options and futures positions also could have an adverse
impact on the Fund's ability to hedge effectively its portfolio. There is also
the risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option.
The exchanges on which the Fund intends to conduct options transactions have
generally established limitations governing the maximum number of call or put
options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these limits
and it may impose other sanctions or restrictions. The Manager does not believe
that these trading and position limits will have any adverse impact on the
portfolio strategies for hedging the Fund's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
Repurchase Agreements; Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements and purchase and sale contracts.
Repurchase agreements and purchase and sale
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contracts may be entered into only with a member bank of the Federal Reserve
System or primary dealer in U.S. Government securities. Under such agreements,
the bank or primary dealer agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period. In the
case of repurchase agreements, the prices at which the trades are conducted do
not reflect the accrued interest on the underlying obligations whereas in the
case of purchase and sale contracts, the prices take into account accrued
interest. Such agreements usually cover short periods, such as under one week.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In the case of a repurchase agreement, the Fund will require the seller to
provide additional collateral if the market value of the securities falls below
the repurchase price at any time during the term of the repurchase agreement;
the Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but 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. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of a default under such a
repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to the Fund will depend on
intervening fluctuations of the market value of such security and the accrued
interest on the security. In such event, the Fund would have rights against the
seller for breach of contract with respect to any losses arising from market
fluctuations following the failure of the seller to perform. 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 communities.
Lending of Portfolio Securities. Subject to investment restriction (9) below,
the Fund may lend securities from its portfolio to approved borrowers and
receive therefor collateral in cash or securities issued or guaranteed by the
United States Government. Such collateral will be maintained at all times in an
amount equal to at least 100% of the current market value of the loaned
securities. The purpose of such loans is to permit the borrower to use such
securities for delivery to purchasers when such borrower has sold short. If
cash collateral is received by the Fund, it is invested in short-term money
market securities, and a portion of the yield received in respect of such
investment is retained by the Fund. Alternatively, if securities are delivered
to the Fund as collateral, the Fund and the borrower negotiate a rate for the
loaned premium to be received by the Fund for lending its portfolio securities.
In either event, the total yield on the Fund's portfolio is increased by loans
of its portfolio securities. The Fund will have the right to regain record
ownership of loaned securities to exercise beneficial rights such as voting
rights, subscription rights and rights to dividends, interest or other
distributions. Such loans are terminable at any time. The Fund may pay
reasonable finder's, administrative and custodial fees in connection with such
loans.
High Yield Securities. The Fund has established no rating criteria for debt
securities in which it may invest. Therefore, the Fund may invest in
convertible and, to a limited extent, non-convertible debt securities either
(a) which are rated BBB or better by Standard & Poor's Corporation ("S&P") or
Baa or better by Moody's Investor Service ("Moody's") or which, in the
Manager's judgment, possess similar credit characteristics ("investment grade
securities") or (b) which are rated BB or lower by S&P or Ba or lower by
Moody's or which, in the Manager's judgment, possess similar credit
characteristics ("high yield securities",
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<PAGE>
also commonly referred to as "junk bonds"). The Manager considers the ratings
assigned by S&P or Moody's as one of several factors in its independent credit
analysis of issuers.
Issuers of high yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if
such issuers are highly leveraged. During such periods, such issuers may not
have sufficient revenues to meet their interest payment obligations. The
issuer's ability to service its debt obligations also may be adversely affected
by specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing.
The risk of loss due to default by the issuer is significantly greater for the
holders of high yield securities because such securities may be unsecured and
may be subordinated to other credits of the issuer.
High yield securities frequently have call or redemption features that would
permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all high yield securities, the secondary trading
market for high yield securities is generally not as liquid as the secondary
market for higher rated securities. Reduced secondary market liquidity may have
an adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to adversely affect the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent it is required to seek recovery upon a default on a portion holding
or participate in the restructuring of the obligation.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act means the lesser of (i) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares). The Fund may not:
(1) (a) Invest in the securities of any one issuer if, immediately after
and as a result of such investment, the value of the holdings of the Fund
in the securities of such issuer exceeds 5% of the Fund's total assets,
taken at market value, except that such restriction shall not apply to
securities issued or guaranteed by the Government of the United States or
any of its agencies or instrumentalities or, with respect to 25% of the
Fund's total assets, to securities issued or guaranteed by the government
of
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<PAGE>
any country which is a member of the Organization for Economic Cooperation
and Development or any such countries' agencies or instrumentalities or
supranational institutions or organizations.
(b) Invest in the securities of any single issuer if, immediately after
and as a result of such investment, the Fund owns more than 10% of the
outstanding voting securities of such issuer.
Nothing in the foregoing investment restrictions shall be deemed to
prohibit the Fund from purchasing the securities of any issuer pursuant to
the exercise of subscription rights distributed to the Fund by the issuer,
except that no such purchase may be made if as a result the Fund will no
longer be a diversified investment company as defined in the Investment
Company Act or fail to meet the diversification requirements of the
Internal Revenue Code of 1986, as amended (the "Code").
(2) Invest more than 25% of its total assets (taken at market value at
the time of each investment) in the securities of issuers in any particular
industry.
(3) Make investments for the purpose of exercising control or management.
(4) Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or
by purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer's commission or profit, other than
customary broker's commission, is involved and only if immediately
thereafter not more than (i) 3% of the total outstanding voting stock of
such company is owned by the Fund, (ii) 5% of the Fund's total assets,
taken at market value, would be invested in any one such company, or (iii)
10% of the Fund's total assets, taken at market value, would be invested in
such securities.
(5) Purchase or sell real estate; provided that the Fund may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
(6) Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities. (The deposit or payment by the Fund of
initial or variation margin in connection with futures or related options
transactions is not considered the purchase of a security on margin.)
(7) Make short sales of securities or maintain a short position.
(8) Make loans to other persons (except as provided in (9) below);
provided, that for purposes of this restriction an investment in repurchase
agreements and purchase and sale contracts shall not be deemed to be the
making of a loan.
(9) Lend its portfolio securities in excess of 33 1/3% of its total
assets, taken at market value; provided that such loan shall be made in
accordance with the guidelines set forth in the Prospectus and this
Statement of Additional Information.
(10) Issue senior securities, borrow money or pledge its assets in excess
of 20% of its total assets taken at market value (including the amount
borrowed) and then only from a bank as a temporary measure for
extraordinary or emergency purposes including to meet redemptions or to
settle securities transactions. Usually only "leveraged" investment
companies may borrow in excess of 5% of their assets; however, the Fund
will not borrow to increase income but only to meet redemption requests or
to settle securities transactions which may otherwise require untimely
dispositions of Fund securities. The Fund will not purchase securities
while borrowings are outstanding except (a) to honor prior commitments or
(b) to exercise subscription rights where outstanding borrowings have been
obtained exclusively for settlements of other securities transactions. The
purchase of securities while borrowings are outstanding will have the
effect of leveraging the Fund. Such leveraging increases the Fund's
exposure to capital risk
9
<PAGE>
and borrowed funds are subject to interest costs which will reduce net
income. (See restriction (11) below regarding the exclusion from this
restriction of arrangements with respect to options, futures contracts and
options on futures contracts).
(11) Mortgage, pledge, hypothecate or in any manner transfer for
indebtedness any securities owned by or held by the Fund except as may be
necessary in connection with borrowings mentioned in (10) above, and then
such mortgaging, pledging or hypothecating may not exceed 10% of its total
assets, taken at market value. (For the purpose of this restriction and
restriction (10) above, collateral arrangements with respect to the writing
of options, futures contracts, options on futures contracts, and collateral
arrangements with respect to initial and variation margin are not deemed to
be a pledge of assets, and neither such arrangements nor the purchase and
sale of options, futures or related options are deemed to be the issuance
of a senior security).
(12) Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which are not otherwise readily marketable,
including repurchase agreements and purchase and sale contracts maturing in
more than seven days, if, regarding all such securities, more than 10% of
its net assets, taken at market value, would be invested in such
securities.
(13) Act as an underwriter of securities, except to the extent that the
Fund may technically be deemed an underwriter when investing in repurchase
agreements and purchase and sale contracts or insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933, as amended (the
"Securities Act") in selling portfolio securities.
(14) Purchase or sell interests in oil, gas or other mineral exploration
or development programs except that the Fund may invest in securities
issued by companies that engage in oil, gas or other mineral exploration or
development activities.
Additional investment restrictions adopted by the Fund, which may be changed
by the Directors, provide that the Fund may not:
(i) Invest in warrants except for the purpose of creating a synthetic
convertible security if at the time of acquisition its investments in
warrants, excluding those purchased for the purpose of creating a synthetic
convertible security, valued at the lower of cost or market value, would
exceed 5% of the Fund's net assets; included within such limitation, but
not to exceed 2% of the Fund's net assets, are warrants which are not
listed on the New York or American Stock Exchange. For purposes of this
restriction, warrants acquired by the Fund in units or attached to
securities may be deemed to be without value.
(ii) Purchase or sell commodities or commodity contracts, except that the
Fund may deal in forward foreign exchange between currencies of the
different countries in which it may invest and purchase and sell currency
options, stock index futures, financial futures and currency futures
contracts and related options on such futures.
(iii) Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operations, if more
than 5% of its total assets would be invested in such securities.
(iv) Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent described in the Fund's
Prospectus and in this Statement of Additional Information, as amended from
time to time.
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(v) Purchase or retain the securities of any issuer, if those individual
Directors, officers and directors of the Fund, the Manager or any
subsidiary thereof each owning beneficially more than 1/2 of 1% of the
securities or such issuer own in the aggregate more than 5% of the
securities of such issuer.
(vi) Purchase or sell OTC options and the securities underlying such
options if, as a result of such transactions, such options, together with
all other illiquid securities or securities which are not readily
marketable, exceed 10% of the net assets of the Fund, taken at market value
except that with respect to OTC options sold by the Fund to primary U.S.
Government securities dealers who agree that the Fund may repurchase such
options at a predetermined price (which may be based upon a formula), the
Fund will treat as illiquid an amount equal to the repurchase price less
the amount by which the option is in-the-money.
The Fund will not change or modify the policy described in clause (vi) above
prior to the change or modification by the Commission staff of its position
regarding OTC options.
In addition, the Fund has undertaken with a State Securities Commission that
it will not invest in real estate limited partnerships or in oil, gas or other
mineral leases.
Portfolio securities of the Fund generally may not be purchased from, sold or
loaned to the Manager or its affiliates or any of their directors, officers or
employees, acting as principal.
With respect to investment restriction (12) above, while the Fund will not
purchase illiquid securities in an amount exceeding 10% of its net assets, the
Fund may purchase, without regard to that limitation, securities that are not
registered under the Securities Act, but that can be offered and sold to
"qualified institutional buyers" under Rule 144A under the Securities Act,
provided that the Fund's Board of Directors continuously determines, based on
the trading markets for the specific rule 144A security, that it is liquid. The
Board of Directors may adopt guidelines regarding such securities which may be
held by the Fund and delegate to the Manager the daily function of determining
and monitoring liquidity of such securities. The Board of Directors, however,
will retain oversight and is ultimately responsible for the determinations.
Since it is not possible to predict with assurance exactly how this market
for restricted securities sold and offered under Rule 144A will develop, the
Board of Directors will carefully monitor the Fund's investments in these
securities, focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers became for a time uninterested in purchasing these
securities.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act involving
only usual and customary commissions or transactions permitted pursuant to an
exemptive order under the Investment Company Act. See "Portfolio Transactions
and Brokerage". Without such an exemptive order, the Fund is prohibited from
engaging in portfolio transactions with Merrill Lynch or its affiliates acting
as principal and from purchasing securities in public offerings that are not
registered under the Securities Act in which such firms or any of its
affiliates participate as an underwriter or dealer.
The investment restrictions set forth in (1) above contain an exception that
permits the Fund to purchase securities pursuant to the exercise of
subscription rights, subject to the condition that such purchase will not
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<PAGE>
result in the Fund ceasing to be a diversified investment company. Japanese and
European corporations frequently issue additional capital stock by means of
subscription rights offerings to existing shareholders at a price substantially
below the market price of the shares. The failure to exercise such rights would
result in the Fund's interest in the issuing company being diluted. The market
for such rights is not developed and, accordingly, the Fund may not always
realize full value on the sale of rights. Therefore, the exception applies in
cases where the limits set forth in the investment restrictions in the
Prospectus would otherwise be exceeded by exercising rights or have already
been exceeded as a result of fluctuations in the market value of the Fund's
portfolio securities with the result that the Fund would otherwise be forced
either to sell securities at a time when it might not otherwise have done so,
or to forego exercising the rights.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is Box
9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel--President and Director(1)(2)--President of the Manager since
1977 and Chief Investment Officer thereof since 1976; President of Fund Asset
Management ("FAM") since 1977 and Chief Investment Officer thereof since 1976;
President and Director of Princeton Services, Inc. ("Princeton Services") since
1993; Executive Vice President of Merrill Lynch since 1990 and Senior Vice
President thereof from 1985 to 1990; Executive Vice President of Merrill Lynch
& Co., Inc. since 1990; Director of Merrill Lynch Funds Distributor, Inc. (the
"Distributor").
Kenneth S. Axelson--Director(2)--75 Jameson Point Road, Rockland, Maine
04841. Executive Vice President and Director, J.C. Penney Company, Inc. until
1982; Director, Grumman Corporation, UNUM Corporation, Protection Mutual
Insurance Company, Zurn Industries, Inc. and, until 1992, Central Maine Power
Company and Key Trust Company of Maine; Trustee, The Chicago Dock and Canal
Trust.
Herbert I. London--Director(2)--New York University--Gallatin Division, 113-
115 University Place, New York, New York 10003. Dean, Gallatin Division of New
York University from 1978 to 1993 and Director from 1975 to 1976; Professor,
New York University since 1973; Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Director, Damon Corporation since 1991; Overseer,
Center for Naval Analyses.
Robert R. Martin--Director(2)--513 Grand Hill, St. Paul, Minnesota 55102.
Chairman and Chief Executive Officer, Kinnard Investments, Inc. from 1990 to
1993; Executive Vice President, Dain Bosworth from 1974 to 1989; Director,
Carnegie Capital Management from 1977 to 1985 and Chairman thereof in 1979;
Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Trustee, Northland College since
1992.
Joseph L. May--Director(2)--424 Church Street, Suite 2000, Nashville,
Tennessee 37219. Attorney in private practice since 1984; President, May and
Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to 1983;
Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The May
Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. from 1972 to 1989.
Andre F. Perold--Director(2)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02136. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund, since 1989;
Director, Quantec Investment Technology (a private United Kingdom company).
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Terry K. Glenn--Executive Vice President(1)(2)--Executive Vice President of
the Manager and FAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President and Director of the Distributor since
1986.
N. John Hewitt--Senior Vice President(1)(2)--Senior Vice President of the
MLAM and FAM since 1980.
Harry E. Dewdney--Vice President and Portfolio Manager(1)--Vice President and
Portfolio Manager of the Manager since 1986; Senior Vice President of the
International Trading and Foreign Exchange Department of Prescott, Ball &
Turben, Inc. from 1978 to 1986.
Donald C. Burke--Vice President(1)(2)--Vice President and Director of
Taxation of MLAM since 1990; Employee of Deloitte & Touche from 1981 to 1990.
Gerald M. Richard--Treasurer(1)(2)--Senior Vice President and Treasurer of
the Manager and FAM since 1984; Vice President of the Distributor since 1981
and Treasurer since 1984; Senior Vice President and Treasurer of Princeton
Services since 1993.
Mark B. Goldfus--Secretary(1)(2)--Vice President of the Manager and FAM since
1985.
- --------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a trustee, director or officer of certain other
investment companies for which the Manager or FAM acts as investment
adviser or manager.
At February 1, 1994, the officers and Directors of the Fund as a group (12
persons) owned an aggregate of less than 1/4 of 1% of the outstanding shares of
common stock of Merrill Lynch & Co., Inc. and owned an aggregate of less than
1% of the outstanding shares of the Fund.
Pursuant to the terms of the management agreement with the Fund, the Manager
pays all compensation of officers and employees of the Fund as well as the fees
of all Directors who are affiliated persons of Merrill Lynch & Co., Inc. or its
subsidiaries. The Fund pays each Director not affiliated with the Manager a fee
of $5,000 per year plus $500 per meeting attended, together with such
Director's actual out-of-pocket expenses relating to attendance at meetings.
The Fund also compensates members of its Audit Committee, which consists of all
of the nonaffiliated Directors. For the year ended October 31, 1993, fees and
expenses paid to the nonaffiliated Directors aggregated $36,395.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities may be held by, or be appropriate investments for, other funds or
investment advisory clients for which the Manager or its affiliates act as an
adviser. Because of different objectives or other factors, a particular
security may be bought for one or more clients when one or more clients are
selling the same security. If purchases or sales of securities by the Manager
for the Fund or other funds for which it acts as investment adviser or for its
advisory clients arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds and clients in a manner deemed equitable to all. To the extent
that transactions on behalf of more than one client of the Manager or its
affiliates during the same period may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse
effect on price.
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The Fund has entered into a management agreement with the Manager (the
"Management Agreement"). As discussed in the Prospectus, the Manager receives
for its services to the Fund monthly compensation at the annual rate of 0.65%
of the average daily net assets of the Fund. For the years ended October 31,
1991, 1992 and 1993 the fees paid by the Fund to the Manager aggregated
$111,800, $97,038 and $139,948 respectively.
The State of California imposes limitations on the expenses of the Fund.
These expense limitations require that the Manager reimburse the Fund in an
amount necessary to prevent the aggregate ordinary operating expenses of the
Fund (excluding interest, taxes, distribution fees, brokerage fees and
commissions and extraordinary charges such as litigation costs) from exceeding
2.5% of the Fund's first $30 million of average daily net assets, 2.0% of the
next $70 million of average daily net assets and 1.5% of the remaining average
daily net assets. The Manager's obligation to reimburse the Fund is limited to
the amount of the management fee. Expenses not covered by this limitation are
interest, taxes, brokerage commissions and other items such as extraordinary
legal expenses. No fee payment will be made to the Manager during any fiscal
year that will cause such expenses to exceed the most restrictive expense
limitation at the time of such payment. For the year ended October 31, 1991,
$65,687 was reimbursed to the Fund pursuant to such operating expense
limitations. For the year ended October 31, 1992, $69,907 was reimbursed to the
Fund pursuant to such operating expense limitations.
The Management Agreement obligates the Manager to provide investment advisory
services and to pay all compensation of and furnish office space for officers
and employees of the Fund connected with investment and economic research,
trading and investment management of the Fund, as well as the fees of all
Directors of the Fund who are affiliated persons of the Manager 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
and prospectuses and statements of additional information (except to the extent
paid by the Distributor), charges of the custodian, any sub-custodian and
transfer agent, expenses of redemption of shares, Commission fees, expenses of
registering the shares under Federal, state or foreign laws, fees and expenses
of nonaffiliated Directors, accounting and pricing costs (including the daily
calculation of net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and other
expenses properly payable by the Fund. Accounting services are provided to the
Fund by the Manager and the Fund reimburses the Manager for its costs in
connection with such services on a semi-annual basis. For the year ended
October 31, 1993, the Fund paid the Manager $49,224 for such services. As
required by the Fund's Distribution Agreement, the Distributor will pay the
promotional expenses of the Fund in connection with the offering of shares of
the Fund. Certain expenses in connection with the account maintenance and
distribution of the Class B shares will be financed by the Fund pursuant to the
Distribution Plan in compliance with Rule 12b-1 under the Investment Company
Act. See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares--Distribution Plan".
The Manager is a limited partnership, the partners of which are Merrill Lynch
& Co., Inc., Merrill Lynch Investment Management, Inc. and Princeton Services,
Inc.
Duration and Termination. Unless earlier terminated as described below, the
Management Agreement will remain in effect from year to year if approved
annually (a) by the Board of Directors or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Directors who are not parties
to such contract or interested persons (as defined in the Investment Company
Act) of any such party. Such contracts are not assignable and may be terminated
without penalty on 60 days written notice at the option of either party thereto
or by the vote of the shareholders of the Fund.
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<PAGE>
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represents an interest in the same portfolio of investments of the
Fund, has the same rights and is identical in all respects, except that Class B
shares bear the expenses of the deferred sales arrangements and any expenses
(including incremental transfer agency costs) resulting from such sales
arrangements, and the expenses paid by the account maintenance fee. The two
classes also have different exchange privileges. See "Shareholder Services--
Exchange Privilege."
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of Class A and Class B
shares of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of the Class A and Class B 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 Management
Agreement described above.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The gross sales charges for the sale of Class A shares for the fiscal year
ended October 31, 1991 were $8,386, of which the Distributor received $572 and
Merrill Lynch received $7,814. The gross sales charges for the sale of Class A
shares for the fiscal year ended October 31, 1992 were $32,899, of which the
Distributor received $1,040 and Merrill Lynch received $31,859. The gross sales
charges for the sale of Class A shares for the fiscal year ended October 31,
1993 were $52,964, of which the Distributor received $5,201 and Merrill Lynch
received $47,763.
The term "purchase", as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A 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 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 although more than one beneficiary is involved. The
term "purchase" also includes purchases by any "company", as that term is
defined in the Investment Company Act, but does not include purchases by any
such company which has not been in existence for at least six months or which
has no purpose other than the purchase of shares of the Fund or shares of other
registered investment companies at a discount; provided, however, that it shall
not include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or broker-
dealer or clients or an investment advisor.
REDUCED INITIAL SALES CHARGE--CLASS A SHARES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase Class
A shares of the Fund at the offering price applicable to the total of (a) the
dollar amount then being purchased plus (b) an amount equal to the then current
net
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<PAGE>
asset value or cost, whichever is higher, of the purchaser's combined holdings
of the Class A shares and Class B shares of the Fund and of any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor. For any such right of
accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A shares of the Fund or any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor made within a thirteen-month
period starting with the first purchase pursuant to a Letter of Intention in
the form provided in the Prospectus. The Letter of Intention is available only
to investors whose accounts are maintained at the Fund's Transfer Agent. The
Letter of Intention is not available to employee benefit plans for which
Merrill Lynch provides plan participant recordkeeping services. The Letter of
Intention is not a binding obligation to purchase any amount of Class A
shares; however, its execution will result in the purchaser paying a lower
sales charge at the appropriate quantity purchase level. A purchase not
originally made pursuant to a Letter of Intention may be included under a
subsequent Letter of Intention executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period.
The value of Class A shares of the Fund and of other investment companies with
an initial sales charge or a deferred sales charge for which the Distributor
acts as the distributor presently held, at cost or maximum offering price
(whichever is higher), on the date of the first purchase under the Letter of
Intention, may be included as a credit toward the completion of such Letter,
but the reduced sales charge applicable to the amount covered by such Letter
will be applied only to new purchases. If the total amount of shares does not
equal the amount stated in the Letter of Intention (minimum of $25,000), the
investor will be notified and must pay, within 20 days of the expiration of
such Letter, the difference between the shares charge on the Class A shares
purchased at the reduced rate and the sales charge applicable to the sales
actually purchased through the Letter. Class A shares equal to at least five
percent of the intended amount will be held in escrow during the thirteen-
month period (while remaining registered in the name of the purchaser) for
this purpose. The first purchase under the Letter of Intention must be at
least five percent of the dollar amount of such Letter. If during the term of
such Letter, a purchase brings the total amount invested to an amount equal to
or in excess of the amount indicated in the Letter, the purchaser will be
entitled on that purchase and subsequent purchases to the reduced percentage
sales charge which would be applicable to a single purchase equal to the total
dollar value of the Class A shares then being purchased under such Letter, but
there will be no retroactive reduction of the sales charges on any previous
purchase. The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the Letter of Intention will
be deducted from the total purchases made under such Letter. An exchange from
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves Money
Fund, Merrill Lynch U.S. Treasury Money Fund or Merrill Lynch U.S.A.
Government Reserves into the Fund that creates a sales charge will count
toward completing a new or existing Letter of Intention from the Fund.
Merrill Lynch Blueprint SM Program. Class A shares of the Fund are offered
to participants in the Merrill Lynch Blueprint SM Program ("Blueprint").
Blueprint is directed to small investors, group IRAs and participants in
certain affinity groups such as credit unions and trade associations.
Investors placing orders to purchase Class A shares of the Fund through
Blueprint will acquire the Class A shares at net asset value
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<PAGE>
plus a sales charge calculated in accordance with the Blueprint sales charge
schedule (i.e., up to $5,000 at 3.5% and $5,000.01 or more at the standard
sales charge rates disclosed in the Prospectus). Class A shares of the Fund
are being offered at net asset value plus a sales charge of 1/2 of 1% for
corporate or group IRA programs placing orders to purchase their Class shares
through Blueprint. Services, including the exchange privilege, available to
Class A investors through Blueprint, however, may differ from those available
to other investors in Class A shares.
Class A shares are offered at net asset value, with a waiver of the front-
end sales charge, to Blueprint participants through the Merrill Lynch Directed
IRA Rollover Program ("IRA Rollover Program") available from Merrill Lynch
Business Financial Services, a business unit of Merrill Lynch. The IRA
Rollover Program is available to custodian rollover assets from Eligible
Retirement Plans (as defined below) whose Trustee and/or Plan Sponsor offers
the Merrill Lynch Directed IRA Rollover Program. Eligible Retirement Plans
include (a) plans qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code'), with a salary reduction feature offering a
menu of investments to plan participants, provided such plan initially has
1,000 or more employees eligible to participate in the plan (employees
eligible to participate in retirement plans of the same sponsoring employer or
its affiliates may be aggregated); or (b) tax qualified retirement plans
within the meaning of Section 401(a) of the Code or deferred compensation
plans within the meaning of Section 403(b) of the Code, provided the plan (i)
initially invested $5 million or more in existing plan assets in portfolios,
mutual funds or trusts advised by the Manager or its subsidiaries or (ii) has
accumulated $5 million or more in existing plan assets invested in mutual
funds advised by the Manager or its subsidiaries, which charge a front-end
sales charge or contingent deferred sales charge (assets of retirement plans
with the same sponsor or an affiliated sponsor may be aggregated).
Orders for purchases and redemptions of Class A shares of the Fund may be
grouped for execution purposes which, in some circumstances, may involve the
execution of such orders two business days following the day such orders are
placed. The minimum initial purchase price is $100, with a $50 minimum for
subsequent purchases through Blueprint. There are no minimum initial or
subsequent purchase requirements for participants who are part of an automatic
investment plan. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available
from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint SM
Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Employer Sponsored Retirement and Savings Plans. Class A shares are offered
at net asset value to employer sponsored retirement or savings plans, such as
tax qualified retirement plans within the meaning of Section 401(a) of the
Code, deferred compensation plans within the meaning of Sections 403(b) and
457 of the Code, other deferred compensation arrangements, VEBA plans, and
non-qualified After Tax Savings and Investment programs, maintained on the
Merrill Lynch Group Employee Services system, herein referred to as "Employer
Sponsored Retirement or Savings Plans", provided the plan has $5 million or
more in existing plan assets initially invested in portfolios, mutual funds or
trusts advised by MLAM either directly or through an affiliate. Class A shares
may also be offered at net asset value to Employer Sponsored Retirement or
Savings Plans, provided the plan has accumulated $5 million or more in
existing plan assets invested in mutual funds advised by MLAM charging a
front-end sales charge or CDSC. Assets of Employer Sponsored Retirement or
Savings Plans sponsored by the same sponsor or an affiliated sponsor may be
aggregated. The Class A share reduced load breakpoints also apply to these
aggregated assets. Class A shares may be offered at net asset value to
multiple plans sponsored by the same sponsor or an affiliated sponsor provided
that the addition of one or more of the multiple plans results in aggregate
assets of $5 million or more invested in
17
<PAGE>
portfolios, mutual funds or trusts advised by MLAM either directly or through
an affiliate. Employer Sponsored Retirement or Savings Plans are also offered
Class A shares at net asset value, provided such plans initially have 1,000 or
more employees eligible to participate in the plans. Employees eligible to
participate in Employer Sponsored Retirement or Savings Plans of the same
sponsoring employer or its affiliates may be aggregated. Tax qualified
retirement plans within the meaning of Section 401(a) of the Code meeting any
of the foregoing requirements and which are provided specialized services
(e.g., plans whose participants may direct on a daily basis their plan
allocations among a wide range of investments including individual corporate
equities and other securities in addition to mutual fund shares) by the Merrill
Lynch Blueprint SM Program, are offered Class A shares at a price equal to net
asset value per share plus a reduced sales charge of 0.50%. Any Employer
Sponsored Retirement or Savings Plan which does not meet the above described
qualifications to purchase Class A shares at net asset value has the option of
purchasing Class A shares at the sales charge schedule disclosed in the
Prospectus, or if the Employer Sponsored Retirement or Savings Plan is a
qualified retirement plan and meets the specified requirements, then it may
purchase Class B shares with a waiver of the CDSC upon redemption. The minimum
initial and subsequent purchase requirements are waived in connection with all
the above-referenced Employer Sponsored Retirement or Savings Plans.
Purchase Privilege of Certain Persons. Directors of the Fund, directors and
trustees of certain other Merrill Lynch-sponsored investment companies,
directors of Merrill Lynch & Co., Inc., employees of Merrill Lynch & Co., Inc.
and its subsidiaries 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. Under such programs, the Fund realizes economies of scale and reduction
of sales related expenses by virtue of familiarity with the Fund.
Class A shares of the Fund are also 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 purchase Class A shares of
the Fund 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, such
redemption must have been made within 60 days prior to the investment in the
Fund, and the proceeds from the redemption must have been maintained in the
interim in cash or a money market fund.
Closed-End Fund Option. Class A shares of the Fund and certain other mutual
funds advised by the Manager or FAMI (the "Eligible Class A shares") are
offered at net asset value to shareholders of certain closed-end funds advised
by the Manager or FAMI who wish to reinvest the net proceeds of a sale of their
closed-end fund shares of common stock in Eligible Class A shares, if the
conditions set forth below are satisfied. First, the sale of closed-end fund
shares must be made through Merrill Lynch, and the net proceeds therefrom must
be immediately reinvested in Eligible Class A shares. Second, the closed-end
fund shares must have either been acquired in the initial public offering or be
shares representing dividends from shares of common stock acquired in such
offering. Third, the closed-end shares must have been continuously maintained
in a Merrill Lynch securities account. Fourth, there must be a minimum purchase
of $250 to be eligible for the investment option. Class A shares of the Fund
are offered at net asset value to shareholders of Merrill Lynch Senior Floating
Rate Fund (formerly known as Merrill Lynch Prime Fund, Inc.) ("Senior Floating
Rate Fund") who wish to reinvest the net proceeds from a sale of certain of
their shares of common stock of Senior Floating Rate Fund in shares of the
Fund. In order to exercise this investment option, Senior Floating Rate Fund
shareholders must sell their Senior Floating Rate Fund shares to the Senior
Floating Rate Fund in connection with a tender offer conducted by the Senior
Floating Rate Fund and reinvest the
18
<PAGE>
proceeds immediately in the Fund. This investment option is available only with
respect to the proceeds of Senior Floating Rate Fund shares as to which no
Early Withdrawal Charge as defined in the prospectus is applicable. Purchase
orders from Senior Floating Rate Fund shareholders wishing to exercise this
investment option will be accepted only on the day that the related Senior
Floating Rate Fund tender offer terminates and will be effected at the net
asset value of the Fund at such day.
Acquisition of Certain Investment Companies. The public offering price of
Class A shares may be reduced to the net asset value per Class A share in
connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may be
adjusted in appropriate cases to reduce possible adverse tax consequences to
the Fund which might result from an acquisition of assets having net unrealized
appreciation which is disproportionately higher at the time of acquisition than
the realized or unrealized appreciation of the Fund.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Distribution Plan. Reference is made to "Purchase of Shares--Deferred Sales
Charge Alternative--Class B Shares--Distribution Plan" in the Prospectus for
certain information with respect to the Distribution Plan of the Fund.
The payment of the distribution fee with respect to Class B shares is subject
to the provisions of Rule 12b-1 under the Investment Company Act. Among other
things, the Distribution Plan provides that the Distributor shall provide and
the Directors shall review quarterly reports of the disbursement of the
distribution fees paid to the Distributor. In their consideration of the
Distribution Plan, the Directors must consider all factors they deem relevant,
including information as to the benefits of the Distribution Plan to the Fund
and its Class B shareholders. The Distribution Plan further provides that so
long as the Distribution Plan remains in effect, the selection and nomination
of Directors who are not "interested persons" of the Fund, as defined in the
Investment Company Act (the "Independent Directors"), shall be committed to the
discretion of the Independent Directors then in office. In approving the
Distribution Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is a reasonable likelihood that the Distribution Plan will
benefit the Fund and its Class B shareholders. The Distribution Plan can be
terminated at any time, without penalty, by the vote of a majority of the
Independent Directors or by the vote of the holders of a majority of the
outstanding Class B voting securities of the Fund. The Distribution Plan cannot
be amended to increase materially the amount to be spent by the Fund without
Class B shareholder approval, and all material amendments are required to be
approved by the vote of Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in the Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of the Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the
date of the Distribution Plan or such report, the first two years in an easily
accessible place.
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<PAGE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for periods during which trading on the New
York Stock Exchange is restricted as determined by the Commission or such
exchange is closed (other than customary weekend and holiday closings), for
any period during which an emergency exists, as defined by the Commission, as
a result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's costs, depending on the market value of the securities held by
the Fund at such time.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares -- Alternative Sale
Arrangements -- Deferred Sales Charge Alternative -- Class B Shares", while
Class B shares redeemed within four years of purchase are subject to a
contingent deferred sales charge under most circumstances, the charge is
waived on redemptions of Class B shares following the death or disability of a
Class B shareholder. Redemptions for which the waiver applies are any partial
or complete redemption following the death or disability (as defined in the
Code) of a Class B shareholder (including one who owns the Class B shares as
joint tenant with his or her spouse), provided the redemption is requested
within one year of the death or initial determination of disability. For the
years ended October 31, 1991, 1992 and 1993, the Distributor received
contingent deferred sales charges of $48,125, $12,562 and $23,432,
respectively, all of which was paid to Merrill Lynch.
Merrill Lynch Blueprint SM Program. Class B shares are offered to certain
participants in the Merrill Lynch Blueprint SM Program ("Blueprint").
Blueprint is directed to small investors and participants in certain affinity
groups such as trade associations, credit unions and benefit plans. Class B
shares of the Fund are offered through Blueprint only to members of certain
affinity groups. The contingent deferred sales charge is waived in connection
with purchase orders placed through Blueprint by members of such affinity
groups. Services, including the exchange privilege, available to Class B
investors through Blueprint, however, may differ from those available to other
Class B investors. Orders for purchases and redemptions of Class B shares of
the Fund may be grouped for execution purposes which, in some circumstances,
may involve the execution of such orders two business days following the day
such orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There is no minimum
initial or subsequent purchase requirement for investors who are part of a
Blueprint automatic investment plan. Additional information concerning these
Blueprint programs, including any annual fees or transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
Blueprint SM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Retirement Plans. Any Retirement Plan which does not meet the qualifications
to purchase Class A shares at net asset value has the option of purchasing
Class A shares at the sales charge schedule disclosed in the Prospectus, or if
the Retirement Plan meets the following requirements, then it may purchase
Class B shares with a waiver of the contingent deferred sales charge upon
redemption. The contingent deferred sales charge is waived for any Eligible
401(k) Plan redeeming Class B shares. The contingent deferred sales charge is
also waived for redemptions from 401(a) plans qualified under the Code,
provided, however, such plan has the same or an affiliated sponsoring employer
as an Eligible 401(k) Plan purchasing MLAM advised mutual
20
<PAGE>
fund Class B shares ("Eligible 401(a) Plan"). The contingent deferred sales
charge is 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,
Pierce, Fenner & Smith Incorporated or Merrill Lynch Trust Company custodied
Individual Retirement Account 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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for making the Fund's portfolio decisions, placing
the Fund's brokerage business, evaluating the reasonableness of brokerage
commissions and negotiating the amount of any commissions paid, subject to a
policy established by the Fund's Directors and officers. The Fund has no
obligation to deal with any broker or group of brokers in the execution of
transactions in portfolio securities. Orders for transactions in portfolio
securities are placed for the Fund with a number of brokers and dealers,
including Merrill Lynch. In placing orders, it is the policy of the Fund to
obtain the most favorable net results, taking into account various factors,
including price, commissions, if any, size of the transaction and difficulty of
execution. Where practicable, the Manager surveys a number of brokers and
dealers in connection with proposed portfolio transactions and selects the
broker or dealer that offers the Fund best price and execution or other
services which are of benefit to the Fund. Securities firms also may receive
brokerage commissions on transactions including covered call options written by
the Fund and the sale of underlying securities upon the exercise of such
options. In addition, consistent with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. and policies established by
the Directors of the Fund, the Manager may consider sales of shares of the Fund
as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Fund.
The Fund does not use any particular broker or dealer, and brokers who
provide supplemental investment research to the Manager may receive orders for
transactions by the Fund. Such supplemental research services ordinarily
consist of assessments and analyses of the business or prospects of a company,
industry or economic sector. Information so received will be in addition to and
not in lieu of the services required to be performed by the Manager under the
Management Agreement. If in the judgment of the Manager the Fund will be
benefited by supplemental research services, the Manager is authorized to pay
brokerage commissions to a broker furnishing such services which are in excess
of commissions that another broker may have charged for effecting the same
transaction. The expenses of the Manager will not necessarily be reduced as a
result of the receipt of such supplemental information, and the Manager may use
such information in servicing its other accounts.
The Fund anticipates that its brokerage transactions involving securities of
companies domiciled in countries other than the United States will be conducted
primarily on the principal stock exchanges of such countries. Brokerage
commissions and other transaction costs on foreign stock exchange transactions
are generally higher than in the United States, although the Fund will endeavor
to achieve the best net results in effecting its portfolio transactions. There
is generally less governmental supervision and regulation of foreign stock
exchanges and brokers than in the United States.
Foreign equity securities may be held by the Fund in the form of American
Depositary Receipts (ADRs) or European Depositary Receipts (EDRs) or other
securities convertible into foreign equity securities. ADRs and EDRs may be
listed on stock exchanges, or traded in over-the-counter markets in the United
States or Europe, as the case may be. ADRs, like other securities traded in the
United States, will be subject to negotiated commission rates.
21
<PAGE>
The Fund invests in certain securities traded in the over-the-counter market
and, where possible, deals directly with the dealers who make a market in the
securities involved, except in those circumstances in which better prices and
execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund are prohibited from dealing with the Fund as principal
in the purchase and sale of securities. Since transactions in the over-the-
counter market usually involve transactions with dealers acting as principal
for their own accounts, affiliated persons of the Fund, including Merrill
Lynch, will not serve as the Fund's dealer in such transactions. However,
affiliated persons of the Fund may serve as its broker in over-the-counter
transactions conducted on an agency basis. For the year ended October 31, 1993,
the Fund paid $32,896, none of which was paid to Merrill Lynch for effecting
transactions in which the Fund paid brokerage commissions.
The Fund's ability and decisions to purchase or sell portfolio securities may
be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a
daily basis in United States dollars, the Fund intends to manage its portfolio
so as to give reasonable assurance that it will be able to obtain United States
dollars to the extent necessary to meet anticipated redemptions. Under present
conditions, it is not believed that these considerations will have any
significant effect on its portfolio strategy.
Pursuant to Section 11(a) of the Securities Exchange Act of 1934 and Rule
11a2-2(T) thereunder, Merrill Lynch may not execute transactions for the Fund
on the floor of any national securities exchange, but may effect such
transactions through transmitting orders for execution, providing for clearance
and settlement and arranging for the performance of such functions. As
permitted by the Rule, the Fund has entered into an agreement with the Manager
and Merrill Lynch which permits Merrill Lynch to retain compensation for
effecting transactions for the Fund on national securities exchanges. The
agreement provides, among other things, that Merrill Lynch must furnish the
Fund at least annually with a statement setting forth the total amount of all
compensation retained by Merrill Lynch under the agreement. For the year ended
October 31, 1991, Merrill Lynch effected no portfolio transactions pursuant to
such contract. For the year ended October 31, 1992, Merrill Lynch engaged in no
portfolio transactions pursuant to such contract. For the year ended October
31, 1993, Merrill Lynch effected no portfolio transactions pursuant to such
contract.
The Directors of the Fund have considered the possibility of recapturing for
the benefit of the Fund brokerage commissions, dealer spreads and other
expenses of possible portfolio transactions, such as underwriting commissions,
by conducting such portfolio transactions through affiliated entities,
including Merrill Lynch. For example, brokerage commissions received by Merrill
Lynch could be offset against the management fee paid by the Fund to the
Manager. After considering all factors deemed relevant, the Directors made a
determination not to seek such recapture. The Directors will reconsider this
matter from time to time.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information--Determination of Net Asset
Value" in the Prospectus concerning the determination of net asset value.
The net asset value of the shares of the Fund is determined once daily Monday
through Friday at 4:15 P.M., New York time, following the close of trading on
the New York Stock Exchange. The New York Stock Exchange is not open on New
Year's Day, Washington's Birthday, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. Any assets or liabilities
initially expressed in terms of non-U.S. dollar currencies are translated into
U.S. dollars at the prevailing market rates
22
<PAGE>
as quoted by one or more banks or dealers on the morning of valuation. The net
asset value is computed by dividing the value of the securities held by the
Fund plus any cash or other assets (including interest and dividends accrued
but not yet received) minus all liabilities (including accrued expenses) by the
total number of shares outstanding at such time. Expenses, including the fees
payable to the Manager, are accrued daily. The per share net asset value of the
Class B shares generally will be lower than the per share net asset value of
the Class A shares, reflecting the daily expense accruals of the distribution
and transfer agency fees applicable with respect to the Class B shares. It is
expected, however, that the per share net asset value of the two classes will
tend to converge immediately after the payment of dividends or distributions,
which will differ by approximately the amount of the expense accrual
differential between the classes.
Portfolio securities that are securities traded on stock exchanges are valued
at the last sale price (regular way) on the exchange on which such securities
are traded as of the close of business on the day the securities are being
valued or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Directors as the
primary market. Securities traded in the over-the-counter market are valued at
the last available quoted bid price in the over-the-counter market prior to the
time of valuation. Securities traded on a stock exchange and the over-the-
counter market will be valued according to the broadest and most representative
market. Options that are traded on exchanges are valued at their last sale
price as of the close of such exchanges or, if there are no sales, then the
price is the last available bid price.
Where there is no market quotation on securities or options, fair market
value will be determined in good faith by or under the direction of the Fund's
Directors. Such valuations and procedures will be reviewed periodically by the
Directors.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designated 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.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive quarterly statements from the Transfer
Agent showing any reinvestments of dividends and capital gains distributions
and any other activity in the account since the previous statement.
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 shares are to be transferred will not take delivery
of shares of the Fund, a shareholder either must redeem the Class A shares so
that the cash proceeds can be transferred to the account at the new firm or
such shareholder must continue to maintain an Investment Account at the
Transfer Agent for those Class A shares. Shareholders interested in
transferring their Class B shares from Merrill Lynch and who do not wish to
have an Investment Account maintained for such shares at the Transfer Agent may
request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the
shareholder. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he 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 may make additions to their Investment Account at any time by
mailing a check directly to the Transfer Agent.
23
<PAGE>
Share certificates are issued only for full shares and only upon the specific
request of the shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by shareholders directly from the Transfer Agent.
AUTOMATIC INVESTMENT PLAN
A shareholder may make additions to an Investment Account at any time by
purchasing Class A or Class B shares at the applicable public offering price
either through the shareholder's securities dealer, or by mail directly to the
Transfer Agent, acting as agent for such securities dealer. Voluntary
accumulation can also be made through a service known as the Automatic
Investment Plan whereby the Fund is authorized through pre-authorized checks of
$50 or more to charge the regular bank account of the shareholder on a regular
basis to provide systematic additions to the Investment Account of such
shareholder. Alternatively, investors who maintain CMA(R) accounts may arrange
to have periodic investments made in the Fund, in their CMA(R) accounts or in
certain related accounts in amounts of $250 or more through the CMA(R)
Automatic Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically additionally in shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund, without sales charge, as
of the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect in writing to receive either their
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed on or about the payment date.
Shareholders may, at any time, notify the Transfer Agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or capital gains distributions reinvested in shares of the Fund or vice
versa and, commencing ten days after the receipt by the Transfer Agent of such
notice, those instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A SHARES
A Class A shareholder may elect to make systematic withdrawals from an
Investment Account on either a monthly or quarterly basis as provided below.
Quarterly withdrawals are available for shareholders who have acquired Class A
shares of the Fund having a value, based on cost or the current offering price,
of $5,000 or more, and monthly withdrawals for shareholders with Class A shares
with such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A shares are
redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A shares.
Redemptions will be made at net asset value as determined at the normal close
of business on the New York Stock Exchange on the 24th day of each month or the
24th day of the last month of each quarter, whichever is applicable. If the New
York Stock Exchange is not open for business on such date, the Class A shares
will be redeemed at the close of business on or about the following business
day. The check for the withdrawal payment will be mailed, or the direct deposit
for the withdrawal payment will be made, on the next business day following
redemption. When a shareholder is making systematic withdrawals, dividends and
distributions on all Class
24
<PAGE>
A shares in the Investment Account are reinvested automatically in the Fund's
Class A shares. A Shareholder's Systematic Withdrawal Plan may be terminated at
any time, without charge or penalty, by the shareholder, the Fund, the Transfer
Agent or the Distributor. Withdrawal payments should not be considered as
dividends, yield or income. Each withdrawal is a taxable event. If periodic
withdrawals continuously exceed reinvested dividends, the shareholder's
original investment may be reduced correspondingly. Purchases of additional
Class A shares concurrent with withdrawals are ordinarily disadvantageous to
the shareholder because of sales charges and tax liabilities. The Fund will not
knowingly accept purchase orders for Class A shares of the Fund from investors
who maintain a Systematic Withdrawal Plan unless such purchase is equal to at
least one year's scheduled withdrawals or $1,200, whichever is greater.
Periodic investments may not be made into an Investment Account in which the
shareholder has elected to make systematic withdrawals.
A Class A shareholder whose shares are held within a CMA (R), CBA (R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the Systematic Redemption
Program. The minimum fixed dollar amount redeemable is $25. The proceeds of
systematic redemptions will be posted to the shareholder's account five
business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month,
bimonthly systematic redemptions will be made at net asset value on the first
Monday of every other month, and quarterly, semiannual or annual redemptions
are made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Company shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Financial Consultant.
EXCHANGE PRIVILEGE
Class A and Class B shareholders of the Fund may exchange their Class A or
Class B shares of the Fund for shares of the same class of Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch
Arizona Municipal Bond Fund, Merrill Lynch Balanced Fund for Investment and
Retirement, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Municipal Bond Fund, Merrill Lynch California Insured Municipal Bond Fund,
Merrill Lynch California Limited Maturity Municipal Bond Fund, Merrill Lynch
Capital Fund, Inc., Merrill Lynch Colorado Municipal Bond Fund, Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.
(shares of which are deemed Class A shares for purposes of the exchange
privilege), Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill
Lynch Federal Securities Trust, Merrill Lynch Florida Limited Maturity
Municipal Bond Fund, Merrill Lynch Florida Municipal Bond Fund, Merrill Lynch
Fund For Tomorrow, Inc., Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Holdings (residents of Arizona
must meet investor suitability standards), Merrill Lynch Global Resources
Trust, Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Growth Fund for
Investment and Retirement, Merrill Lynch Healthcare Fund, Inc. (residents of
Wisconsin must meet investor suitability standards), Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Maryland Municipal Bond Fund, Merrill Lynch Massachusetts Limited
Maturity Municipal Bond Fund, Merrill Lynch Massachusetts Municipal Bond Fund,
Merrill Lynch Michigan Limited Maturity Municipal Bond Fund, Merrill Lynch
Michigan Municipal Bond
25
<PAGE>
Fund, Merrill Lynch Minnesota Municipal Bond Fund, Merrill Lynch Municipal Bond
Fund, Inc., Merrill Lynch Municipal Intermediate Term Fund, Merrill Lynch New
Jersey Limited Maturity Municipal Bond Fund, Merrill Lynch New Jersey Municipal
Bond Fund, Merrill Lynch New York Limited Maturity Municipal Bond Fund, Merrill
Lynch New York Municipal Bond Fund, Merrill Lynch North Carolina Municipal Bond
Fund, Merrill Lynch Ohio Municipal Bond Fund, Merrill Lynch Oregon Municipal
Bond Fund, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Pennsylvania Limited
Maturity Municipal Bond Fund, Merrill Lynch Pennsylvania Municipal Bond Fund,
Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Short-Term Global Income Fund
Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch Texas Municipal Bond
Fund, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch World Income
Fund, Inc., on the basis described below. In addition, Class A shareholders of
the fund may exchange their Class A shares for shares of Merrill Lynch U.S.A.
Government Reserves, Merrill Lynch U.S. Treasury Money Fund and Merrill Lynch
Ready Assets Trust (or Merrill Lynch Retirement Reserves Money Fund if the
exchange occurs within certain retirement plans) (together, the "Class A money
market funds") and Class B shareholders of the Fund may exchange their Class B
shares for shares of Merrill Lynch Government Fund, Merrill Lynch Institutional
Fund, Merrill Lynch Treasury Fund and Merrill Lynch Institutional Tax-Exempt
Fund (together, the "Class B money market funds") on the basis described below.
Shares with a net asset value of at least $250 are required to qualify for the
exchange privilege and any shares utilized in an exchange must have been held
by the shareholder for 15 days. Certain funds into which exchanges may be made
may impose a redemption fee (not in excess of 2.00% of the amount redeemed) on
shares purchased through the exchange privilege when such shares are
subsequently redeemed, including redemption through subsequent exchanges. Such
redemption fee would be in addition to any contingent deferred sales charge
otherwise applicable to a redemption of Class B shares. It is contemplated that
the exchange privilege may be applicable to other new mutual funds whose shares
may be distributed by the Distributor. The exchange privilege available to
participants in the Merrill Lynch Blueprint SM Program may be different from
that available to other investors.
Under the exchange privilege, each of the funds with Class A shares
outstanding offers to exchange its Class A shares ("new Class A shares") for
Class A shares ("outstanding Class A shares") of any of the other funds, on the
basis of relative net asset value per Class A share, plus an amount equal to
the difference, if any, between the sales charge previously paid on the
outstanding Class A shares and the sales charge payable at the time of the
exchange on the new Class A shares. With respect to outstanding Class A 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 shares in the initial purchase and any subsequent exchange. Class
A shares issued pursuant to dividend reinvestment are sold on a no-loan basis
in each of the funds offering Class A shares. For purposes of the exchange
privilege, Class A 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 shares on which the dividend was paid. Based on
this formula, Class A shares of the Fund generally will be exchanged into the
Class A shares of the other funds or into shares of the Class A money market
funds without a sales charge.
In addition, each of the funds with Class B shares outstanding offers to
exchange its Class B shares ("new Class B shares") for Class B shares
("outstanding Class B shares") of any of the other funds on the basis of
relative net asset value per Class B share, without the payment of any
contingent deferred sales load 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 contingent deferred sales
charge schedule if such schedule is higher than the deferred sales charge
schedule relating to the new Class B shares acquired
26
<PAGE>
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
contingent deferred sales charge schedule if such schedule is higher than the
deferred sales charge schedule relating to the Class B shares of the fund from
which the exchange has been made. For purposes of computing the sales load that
may be payable on a disposition of the new Class B shares, the holding period
for the outstanding Class B shares is "tacked" to the holding period of the new
Class B shares. For example, an investor may exchange Class B shares of the
Fund for those of Merrill Lynch Global Resources Trust (formerly known as
Merrill Lynch Natural Resources Trust) after having held the Fund's Class B
shares for two and a half years. The 2% sales charge that generally would apply
to redemption would not apply to the exchange. Three years later the investor
may decide to redeem the Class B shares of Merrill Lynch Global Resources Trust
and receive cash. There will be no contingent deferred sales load due on this
redemption, since by "tacking" the two and a half year holding period of the
Fund's Class B shares to the three year holding period for the Merrill Lynch
Global Resources Trust Class B shares, the investor will be deemed to have held
the new Class B shares for more than five years.
Shareholders also may exchange Class A shares and Class B shares from any of
the funds into shares of the Class A money market funds and Class B money
market funds, respectively, but the period of time that Class B shares are held
in a Class B money market fund will not count towards satisfaction of the
holding period requirement for purposes of reducing the contingent deferred
sales load. However, shares of a Class B money market fund which were acquired
as a result of an exchange for Class B shares of a fund may, in turn, be
exchanged back into Class B shares of any fund offering such shares, in which
event the holding period for Class B shares of the fund will be aggregated with
previous holding periods for purposes of reducing the contingent deferred sales
load. Thus, for example, an investor may exchange Class B shares of the Fund
for shares of Merrill Lynch Institutional Fund after having held the Fund Class
B shares for two and a half years and three years later decide to redeem the
shares of Merrill Lynch Institutional Fund for cash. At the time of this
redemption, the 2% contingent deferred sales load that would have been due had
the Class B shares of the Fund been redeemed for cash rather than exchanged for
shares of Merrill Lynch Institutional Fund will be payable. If, instead of such
redemption the shareholder exchanged such shares for Class B shares of a fund
which the shareholder continues to hold for an additional two and a half years,
any subsequent redemption will not incur a contingent deferred sales load.
The investment objectives of the other funds into which exchanges can be made
are as follows:
Merrill Lynch Adjustable Rate Securities
Fund, Inc. .............................. High current income consistent
with a policy of limiting the de-
gree of fluctuation in net asset
value by investing primarily in a
portfolio of adjustable rate se-
curities, consisting principally
of mortgage-backed and asset-
backed securities.
Merrill Lynch Americas Income Fund, Inc.
....................................
A high level of current income,
consistent with prudent
investment risk, by investing
primarily in debt securities
denominated in a currency of a
country located in the Western
Hemisphere (i.e., North and South
America and the surrounding
waters).
27
<PAGE>
Merrill Lynch Arizona Limited Maturity
Municipal Bond Fund.................
A portfolio of Merrill Lynch
Multi-State Limited Maturity
Municipal Series Trust, a series
fund, whose objective is to
provide as high a level of income
exempt from Federal and Arizona
income taxes as is consistent
with prudent investment
management through investment in
a portfolio primarily of
intermediate-term investment
grade Arizona Municipal Bonds.
Merrill Lynch Arizona Municipal Bond A portfolio of Merrill Lynch Mul-
Fund..................................... ti-State Municipal Series Trust,
a series fund, whose objective is
to provide investors with as high
a level of income exempt from
Federal and Arizona income taxes
as is consistent with prudent in-
vestment management.
Merrill Lynch Balanced Fund for
Investment and Retirement................
As high a level of total invest-
ment return as is consistent with
reasonable risk by investing in
common stock and other types of
securities, including fixed in-
come securities and convertible
securities.
Merrill Lynch Basic Value Fund, Inc. .....
Capital appreciation and, second-
arily, income through investments
in securities, primarily equi-
ties, that are undervalued and
therefore represent basic invest-
ment value.
Merrill Lynch California Insured
Municipal Bond Fund...................... A portfolio of Merrill Lynch Cali-
fornia Municipal Series Trust, a
series fund, whose objective is
to provide shareholders with as
high a level of income exempt
from Federal and California in-
come taxes as is consistent with
prudent investment management
through investment in a portfolio
primarily of insured California
Municipal Bonds.
Merrill Lynch California Limited Maturity
Municipal Bond Fund.................
A portfolio of Merrill Lynch Mul-
ti-State Limited Maturity Munici-
pal Series Trust, a series fund,
whose objective is to provide
shareholders with as high a level
of income exempt from Federal and
California income taxes as is
consistent with prudent invest-
ment management through invest-
ment in a portfolio primarily of
intermediate-term investment
grade California Municipal Bonds.
28
<PAGE>
Merrill Lynch California Municipal Bond
Fund.....................................
A portfolio of Merrill Lynch Cali-
fornia Municipal Series Trust, a
series fund, whose objective is
to provide investors as high a
level of income exempt from Fed-
eral and California income taxes
as is consistent with prudent in-
vestment management.
The highest total investment re-
Merrill Lynch Capital Fund, Inc. ......... turn consistent with prudent risk
through a fully managed invest-
ment policy utilizing equity,
debt and convertible securities.
Merrill Lynch Colorado Municipal Bond
Fund................................
A portfolio of Merrill Lynch Mul-
ti-State Municipal Series, a se-
ries fund, whose objective is as
high a level of income exempt
from Federal and Colorado income
taxes as is consistent with pru-
dent investment management.
Merrill Lynch Corporate Bond Fund, Inc. .. Current income from three separate
diversified portfolios of fixed
income securities.
Merrill Lynch Developing Capital Markets
Fund, Inc. .............................. Long-term appreciation through in-
vestment in securities, princi-
pally equities, of issuers in
countries having smaller capital
markets.
Merrill Lynch Dragon Fund, Inc. ..........
Capital appreciation primarily
through investment in equity and
debt securities of issuers domi-
ciled in developing countries lo-
cated in Asia and the Pacific Ba-
sin, other than Japan, Australia
and New Zealand.
Merrill Lynch EuroFund.................... Capital appreciation primarily
through investment in equity se-
curities of corporations domi-
ciled in Europe.
Merrill Lynch Federal Securities Trust.... High current return through in-
vestments in U.S. Government and
Government agency securities, in-
cluding GNMA mortgage-backed cer-
tificates and other mortgage-
backed Government securities.
Merrill Lynch Florida Limited Maturity
Municipal Bond Fund.................
A portfolio of Merrill Lynch Mul-
ti-State Limited Maturity Munici-
pal Series Trust, a series fund,
whose objective is as high a
level of income exempt from Fed-
eral income taxes as is consis-
tent with prudent investment man-
agement while serving to offer
shareholders the opportunity to
own securities exempt from Flor-
ida intangible personal property
taxes through investment in a
portfolio primarily of intermedi-
ate-term investment grade Florida
Municipal Bonds.
29
<PAGE>
Merrill Lynch Florida Municipal Bond
Fund.....................................
A portfolio of Merrill Lynch Mul-
ti-State Municipal Series Trust,
a series fund, whose objective is
as high a level of income exempt
from Federal income taxes as is
consistent with prudent invest-
ment management while seeking to
offer shareholders the opportu-
nity to own securities exempt
from Florida intangible personal
property taxes.
Merrill Lynch Fund For Tomorrow, Inc......
Long-term growth through invest-
ment in a portfolio of good qual-
ity securities, primarily common
stock, potentially positioned to
benefit from demographic and cul-
tural changes as they affect con-
sumer markets.
Merrill Lynch Fundamental Growth Fund,
Inc...................................... Long-term growth through invest-
ment in a diversified portfolio
of equity securities placing par-
ticular emphasis on companies
that have exhibited an above-av-
erage growth rate in earnings.
Merrill Lynch Global Allocation Fund,
Inc...................................... High total return, consistent with
prudent risk, through a fully
managed investment policy utiliz-
ing United States and foreign eq-
uity, debt and money market secu-
rities, the combination of which
will be varied from time to time
both with respect to the types of
securities and markets in re-
sponse to changing market and
economic trends.
Merrill Lynch Global Bond Fund for
Investment and Retirement................ High total investment return from
investment in a global portfolio
of debt instruments denominated
in various currencies and multi-
national currency units.
Merrill Lynch Global Holdings (residents
of Arizona must meet investor
suitability standards)..............
The highest total investment re-
turn consistent with prudent risk
through worldwide investment in
an internationally diversified
portfolio of securities.
Merrill Lynch Global Resources Trust......
Long-term growth and protection of
capital from investment in secu-
rities of domestic and foreign
companies that possess substan-
tial natural resource assets.
30
<PAGE>
Merrill Lynch Global Utility Fund, Inc....
Capital appreciation and current
income through investment of at
least 65% of its total assets in
equity and debt securities issued
by domestic and foreign companies
which are primarily engaged in
the ownership or operation of fa-
cilities used to generate, trans-
mit or distribute electricity,
telecommunications, gas or water.
A portfolio of Merrill Lynch Funds
Merrill Lynch Government Fund............. for Institutions Series, a series
fund, whose objective is to pro-
vide current income consistent
with liquidity and security of
principal from investment in se-
curities issued or guaranteed by
the U.S. Government, its agencies
and instrumentalities and in re-
purchase agreements secured by
such obligations.
Merrill Lynch Growth Fund for Investment
and Retirement........................... Growth of capital and, secondari-
ly, income from investment in a
diversified portfolio of equity
securities placing principal em-
phasis on those securities which
management of the fund believes
to be undervalued.
Merrill Lynch Healthcare Fund, Inc.
(residents of Wisconsin must meet
investor suitability standards)..........
Capital appreciation through
worldwide investment in equity
securities of companies that de-
rive or are expected to derive a
substantial portion of their
sales from products and services
in healthcare.
Merrill Lynch Institutional Fund.......... A portfolio of Merrill Lynch Funds
for Institutions series, a series
fund, whose objective is to pro-
vide maximum current income con-
sistent with liquidity and the
maintenance of a high quality
portfolio of money market securi-
ties.
Merrill Lynch Institutional Tax-Exempt
Fund..................................... Current income exempt from Federal
income taxes, preservation of
capital and liquidity available
from investing in a diversified
portfolio of short-term, high
quality municipal bonds.
Merrill Lynch International Equity Fund...
Capital appreciation and, second-
arily, income by investing in a
diversified portfolio of equity
securities of issuers located in
countries other than the United
States.
31
<PAGE>
Merrill Lynch Latin America Fund, Inc. ...
Capital appreciation by investing
primarily in Latin American eq-
uity and debt securities.
Merrill Lynch Maryland Municipal Bond
Fund................................
A portfolio of Merrill Lynch Mul-
ti-State Municipal Series Trust,
a series fund, whose objective is
as high a level of income exempt
from Federal and Maryland income
taxes as is consistent with pru-
dent investment management.
Merrill Lynch Massachusetts Limited
Maturity Municipal Bond Fund........
A portfolio of Merrill Lynch Mul-
ti-State Limited Maturity Munici-
pal Series Trust, a series fund,
whose objective is as high a
level of income exempt from Fed-
eral and Massachusetts income
taxes as is consistent with pru-
dent investment management
through investment in a portfolio
primarily of intermediate-term
investment grade Massachusetts
Municipal Bonds.
Merrill Lynch Massachusetts Municipal
Bond Fund................................ A portfolio of Merrill Lynch Mul-
ti-State Municipal Series Trust,
a series fund, whose objective is
as high a level of income exempt
from Federal and Massachusetts
income taxes as is consistent
with prudent investment manage-
ment.
Merrill Lynch Michigan Limited Maturity
Municipal Bond Fund.................
A portfolio of Merrill Lynch Mul-
ti-State Limited Maturity Munici-
pal Series Trust, a series fund,
whose objective is a high level
of income exempt from Federal and
Michigan income taxes as is con-
sistent with prudent investment
management through investment in
a portfolio primarily of interme-
diate-term investment grade Mich-
igan Municipal Bonds.
Merrill Lynch Michigan Municipal Bond A portfolio of Merrill Lynch Mul-
Fund..................................... ti-State Municipal Series Trust,
a series fund, whose objective is
as high a level of income exempt
from Federal and Michigan income
taxes as is consistent with pru-
dent investment management.
Merrill Lynch Minnesota Municipal Bond
Fund..................................... A portfolio of Merrill Lynch Mul-
ti-State Municipal Series Trust,
a series fund, whose objective is
as high a level of income exempt
from Federal and Minnesota income
taxes as is consistent with pru-
dent investment management.
32
<PAGE>
Merrill Lynch Municipal Bond Fund, Inc....
Tax-exempt income from three sepa-
rate diversified portfolios of
municipal bonds.
Merrill Lynch Municipal Intermediate Term Currently the only portfolio of
Fund................................ Merrill Lynch Municipal Series
Trust, a series fund, whose ob-
jective is to provide as high a
level as possible of income ex-
empt from Federal income taxes by
investing in investment grade ob-
ligations with a dollar weighted
average maturity of five to
twelve years.
Merrill Lynch New Jersey Limited Maturity
Municipal Bond Fund.................
A portfolio of Merrill Lynch Mul-
ti-State Limited Maturity Munici-
pal Series Trust, a series fund,
whose objective is as high a
level of income exempt from Fed-
eral and New Jersey income taxes
as is consistent with prudent in-
vestment management through a
portfolio primarily of intermedi-
ate-term investment grade New
Jersey Municipal Bonds.
Merrill Lynch New Jersey Municipal Bond
Fund..................................... A portfolio of Merrill Lynch Mul-
ti-State Municipal Series Trust,
a series fund, whose objective is
as high a level of income exempt
from Federal and New Jersey in-
come taxes as is consistent with
prudent investment management.
Merrill Lynch New York Limited Maturity
Municipal Bond Fund.................
A portfolio of Merrill Lynch Mul-
ti-State Limited Maturity Munici-
pal Series Trust, a series fund,
whose objective is as high a
level of income exempt from Fed-
eral, New York State and New York
City income taxes as is consis-
tent with prudent investment man-
agement through investment in a
portfolio primarily of intermedi-
ate-term grade New York Municipal
Bonds.
Merrill Lynch New York Municipal Bond
Fund..................................... A portfolio of Merrill Lynch Mul-
ti-State Municipal Series Trust,
a series fund, whose objective is
as high a level of income exempt
from Federal, New York State and
New York City income taxes as is
consistent with prudent invest-
ment management.
33
<PAGE>
Merrill Lynch North Carolina Municipal
Bond Fund................................ A portfolio of Merrill Lynch Mul-
ti-State Municipal Series Trust,
a series fund, whose objective is
as high a level of income exempt
from Federal and North Carolina
income taxes as is consistent
with prudent investment manage-
ment.
Merrill Lynch Ohio Municipal Bond Fund.... A portfolio of Merrill Lynch Mul-
ti-State Municipal Series Trust,
a series fund, whose objective is
to provide investors with as high
a level of income exempt from
Federal and Ohio income taxes as
is consistent with prudent in-
vestment management.
Merrill Lynch Oregon Municipal Bond Fund..
A portfolio of Merrill Lynch Mul-
ti-State Municipal Series Trust,
a series fund, whose objective is
as high a level of income exempt
from Federal and Oregon income
taxes as is consistent with pru-
dent investment management.
Merrill Lynch Pacific Fund, Inc. .........
Capital appreciation by investing
in equity securities of corpora-
tions domiciled in Far Eastern
and Western Pacific countries,
including Japan, Australia, Hong
Kong and Singapore.
Merrill Lynch Pennsylvania Limited
Maturity Municipal Bond Fund........
A portfolio of Merrill Lynch Mul-
ti-State Limited Maturity Munici-
pal Series Trust, a series fund,
whose objective is to provide as
high a level of income exempt
from Federal and Pennsylvania in-
come taxes as is consistent with
prudent investment management
through investment in a portfolio
of intermediate-term investment
grade Pennsylvania Municipal
Bonds.
Merrill Lynch Pennsylvania Municipal Bond
Fund..................................... A portfolio of Merrill Lynch Mul-
ti-State Municipal Series Trust,
a series fund, whose objective is
as high a level of income exempt
from Federal and Pennsylvania in-
come taxes as is consistent with
prudent investment management.
Merrill Lynch Phoenix Fund, Inc........... Long-term growth of capital by in-
vesting in equity and fixed in-
come securities, including tax-
exempt securities, of issuers in
weak financial condition or expe-
riencing poor operating results
believed to be undervalued rela-
tive to the current or prospec-
tive condition of such issuer.
34
<PAGE>
Merrill Lynch Ready Assets Trust..........
Preservation of capital, liquidity
and the highest possible current
income consistent with the fore-
going objectives from the short-
term money market securities in
which the Trust invests.
Merrill Lynch Retirement Reserves Money
Fund (available only if the exchange
occurs within certain retirement
plans)...................................
Currently the only portfolio of
Merrill Lynch Retirement Series
Trust, a series fund, whose ob-
jectives are current income,
preservation of capital and li-
quidity available from investing
in a diversified portfolio of
short-term money market
securities.
Merrill Lynch Short-Term Global Income
Fund, Inc................................
As high a level of current income
as is consistent with prudent in-
vestment management from a global
portfolio of high quality debt
securities denominated in various
currencies and multinational cur-
rency units and having remaining
maturities not exceeding three
years.
Merrill Lynch Special Value Fund, Inc..... Long-term growth of capital from
investments in securities, pri-
marily common stocks, of rela-
tively small companies believed
to have special investment value
and emerging growth companies re-
gardless of size.
Merrill Lynch Strategic Dividend Fund..... Long-term total return from in-
vestment in dividend paying com-
mon stocks which yield more than
Standard & Poor's 500 Composite
Stock Price Index.
Merrill Lynch Technology Fund, Inc. ...... Capital appreciation through
worldwide investment in equity
securities of companies that de-
rive or are expected to derive a
substantial portion of their
sales from products and services
in technology.
Merrill Lynch Texas Municipal Bond Fund... A portfolio of Merrill Lynch Mul-
ti-State Municipal Series Trust,
a series fund, whose objective is
as high a level of income exempt
from Federal income taxes as is
consistent with prudent invest-
ment management by investing pri-
marily in a portfolio of long-
term, investment grade obliga-
tions issued by the State of Tex-
as, its political subdivisions,
agencies and instrumentalities.
35
<PAGE>
Merrill Lynch Treasury Fund...............
A portfolio of Merrill Lynch Funds
for Institutions Series, a series
fund, whose objective is to pro-
vide current income consistent
with liquidity and security of
principal from investment in di-
rect obligations of the U.S.
Treasury and up to 10% of its to-
tal assets in repurchase agree-
ments secured by such obliga-
tions.
Merrill Lynch U.S.A. Government Reserves.. Preservation of capital, current
income and liquidity available
from investing in direct obliga-
tions of the U.S. Government and
repurchase agreements relating to
such securities.
Merrill Lynch U.S. Treasury Money Fund.... Preservation of capital, liquidity
and current income through in-
vestment exclusively in a diver-
sified portfolio of short-term
marketable securities which are
direct obligations of the U.S.
Treasury.
Merrill Lynch Utility Income Fund, Inc. ..
High current income through in-
vestment in equity and debt secu-
rities issued by companies which
are primarily engaged in the own-
ership or operation of facilities
used to generate, transmit or
distribute electricity, telecom-
munications, gas or water.
Merrill Lynch World Income Fund, Inc...... High current income by investing
in a global portfolio of fixed
income securities denominated in
various currencies, including
multinational currencies.
Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made. Exercise of the exchange privilege is treated as a sale for Federal
income tax purposes and, depending on the circumstances, a short- or long-term
capital gain or loss may be realized. In addition, a shareholder exchanging
shares of any of the funds may be subject to a backup withholding tax unless
such shareholder certifies under penalty of perjury that the taxpayer
identification number on file with any such fund is correct and that such
investor is not otherwise subject to backup withholding. See "Dividends,
Distributions and Taxes" below.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant, who will advise the Fund of the exchange, or, if
the exchange does not involve a money market fund, the shareholder may write to
the Transfer Agent requesting that the exchange be effected. Such letter must
be signed exactly as the account is registered with signatures guaranteed by an
"eligible guarantor institution" as such is defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, the existence and validity of
which may be verified by the Transfer Agent through the use of industry
publications. Shareholders of the Fund, and shareholders of the other funds
described above with shares for which certificates have not been issued, may
exercise the exchange privilege by wire through their securities dealers.
36
<PAGE>
The Fund reserves the right to require a properly completed Exchange
Application. This exchange privilege may be modified or terminated in
accordance with the rules of the Commission. The Fund reserves the right to
limit the number of times an investor may exercise the exchange privilege.
Certain funds may suspend the continuous offering of their shares to the
general public at any time and may thereafter resume such offering from time to
time. The exchange privilege is available only to U.S. shareholders in states
where the exchange legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income, if any.
Dividends from such net investment income will be paid quarterly. All net
realized long- or short-term capital gains, if any, will be distributed to the
Fund's shareholders annually. From time to time, the Fund may declare a special
distribution at or about the end of the calendar year in order to comply with a
Federal income tax requirement that certain percentages of its ordinary income
and capital gains be distributed during the calendar year. If in any fiscal
year, the Fund has net income from certain foreign currency transactions, such
income will be distributed annually. See "Shareholder Services--Automatic
Reinvestment of Dividends and Capital Gains Distributions" for information
concerning the manner in which dividends and distributions may be reinvested
automatically in shares of the Fund. Shareholders may elect in writing to
receive any such dividends or distributions, or both, in cash. Dividends and
distributions are taxable to shareholders, as discussed below, whether they are
reinvested in shares of the Fund or received in cash. The per share dividends
on Class B shares will be lower than the per share dividends and distributions
on Class A shares as a result of the distribution and transfer agency fees
applicable with respect to the Class B shares. See "Determination of Net Asset
Value".
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. If it so
qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital
gains that it distributes to Class A and Class B shareholders (together, the
"shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter as
"ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options)
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset). Any loss upon the sale or exchange of Fund
shares held for six months or less, however, will be treated as long-term
capital loss to the extent of any long-term capital gains distributions
received by the shareholder.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income or capital gain dividends. A
portion of the Fund's
37
<PAGE>
ordinary income dividends may be eligible for the dividends received deduction
allowed to corporations under the Code, if certain requirements are met. For
this purpose, the Fund will allocate dividends eligible for the dividends
received deduction between the Class A and Class B shareholders according to a
method (which it believes is consistent with the Securities and Exchange
Commission exemptive order permitting the issuance and sale of two classes of
stock) that is based on the gross income allocable to Class A and Class B
shareholders during the taxable year, or such other method as the Internal
Revenue Service may prescribe. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S.
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends and capital gain dividends and
on redemption payments ("backup withholding"). Generally, shareholders subject
to backup withholding will be those for whom no certified taxpayer
identification number is on file with the Fund or who, to the Fund's knowledge,
have furnished an incorrect number. When establishing an account, an investor
must certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Shareholders may be able to claim United States foreign tax credits with
respect to such taxes, subject to certain conditions and limitations contained
in the Code. For example, certain retirement accounts cannot claim foreign tax
credits on investments in foreign securities held in the Fund. If more than 50%
in value of the Fund's total assets at the close of its taxable year consists
of securities of foreign corporations, the Fund will be eligible, and intends,
to file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their proportionate shares
of such withholding taxes in their United States income tax returns as gross
income, treat such proportionate shares as taxes paid by them, and deduct such
proportionate shares in computing their taxable incomes or, alternatively, use
them as foreign tax credits against their United States income taxes. The Fund
will report annually to its shareholders the amount per share of such
withholding taxes. No deductions for foreign taxes, however, may be claimed by
noncorporate shareholders who do not itemize deductions. A shareholder that is
a nonresident alien individual or a foreign corporation may be subject to U.S.
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against such
U.S. tax for the foreign taxes treated as having been paid by such shareholder.
For this purpose, the Fund will allocate foreign taxes and foreign source
income between the Class A and Class B shareholders according to a method
similar to that described above for the allocation of dividends eligible for
the dividends received deduction.
If a Class A shareholder exercises the exchange privilege within 90 days of
acquiring such shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
the purchase of the new Class A shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid for the
new Class A shares.
38
<PAGE>
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income
and capital gains in the manner necessary to 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. In such event, the Fund will be liable for the tax only on the
amount by which it does not meet the foregoing distribution requirements.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may write, purchase or sell options, futures or forward foreign
exchange contracts. Options, futures and forward foreign exchange contracts
that are "Section 1256 contracts" will be "marked to market" for Federal income
tax purposes at the end of each taxable year, i.e., each such options, futures
or forward foreign exchange contract will be treated as sold for its fair
market value on the last day of the taxable year. Unless such contract is a
non-equity option or a regulated futures contract for a non-U.S. currency and
the Fund elects to have gain or loss in connection with the contract treated as
ordinary gain or loss under Code Section 988 (as described below), gain or loss
from Section 1256 contracts will be 60% long-term and 40% short-term capital
gain or loss. The mark-to-market rules outlined above, however, will not apply
to certain transactions entered into by the Fund solely to reduce the risk of
changes in price or interest or currency exchange rates with respect to its
investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options and futures contracts. Under
Section 1092, the Fund may be required to postpone recognition for tax purposes
of losses incurred in certain closing transactions in options and futures
contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income may be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an options or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stocks securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, futures, or
forward foreign exchange contracts will be valued for purposes of the RIC
diversification requirements applicable to the Fund. The Fund may request a
private letter ruling from the Internal Revenue Service on some or all of these
issues.
39
<PAGE>
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders
as ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary dividend distributions, and any distributions made
before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares. These rules and the mark-to-market
rules described above, however, will not apply to certain transactions entered
into by the Fund solely to reduce the risk of currency fluctuations with
respect to its investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action
either prospectively or retroactively.
Ordinary income and capital gains dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICS which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective shareholders. From time to time, the Fund may include the Fund's
Morningstar risk-adjusted performance ratings in advertisements or supplemental
sales literature. Total return figures are based on the Fund's historical
performance and are not intended to indicate future performance. Average annual
total return is determined separately for Class A and Class B shares in
accordance with formulas specified by the Commission.
Average annual total 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 shares and
the contingent deferred sales charge that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B shares.
40
<PAGE>
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total data since the average rates
of return reflect compounding of return; aggregate total return data generally
will be higher than average annual total return data since the aggregate rates
of return reflect compounding over a longer period of time.
Set forth below is total return information for the Class A and Class B
shares of the Fund for the periods indicated:
<TABLE>
<CAPTION>
CLASS A SHARES * CLASS B SHARES
----------------------------------- -----------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
$1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
One Year Ended October
31, 1993............... 12.93% $1,129.30 12.45% $1,124.50
Five Years Ended October
31, 1993............... 7.36% $1,426.40
Inception (February 26,
1988) to October 31,
1993................... 6.77% $1,450.60
November 4, 1988 to
October 31, 1993....... 7.53% $1,436.60
<CAPTION>
<S> <C> <C> <C> <C>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Year Ended October 31,
1993................... 17.64% $1,176.40 16.45% $1,164.50
1992................... 10.00% $1,100.00 8.77% $1,087.70
1991................... 18.09% $1,180.90 16.79% $1,167.90
1990................... (7.86)% $ 921.40 (8.68)% $ 913.20
1989................... 5.58% $1,055.80
Inception (February 26,
1988) to October 31,
1988................... 1.70% $1,017.00
November 4, 1988 to
October 31, 1989....... 6.29% $1,062.90
AGGREGATE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (February 26,
1988) to October 31,
1993................... 45.06% $1,450.60
November 4, 1988 to
October 31, 1993....... 43.66% $1,436.60
</TABLE>
- --------
* Information as to Class A shares is presented for the period November 4,
1988 to October 31, 1992. Prior to November 4, 1988, no Class A shares were
publicly issued.
41
<PAGE>
In order to reflect the reduced sales charges in the case of Class A shares
or the waiver of the contingent deferred sales charge in the case of Class B
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares", respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may take into account the
contingent deferred sales charge and therefore may reflect greater total return
since, due to the reduced sales charges or the waiver of sales charges, a lower
amount of expenses is deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on October 22, 1987. It has an
authorized capital of 200,000,000 shares of Common Stock, par value $0.10 per
share, divided into two classes, designated Class A and Class B Common Stock,
each of which consists of 100,000,000 shares. Both Class A and Class B Common
Stock represent an interest in the same assets of the Fund and are identical in
all respects except that the Class B shares bear certain expenses related to
the account maintenance and distribution of such shares and have exclusive
voting rights with respect to matters relating to such expenditures. The Fund
has received an order from the Commission permitting the issuance and sale of
two classes of Common Stock. The Board of Directors of the Fund may classify
and reclassify the shares of the Fund into additional classes of Common Stock
at a future date. The creation of additional classes would require an
additional order from the Commission. There is no assurance that such an
additional order will be issued.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act upon any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement;(iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent accountants. Generally, under Maryland law, a meeting of
shareholders may be called for any purpose on the written request of the
holders of at least 25% of the outstanding shares of the Fund. Voting rights
for Directors are not cumulative. Shares issued are fully paid and non-
assessable and have no preemptive or conversion rights. Redemption rights are
discussed elsewhere herein and in the Prospectus. Each share of Class B Common
Stock is entitled to participate equally in dividends and distributions
declared by the Fund and in the net assets of the Fund upon liquidation or
dissolution after satisfaction of outstanding liabilities. Stock certificates
will be issued by the Transfer Agent only on specific request. Certificates for
fractional shares are not issued in any case.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares for $100,000. Such shares were acquired for investment and can only be
disposed by redemption. The organizational expenses of the Fund were paid by
the Fund and are being amortized over a period not exceeding five years. The
proceeds realized by the Manager upon redemption of any of such shares will be
reduced by the proportionate amount of the unamortized organizational expenses
which the number of shares redeemed bears to the number of shares initially
purchased.
42
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A and
Class B shares of the Fund based on the projected value of the Fund's net
assets and number of shares outstanding on the balance sheet date of October
31, 1993 is as follows:
TABLE
<TABLE>
<CAPTION>
CLASS A CLASS B
---------- -----------
<S> <C> <C>
Net Assets......................................... $4,557,201 $29,831,349
========== ===========
Number of Shares Outstanding....................... 411,407 2,679,466
========== ===========
Net Asset Value Per Share (net assets divided by
number of shares outstanding)..................... $ 11.08 $ 11.13
Shares Charge (for Class A shares: 4.00% of offer-
ing price (4.17% of net asset value per share))*.. 0.46 **
---------- -----------
Offering Price..................................... $ 11.54 $ 11.13
========== ===========
</TABLE>
--------
* Rounded to the nearest one-hundredth percent; assumes maximum sales
charge is applicable.
** Class B shares are not subject to an initial sales charge but may be
subject to a contingent deferred sales charge on redemption of shares
within four years of purchase. See "Purchase of Shares--Deferred
Sales Charge Alternative--Class B Shares" herein and in the
Prospectus.
INDEPENDENT AUDITORS
Deloitte & Touche, 117 Campus Drive, Princeton, New Jersey 08540-6400, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the Fund's shareholders. The
independent auditors are responsible for auditing the annual financial
statements of the Fund.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 351, Boston, Massachusetts
02101, acts as the Custodian of the Fund's assets. The Custodian is responsible
for safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities and collecting interest and dividends on the
Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive, Jacksonville, Florida
32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "Management of
the Fund--Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
43
<PAGE>
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements
audited by independent auditors, is sent to shareholders each year. After the
end of each year, shareholders will receive Federal income tax information
regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act, to which reference is hereby made.
Under a separate agreement, Merrill Lynch & Co., Inc. has granted the Fund
the right to use the "Merrill Lynch" name and has reserved the right to
withdraw its consent to the use of such name by the Fund at any time or to
grant the use of such name to any other company, and the Fund has granted
Merrill Lynch & Co., Inc., under certain conditions, the use of any other name
it might assume in the future, with respect to any corporation organized by
Merrill Lynch & Co., Inc.
To the knowledge of the Fund, no person owned beneficially 5% or more of the
Fund's shares on February 1, 1994.
44
<PAGE>
APPENDIX
RATINGS OF DEBT SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE,
INC.'S ("MOODY'S") CORPORATE RATINGS
AAA Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
AA Bonds which are rated AA are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
BAA
Bonds which are rated BAA are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
BA Bonds which are rated BA are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
CAA Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
CA Bonds which are rated CA represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic rating
classification from AA through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
45
<PAGE>
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act of 1933, nor does it
represent that any specific note is a valid obligation of a rated issuer or
issued in conformity with any applicable law. Moody's employs the following
three designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. PRIME-1 repayment
capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well established industries
-- High rates of return on funds employed
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its Commercial Paper obligations are
supported by the credit of another entity or entities, then the name or names
of such supporting entity or entities are listed within parentheses beneath the
name of the issuer, or there is a footnote referring the reader to another page
for the name or names of the supporting entity or entities. In assigning
ratings to such issuers, Moody's evaluates the financial strength of the
indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representation and gives no opinion on the
legal validity or enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
46
<PAGE>
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds, a
variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols, presented below, are designed to avoid
comparison with bond quality in absolute terms. It should always be borne in
mind that preferred stocks occupy a junior position to bonds within a
particular capital structure and that these securities are rated within the
universe of preferred stocks.
Preferred stock rating symbols and their definitions are as follows:
AAA An issue which is rated "AAA" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
AA An issue which is rated "AA" is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the
foreseeable future.
A An issue which is rated "A" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
BAA An issue which is rated "BAA" is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length
of time.
BA An issue which is rated "BA" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
B An issue which is rated "B" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
CAA An issue which is rated "CAA" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
CA An issue which is rated "CA" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.
C This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "AA" through "B" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S ("STANDARD & POOR'S") CORPORATE
DEBT RATINGS
A Standard & Poor's corporate or municipal rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
47
<PAGE>
The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and
(3) protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard and Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded, on balance, as having
predominantly speculative characteristics with respect to capacity to
pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB- rating.
B Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity
or willingness to pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BB or BB- rating.
CCC Debt rated CCC has a current identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions
to meet timely payments of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal.
48
<PAGE>
The CCC rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied B or B- rating.
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been
filed but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is being
paid.
D Debt rated D is in payment default. The D rating category is also used
when interest payments or principal repayments are not made on the date
due even if the applicable grace period has not expired, unless Standard
& Poor's believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing with the major
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is provisional.
A provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal amount
of those bonds to the extent that the underlying deposit collateral is insured
by the Federal Savings & Loan Insurance Corp. or the Federal Deposit Insurance
Corp. and interest is adequately collateralized.
* Continuance of the rating is contingent upon Standard & Poor's receipt of
an executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.
NR Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
Debt Obligations of Issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments may impose certain
rating or other standards for obligations eligible for investment by savings
banks, trust companies, insurance companies and fiduciaries generally.
49
<PAGE>
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A-1" for
the highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1".
A-3 Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not be
higher than the bond rating symbol assigned to, or that would be assigned to,
the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment--capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable
sinking fund requirements in accordance with the terms of the
obligation.
II. Nature of, and provisions of, the issue.
III.Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
50
<PAGE>
AA A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated "AAA".
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead a weakened capacity to make
payments for a preferred stock in this category than for issues in the
"A" category.
BB B CCC
Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay
preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such
issues will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate
a particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the rating.
Preferred stock ratings are wholly unrelated to Standard & Poor's earnings and
dividend rankings for common stocks.
The ratings are based on current information furnished to Standard & Poor's
by the issuer, and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
51
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Global Convertible Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Global Convertible Fund, Inc. as
of October 31, 1993, the related statements of operations for the year then
ended and changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the five-year
period ended October 31, 1993. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1993, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Global Convertible Fund, Inc. as of October 31, 1993, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche
Princeton, New Jersey
December 8, 1993
52
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Shares Value Percent of
Industries Held Convertible Preferred Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
NORTH AMERICA
United States
Automotive 3,000 Goodrich (B.F.) Company, $3.50 Pfd., Series D $ 164,550 $ 156,000 0.45%
Parts
Chemicals 20,000 Ashland Oil Inc., $6.25 Pfd. 1,065,800 1,247,500 3.63
Data 20,000 UNISYS Corp., $3.75 Pfd., Series A 1,233,875 952,500 2.77
Processing
Food/Beverage/ 15,000 ConAgra Inc., Class E 526,200 483,750 1.41
Tobacco &
Household
Forest 15,000 Federal Paper Board Co., $2.875 Pfd. 732,450 731,250 2.13
Products/ 5,000 James River Corp. of Virginia, $3.375 Pfd., Series K 223,000 225,625 0.65
Paper & ----------- ---------- ------
Packaging 955,450 956,875 2.78
Metals & 10,000 USX Corp., $3.25 Pfd. 505,800 552,500 1.61
Mining 15,000 Wheeling-Pittsburgh Corp., Series K 768,537 993,750 2.89
----------- ---------- ------
1,274,337 1,546,250 4.50
Miscellaneous 20,000 Glendale Federal Savings Bank, 8.75% Non-Cumulative
Preferred Stock, Series E 500,000 515,000 1.50
Total Investments in United States
Convertible Preferred Stocks 5,720,212 5,857,875 17.04
<CAPTION>
Face
Amount Convertible Bonds
<S> <S> <C> <S> <C> <C> <C>
Canada
Oil & Related US$ 700,000 Amoco Canada Petro Co., Ltd., 7.375% due 9/01/2013 843,500 861,000 2.50
Total Investments in Canadian Convertible Bonds 843,500 861,000 2.50
United States 250,000 Zenith Electronics Corp., 6.25% due 4/01/2011 196,875 173,125 0.50
Appliances &
Household
Durables
Building & 500,000 Masco Corp., 5.25% due 2/15/2012 436,250 500,000 1.45
Construction
Chemicals 550,000 Witco Corp., 5.50% due 3/15/2012 471,500 588,500 1.71
Computer 500,000 Cray Research, Inc., 6.125% due 2/01/2011 510,000 437,500 1.27
Services
</TABLE>
53
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Face Value Percent of
Industries Amount Convertible Bonds Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
NORTH AMERICA (concluded)
United States
(concluded)
Electronics US$ 1,400,000 Texas Instruments, Inc., 2.75% due 9/29/2002 $ 1,361,125 $ 1,424,500 4.14%
Food & 750,000 American Brands Inc., 5.75% due 4/11/2005 877,500 866,250 2.52
Beverage
Forest 500,000 Mead Corp., 6.75% due 9/15/2012 474,750 522,500 1.52
Products/
Paper &
Packaging
Leisure 400,000 Eastman Kodak Co., 6.375% due 7/01/2001 421,000 494,000 1.44
Machinery 600,000 Trimas Corp., 5.00% due 8/01/2003 603,750 660,000 1.92
Metals & 300,000 USX Corp., 7.00% due 6/15/2017 285,600 289,500 0.84
Mining
Multi-Industry 600,000 Ogden Corp., 5.75% due 10/20/2002 559,500 570,000 1.66
Natural Gas 500,000 Consolidated Natural Gas Co., 7.25% due 12/15/2015 606,250 587,500 1.71
Oil & Related 1,600,000 Pennzoil Co., 4.75% due 10/01/2003 1,614,625 1,624,000 4.72
Real Estate 500,000 Rockefeller Center Properties, Inc., 8.00%
due 12/31/2000 520,000 490,000 1.43
Retail Stores 750,000 Home Depot Inc., 4.50% due 2/15/1997 873,750 909,375 2.65
Textiles 250,000 Fieldcrest Cannon, Inc., 6.00% due 3/15/2012 160,000 207,500 0.60
Total Investments in United States
Convertible Bonds 9,972,475 10,344,250 30.08
Total Investments in North American Securities 16,536,187 17,063,125 49.62
<CAPTION>
Shares
Held Common Stocks
<S> <S> <C> <S> <C> <C> <C>
PACIFIC BASIN
Japan
Financial 10,000 Daiwa Securities Co., Ltd. 109,055 128,406 0.37
Services 10,000 Nikko Securities Co., Ltd. 91,790 109,931 0.32
6,000 Nomura Securities Co., Ltd. 94,803 110,300 0.32
10,000 Yamaichi Securities Co., Ltd. 94,005 71,132 0.21
----------- ---------- ------
389,653 419,769 1.22
Machinery 20,000 Shimadzu Corp. 156,900 131,178 0.38
5,000 Sodick Co., Ltd. 94,250 35,751 0.11
----------- ---------- ------
251,150 166,929 0.49
Total Investments in Japanese Common Stocks 640,803 586,698 1.71
<CAPTION>
Face
Amount Convertible Bonds
<S> <S> <C> <S> <C> <C> <C>
Australia US$ 750,000 Lend Lease Finance International, 4.75%
Banking due 6/01/2003 848,437 879,375 2.56
Total Investments in Australian Convertible Bonds 848,437 879,375 2.56
Japan Yen 15,000,000 No. 2 Mazda Motors, Ltd., 1.70% due 3/31/1998 131,050 128,176 0.37
Automotive
Banking 50,000,000 No. 3 Bank of Tokyo, Ltd., 1.30% due 9/30/1994 502,107 509,007 1.48
Building & 25,000,000 No. 2 Nichiei Construction Co., Ltd., 1.50%
Construction due 4/30/1999 195,234 228,637 0.67
25,000,000 No. 2 Nichiei Construction Co., Ltd., 1.70%
due 10/31/2002 261,132 245,035 0.71
20,000,000 No. 4 Sekisui House, Ltd., 1.60% due 7/31/1996 160,119 179,400 0.52
----------- ---------- ------
616,485 653,072 1.90
</TABLE>
54
<PAGE>
<TABLE>
<S> <C> <S> <C> <C> <C>
Business 50,000,000 No. 8 SECOM, 4.20% due 9/30/1994 520,105 524,249 1.52
Services
Chemicals 20,000,000 No. 6 Sekisui Plastic Co., Ltd., 2.00% due 9/29/2000 217,190 206,928 0.60
Computer 5,000,000 No. 5 CSK Corp., 3.80% due 3/19/1999 38,344 46,559 0.13
Services 5,000,000 No. 6 CSK Corp., 3.90% due 3/20/2001 38,344 46,790 0.14
----------- ---------- ------
76,688 93,349 0.27
Electronics 15,000,000 No. 2 Kyushu Matsushita Electric Co., Inc., 1.50%
due 3/31/1999 158,941 152,425 0.44
Food & 15,000,000 No. 4 Asahi Breweries, Ltd., 2.10% due 10/21/1997 138,779 133,995 0.39
Household 35,000,000 No. 3 Itoham Foods, Inc., 1.80% due 2/28/2003 336,922 302,309 0.88
Products 45,000,000 No. 4 Kikkoman, 1.60% due 12/29/2000 468,167 455,196 1.32
30,000,000 No. 6 Meiji Milk Products, 2.10% due 9/30/2002 303,887 290,993 0.85
35,000,000 No. 2 Skylark Co., Ltd., 1.60% due 6/28/1996 305,539 326,559 0.95
----------- ---------- ------
1,553,294 1,509,052 4.39
Health & 15,000,000 No. 2 Dai-Ichi Kogyo Seiyaku Co., Ltd., 2.00%
Personal Care due 3/31/1997 162,367 137,182 0.40
15,000,000 No. 3 EISAI Co., Ltd., 4.20% due 3/31/1998 183,945 171,824 0.50
----------- ---------- ------
346,312 309,006 0.90
Leisure 30,000,000 No. 2 Tokyo Dome Co., Ltd., 1.70% due 1/31/1997 303,458 266,051 0.77
15,000,000 No. 1 Yamaha Corp., 1.40% due 3/31/1997 150,737 130,254 0.38
----------- ---------- ------
454,195 396,305 1.15
Machinery 15,000,000 No. 1 Shibuya Kogyo Co., Ltd., 2.10% due 6/28/1996 128,413 132,610 0.39
15,000,000 No. 2 Sumitomo Precision Products Co., Ltd., 2.00%
due 9/30/1997 130,739 128,868 0.37
----------- ---------- ------
259,152 261,478 0.76
Metal & 25,000,000 No. 2 Godo Steel Co., Ltd., 2.60% due 3/29/2002 256,657 250,115 0.73
Mining
Multi- 40,000,000 No. 4 Sony Corp., 1.40% due 3/31/2005 278,956 327,021 0.95
Industry
Oil & Related 20,000,000 No. 4 Nippon Oil Co., Ltd., 1.70% due 3/31/2003 147,642 162,587 0.47
Real Estate 15,000,000 No. 12 Mitsui Real Estate Development Co., Ltd.,
1.40% due 9/30/2003 148,558 123,880 0.36
Transportation 30,000,000 No. 4 All Nippon Airways Co., Ltd., 1.80%
due 3/31/2003 254,706 243,326 0.71
50,000,000 No. 6 Yamato Transport Co. Ltd., 1.70% due 9/30/2002 539,151 518,245 1.51
----------- ---------- ------
793,857 761,571 2.22
Total Investments in Japanese Convertible Bonds 6,461,189 6,368,221 18.51
Total Investments in Pacific Basin Securities 7,950,429 7,834,294 22.78
</TABLE>
55
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
WESTERN EUROPE
United Kingdom
Business 71,944 Saatchi & Saatchi Co., PLC $ 217,005 $ 196,739 0.57%
Services
Total Investments in United Kingdom Common Stocks 217,005 196,739 0.57
<CAPTION>
Face
Amount Convertible Bonds
<S> <S> <C> <S> <C> <C> <C>
France
Leisure Ffr 4,200,000 Euro Disney SCA, 6.75% due 10/01/2001 686,298 649,561 1.89
Total Investments in French Convertible Bonds 686,298 649,561 1.89
Switzerland
Banking US$ 700,000 CS Holdings, 4.875% due 11/19/2002 890,750 1,011,500 2.94
Total Investments in Swiss Convertible Bonds 890,750 1,011,500 2.94
United
Kingdom
Business Pound
Services Sterling 500,000 Hanson Trust PLC, 9.50% due 1/31/2006 869,996 902,866 2.63
Food & 500,000 Allied-Lyons PLC, 6.75% due 7/07/2008 817,944 828,557 2.41
Beverage 250,000 Northern Foods PLC, 6.75% due 8/08/2008 379,400 378,052 1.10
----------- ----------- ------
1,197,344 1,206,609 3.51
Oil &
Related 800,000 Elf Enterprise Finance, 8.75% due 6/27/2006 1,258,880 1,287,049 3.74
Transpor- 300,000 P&O Steam Navigation Co., 7.25% due 5/19/2003 477,653 479,299 1.39
tation
Total Investments in United Kingdom
Convertible Bonds 3,803,873 3,875,823 11.27
Total Investments in Western European Securities 5,597,926 5,733,623 16.67
<CAPTION>
Short-Term Securities
<S> <S> <C> <S> <C> <C> <C>
United States
Commercial
Paper* US$ 628,000 General Electric Capital Corp., 2.93% due 11/01/1993 627,898 627,898 1.83
US Government
Obligations* 2,500,000 US Treasury Bills, 3.00% due 1/13/1994 2,484,375 2,484,219 7.22
Total Investments in Short-Term Securities 3,112,273 3,112,117 9.05
Total Investments $33,196,815 33,743,159 98.12
===========
Unrealized Appreciation on Forward Foreign Exchange Contracts** 87,944 0.26
Other Assets Less Liabilities 557,447 1.62
----------- ------
Net Assets $34,388,550 100.00%
=========== ======
<FN>
*Commercial Paper and US Treasury Bills are traded on a discount basis;
the interest rates shown are the discount rates paid at the time of purchase
by the Fund.
**Forward foreign exchange contract as of October 31, 1993 is as follows:
Expiration
Foreign Currency Sold Date Appreciation
Yen 250,000,000 January 1993 $87,944
Total (US$ Commitment--$2,398,312) $87,944
=======
See Notes to Financial Statements.
</TABLE>
56
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of October 31, 1993
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$33,196,815) (Note 1a) $33,743,159
Cash 307
Unrealized appreciation on forward foreign exchange contracts (Note 1b) 87,944
Foreign demand deposits (Note 1b) 66,675
Receivables:
Interest $309,180
Capital shares sold 302,034
Dividends 4,861 616,075
--------
Prepaid registration fees and other assets (Note 1f) 52,516
-----------
Total assets 34,566,676
-----------
Liabilities: Payables:
Capital shares redeemed 56,842
Distributor (Note 2) 24,808
Investment adviser (Note 2) 18,471 100,121
--------
Accrued expenses and other liabilities 78,005
-----------
Total liabilities 178,126
-----------
Net Assets: Net assets $34,388,550
===========
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares authorized $ 41,141
Consist of: Class B Common Stock, $0.10 par value, 100,000,000 shares authorized 267,946
Paid-in capital in excess of par 33,072,579
Undistributed investment income--net 71,580
Undistributed realized capital gains on investments and foreign
currency transactions--net 303,814
Unrealized appreciation on investments and foreign currency
transactions--net 631,490
-----------
Net assets $34,388,550
===========
Net Asset Value: Class A--Based on net assets of $4,557,201 and 411,407 shares outstanding $ 11.08
===========
Class B--Based on net assets of $29,831,349 and 2,679,466 shares outstanding $ 11.13
===========
See Notes to Financial Statements.
</TABLE>
57
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended October 31, 1993
<S> <S> <C> <C>
Investment Interest and discount earned (net of $7,703 foreign withholding tax) $ 760,353
Income Dividends (net of $113 foreign withholding tax) 226,615
(Notes 1d & 1e): ----------
Total investment income 986,968
----------
Expenses: Distribution fees--Class B (Note 2) 189,770
Investment advisory fees (Note 2) 139,948
Printing and shareholder reports 82,325
Professional fees 69,351
Accounting services (Note 2) 49,224
Registration fees (Note 1f) 47,493
Directors' fees and expenses 36,395
Transfer agent fees--Class B (Note 2) 25,426
Custodian fees 19,660
Amortization of organization expenses (Note 1f) 8,247
Transfer agent fees--Class A (Note 2) 2,795
Other 5,527
----------
Total expenses 676,161
----------
Investment income--net 310,807
----------
Realized & Realized gain from:
Unrealized Gain on Investments--net $ 280,656
Investments & Foreign currency transactions 23,158 303,814
Foreign Currency
Transactions--Net Change in unrealized appreciation/depreciation on:
(Notes 1b, 1e & 3): Investments--net 2,442,681
Foreign currency transactions 64,039 2,506,720
---------- ----------
Net realized and unrealized gain on investments and foreign
currency transactions 2,810,534
----------
Net Increase in Net Assets Resulting from Operations $3,121,341
==========
See Notes to Financial Statements.
</TABLE>
58
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended
October 31,
Increase (Decrease) in Net Assets: 1993 1992
<S> <S> <C> <C>
Operations: Investment income--net $ 310,807 $ 187,183
Realized gain on investments and foreign currency transactions--net 303,814 310,130
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net 2,506,720 750,722
----------- -----------
Net increase in net assets resulting from operations 3,121,341 1,248,035
----------- -----------
Dividends & Investment income--net:
Distributions to Class A (59,079) (18,134)
Shareholders Class B (236,220) (231,397)
(Note 1g): Realized gain on investments--net:
Class A (37,814) (11,283)
Class B (223,267) (368,072)
----------- -----------
Net decrease in net assets resulting from dividends and distributions
to shareholders (556,380) (628,886)
----------- -----------
Capital Share Net increase in net assets derived from capital share transactions 15,565,778 217,975
Transactions ----------- -----------
(Note 4):
Net Assets: Total increase in net assets 18,130,739 837,124
Beginning of year 16,257,811 15,420,687
----------- -----------
End of year* $34,388,550 $16,257,811
=========== ===========
<FN>
*Undistributed investment income--net $ 71,580 $ 56,072
=========== ===========
See Notes to Financial Statements.
</TABLE>
59
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A
For the
Period
The following per share data and ratios have been derived Nov. 4,
from information provided in the financial statements. For the Year Ended 1988++ to
October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1993 1992 1991 1990 1989
<S> <S> <C> <C> <C> <C> <C>
Per Share Operating Net asset value beginning of period $ 9.79 $ 9.39 $ 8.37 $ 9.95 $ 9.97
Performance: ------- ------- ------- ------- -------
Investment income--net .23 .21 .25 .38 .39
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net++++ 1.45 .68 1.22 (1.11) .21
------- ------- ------- ------- -------
Total from investment operations 1.68 .89 1.47 (.73) .60
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.23) (.25) (.37) (.42) (.45)
------- ------- ------- ------- -------
Realized gain on investments--net (.16) (.24) (.08) (.43) (.17)
------- ------- ------- ------- -------
Total dividends and distributions (.39) (.49) (.45) (.85) (.62)
------- ------- ------- ------- -------
Net asset value, end of period $ 11.08 $ 9.79 $ 9.39 $ 8.37 $ 9.95
======= ======= ======= ======= =======
Total Investment Based on net asset value per share 17.64% 10.00% 18.09% (7.86%) 6.29%+++
Return:** ======= ======= ======= ======= =======
Ratios to Average Expenses, net of reimbursement 2.22% 2.47% 2.47% 2.39% 1.77%*
Net Assets: ======= ======= ======= ======= =======
Expenses 2.22% 2.86% 2.87% 2.39% 1.77%*
======= ======= ======= ======= =======
Investment income--net 2.36% 2.61% 3.16% 4.55% 5.62%*
======= ======= ======= ======= =======
Supplemental Data: Net assets, end of period (in thousands) $ 4,557 $ 2,283 $ 448 $ 162 $ 194
======= ======= ======= ======= =======
Portfolio turnover 26.02% 4.91% 18.02% 22.76% 15.91%
======= ======= ======= ======= =======
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class B
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1993 1992 1991 1990 1989
<S> <S> <C> <C> <C> <C> <C>
Per Share Operating Net asset value beginning of period $ 9.84 $ 9.44 $ 8.39 $ 9.95 $ 9.94
Performance: ------- ------- ------- ------- -------
Investment income--net .13 .12 .18 .29 .37
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net++++ 1.46 .67 1.20 (1.10) .17
------- ------- ------- ------- -------
Total from investment operations 1.59 .79 1.38 (.81) .54
------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net (.14) (.15) (.25) (.32) (.36)
Realized gain on investments--net (.16) (.24) (.08) (.43) (.17)
------- ------- ------- ------- -------
Total dividends and distributions (.30) (.39) (.33) (.75) (.53)
------- ------- ------- ------- -------
Net asset value, end of period $ 11.13 $ 9.84 $ 9.44 $ 8.39 $ 9.95
======= ======= ======= ======= =======
Total Investment Based on net asset value per share 16.45% 8.77% 16.79% (8.68%) 5.58%
Return:** ======= ======= ======= ======= =======
</TABLE>
60
<PAGE>
<TABLE>
<S> <S> <C> <C> <C> <C> <C>
Ratios to Average Expenses, excluding distribution fees and net of
Net Assets: reimbursement 2.26% 2.49% 2.50% 2.41% 1.63%
======= ======= ======= ======= =======
Expenses, net of reimbursement 3.26% 3.49% 3.50% 3.41% 2.63%
======= ======= ======= ======= =======
Expenses 3.26% 3.96% 3.88% 3.41% 2.97%
======= ======= ======= ======= =======
Investment income--net 1.32% 1.53% 2.25% 3.51% 3.62%
======= ======= ======= ======= =======
Supplemental Data: Net assets, end of period (in thousands) $29,831 $13,975 $14,973 $18,296 $30,813
======= ======= ======= ======= =======
Portfolio turnover 26.02% 4.91% 18.02% 22.76% 15.91%
======= ======= ======= ======= =======
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
++++Foreign currency transaction amounts have been reclassified to
conform with 1993 presentation.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Global Convertible Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a non-
diversified, open-end management investment company. The Fund
offers both Class A and Class B Shares. Class A Shares are sold
with a front-end sales charge. Class B Shares may be subject to a
contingent deferred sales charge. Both classes of shares have
identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B Shares bear certain
expenses related to the distribution of such shares and have
exclusive voting rights with respect to matters relating to such
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are
traded on stock exchanges are valued at the last sale price on the
exchange on which such securities are traded as of the close of
business on the day the securities are being valued or, lacking any
sales, at the last available bid price. Securities traded in the over-
the-counter market are valued at the last available quoted bid price
in the over-the-counter market prior to the time of valuation. In
cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the
authority of the Fund's Directors as the primary market. Securities
traded both in the over-the-counter market and on a stock exchange
are valued based upon the prices or quotes obtained from the broadest
and most representative market. Short-term securities are valued at
amortized cost which approximates market. Options which are traded on
exchanges are valued at their last sale price as of the close of such
exchanges or, lacking any sales, at the last available bid price.
Securities for which market quotations are not readily available are
valued at their fair value as determined in good faith by or under
the direction of the Fund's Directors.
(b) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing
when recognized. Assets and liabilities denominated in foreign
currencies are valued at the exchange rate at the end of the
period. Foreign currency transactions are the result of settling
(realized) or valuing (unrealized) such transactions expressed in
foreign currencies into US dollars. Realized and unrealized gains
or losses from investments include the effects of foreign
exchange rates on investments.
The Fund is authorized to enter into forward foreign exchange
contracts as a hedge against either specific transactions or
portfolio positions. Such contracts are not entered on the Fund's
records. However, the effect on operations income is recorded from
the date the Fund enters into such contracts. Premium or discount is
amortized over the life of the contracts.
(c) Options--The Fund can write covered call options and purchase
put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is sold through an exercise of an option, the
related premium received (or paid) is deducted from (or added to) the
basis of the security sold. When an option expires (or the Fund enters
into a closing transaction), the Fund realizes a gain or loss on the
option to the extent of the premiums received or paid (or gain or loss
to the extent the cost of the closing transaction exceeds the premium
paid or received).
Written and purchased options are non-income producing
investments.
61
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its taxable
income to its shareholders. Therefore, no Federal income tax provision
is required. Under the applicable foreign tax law, a withholding tax
may be imposed on interest, dividends, and capital gains at various rates.
(e) Security transactions and investment income--Security transactions
are recorded on the dates the transactions are entered into (the
trade dates). Dividend income is recorded on the ex-dividend date,
except that if the ex-dividend date has passed, certain dividends from
foreign securities are recorded as soon as the Fund is informed of the
ex-dividend date. Interest income (including amortization of discount) is
recognized on the accrual basis. Realized gains and losses on security
transactions are determined on the identified cost basis.
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by the
Fund are recorded on the ex-dividend dates.
(h) Reclassifications--Certain 1992 amounts have been reclassified to
conform to the 1993 presentation.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management ("MLAM"). MLAM is the name under
which Merrill Lynch Investment Management, Inc. ("MLIM") does
business. MLIM is an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc. The Fund also has a Distribution Agreement and
a Distribution Plan with Merrill Lynch Funds Distributor, Inc.
("MLFD" or "Distributor"), a wholly-owned subsidiary of MLIM.
MLAM is responsible for the management of the Fund's portfolio
and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund.
For such services, the Fund pays a monthly fee at the annual rate
of 0.65% of the average daily value of the Fund's net assets.
Certain of the states in which the shares of the Fund are
qualified for sale impose limitations on the expenses of the
Fund. The most restrictive annual expense limitation requires
that the Investment Adviser reimburse the Fund to the extent the
Fund's expenses (excluding interest, taxes, distribution
fees, brokerage fees and commissions, and extraordinary items)
exceed 2.5% of the Fund's first $30 million of average daily net
assets, 2.0% of the Fund's next $70 million of average daily net
assets, and 1.5% of the average daily net assets in excess thereof.
MLAM's obligation to reimburse the Fund is limited to the amount of
the management fee.
No fee payment will be made to MLAM during any fiscal year that
will cause such expenses to exceed the most restrictive expense
limitation at the time of such payment.
The Fund has adopted a Plan of Distribution (the "Plan") pursuant
to Rule 12b-1 under the Investment Company Act of 1940, pursuant
to which MLFD receives a fee from the Fund at the end of each month
at an annual rate of 1.0% of the average daily net assets of the
Class B Shares of the Fund. This fee is to compensate the Distributor
for the services it provides and the expenses borne by the Distributor
under the Distribution Agreement. As authorized by the Plan, the
Distributor has entered into an agreement with Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), an affiliate of MLIM, which provides
for the compensation of MLPF&S for providing distribution-related
services to the Fund. For the year ended October 31, 1993, MLFD earned
$189,770 under the Plan, all of which was paid to MLPF&S pursuant
to the Agreement.
For the year ended October 31, 1993, MLFD earned underwriting
discounts of $5,201, and MLPF&S earned dealer concessions of
$47,763 on sales of the Fund's Class A Shares.
MLPF&S received contingent deferred sales charges of $23,432 for
the sale of Class B Shares.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
Merrill Lynch & Co., Inc., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLIM, MLPF&S, FDS, MLFD, and/or Merrill Lynch & Co., Inc.
3. Investments:
Purchases and sales of investments, excluding short-term
securities, for the year ended October 31, 1993 were $21,208,852
and $4,198,557, respectively.
Net realized and unrealized gains (losses) as of October 31, 1993
were as follows:
Realized Unrealized
Gains Gains (Losses)
Long-term investments $280,619 $546,500
Short-term investments 37 (156)
Foreign currency transactions 23,158 (2,798)
Forward foreign exchange contracts -- 87,944
-------- --------
Total $303,814 $631,490
======== ========
As of October 31, 1993, net unrealized appreciation for Federal
income tax purposes aggregated $546,344, of which $1,463,353
related to appreciated securities and $917,009 related to
depreciated securities. At October 31, 1993, the aggregate cost
of investments for Federal income tax purposes was $33,196,815.
4. Capital Share Transactions:
Net increase in net assets derived from capital share
transactions were $15,565,778 and $217,975 for the years ended
October 31, 1993 and October 31, 1992, respectively.
Transactions in capital shares for Class A and Class B were as
follows:
Class A Shares for the Year Dollar
Ended October 31, 1993 Shares Amount
Shares sold 344,076 $ 3,672,869
Shares issued to shareholders in
reinvestment of dividends and
distributions 7,421 74,878
--------- -----------
Total issued 351,497 3,747,747
Shares redeemed (173,369) (1,757,328)
--------- -----------
Net increase 178,128 $ 1,990,419
========= ===========
Class A Shares for the Year Dollar
Ended October 31, 1992 Shares Amount
Shares sold 264,681 $ 2,546,941
Shares issued to shareholders in
reinvestment of dividends and
62
<PAGE>
distributions 2,040 18,618
--------- -----------
Total issued 266,721 2,565,559
Shares redeemed (81,135) (761,771)
--------- -----------
Net increase 185,586 $ 1,803,788
========= ===========
Class B Shares for the Year Dollar
Ended October 31, 1993 Shares Amount
Shares sold 1,924,389 $20,699,900
Shares issued to shareholders in
reinvestment of dividends and
distributions 33,583 338,734
--------- -----------
Total issued 1,957,972 21,038,634
Shares redeemed (698,109) (7,463,275)
--------- -----------
Net increase 1,259,863 $13,575,359
========= ===========
Class B Shares for the Year Dollar
Ended October 31, 1992 Shares Amount
Shares sold 511,719 $ 4,895,980
Shares issued to shareholders in
reinvestment of dividends and
distributions 43,019 388,354
--------- -----------
Total issued 554,738 5,284,334
Shares redeemed (720,408) (6,870,147)
--------- -----------
Net decrease (165,670) $(1,585,813)
========= ===========
63
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
Management of the Fund..................................................... 12
Directors and Officers.................................................... 12
Management and Advisory
Arrangements............................................................. 13
Purchase of Shares......................................................... 15
Redemption of Shares....................................................... 20
Portfolio Transactions and Brokerage....................................... 21
Determination of Net Asset Value........................................... 22
Shareholder Services....................................................... 23
Dividends, Distributions and Taxes......................................... 37
Performance Data........................................................... 40
General Information........................................................ 42
Description of Shares..................................................... 42
Computation of Offering Price Per Share................................... 43
Independent Auditors...................................................... 43
Custodian................................................................. 43
Transfer Agent............................................................ 43
Legal Counsel............................................................. 43
Reports to Shareholders................................................... 44
Additional Information.................................................... 44
Appendix................................................................... 45
Independent Auditors' Report............................................... 52
Financial Statements....................................................... 53
</TABLE>
Code #10666
Statement of
Additional Information
[ART]
- -------------------------------------------------------------------------------
MERRILL LYNCH
GLOBAL CONVERTIBLE
FUND, INC.
February 24, 1994
Distributor:
Merrill Lynch Funds
Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A)FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for each of the years in the five-year period ended
October 31, 1993 and the period February 26, 1988 (commencement of
operations) to October 31, 1988.
Contained in Part B:
Schedule of Investments as of October 31, 1993.
Statement of Assets and Liabilities as of October 31, 1993.
Statement of Operations for the year ended October 31, 1993.
Statements of Changes in Net Assets for the years ended October 31, 1993
and 1992.
Financial Highlights for each of the years in the five-year period ended
October 31, 1993.
(B)EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
1 --Articles of Incorporation of the Registrant.(a)
2 --By-Laws of Registrant.(e)
3 --None.
4 --Portions of the Articles of Incorporation and the By-Laws of the Regis-
trant defining the rights of holders of shares of the Registrant.(h)
5 --Management Agreement between Registrant and Merrill Lynch Asset Manage-
ment, Inc.(c)
6(a) --Class B Distribution Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc.(e)
(b) --Class A Distribution Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc.(f)
(c) --Letter Agreement between the Fund and Merrill Lynch Funds Distributor,
Inc. dated September 15, 1993, in connection with the Merrill Lynch Mutual
Fund Adviser program.
7 --None.
8 --Custody Agreement between Registrant and State Street Bank and Trust
Company.(e)
9(a) --Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement between Registrant and Merrill Lynch Financial Data Serv-
ice, Inc. (now known as Financial Data Services, Inc.).(c)
(b) --Agreement between Merrill Lynch & Co., Inc. and the Registrant relating to
use by Registrant of Merrill Lynch name.(e)
10 --None.
11 --Consent of Deloitte & Touche, independent auditors for the Registrant.
12 --None.
13 --Certificate of Merrill Lynch Asset Management, Inc.(e)
14(a) --Prototype Individual Retirement Account Plan, Simplified Employee Pension
Plan and Corporate Individual Retirement Account Plan available from Mer-
rill Lynch, Pierce, Fenner & Smith Incorporated.(c)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
(b) --Prototype Merrill Lynch Tax-Deferred Basic (TM) Retirement Plan available
from Merrill Lynch, Pierce, Fenner & Smith Incorporated.(d)
15(a) --Form of proposed Distribution Plan of the Registrant and Distribution Plan
Sub-Agreement.(e)
(b) --Amended and Restated Class B Distribution Plan of the Registrant and
Amended and Restated Class B Shares Distribution Plan Sub-Agreement.
16(a) --Schedule for computation of each performance quotation for Class A shares
provided in the Registration Statement in response to Item 22.(g)
(b) --Schedule for computation of each performance quotation for Class B shares
provided in the Registration Statement in response to Item 22.(f)
</TABLE>
- --------
(a) Filed on November 20, 1987 as an exhibit to the Registrant's Registration
Statement under the Securities Act of 1933.
(b) Incorporated by reference to Exhibit 14 to Post-Effective Amendment No. 3
to the Registration Statement under the Securities Act of 1933 on Form N-1
(File No. 2-60836) of Merrill Lynch Special Value Fund, Inc., filed on July
11, 1979.
(c) Incorporated by reference to Exhibit 14 to Pre-Effective Amendment No. 1 to
the Registration Statement under the Securities Act of 1933 on Form N-1
(File No. 2-74584) of Merrill Lynch Retirement Series Trust, filed on
January 26, 1982.
(d) Incorporated by reference to Exhibit 14 to Post-Effective Amendment No. 3
to the Registration Statement under the Securities Act of 1933 on Form N-1A
(File No. 2-74584) of Merrill Lynch Retirement Series Trust, filed December
29, 1983.
(e) Filed on January 25, 1988 as an Exhibit to the Registrant's Registration
Statement under the Securities Act of 1933.
(f) Filed on October 11, 1988 as an Exhibit to Post-Effective Amendment No. 2
to the Registrant's Registration Statement under the Securities Act of
1933.
(g) Filed on February 27, 1990 as an Exhibit to Post-Effective Amendment No. 4
to the Registrant's Registration Statement under the Securities Act of
1933.
(h) Reference is made to Article V, Article VI (Section 3), Article VII,
Article VIII and Article X of the Registrant's Articles of Incorporation,
previously filed as Exhibit (1), to the Registration Statement; and to
Article II, Article III (sections 1, 3, 5, 6, and 17), Article VI, Article
VII, Article XIII and Article XIV of the Registrant's By-Laws previously
filed as Exhibit (2) to the Registration Statement.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AT
TITLE OF CLASS DECEMBER 31, 1993
-------------- -----------------
<S> <C>
Class A shares of beneficial interest, par value $0.10
per share............................................. 6
Class B shares of beneficial interest, par value $0.10
per share............................................. 64
</TABLE>
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of Registrant's Bylaws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Class A and Class B Distribution
Agreements.
C-2
<PAGE>
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940, as amended, may be concerned, such
payments will be made only on the following conditions: (i) the advances must
be limited to amounts used, or to be used, for the preparation or presentation
of a defense to the action, including costs connected with the preparation of a
settlement; (ii) advances may be made only on receipt of a written promise by,
or on behalf of, the recipient to repay that amount of the advance which
exceeds the amounts to which it is ultimately determined that he is entitled to
receive from the Registrant by reason of indemnification; and (iii) (a) such
promise must be secured by a surety bond, other suitable insurance or an
equivalent form of security which assures that any repayments may be obtained
by the Registrant without delay or litigation, which bond, insurance or other
form of security must be provided by the recipient of the advance, or (b) a
majority of a quorum of the Registrant's disinterested, non-party Directors, or
an independent legal counsel in a written opinion, shall determine, based on a
review of readily available facts, that the recipient of the advance ultimately
will be found entitled to indemnification.
In Section 9 of the Class A and Class B Distribution Agreements relating to
the securities being offered hereby, the Registrant agrees to indemnify the
Distributor and each person, if any, who controls the Distributor within the
meaning of the Securities Act of 1933, as amended (the "1933 Act"), against
certain types of civil liabilities arising in connection with the Registration
Statement or Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Merrill Lynch Asset Management, L.P. (doing business as Merrill Lynch Asset
Management (the "Manager" or "MLAM")) also acts as investment adviser for the
following investment companies: Convertible Holdings, Inc., Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Balanced Fund for Investment and Retirement, Merrill Lynch
Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Holdings, Merrill Lynch Global
Resources Trust, Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Growth
Fund for Investment and Retirement, Merrill Lynch Healthcare Fund, Inc.,
Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Institutional Intermediate Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund,
C-3
<PAGE>
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch Utility Income
Fund, Inc., Merrill Lynch Variable Series Funds, Inc. and Senior Floating Rate
Fund. Fund Asset Management, L.P. ("FAM"), an affiliate of the Manager, acts as
the investment adviser for the following investment companies: Apex Municipal
Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc.,
Corporate High Yield Fund II, Inc., Financial Institutions Series Trust, Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Institutional
Tax-Exempt Fund, Merrill Lynch Multi-State Municipal Series Trust, Merrill
Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc., MuniAssets
Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund Accumulation
Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund,
Inc., MuniVest Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest
Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund,
Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania Insured Fund,
MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II, Inc., MuniYield
California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield
California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida
Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield
Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio II,
Inc., Taurus MuniCalifornia Holdings, Inc., and Taurus MuniNew York Holdings,
Inc. The address of each of these investment companies is Box 9011, Princeton,
New Jersey 08543-9011, except that the address of Merrill Lynch Funds for
Institutions Series, Merrill Lynch Institutional Intermediate Fund and Merrill
Lynch Institutional Tax-Exempt Fund is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2646. The address of the Manager and FAM is also
Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co.
Inc. ("ML&Co.") is World Financial Center, North Tower, 250 Vesey Street, New
York, New York 10281.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
December 31, 1991 for his or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of substantially all of
the investment companies described in the preceding paragraph and Messrs.
Durnin, Giordano, Monagle, Harvey and Kirstein are directors, trustees or
officers of one or more of such companies.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS
NAME POSITION(S) WITH MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------------ ----------------------------------
<S> <C> <C>
ML & Co................. Limited Partner Financial Services Holding Company
Merrill Lynch Investment Investment Advisory Services; Limited
Management, Inc........ Limited Partner Partner of FAM
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS
NAME POSITIONS WITH MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------------- ----------------------------------
<S> <C> <C>
Princeton Services, Inc.
("Princeton Services"). General Partner General Partner of FAM
Arthur Zeikel........... President President of FAM; President and Director
of Princeton Services; Director of
Merrill Lynch Funds Distributor, Inc.
("MLFD"); Executive Vice President of ML
& Co.; Executive Vice President of
Merrill Lynch
Terry K. Glenn.......... Executive Vice Executive Vice President of FAM; Executive
President Vice President and Director of Princeton
Services; President and Director of MLFD;
Director of Financial Data Services, Inc.
("FDS"); President of Princeton
Administrators
Bernard J. Durnin....... Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
Vincent R. Giordano..... Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
Elizabeth Griffin....... Senior Vice Senior Vice President of FAM
President
Norman R. Harvey........ Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
N. John Hewitt.......... Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
Philip L. Kirstein...... Senior Vice Senior Vice President, General Counsel and
President, General Secretary of FAM; Senior Vice President,
Counsel and General Counsel, Director and Secretary
Secretary of Princeton Services; Director of MLFD
Ronald M. Kloss......... Senior Vice Senior Vice President and Controller of
President and FAM; Senior Vice President and Controller
Controller of Princeton Services
Stephen M. M. Miller.... Senior Vice Executive Vice President of Princeton
President Services
Joseph T. Monagle, Jr. . Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
Gerald M. Richard....... Senior Vice Senior Vice President and Treasurer of
President and FAM; Senior Vice President and Treasurer
Treasurer of Princeton Services; Vice President and
Treasurer of MLFD
Richard L. Rufener...... Senior Vice Vice President of MLFD; Senior Vice
President President of Princeton Services
Ronald L. Welburn....... Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
Anthony Wiseman......... Senior Vice Senior Vice President of Princeton
President Services
</TABLE>
C-5
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant. MLFD acts as
the principal underwriter for each of the investment companies referred to in
the first paragraph of Item 28 except Apex Municipal Fund, Inc., CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, Convertible Holdings,
Inc., The Corporate Fund Accumulation Program, Inc., Corporate High Yield Fund,
Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., MuniAssets Fund, Inc., MuniBond Income
Fund, Inc., The Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund,
Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc.,
MuniVest California Insured Fund, Inc., MuniVest Florida Fund, MuniVest
Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York
Insured Fund, Inc., MuniVest Pennsylvania Fund, MuniYield Arizona Fund,
MuniYield Arizona Fund II, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield Florida Fund, MuniYield Florida
Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield
Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio II,
Inc., Taurus MuniCalifornia Holdings, Inc. and Taurus MuniNewYork Holdings,
Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Crook,
Aldrich, Breen, Graczyk, Wasel and Fatseas is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH MLFD WITH REGISTRANT
---- --------------------- ---------------------
<S> <C> <C>
Terry K. Glenn.............. President and Director Executive Vice
President
Arthur Zeikel............... Director President and Director
Philip L. Kirstein.......... Director None
William E. Aldrich.......... Senior Vice President None
Robert W. Crook............. Senior Vice President None
Michael J. Brady............ Vice President None
William M. Breen............ Vice President None
Sharon Creveling............ Vice President and Assistant None
Treasurer
Mark A. DeSario............. Vice President None
James T. Fatseas............ Vice President None
Stanley Graczyk............. Vice President None
Debra W. Landsman-Yaros..... Vice President None
Michelle T. Lau............. Vice President None
Gerald M. Richard........... Vice President and Treasurer Treasurer
Richard L. Rufener.......... Vice President None
Salvatore Venezia........... Vice President None
William Wasel............... Assistant Vice President None
Robert Harris............... Secretary None
</TABLE>
(c) Not applicable.
C-6
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the Rules
thereunder will be maintained at the offices of the Registrant and its
Custodian and Transfer Agent.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund--Management
and Advisory Arrangements" in the Prospectus constituting Part A of the
Registration Statement and under "Management of the Fund--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS.
Not applicable.
C-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF THE
REQUIREMENTS FOR EFFECTIVENESS OF THIS REGISTRATION STATEMENT PURSUANT TO RULE
485(B) UNDER THE SECURITIES ACT OF 1933 AND HAS DULY CAUSED THIS AMENDMENT TO
THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO, AND STATE OF NEW
JERSEY, ON THE 23RD DAY OF FEBRUARY, 1994.
Merrill Lynch Global Convertible Fund,
Inc.
(REGISTRANT)
/s/ Arthur Zeikel
By________________________________________
(ARTHUR ZEIKEL, PRESIDENT)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Arthur Zeikel President and
- ------------------------------------- Director (Principal February 23,
(ARTHUR ZEIKEL) Executive Officer) 1994
/s/ Gerald M. Richard Treasurer (Principal
- ------------------------------------- Financial and February 23,
(GERALD M. RICHARD) Accounting Officer) 1994
Kenneth S. Axelson* Director
- -------------------------------------
(KENNETH S. AXELSON)
Herbert I. London* Director
- -------------------------------------
(HERBERT I. LONDON)
Director
Robert R. Martin*
- -------------------------------------
(ROBERT R. MARTIN)
Joseph L. May* Director
- -------------------------------------
(JOSEPH L. MAY)
Andre F. Perold* Director
- -------------------------------------
(ANDRE F. PEROLD)
/s/ Arthur Zeikel
*By__________________________________ February 23,
(ARTHUR ZEIKEL, ATTORNEY-IN-FACT) 1994
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE NO.
------- --------
<C> <S> <C>
6(c) --Letter Agreement between the Fund and Merrill Lynch Funds
Distributor, Inc., dated September 15, 1993, in connection
with the Merrill Lynch Mutual Fund Adviser program.
11 --Consent of Deloitte & Touche, independent auditors for
the Registrant.
15(b) --Amended and Restated Class B Distribution Plan of the
Registrant and Amended and Restated Class B Shares
Distribution Plan Sub-Agreement.
</TABLE>
<PAGE>
GRAPHICS APPENDIX LIST
PAGE WHERE
GRAPHIC
APPEARS DESCRIPTION OF GRAPHIC OR CROSS REFERENCE
- --------------------------------------------------------------------------------
Prospectus and
Statement of Map of the World
Additional Instructions
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 99.6(c)
September 15, 1993
Merrill Lynch Funds Distributor, Inc.
Post Office Box 9011
Princeton, New Jersey 08543-9011
Each of the undersigned open-end investment companies (the "Funds") has
entered into a Distribution Agreement with Merrill Lynch Funds Distributor, Inc.
(the "Distributor"). Under the terms of such agreements, the Distributor is
authorized to offer shares of each Fund and to purchase, as principal, such
number of shares from each of the Funds as are needed to fill unconditional
orders for shares of such Fund placed with the Distributor by investors or by
securities dealers.
This letter confirms the agreement by each Fund with the Distributor that,
in connection with the Merrill Lynch Mutual Fund Adviser program, the
Distributor and its affiliate, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, are also authorized
<PAGE>
to offer and sell shares of such Fund, as agent for the Fund, to participants in
such program. This letter further confirms that the terms of the Distribution
Agreement between each Fund and the Distributor shall apply to such sales,
including terms as to the offering price of shares, the proceeds to be paid to
each Fund, the duties of the Distributor, the payment of expenses and
indemnification obligations of each Fund and the Distributor.
If the foregoing is consistent with your understanding of our agreement,
please sign and return one copy of the enclosed agreement.
Very truly yours,
The Investment Companies listed
on Schedule A hereto
By: /s/ Terry K. Glenn
---------------------------
Authorized Signatory
Accepted as of the date
set forth above
Merrill Lynch Funds Distributor, Inc.
By: /s/ Gerald M. Richard
--------------------------------
Authorized Signatory
2
<PAGE>
The Declaration of Trust establishing each investment company listed on
Schedule A hereto which has been organized as a Massachusetts trust (each, a
"Fund"), a copy of which, together with all amendments thereto, is on file in
the office of the Secretary of the Commonwealth of Massachusetts, provides that
the name 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 shall be held to any personal liability,
nor shall resort be had to their private property for the satisfaction of any
obligation or claim or otherwise in connection with the affairs of the Fund, but
the Fund estate only shall be liable.
3
<PAGE>
SCHEDULE A
----------
EQUITY FUNDS:
Merrill Lynch Balanced Fund for Investment and Retirement
Merrill Lynch Basic Value Fund, Inc.
Merrill Lynch Capital Fund, Inc.
Merrill Lynch Developing Capital Markets Fund, Inc.
Merrill Lynch Dragon Fund, Inc.
Merrill Lynch EuroFund
Merrill Lynch Fundamental Growth Fund, Inc.
Merrill Lynch Fund for Tomorrow, Inc.
Merrill Lynch Global Allocation Fund, Inc.
Merrill Lynch Global Utility Fund, Inc.
Merrill Lynch Growth Fund for Investment and Retirement
Merrill Lynch Healthcare Fund, Inc.
Merrill Lynch International Equity Fund
Merrill Lynch International Holdings, Inc.
Merrill Lynch Latin America Fund, Inc.
Merrill Lynch Natural Resources Trust
Merrill Lynch Pacific Fund, Inc.
Merrill Lynch Phoenix Fund, Inc.
Merrill Lynch Special Value Fund, Inc.
Merrill Lynch Strategic Dividend Fund
Merrill Lynch Technology Fund, Inc.
Merrill Lynch Utility Income Fund, Inc.
FIXED INCOME FUNDS:
Merrill Lynch Adjustable Rate Securities Fund, Inc.
Merrill Lynch Americas Income Fund, Inc.
Merrill Lynch Corporate Bond Fund, Inc.
Merrill Lynch Federal Securities Trust
Merrill Lynch Global Bond Fund for Investment and Retirement
Merrill Lynch Global Convertible Fund, Inc.
Merrill Lynch Short-Term Global Income Fund, Inc.
Merrill Lynch World Income Fund, Inc.
TAX-EXEMPT FIXED INCOME FUNDS:
Merrill Lynch Arizona Municipal Bond Fund
Merrill Lynch California Municipal Bond Fund
Merrill Lynch California Insured Municipal Bond Fund
Merrill Lynch Florida Municipal Bond Fund
Merrill Lynch Massachusetts Municipal Bond Fund
Merrill Lynch Michigan Municipal Bond Fund
Merrill Lynch Minnesota Municipal Bond Fund
Merrill Lynch Municipal Bond Fund, Inc.
A-1
<PAGE>
Merrill Lynch Municipal Income Fund
Merrill Lynch New Jersey Municipal Bond Fund
Merrill Lynch New York Municipal Bond Fund
Merrill Lynch North Carolina Municipal Bond Fund
Merrill Lynch Ohio Municipal Bond Fund
Merrill Lynch Pennsylvania Municipal Bond Fund
Merrill Lynch Texas Municipal Bond Fund
INSTITUTIONAL MONEY MARKET FUNDS:
Merrill Lynch Institutional Fund
Merrill Lynch Government Fund
Merrill Lynch Treasury Fund
Merrill Lynch Institutional Tax-Exempt Fund
A-2
<PAGE>
EXHIBIT 99-11
INDEPENDENT AUDITORS' CONSENT
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.:
We consent to the use in Post-Effective Amendment No. 8 to Registration
Statement No. 33-18720 of our report dated December 8, 1993 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche
Princeton, New Jersey
February 22, 1994
<PAGE>
EXHIBIT 99.15(b)
AMENDED AND RESTATED
CLASS B DISTRIBUTION PLAN
OF
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the 18th day of January, 1988, and amended and
restated as of September 18, 1992, by and between corporation (the "Fund"), and
Merrill Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H :
-------------------
WHEREAS, the Fund is engaged in business as an open-end investment company
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"); and
WHEREAS, MLFD is a securities firm engaged in the business of selling
shares of investment companies either directly to purchasers or through other
securities dealers; and
WHEREAS, the Fund has entered into a Class B Shares Distribution Agreement
with MLFD, pursuant to which MLFD acts as the exclusive distributor and
representative of the Fund in the offer and sale of Class B shares of common
stock, par value $0.10 per share (the "Class B shares"), of the Fund to the
public; and
WHEREAS, the Fund has entered into a Class B Distribution Plan (the "Prior
Plan") pursuant to Rule 12b-1 under the Investment Company Act; and
WHEREAS, the Fund desires to adopt this Amended and Restated Class B
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act, pursuant to which the Fund will pay an account maintenance fee and
a distibution fee to MLFD with respect to the Fund's Class B shares; and
WHEREAS, the Directors of the Fund have determined that there is a
reasonable likelihood that adoption of the Plan will benefit the Fund and its
Class B shareholders;
<PAGE>
NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby agrees to the terms
of, the Plan in accordance with Rule 12b-1 under the Investment Company Act on
the following terms and conditions:
1. The Fund shall pay MLFD an account maintenance fee under the Plan at
the end of each month at the annual rate of 0.25% of average daily net assets of
the Fund relating to Class B shares to compensate MLFD and securities firms with
which MLFD enters into related agreements pursuant to Paragraph 3 hereof
("Sub-Agreements") for account maintenance activities with respect to Class B
shareholders of the Fund.
2. The Fund shall pay MLFD a distribution fee under the Plan at the end
of each month at the annual rate of 0.75% of average daily net assets of the
Fund relating to Class B shares to compensate MLFD and securities firms with
which MLFD enters into related Sub-Agreements for providing sales and
promotional activities and services. Such activities and services will relate to
the sale, promotion and marketing of the Class B shares of the Fund. Such
expenditures may consist of sales commissions to financial consultants for
selling Class B shares of the Fund, compensation, sales incentives and payments
to sales and marketing personnel, and the payment of expenses incurred in its
sales and promotional activities, including advertising expenditures related to
the Fund and the costs of preparing and distributing promotional materials. The
distribution fee may also be used to pay the financing costs of carrying the
unreimbursed expenditures described in this Paragraph 2. Payment of the
distribution fee described in this Paragraph 2 shall be subject to any
limitations set forth in any applicable regulation of the National Association
of Securities Dealers, Inc.
3. The Fund hereby authorizes MLFD to enter into Sub-Agreements with
certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce,
Fenner & Smith Incorporated, to provide compensation to such Securities Firms
for activities and services of the type referred to in Paragraphs 1 and 2
hereof. MLFD may reallocate all or a portion of its account maintenance fee or
distibution fee to such Securities Firms as compensation for the above-mentioned
activities and services. Such Sub-Agreement shall provide that the Securities
Firms shall provide MLFD with such information as is reasonably necessary to
permit MLFD to comply with the reporting requirements set forth in Paragraph 4
hereof.
2
<PAGE>
4. MLFD shall provide the Fund for review by the Board of Directors, and
the Directors shall review, at least quarterly, a written report complying with
the requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period.
5. The Prior Plan has been approved by a vote of at least a majority, as
defined in the Investment Company Act, of the outstanding Class B voting
securities of the Fund. The Plan has not been submitted to the Class B
shareholders because the amendments do not materially increase the rate of
payments by the Fund provided for in the Prior Plan.
6. The Plan shall not take effect until it has been approved, together
with any related agreements, by (a) the Directors of the Fund and (b) those
Directors of the Fund who are not "interested persons" of the Fund, as defined
in the Investment Company Act, and have no direct or indirect financial interest
in the operation of this Plan or any agreements related to it (the "Rule 12b-1
Directors"), cast in person at a meeting or meetings called for the purpose of
voting on the Plan and such related agreements.
7. The Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
the Plan in Paragraph 6.
8. The Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors, or by vote of a majority of the outstanding Class B voting
securities of the Fund.
9. The Plan may not be amended to increase materially the rate of payments
by the Fund provided for herein unless such amendment is approved by at least a
majority, as defined in the Investment Company Act, of the oustanding Class B
voting securities of the Fund, and by the Directors of the Fund in the manner
provided for in Paragraph 6 hereof, and no material amendment to the Plan shall
be made unless approved in the manner provided for approval and annual renewal
in Paragraph 6 hereof.
10. While the Plan is in effect, the selection and nomination of Directors
who are not interested persons, as defined in the Investment Company Act, of the
Fund shall not be committed to the discretion of the Directors who are not
interested persons.
11. The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Paragraph 4 hereof, for a period of not less
than six years from the date of
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<PAGE>
the Plan, or the agreements or such report, as the case may be, the first two
years in an easily accessible place.
IN WITNESS WHEREOF, the parties hereto have executed this Plan as of the
date first above written.
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
By /s/ Jerry Weiss
----------------------------------------
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By /s/ Mark A. DeSario
----------------------------------------
<PAGE>
AMENDED AND RESTATED
CLASS B SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the 18th day of January, 1988, and amended and
restated as of September 18, 1992, by and between Merrill Lynch Funds
Distributor, Inc. ("MLFD"), and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (the "Securities Firm").
W I T N E S S E T H :
-------------------
WHEREAS, MLFD has entered into an agreement with Merrill Lynch Global
Convertible Fund, Inc., a Maryland corporation (the "Fund"), pursuant to which
it acts as the exclusive distributor for the sale of Class B shares of common
stock, par value $0.10 per share (the "Class B shares"), of the Fund; and
WHEREAS, MLFD and the Fund have entered into an Amended and Restated
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940 (the "Act") pursuant to which MLFD receives an account
maintenance fee from the Fund at the annual rate of 0.25% of average daily net
assets of the Fund relating to Class B shares of the Fund and a distribution fee
from the Fund at the annual rate of 0.75% of average daily net assets of the
Fund relating to Class B shares for providing sales and promotional activities
and services related to the distibution of Class B shares of the Fund; and
WHEREAS, MLFD desires the Securities Firm to perform certain account
maintenance activities and sales and promotional activities and services for
the Fund's Class B shareholders and the Securities Firm is willing to perform
such activities and services;
NOW, THEREFORE, in consideration of the mutal covenants contained herein,
the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenace activities with
respect to the Class B shares of the Fund of the types referred to in Paragraph
1 of the Plan.
2. The Securities Firm shall provide sales and promotional activities and
services with respect to the sale of the Class B shares of the Fund, and incur
distribution expenditures, of the types referred to in Paragraph 2 of the Plan.
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<PAGE>
3. As compensation for its activities and services performed under this
Sub-Agreement, MLFD shall pay the Securities Firm an account maintenance fee and
a distribution fee at the end of each calendar month in an amount agreed upon by
the parties hereto.
4. The Securities Firm shall provide MLFD, at least quarterly, such
information as reasonably requested by MLFD to enable MLFD to comply with the
reporting requirements of Rule 12b-1 regarding the disbursement of the account
maintenance fee and the distribution fee during such period referred to in
Paragraph 4 of the Plan.
5. This Sub-Agreement shall not take effect until it has been approved by
votes of a majority of both (a) the Directors of the Fund and (b) those
Directors of the Fund who are not "interested persons" of the Fund, as defined
in the Act, and have no direct or indirect financial interest in the operation
of the Plan, this Agreement or any agreements related to the Plan or this
Agreement (the "Rule 12b-1 Directors"), cast in person at a meeting or meetings
called for the purpose of voting on this Agreement.
6. This Agreement shall continue in effect for as long as such continuance
is specfically approved at least annually in the manner provided for approval of
the Plan in Paragraph 6.
7. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Plan or any amendment to
the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By /s/ Mark A. DeSario
------------------------------------
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By /s/ David Conine
-----------------------------------
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