<PAGE> 1
As filed with the Securities and Exchange Commission on February 24, 1995.
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. / /
Post-Effective Amendment No. 10 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 11 /X/
(Check appropriate box or boxes)
---------------------
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------------
COPIES TO:
<TABLE>
<S> <C>
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK, 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR.
</TABLE>
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)
/ / on (date) pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
/ / this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
---------------------
The Registrant has registered an indefinite number of its shares 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 22, 1994.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
FORM N-1A
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
- --------- ---------------------------------------
<C> <S> <C>
PART A
1. Cover Page............................. Cover Page
2. Synopsis............................... Fee Table
3. Condensed Financial Information........ Financial Highlights; Performance Data
4. General Description of Registrant...... Cover Page; Investment Objective and
Policies; Additional Information
5. Management of the Fund................. Fee Table; Management of the Fund;
Inside Back Cover Page
5A. Management's Discussion of Fund
Performance.......................... Not Applicable
6. Capital Stock and Other Securities..... Cover Page; Additional Information
7. Purchase of Securities Being Offered... Cover Page; Merrill Lynch Select
Pricing(SM) System; Fee Table; Purchase
of Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
8. Redemption or Repurchase............... Merrill Lynch Select Pricing(SM) System;
Fee Table; Purchase of Shares;
Redemption of Shares
9. Pending Legal Proceedings.............. Not Applicable
PART B
10. Cover Page............................. Cover Page
11. Table of Contents...................... Back Cover Page
12. General Information and History........ Not Applicable
13. Investment Objective and Policies...... Investment Objective and Policies
14. Management of the Fund................. Management of the Fund
15. Control Persons and Principal Holders
of Securities........................ Management of the Fund; Additional
Information
16. Investment Advisory and Other
Services............................. Management of the Fund; Purchase of
Shares; General Information
17. Brokerage Allocation and Other
Practices............................ Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities..... General Information
19. Purchase, Redemption and Pricing of
Securities Being Offered............. Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services
20. Tax Status............................. Dividends, Distributions and Taxes
21. Underwriters........................... Purchase of Shares
22. Calculation of Performance Data........ Performance Data
23. Financial Statements................... Financial Statements
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE> 3
PROSPECTUS
FEBRUARY 24, 1995
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Global Convertible Fund, Inc. (the "Fund") is a mutual fund
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.
------------------------
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund
offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. The Merrill Lynch Select Pricing
System permits an investor to choose the method of purchasing shares that the
investor believes is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other relevant
circumstances. See "Merrill Lynch Select Pricing(SM) System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 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 $100 and the minimum subsequent purchase is $1.
Merrill Lynch may charge its customers a processing fee (presently $4.85) for
confirming purchases and repurchases. Purchases and redemptions directly through
the Fund's transfer agent are not subject to the processing fee. See "Purchase
of Shares" and "Redemption of Shares".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated February 24, 1995 (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> 4
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(A) CLASS B(B) CLASS C CLASS D
----------- -------------------------------- ------------ -----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price).... 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on Dividend
Reinvestments.......................... None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption 1.0% for
proceeds, whichever is lower).......... None(d) 4.0% during the first year, one year None(d)
decreasing 1.0% annually to 0.0%
after the fourth year
Exchange Fee............................. None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)(E):
Investment Advisory Fees(f)............ 0.65% 0.65% 0.65% 0.65%
12b-1 Fees(g):
Account Maintenance Fees............. None 0.25% 0.25% 0.25%
Distribution Fees.................... None 0.75% 0.75% None
(Class B shares convert to Class
D
shares automatically after
approximately eight years and
cease being subject to
distribution fees)
Other Expenses:
Custodial Fees....................... 0.06% 0.06% 0.06% 0.06%
Shareholder Servicing Costs(h)....... 0.13% 0.16% 0.16% 0.13%
Other................................ 0.82% 0.82% 0.82% 0.82%
----- ----- ----- -----
Total Other Expenses............. 1.01% 1.04% 1.04% 1.01%
----- ----- ----- -----
Total Fund Operating Expenses............ 1.66% 2.69% 2.69% 1.91%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and investment programs. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 25.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 27.
(c) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 25.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that purchases of $1,000,000 or more which may not
be subject to an initial sales charge may instead be subject to a CDSC if
redeemed within the first year after purchase.
(e) Information for Class A and Class B shares is stated for the fiscal year
ended October 31, 1994. Information under "Other Expenses" for Class C and
Class D shares is estimated for the fiscal year ending October 31, 1995.
(f) See "Management of the Fund -- Management and Advisory Arrangements" -- page
21.
(g) See "Purchase of Shares -- Distribution Plans" -- page 30.
(h) See "Management of the Fund -- Transfer Agency Services" -- page 23.
2
<PAGE> 5
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $52.50 initial sales
charge (Class A and Class D shares only) and assuming
(1) the Total Fund Operating Expenses for each class set
forth above;
(2) a 5% annual return throughout the periods and (3)
redemption at the end of the period:
Class A.............................................. $68 $102 $138 $239
Class B.............................................. $67 $104 $142 $284*
Class C.............................................. $37 $ 84 $142 $302
Class D.............................................. $71 $109 $150 $264
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of
the period:
Class A.............................................. $68 $102 $138 $239
Class B.............................................. $27 $ 84 $142 $284*
Class C.............................................. $27 $ 84 $142 $302
Class D.............................................. $71 $109 $150 $264
</TABLE>
- ---------------
* Assumes conversion to Class D shares approximately eight years after purchase.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission ("Commission") regulations. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL
RATE OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATE OF RETURN MAY BE MORE OR LESS
THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C shareholders
who hold their shares for an extended period of time may pay more in Rule 12b-1
distribution fees than the economic equivalent of the maximum front-end sales
charge permitted under the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. ("NASD"). Merrill Lynch may charge its customers a
processing fee (presently $4.85) for confirming purchases and repurchases.
Purchases and redemptions directly through the Fund's transfer agent are not
subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares".
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing(SM) System is used by more than
50 mutual funds advised by Merrill Lynch Asset Management, L.P. ("MLAM" or the
"Manager") or an affiliate of MLAM, Fund Asset Management, L.P. ("FAM"). Funds
advised by MLAM or FAM are referred to herein as "MLAM-advised mutual funds".
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are
3
<PAGE> 6
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on the Class D shares, are imposed directly against those
classes and not against all assets of the Fund and, accordingly, such charges
will not affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by the Fund for
each class of shares will be calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Each class has different exchange privileges.
See "Shareholder Services -- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing System, followed
by a more detailed description of each class and a discussion of the factors
that investors should consider in determining the method of purchasing shares
under the Merrill Lynch Select Pricing System that the investor believes is the
most beneficial under his particular circumstances. More detailed information as
to each class of shares is set forth under "Purchase of Shares".
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.75% B shares convert to
years, D shares automatically
at a rate of 4.0% during after approximately
the first year, decreasing eight years(4)
1.0%
annually to 0.0%
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- -------------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. Contingent deferred sales charges ("CDSCs") are imposed
if the redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a CDSC if redeemed within one year. See
"Class A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period for
the shares acquired.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors
4
<PAGE> 7
that currently own Class A shares in a shareholder account are
entitled to purchase additional Class A shares in that account. Other
eligible investors include certain retirement plans and participants
in certain investment programs. In addition, Class A shares will be
offered to Merrill Lynch & Co., Inc. ("ML & Co.") and its
subsidiaries (the term "subsidiaries" when used herein with respect
to ML & Co. includes FAM, the Manager and certain other entities
directly or indirectly wholly-owned and controlled by ML & Co.), and
their directors and employees and to members of the Boards of
MLAM-advised mutual funds. The maximum initial sales charge is 5.25%,
which is reduced for purchases of $25,000 and over. Purchases of
$1,000,000 or more may not be subject to an initial sales charge, but
if the initial sales charge is waived such purchases may be subject
to a CDSC of 1.0% if the shares are redeemed within one year after
purchase. Sales charges are also reduced under a right of
accumulation which takes into account the investor's holdings of all
classes of all MLAM-advised mutual funds. See "Purchase of Shares --
Initial Sales Charge Alternatives -- Class A and Class D Shares".
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%,
an ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to the Class B shares, and a CDSC if they are redeemed
within four years of purchase. Approximately eight years after
issuance, Class B shares will convert automatically into Class D
shares of the Fund, which are subject to an account maintenance fee
but no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares
of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, as will the Class D account
maintenance fee of the acquired fund upon the conversion, and the
holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired. Automatic conversion of Class
B shares into Class D shares will occur at least once a month on the
basis of the relative net asset values of the shares of the two
classes on the conversion date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D
shares will not be deemed a purchase or sale of the shares for Federal
income tax purposes. Shares purchased through reinvestment of
dividends on Class B shares also will convert automatically to Class D
shares. The conversion period for dividend reinvestment shares and for
certain retirement plans is modified as described under "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Conversion of Class B Shares to Class D Shares".
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to the Class C shares. Class C shares are also
subject to a CDSC if they are redeemed within one year of purchase.
Although Class C shares are subject to a 1.0% CDSC for only one year
(as compared to four years for Class B), Class C shares have no
conversion feature and, accordingly, an investor that purchases Class
C shares will be subject to distribution fees that will be imposed on
Class C shares for an indefinite period subject to annual approval by
the Fund's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge, but if the initial sales charge is waived
such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. The schedule of initial sales
charges and reductions for Class D shares is the same as the schedule
for Class A shares. Class D shares also will be issued upon
5
<PAGE> 8
conversion of Class B shares as described above under "Class B". See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A
and Class D Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the deferred sales charges imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
also may elect to purchase Class A or Class D shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class B or
Class C shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Although some investors that previously
purchased Class A shares may no longer be eligible to purchase Class A shares of
other MLAM-advised mutual funds, those previously purchased Class A shares,
together with Class B, Class C and Class D share holdings, will count toward a
right of accumulation which may qualify the investor for reduced initial sales
charges on new initial sales charge purchases. In addition, the ongoing Class B
and Class C account maintenance and distribution fees will cause Class B and
Class C shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class D account
maintenance fees will cause Class D shares to have a higher expense ratio, pay
lower dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately eight years, and thereafter investors will be
subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forego the Class B conversion feature, making their investment
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See "Purchase of Shares -- Limitations on the Payment of Deferred
Sales Charges".
6
<PAGE> 9
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. Audited financial statements for
the year ended October 31, 1994 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 OCTOBER 31, FOR THE YEAR ENDED OCTOBER 31,
-------------------------------------------------------- ----------------------------------------
1994 1993 1992 1991 1990 1989+ 1994 1993 1992 1991
------ ------ ------ ------ ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................. $11.08 $ 9.79 $ 9.39 $ 8.37 $ 9.95 $ 9.97 $ 11.13 $ 9.84 $ 9.44 $ 8.39
------ ------ ------ ------ ------ ------ ------- ------- ------- -------
Investment income--net..... .33 .23 .21 .25 .38 .39 .21 .13 .12 .18
Realized and unrealized
gain (loss) on investments
and foreign currency
transactions--net......... (.27) 1.45 .68 1.22 (1.11) .21 (.25) 1.46 .67 1.20
------ ------ ------ ------ ------ ------ ------- ------- ------- -------
Total from investment
operations................ .06 1.68 .89 1.47 (.73) .60 (.04) 1.59 .79 1.38
------ ------ ------ ------ ------ ------ ------- ------- ------- -------
Less dividends and
distributions:
Investment income--net.... (.30) (.23) (.25) (.37) (.42) (.45) (.20) (.14) (.15) (.25)
Realized gain on
investments--net........ (.09) (.16) (.24) (.08) (.43) (.17) (.09) (.16) (.24) (.08)
------ ------ ------ ------ ------ ------ ------- ------- ------- -------
Total dividends and
distributions............. (.39) (.39) (.49) (.45) (.85) (.62) (.29) (.30) (.39) (.33)
------ ------ ------ ------ ------ ------ ------- ------- ------- -------
Net asset value, end of
period.................... $10.75 $11.08 $ 9.79 $ 9.39 $ 8.37 $ 9.95 $ 10.80 $ 11.13 $ 9.84 $ 9.44
======= ======= ======= ======= ======= ======= ======== ======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value
per share................. 0.61% 17.64% 10.00% 18.09% (7.86)% 6.29%# (0.37)% 16.45% 8.77% 16.79%
======= ======= ======= ======= ======= ======= ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
distribution fees and net
of reimbursement.......... 1.66% 2.22% 2.47% 2.47% 2.39% 1.77%* 1.69% 2.26% 2.49% 2.50%
======= ======= ======= ======= ======= ======= ======== ======== ======== ========
Expenses, net of
reimbursement............. 1.66% 2.22% 2.47% 2.47% 2.39% 1.77%* 2.69% 3.26% 3.49% 3.50%
======= ======= ======= ======= ======= ======= ======== ======== ======== ========
Expenses................... 1.66% 2.22% 2.86% 2.87% 2.39% 1.77%* 2.69% 3.26% 3.96% 3.88%
======= ======= ======= ======= ======= ======= ======== ======== ======== ========
Investment income--net..... 2.97% 2.36% 2.61% 3.16% 4.55% 5.62%* 1.95% 1.32% 1.53% 2.25%
======= ======= ======= ======= ======= ======= ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)............ $7,850 $4,557 $2,283 $ 448 $ 162 $ 194 $53,121 $29,831 $13,975 $14,973
======= ======= ======= ======= ======= ======= ======== ======== ======== ========
Portfolio turnover......... 38.04% 26.02% 4.91% 18.02% 22.76% 15.91% 38.04% 26.02% 4.91% 18.02%
======= ======= ======= ======= ======= ======= ======== ======== ======== ========
<CAPTION>
1990 1989 1988++
------- ------- -------
<S> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................. $ 9.95 $ 9.94 $ 10.00
------- ------- -------
Investment income--net..... .29 .37 .27
Realized and unrealized
gain (loss) on investments
and foreign currency
transactions--net......... (1.10) .17 (.10)
------- ------- -------
Total from investment
operations................ (.81) .54 .17
------- ------- -------
Less dividends and
distributions:
Investment income--net.... (.32) (.36) (.23)
Realized gain on
investments--net........ (.43) (.17) --
------- ------- -------
Total dividends and
distributions............. (.75) (.53) (.23)
------- ------- -------
Net asset value, end of
period.................... $ 8.39 $ 9.95 $ 9.94
======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value
per share................. (8.68)% 5.58% 1.70%#
======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, excluding
distribution fees and net
of reimbursement.......... 2.41% 1.63% 1.48%*
======== ======== ========
Expenses, net of
reimbursement............. 3.41% 2.63% 2.48%*
======== ======== ========
Expenses................... 3.41% 2.97% 2.60%*
======== ======== ========
Investment income--net..... 3.51% 3.62% 3.74%*
======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)............ $18,296 $30,813 $41,232
======== ======== ========
Portfolio turnover......... 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.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
7
<PAGE> 10
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS C CLASS D
---------------------- ----------------------
FOR THE PERIOD FOR THE PERIOD
OCTOBER 21, 1994+++ OCTOBER 21, 1994+++
INCREASE (DECREASE) IN NET ASSET VALUE: TO OCTOBER 31, 1994## TO OCTOBER 31, 1994# #
---------------------- ----------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................................ $10.74 $10.69
------ ------
Realized and unrealized gain (loss) on investments and foreign
currency transactions--net........................................ .07 .07
------ ------
Total from investment operations.................................... .07 .07
------ ------
Net asset value, end of period...................................... $10.81 $10.76
===================== =====================
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.................................. 0.65%# 0.65%#
===================== =====================
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fees............................... 4.64%* 4.88%*
===================== =====================
Expenses............................................................ 5.64%* 5.13%*
===================== =====================
Investment income--net.............................................. (1.74)%* (1.24)%*
===================== =====================
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............................ $ 203 $ 179
===================== =====================
Portfolio turnover.................................................. 38.04% 38.04%
===================== =====================
</TABLE>
+ Class A shares commenced operations on November 4, 1988.
++ Class B shares commenced operations on February 26, 1988.
+++ Class C shares and Class D shares commenced operations on October 21, 1994.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
# # Based on average shares outstanding during the period.
8
<PAGE> 11
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 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
9
<PAGE> 12
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.
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, i.e., fixed
income and the right to acquire equity securities. See "Convertible Securities"
below for additional information concerning convertible securities and synthetic
convertible securities eligible for purchase by the Fund.
The Fund believes that the characteristics of convertible securities make
them appropriate investments for an investment company seeking a high total
return from capital appreciation and investment income.
10
<PAGE> 13
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 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
11
<PAGE> 14
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.
The table below shows, by Standard & Poor's Ratings Group ("S&P") rating
category, the ratings of convertible securities held by the Fund as of January
31, 1995 as percentages of total net assets.*
<TABLE>
<CAPTION>
S&P RATED UNRATED
------------------------------------------------------------------ --------
<S> <C>
AAA, 0.00%; AA, 9.76%; A, 17.01%;
BBB, 19.33%; BB, 6.52%; B, 5.55% 27.02%**
</TABLE>
- ---------------
* Convertible securities comprised 85.19% of the total net assets of the Fund
as of January 31, 1995.
** Percentage of the portfolio of the Fund that consisted of convertible
securities that were not rated by S&P as of January 31, 1995.
For a description of the above referenced ratings, see the appendix to the
Statement of Additional Information. The Fund has established no rating criteria
for the securities in which it may invest and such securities may not be rated
at all for creditworthiness. The above percentages are as of January 31, 1995;
the rating composition of the portfolio of the Fund may vary over time.
CONVERTIBLE SECURITIES
Set forth below is additional information concerning traditional
convertible securities and "synthetic" convertible securities.
Convertible securities are issued and traded in a number of securities
markets. For the past several years, the principal markets have been the United
States, the Euromarket and Japan. Issuers during this period have included major
corporations domiciled in the United States, Japan, France, Switzerland, Canada
and the United Kingdom. Since the Fund will invest a substantial portion of its
assets in the United States market and the Euromarket, where convertible bonds
have been primarily denominated in the United States dollar, it is expected that
ordinarily a substantial portion of the convertible securities held by the Fund
will be denominated in United States dollars. However, the underlying equity
securities typically will be quoted in the currency of the country where the
issuer is domiciled. With respect to convertible securities denominated in a
currency different from that of the underlying equity securities, the conversion
price may be based on a fixed exchange rate established at the time the security
is issued. As a result, fluctuations in the exchange rate between the currency
in which the debt security is denominated and the currency in which the share
price is quoted will affect the value of the convertible security. As described
below, the Fund is authorized to enter into foreign currency hedging
transactions in which it may seek to reduce the impact of such fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent interest rates change, the investment value of
12
<PAGE> 15
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.
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.
13
<PAGE> 16
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 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
14
<PAGE> 17
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.
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
15
<PAGE> 18
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 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
16
<PAGE> 19
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 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
17
<PAGE> 20
yen relative to the dollar will tend to be offset by an increase in the value of
the put option. To offset, in whole or in part, the cost of acquiring such a put
option, the Fund may also sell a call option which, if exercised, requires it to
sell a specified amount of pounds for dollars at a specified price by a future
date (a technique called a "straddle"). By selling such call option in this
illustration, the Fund gives up the opportunity to profit without limit from
increases in the relative value of the yen to the dollar. The Manager believes
that "straddles" of the type which may be utilized by the Fund constitute
hedging transactions and are consistent with the policies described above.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or sell a currency at a fixed price on a future date (with exchange-traded
contracts and OTC options having the characteristics described above). A futures
contract on a foreign currency is an agreement between two parties to buy and
sell a specified amount of a currency for a set price on a future date. Futures
contracts and options on futures contracts are traded on boards of trade of
futures exchanges. The Fund will not speculate in foreign currency options,
futures or related options. Accordingly, the Fund will not hedge a currency
substantially in excess of the market value of securities that it has committed
or anticipates to purchase that are denominated in such currency, and in the
case of securities that have been sold by the Fund but not yet delivered, the
proceeds thereof in its denominated currency. The Fund may not incur potential
net liabilities of more than 20% of its total assets from foreign currency
options, futures or related options.
Restrictions on the Use of Futures Transactions. Under regulations of the
Commodity Futures Trading Commission ("CFTC"), the futures trading activities
described herein will not result in the Fund being deemed to be a "commodity
pool", as defined under such regulations, provided that the Fund adheres to
certain restrictions. In particular, the Fund may purchase and sell futures
contracts and options thereon (i) only for bona fide hedging purposes, and (ii)
for non-hedging purposes, if the aggregate initial margins and premiums required
to establish positions in such contracts and options does not exceed 5% of the
liquidation value of the Fund's portfolio assets after taking into account
unrealized profits and unrealized losses on any such contracts and options.
(However, as stated above, the Fund intends to engage in such options and
futures transactions only for hedging purposes.) Margin deposits may consist of
cash or securities acceptable to the broker and the relevant contract market.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., high grade commercial paper and daily tender adjustable
notes) or short-term high-grade fixed-income securities in a segregated account
with the Fund's Custodian so that the amount so segregated, plus the amount of
initial and variation margin held in the account of its broker, equals the
market value of the futures 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).
18
<PAGE> 21
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.
19
<PAGE> 22
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. The Fund may invest in money market securities
pursuant to repurchase agreements. Repurchase agreements may be entered into
only with a member bank of the Federal Reserve System or a primary dealer in
United States Government securities or an affiliate thereof. Under such
agreements, the bank or primary dealer or an affiliate thereof agrees, upon
entering into the contract, to repurchase the security at a mutually agreed upon
time and price, thereby determining the yield during the term of the agreement.
This results in a fixed rate of return insulated from market fluctuations during
such period. In the case of repurchase agreements, the prices at which the
trades are conducted do not reflect accrued interest on the underlying
obligation. Such agreements usually cover short periods, such as under one week.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In the case of a repurchase agreement, the Fund will require the seller to
provide additional collateral if the market value of the securities falls below
the repurchase price at any time during the term of the repurchase agreement. In
the event of default by the seller under a repurchase agreement construed to be
a collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with disposition of the collateral. In the event of a
default under such a repurchase agreement, instead of the contractual fixed
rate, the rate of return to the Fund shall be dependent upon intervening
fluctuations of the market value of such security and the accrued interest on
the security. In such event, the Fund would have rights against the seller for
breach of contract with respect to any losses arising from market fluctuations
following the failure of the seller to perform. The Fund may not invest in
repurchase agreements maturing in more than seven days if such
20
<PAGE> 23
investments, together with the Fund's other illiquid investments, would exceed
15% (10% to the extent required by certain state laws) of the Fund's total
assets.
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio with a value not exceeding 33 1/3% of its total
assets to banks, brokers and other financial institutions and receive collateral
in cash or securities issued or guaranteed by the United States Government. Such
collateral will be maintained at all times in an amount equal to at least 100%
of the current market value of the loaned securities. During the period of such
a loan, the Fund receives the income on the loaned securities and either
receives the income on the collateral or other compensation, i.e., negotiated
loan premium or fee, for entering into the loan and thereby increases its yield.
In the event that the borrower defaults on its obligation to return borrowed
securities, because of insolvency or otherwise, the Fund could experience delays
and costs in gaining access to the collateral and could suffer a loss to the
extent that the value of the collateral falls below the market value of the
borrowed securities.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
Among the more significant restrictions, the Fund may not borrow amounts in
excess of 33 1/3% of its total assets taken at market value (including the
amount borrowed), and an additional 5% of its total assets for temporary
purposes. As a non-fundamental restriction, the Fund is further limited and may
not borrow amounts in excess of 20% of its total assets taken at market value
(including the amount borrowed), and then only from banks as a temporary measure
for extraordinary or emergency purposes.
Investors are referred to the Statement of Additional Information for a
complete description of such restrictions and policies.
MANAGEMENT OF THE FUND
DIRECTORS
The Directors of the Fund consist of five individuals, four 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 MLAM and FAM;
President and Director of Princeton Services, Inc.; Executive Vice President of
Merrill Lynch; Executive Vice President of Merrill Lynch & Co., Inc. ("ML &
Co."); Director of Merrill Lynch Funds Distributor, Inc.
HERBERT I. LONDON -- John M. Olin Professor of Humanities, Gallatin
Division of New York University.
ROBERT R. MARTIN -- Director, WTC Industries, Inc.
21
<PAGE> 24
JOSEPH L. MAY -- Attorney in private practice.
ANDRE F. PEROLD -- Professor, Harvard Business School.
- ---------------
*Interested person, as defined by the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Manager, which is an affiliate of FAM and is owned and controlled by ML
& Co., a financial services holding company, acts as the Manager for the Fund
and provides the Fund with management and investment advisory services. The
Manager or FAM acts as the investment adviser for more than 130 other registered
investment companies. The Manager also offers portfolio management and portfolio
analysis services to individuals and institutions. As of January 31, 1995, the
Manager and FAM had a total of approximately $166.5 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, 1994 the
fee paid by the Fund to the Manager was $285,526 (based upon average net assets
of approximately $43.8 million). Of this amount, none was reimbursed by the
Manager to the Fund pursuant to certain operating expense limitations. At
January 31, 1995, the net assets of the Fund aggregated approximately $101.4
million. At this asset level, the annual management fee would aggregate
approximately $659,253. 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, 1994, the
Fund reimbursed the Manager $66,982 for accounting services. For the year ended
October 31, 1994, the annualized ratio of total expenses, net of distribution
fees, to average net assets was 1.66% for the Class A shares, 1.69% for the
Class B shares; 4.64% for the Class C shares and 4.88% for the Class D shares.
22
<PAGE> 25
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-l of the Investment Company Act which incorporates the Code of Ethics of the
Manager (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Manager and, as described below,
impose additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security which at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Manager.
Furthermore, the Codes provide for trading "blackout periods" which prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a
wholly-owned subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant
to a transfer agency, dividend disbursing agency and shareholder servicing
agency agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer
Agency Agreement, the Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Fund pays the Transfer
Agent a fee of $11.00 per Class A or Class D shareholder account and $14.00 per
Class B or Class C shareholder account and the Transfer Agent is entitled to
reimbursement from the Fund for out-of-pocket expenses incurred by the Transfer
Agent under the Transfer Agency Agreement. For the year ended October 31, 1994,
the Fund paid the Transfer Agent $69,983 pursuant to the Transfer Agency
Agreement for providing transfer agency services. At January 31, 1995, the Fund
had 2,382 Class A shareholder accounts, 14,358 Class B shareholder accounts, 779
Class C shareholder accounts and 336 Class D shareholder accounts. At this level
of accounts, the annual fee payable to the Transfer Agent would aggregate
approximately $241,816, plus miscellaneous and out-of-pocket expenses.
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. Shares of the Fund are offered continuously for sale by the
Distributor and other eligible securities dealers (including Merrill Lynch).
Shares of the Fund may be purchased from securities dealers or by mailing a
purchase order directly to the Transfer Agent. The minimum initial purchase is
$1,000 and the minimum subsequent purchase is $50, except for retirement plans,
the minimum initial purchase is $100, and the minimum subsequent purchase is $1.
The Fund is offering its shares in four classes, at a public offering price
equal to the next determined net asset value per share plus sales charges which
are imposed either at the time of purchase or on a deferred basis, depending
upon the class of shares selected by the investor under the Merrill Lynch Select
Pricing(SM) System, as
23
<PAGE> 26
described below. The applicable offering price for purchase orders is based upon
the net asset value of the Fund next determined after receipt of the purchase
order by the Distributor. As to purchase orders received by securities dealers
prior to the close of business on the New York Stock Exchange (generally, 4:00
P.M., New York time), which includes orders received after the close of business
on the previous day, the applicable offering price will be based on the net
asset value determined as of 15 minutes after the close of business on the New
York Stock Exchange on that day, provided the Distributor in turn receives the
order from the securities dealer prior to 30 minutes after the close of business
on the New York Stock Exchange on that day. If the purchase orders are not
received prior to 30 minutes after the close of business on the New York Stock
Exchange, such orders shall be deemed received on the next business day. The
Fund or the Distributor may suspend the continuous offering of the Fund's shares
of any Class at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any order
may be rejected by the Distributor or the Fund. Neither the Distributor nor the
dealers are permitted to withhold placing orders to benefit themselves by a
price change. Merrill Lynch may charge its customers a processing fee (presently
$4.85) to confirm a sale of shares to such customers. Purchases directly through
the Fund's Transfer Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives and shares of Class
B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a contingent deferred sales charge and ongoing
distribution fees. A discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System is set forth under "Merrill Lynch Select Pricing(SM) System"
on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, will be imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid. See "Distribution Plans" below. Each class has different exchange
privileges. See "Shareholder Services -- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and
24
<PAGE> 27
Class C shares in that the sales charges applicable to each class provide for
the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, which are
eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
A Maximum 5.25% initial No No No
sales charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.75% B shares convert to
years, D shares automatically
at a rate of 4.0% during after approximately
the first year, decreasing eight years(4)
1.0%
annually to 0.0%
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- -------------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs may be imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives -- Class A and Class D Shares -- Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a 1.0% CDSC if redeemed within one
year.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period for
the shares acquired.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
25
<PAGE> 28
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternative is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below:
<TABLE>
<CAPTION>
SALES CHARGE DISCOUNT TO
AS SELECTED DEALERS
SALES CHARGE AS PERCENTAGE* OF AS PERCENTAGE OF
PERCENTAGE OF THE NET AMOUNT THE OFFERING
AMOUNT OF PURCHASE OFFERING PRICE INVESTED PRICE
- ------------------------------------------------ --------------- -------------- ----------------
<S> <C> <C> <C>
Less than $25,000............................... 5.25% 5.54% 5.00%
$25,000 but less than $50,000................... 4.75 4.99 4.50
$50,000 but less than $100,000.................. 4.00 4.16 3.75
$100,000 but less than $250,000................. 3.00 3.09 2.75
$250,000 but less than $1,000,000............... 2.00 2.04 1.80
$1,000,000 and over**........................... 0.00 0.00 0.00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** Class A and Class D purchases of $1,000,000 or more made on or after October
21, 1994 (the date Class D shares were initially offered to the public) will be
subject to a CDSC of 1.0% if the shares are redeemed within one year after
purchase. Class A purchases made prior to October 21, 1994 may be subject to a
CDSC if the shares are redeemed within one year of purchase at the following
rates: 0.75% on purchases of $1,000,000 to $2,500,000; 0.40% on purchases of
$2,500,001 to $3,500,000; 0.25% on purchases of $3,500,001 to $5,000,000; and
0.20% on purchases of more than $5,000,000, in lieu of paying an initial sales
charge. The charge will be assessed as an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed. A sales charge
of 0.75% will be charged on purchases of $1 million or more of Class A or Class
D shares by certain Employer Sponsored Retirement or Savings Plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended (the "Securities Act"). For the fiscal year ended December 31, 1994,
the Distributor received no CDSCs with respect to redemptions within one year
after purchase of Class A shares purchased subject to front-end sales charge
waivers.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors who currently own Class A shares in a
shareholder account, including participants in the Merrill Lynch Blueprint(SM)
Program, are entitled to purchase additional Class A shares in that account.
Certain employer sponsored retirement or savings plans, including eligible
401(k) plans, may purchase Class A shares at net asset value provided such plans
meet the required minimum number of eligible employees or required amount of
assets advised by MLAM or any of its affiliates. Class A shares are available at
net asset value to corporate warranty insurance reserve fund programs provided
that the program has $3 million or more initially invested in MLAM-advised
mutual funds. Also eligible to purchase Class A shares at net asset value are
participants in certain investment programs including TMA(SM) Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services and
certain purchases made in connection with the Merrill Lynch Mutual Fund Adviser
program. In addition, Class A shares are offered at net asset value to ML & Co.
and its subsidiaries and their directors and employees and to members of the
Boards of MLAM-advised investment companies, including the Fund. Certain persons
who acquire shares of certain MLAM-advised closed-end funds who wish to reinvest
the net proceeds from a sale of their closed-end fund shares of common stock in
shares of the Fund also may purchase Class A shares of the Fund if certain
conditions set forth in the Statement of Additional Information are met. For
example, Class A shares of the Fund and certain other MLAM-advised mutual funds
are offered at net asset value to shareholders of Merrill Lynch Senior Floating
Rate Fund, Inc. who wish to reinvest the net
26
<PAGE> 29
proceeds from a sale of certain of their shares of common stock of Merrill Lynch
Senior Floating Rate Fund, Inc. in shares of such funds.
Reduced Initial Sales Charges. No sales charges are imposed upon Class A
and Class D shares issued as a result of the automatic reinvestment of dividends
or capital gains distributions. Class A and Class D sales charges also may be
reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class D shares are offered at net asset value, without a sales charge, to
an investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint(SM) Program.
Additional information concerning these reduced initial sales charges,
including information regarding investments by Employee Sponsored Retirement or
Savings Plans, is set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C shares are subject to
an account maintenance fee of 0.25% of net assets and Class B and Class C shares
are subject to distribution fees of 0.75% of net assets as discussed below under
"Distribution Plans". The proceeds from the account maintenance fees are used to
compensate Merrill Lynch for providing continuing account maintenance
activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares from the dealers' own funds. The combination of the
CDSC and the ongoing distribution fee facilitates the ability of the Fund to
sell the Class B and
27
<PAGE> 30
Class C shares without a sales charge being deducted at the time of purchase.
Approximately eight years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges" below. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder
Services -- Exchange Privilege" will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges -- Class B Shares. Class B shares that
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no charge will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. For the year ended October 31, 1994
the Distributor received CDSCs of $55,082 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 Class B CDSC:
<TABLE>
<CAPTION>
CLASS B
CDSC AS A
YEAR SINCE PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
--------------------------------------------------------------------- -----------------
<S> <C>
0-1.................................................................. 4.0%
1-2.................................................................. 3.0%
2-3.................................................................. 2.0%
3-4.................................................................. 1.0%
4 and thereafter..................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
applicable rate being charged. Therefore, it will be assumed that the redemption
is first of shares 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 or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend
28
<PAGE> 31
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 Class B CDSC also is waived on redemptions of shares by certain
eligible 401(a) and eligible 401(k) plans and in connection with certain group
plans placing orders through the Merrill Lynch Blueprint(SM) Program. The
Class B CDSC is also waived for any Class B shares which are purchased by an
eligible 401(a) plan which are rolled over into a Merrill Lynch or Merrill
Lynch Trust Company custodied IRA and held in such account at the time of
redemption. The Class B CDSC also is waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. Additional information concerning the
waiver of the Class B CDSC is set forth in the Statement of Additional
Information.
Contingent Deferred Sales Charges -- Class C Shares. Class C shares which
are redeemed within one year after purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. For the period October 21, 1994
(commencement of the public offering of Class C shares) to October 31, 1994, the
Distributor received no CDSCs with respect to Class C shares.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single
29
<PAGE> 32
account will result in less than $50 worth of Class B shares being left in the
account, all of the Class B shares of the Fund held in the account on the
Conversion Date will be converted to Class D shares of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer
30
<PAGE> 33
to compensate its financial consultants in connection with the sale of the Class
B and Class C shares. In this regard, the purpose and function of the ongoing
distribution fees and the CDSC are the same as those of the initial sales charge
with respect to the Class A and Class D shares of the Fund in that the deferred
sales charges provide for the financing of the distribution of the Fund's Class
B and Class C shares.
For the fiscal year ended October 31, 1994, the Fund paid the Distributor
$95,430 for the account maintenance fee and $286,288 for the distribution fee
pursuant to the Class B Distribution Plan. From October 21, 1994 (commencement
of the public offering of Class C and Class D shares) to October 31, 1994, the
Fund paid the Distributor account maintenance fees of $5 and distribution fees
of $14 under the Class C Distribution Plan. For the same period, the Fund paid
the Distributor account maintenance fees of $4 and no distribution fees under
the Class D Distribution Plan. At January 31, 1995, the net assets of the Fund
subject to the Class B Distribution Plan aggregated approximately $83.2 million.
At this asset level, the annual fee payable pursuant to the Class B Distribution
Plan would aggregate approximately $832,216. At January 31, 1995, the net assets
of the Fund subject to the Class C Distribution Plan aggregated approximately
$3.4 million. At this asset level, the annual fee payable pursuant to the Class
C Distribution Plan would aggregate approximately $33,659. At January 31, 1995,
the net assets of the Fund subject to the Class D Distribution Plan aggregated
approximately $2.1 million. At this asset level, the annual fee payable pursuant
to the Class D Distribution Plan would aggregate approximately $5,210.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs
and the expenses consist of financial consultant compensation. As of December
31, 1993, the last date at which fully allocated data is available, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch
exceeded fully allocated accrual revenues for such period by approximately
$312,000 (.59% of Class B net assets at that date). As of December 31, 1994
direct cash revenues for the period since the commencement of operations
exceeded direct cash expenses by $1,373,325 (1.71% of Class B net assets at that
date). Similar fully allocated accrual data is not yet available with respect to
Class C shares which the Fund commenced offering to the public on October 21,
1994. As of December 31, 1994, for Class C shares, direct cash expenses for the
period since October 21, 1994 (commencement of public offering) exceeded direct
cash revenues by $8,052 (0.33% of Class C net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with the Class B, Class C and Class D shares, and there is no
assurance that the Directors of the Fund will approve the continuance of the
Distribution Plans from year to year. However, the Distributor intends to seek
annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Directors will be asked to take into consideration
expenses incurred
31
<PAGE> 34
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not be
used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those Class
B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to
Class D Shares".
Limitations on the Payment of Deferred Sales Charges. The maximum sales
charge rule in the Rules of Fair Practice of the NASD imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee. The
maximum sales charge rule is applied separately to each class. As applicable to
the Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges) plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payments in excess of the amount payable
under the NASD formula will not be made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund on receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive on redemption all dividends
declared through the date of redemption. The value of shares at the time of
redemption may be more or less than the shareholder's cost, depending on the
market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Fund's Transfer Agent, 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
32
<PAGE> 35
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, Federal funds 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 30 minutes after the close of business on the New
York Stock Exchange (generally, 4:00 P.M., New York time) on the same day.
Dealers have the responsibility of submitting such repurchase requests to the
Fund not later than 30 minutes after the close of business on the New York Stock
Exchange in order to obtain that day's closing price.
These repurchase arrangements are for the convenience of shareholders and
do not involve a charge by the Fund (other than any applicable CDSC). However,
securities firms which do not have selected dealer agreements with the
Distributor may impose a charge on the shareholder for transmitting the notice
of repurchase to the Fund. Merrill Lynch may charge its customers a processing
fee (presently $4.85) to confirm a repurchase of shares. 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.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A shares have a one-time
privilege to reinstate their accounts by purchasing Class A or Class D shares,
as the case may be, of the Fund at net asset value without a sales charge up to
the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be reinstated
to the Transfer Agent 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
33
<PAGE> 36
privilege and may be exercised by the Class A or Class D shareholder only the
first time such shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which
are designed to facilitate investment in shares of the Fund. Certain of such
services are not available to investors who place orders for the Fund through
the Merrill Lynch 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 statements, at least quarterly, from the Transfer Agent. These quarterly
statements will serve as transaction confirmations for automatic investment
purchases and the reinvestment of ordinary income dividends and long-term
capital gain distributions. These statements will also show any other activity
in the account since the preceding statement. Shareholders will receive separate
transaction confirmations for each purchase or sale transaction other than
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gains distributions. Shareholders may make additions to
their Investment Accounts at any time by mailing a check directly to the
Transfer Agent. Shareholders may also maintain their accounts through Merrill
Lynch. Upon the transfer of shares out of a Merrill Lynch brokerage account, an
Investment Account in the transferring shareholder's name may be opened at the
Transfer Agent. Shareholders considering transferring their Class A or Class D
shares from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the Class A or Class D shares are to
be transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A or Class D shares (paying any applicable CDSC) so
that the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder
at the Transfer Agent. Shareholders considering transferring a tax-deferred
retirement account such as an individual retirement account from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the retirement account is to be transferred will not take delivery
of shares of the Fund, a shareholder either must redeem the shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm, or such shareholder must continue to maintain a retirement account
at Merrill Lynch for those shares.
Exchange Privilege. Shareholders of each class of shares of the Fund each
have an exchange privilege with certain other MLAM-advised mutual funds. There
is currently no limitation on the number of times a shareholder may exercise the
exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A
34
<PAGE> 37
shares of the second fund in his account in which the exchange is made at the
time of the exchange or is otherwise eligible to purchase Class A shares of the
second fund. If the Class A shareholder wants to exchange Class A shares for
shares of a second MLAM-advised mutual fund, and the shareholder does not hold
Class A shares of the second fund in his account at the time of the exchange and
is not otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
MLAM-advised mutual fund at any time as long as, at the time of the exchange,
the shareholder holds Class A shares of the second fund in the account in which
the exchange is made or is otherwise eligible to purchase Class A shares of the
second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period of the newly acquired shares of the
other Fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services -- Exchange
Privilege" in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of
Class A and Class D shares under the Merrill Lynch Mutual Fund Adviser ("MFA")
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the MFA program of Class A or Class D shares
of a MLAM-advised mutual fund for Class A or Class D shares of the Fund will be
made solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other MLAM-advised mutual
35
<PAGE> 38
fund and the sales charge payable on the shares of the Fund being acquired in
the exchange under the MFA program.
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund, without a sales charge, at the net asset
value per share next determined on the ex-dividend date of such dividend or
distribution. A shareholder may at any time, by written notification or by
telephone (1-800-MER-FUND) to the Transfer Agent, elect to have subsequent
dividends or capital gains distributions, or both, paid in cash, rather than
reinvested, in which event payment will be mailed on or about the payment date.
Cash payments also can be directly deposited to the shareholder's bank account.
No CDSC will be imposed upon redemption of shares issued as a result of the
automatic reinvestment of dividends or capital gains distributions.
Systematic Withdrawal Plans. A Class A or Class D shareholder may elect to
receive systematic withdrawal payments from his Investment Account through
automatic payment by check or through automatic payment by direct deposit to his
bank account on either a monthly or quarterly basis. 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.
Automatic Investment Plans. Regular additions of shares may be made to an
investor's Investment Account by pre-arranged charges of $50 or more to his
regular bank account. Investors who maintain CMA(R) 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) Automated
Investment Program.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
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
36
<PAGE> 39
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 described in
this paragraph but may not be able to claim a credit or deduction against such
U.S. tax for the foreign taxes treated as having been paid by such shareholder.
The Fund will report annually to its shareholders the amount per share of such
withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends, and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer 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
income 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 and resulting in a capital gain for any shareholder who received a
distribution greater than the shareholder's tax basis in Fund shares (assuming
the shares were held as a capital asset).
37
<PAGE> 40
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon the purchase of the new shares in the absence
of the exchange privilege. Instead, such sales charge will be treated as an
amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative 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, Class B, Class C and Class D shares in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period such as
in the case of Class B and Class C shares and the maximum sales charge in the
case of Class A and Class D shares. Dividends paid by the Fund with respect to
all shares, to the extent any dividends are paid, will be calculated in the same
manner at the same time on the
38
<PAGE> 41
same day and will be in the same amount, except that account maintenance and
distribution charges and any incremental transfer agency costs relating to each
class of shares will be borne exclusively by that class. The Fund will include
performance data for all classes of shares of the Fund in any advertisement or
information including performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average annual total return data
since the average annual rates of return reflect compounding; aggregate total
return data generally will be higher than average annual total return data since
the aggregate rates of return reflect compounding over a longer period of time.
In advertisements distributed to investors whose purchases are subject to
reduced sales charges in the case of Class A and Class D 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 indicative of the Fund's relative
performance for any future period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all its net investment income.
Dividends from such net investment income are paid quarterly. All net realized
long- or short-term capital gains, if any, are distributed to the Fund's
shareholders at least annually. From time to time, the Fund may declare a
special distribution at or about the end of the calendar year in order to comply
with 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
39
<PAGE> 42
(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 each class of shares will be
reduced as a result of any account maintenance, distribution and transfer agency
fees applicable with respect to such class of shares. See "Additional
Information -- Determination of Net Asset Value".
DETERMINATION OF NET ASSET VALUE
The net asset value of shares of all classes of the Fund is determined by
the Manager once daily 15 minutes after the close of business on the New York
Stock Exchange (generally, 4:00 P.M. New York time), on each day during which
the New York Stock Exchange is open for trading. 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 Class A shares generally will be higher
than the per share net asset value of shares of other classes, reflecting the
daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to the Class B and Class C shares
and the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; moreover, the per share net asset value of Class D
shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the four
classes will tend to converge (although not necessarily meet) immediately after
the payment of dividends or distributions, which will differ by approximately
the amount of the expense accrual differential between the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Directors as the
primary market. Securities traded in the over-the-counter market are valued at
the most recent available 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.
40
<PAGE> 43
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on October 22, 1987. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock, each of which consists of 100,000,000 shares. Shares of Class A,
Class B, Class C and Class D Common Stock represent an interest in the same
assets of the Fund and are identical in all respects except that Class B, Class
C and Class D shares bear certain expenses related to the account maintenance
associated with such shares, and Class B and Class C shares bear certain
expenses, related to distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to account maintenance and
distribution expenditures, as applicable. See "Purchase of Shares". The Fund has
received an order from the Commission permitting the issuance and sale of
multiple 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.
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 shareholders be held upon the written request of at least 10% of the
outstanding shares of the Fund entitled to vote at such meeting. Voting rights
for Directors are not cumulative. Shares issued are fully paid and
non-assessable and have no preemptive rights. Shares have the conversion rights
described in this Prospectus. Each share of Common Stock is entitled to
participate equally in dividends and distributions declared by the Fund and in
the net assets of the Fund upon liquidation or dissolution after satisfaction of
outstanding liabilities except, as noted above, the Class B, Class C and Class D
shares bear certain additional expenses.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
FINANCIAL DATA SERVICES, INC.
ATTN: TAMFO
P.O. BOX 45289
JACKSONVILLE, FLORIDA 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch financial consultant or 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.
41
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[This page intentionally left blank.]
42
<PAGE> 45
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT(SM) PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT(SM)
PROGRAM APPLICATION BY CALLING TOLL FREE (800) 637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
/ / Class A shares / / Class B shares
/ / Class C shares / / Class D shares
of Merrill Lynch Global Convertible Fund, Inc. and establish an Investment
Account as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to Financial Data Services,
Inc., as an initial investment (minimum $1,000). I understand that this
purchase will be executed at the applicable offering price next to be
determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
<TABLE>
<S> <C>
1. .......................................................... 4. ..........................................................
2. .......................................................... 5. ..........................................................
3. .......................................................... 6. ..........................................................
</TABLE>
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address.........................................................................
(Zip Code)
<TABLE>
<S> <C>
Occupation ......................................... Name and Address of Employer................................................
.............................................................................
.............................................................................
................................................... .............................................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT / / Reinvest SELECT / / Reinvest
ONE: / / Cash ONE: / / Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU:
/ / Check or / / Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Global Convertible Fund, Inc. Authorization Form.
Specify type of account (check one): / / checking / / savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number ........................ Account Number.............................
Bank Address....................................................................
I agree that this authorization will remain in effect until I provide written
notification to Financial Data Services, Inc. amending or terminating this
service.
Signature of Depositor..........................................................
Signature of Depositor ........................Date.............................
(if joint account, both must sign)
NOTE: If direct deposit to bank account is selected, your blank, unsigned check
marked "VOID" or a deposit slip from your savings account should accompany this
application.
43
<PAGE> 46
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. -- AUTHORIZATION FORM
(PART 1) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
-------------------------------------------------------
-------------------------------------------------------
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Taxes") either because I have not been notified that I am subject thereto as a
result of a failure to report all interest or dividends, or the Internal Revenue
Service ("IRS") has notified me that I am no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (See terms and conditions in
the Statement of Additional Information)
<TABLE>
<S> <C>
......................,
19 . . . .
Date of initial purchase
</TABLE>
Dear Sir/Madam:
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Global Convertible Fund, Inc. or any other investment company with an
initial sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13 month period which will
equal or exceed:
/ / $25,000 / / $50,000 / / $100,000 / / $250,000
/ / $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Global Convertible
Fund, Inc. Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Global Convertible Fund, Inc. held as security.
<TABLE>
<S> <C>
By:.............................................................. ...............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint parties, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................ Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
- --- ---
- - -
- - -
- --- ---
This form when completed should be mailed to:
Merrill Lynch Global Convertible Fund, Inc.
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases made under a Letter of Intention or Systematic
Withdrawal Plan. We guarantee the shareholder's signature.
...............................................................
Dealer Name and Address
By ............................................................
Authorized Signature of Dealer
<TABLE>
<S> <C> <C>
- --------- ------------
- --------- ------------ ---------------------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer Account No.
</TABLE>
44
<PAGE> 47
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C>
(PLEASE PRINT) ------------------------------------
Name of Owner....................................................................... ------------------------------------
First Name Initial Last Name Social Security No.
or Taxpayer Identification No.
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
.................................................................................... Account Number...........................
(Zip Code) (if existing account)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND D SHARES ONLY (See terms and
conditions in the Statement of Additional Information)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch Global
Convertible Fund, Inc. at cost or current offering price. Withdrawals to be made
either (check one) / / Monthly on the 24th day of each month, or N Quarterly on
the 24th day of March, June, September and December. If the 24th falls on a
weekend or holiday, the next succeeding business day will be utilized. Begin
systematic withdrawal on _____________ (month), or as soon as possible
thereafter.
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): / / $_____
or / / ___% of the current value of / / Class A or / / Class D shares in the
account.
SPECIFY WITHDRAWAL METHOD: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of..........................................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print)......................................................
Address.........................................................................
.........................................................................
Signature of Owner
..................................................Date..........................
Signature of Co-Owner (if any)..................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING
THIS SERVICE.
Specify type of account (check one): / / checking / / savings
Name on your account............................................................
Bank Name.......................................................................
Bank Number .............................. Account Number.......................
Bank Address....................................................................
....................................................................
Signature of Depositor
.......................................... Date.................................
Signature of Depositor..........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
45
<PAGE> 48
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. -- AUTHORIZATION FORM
(PART 2) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account as described below each
month to purchase: (choose one)
/ / Class A shares / / Class B shares
/ / Class C shares / / Class D shares
of Merrill Lynch Global Convertible Fund, Inc., subject to the terms set forth
below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Global Convertible Fund, Inc. as indicated below:
Amount of each check or ACH debit $..........................................
Account Number...............................................................
Please date and invest ACH debits on the 20th of each month
beginning______________or as soon thereafter as possible.
(month)
I agree that you are preparing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
credit my bank account. I further agree that if a debit is not honored upon
presentation, Financial Data Services, Inc. is authorized to discontinue
immediately the Automatic Investment Plan and to liquidate sufficient shares
held in my account to offset the purchase made with the dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City............................................ State .......... Zip ..........
As a convenience to me, I hereby request and authorize you to pay and charge
to my account ACH debits drawn on my account by and payable to Financial Data
Services, Inc. I agree that your rights in respect to each such debit shall be
the same as if it were a check drawn on you and signed personally by me. This
authority is to remain in effect until revoked by me in writing. Until you
receive such notice, you shall be fully protected in honoring any such debit. I
further agree that if any such debit be dishonored, whether with or without
cause and whether intentionally or inadvertently, you shall be under no
liability.
................. .......................................
Date Signature of Depositor
................. .......................................
Bank Account Signature of Depositor
Number (If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
46
<PAGE> 49
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 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 LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE> 50
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table............................... 2
Merrill Lynch Select Pricing(SM) System. 3
Financial Highlights.................... 7
Special Considerations.................. 9
Investment Objective and Policies....... 10
Management of the Fund.................. 21
Directors............................. 21
Management and Advisory Arrangements.. 21
Code of Ethics........................ 22
Transfer Agency Services.............. 23
Purchase of Shares...................... 23
Initial Sales Charge Alternatives --
Class A and Class D Shares.......... 25
Deferred Sales Charge Alternatives --
Class B and Class C Shares.......... 27
Distribution Plans.................... 30
Limitations on the Payment of Deferred
Sales Charges....................... 31
Redemption of Shares.................... 32
Redemption............................ 32
Repurchase............................ 33
Reinstatement Privilege -- Class A and
Class D Shares...................... 33
Shareholder Services.................... 33
Taxes................................... 36
Performance Data........................ 38
Additional Information.................. 39
Dividends and Distributions........... 39
Determination of Net Asset Value...... 40
Organization of the Fund.............. 40
Shareholder Reports................... 41
Shareholder Inquiries................. 41
Authorization Form...................... 43
</TABLE>
Code # 10665-0295
[MERRILL LYNCH LOGO HERE]
MERRILL LYNCH
GLOBAL CONVERTIBLE
FUND, INC.
ART WORK
HERE
PROSPECTUS
February 24, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 51
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
Merrill Lynch Global Convertible Fund, Inc. (the "Fund") is a mutual fund
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.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the
investor believes is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other relevant
circumstances.
-------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated
February 24, 1995 (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, 1995.
<PAGE> 52
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, 1993 and 1994,
the portfolio turnover rates were 4.91%, 26.02% and 38.04%, 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. ("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 such
2
<PAGE> 53
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
3
<PAGE> 54
"Commission") has taken the position that OTC options and the assets used as
cover for written OTC options are illiquid securities.
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 of
1940, as amended (the "Investment Company Act") in connection with its strategy
of investing in futures contracts. Section 17(f) relates to the custody of
securities and other assets of an investment company and may be deemed to
prohibit certain
4
<PAGE> 55
arrangements between the Fund and commodities brokers with respect to initial
and variation margin. Section 18(f) of the Investment Company Act prohibits an
open-end investment company such as the Fund from issuing a "senior security"
other than a borrowing from a bank. The staff of the Commission has in the past
indicated that a futures contract may be a "senior security" under the
Investment Company Act.
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
5
<PAGE> 56
believes that "straddles" of the type which may be utilized by the Fund
constitute hedging transactions and are consistent with the policies described
above.
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.
6
<PAGE> 57
OTHER INVESTMENT POLICIES AND PRACTICES
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer or an affiliate
thereof in U.S. Government securities. Under such agreements, the bank or
primary dealer or an affiliate thereof agrees, upon entering into the contract,
to repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period. In the
case of repurchase agreements, the prices at which the trades are conducted do
not reflect the accrued interest on the underlying obligations. Repurchase
agreements may be construed to be collateralized loans by the purchaser to the
seller secured by the securities transferred to the purchaser. In the case of a
repurchase agreement, the Fund will require the seller to provide additional
collateral if the market value of the securities falls below the repurchase
price at any time during the term of the repurchase agreement. In the event of
default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with the disposition of the collateral. In the event of a
default under such a repurchase agreement, instead of the contractual fixed rate
of return, the rate of return to the Fund will depend on intervening
fluctuations of the market value of such security and the accrued interest on
the security. In such event, the Fund would have rights against the seller for
breach of contract with respect to any losses arising from market fluctuations
following the failure of the seller to perform.
Lending of Portfolio Securities. The Fund may lend securities from its
portfolio to approved borrowers and receive therefor collateral in cash or
securities issued or guaranteed by the United States Government. Such collateral
will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. The purpose of such loans is to
permit the borrower to use such securities for delivery to purchasers when such
borrower has sold short. If cash collateral is received by the Fund, it is
invested in short-term money market securities, and a portion of the yield
received in respect of such investment is retained by the Fund. Alternatively,
if securities are delivered to the Fund as collateral, the Fund and the borrower
negotiate a rate for the loaned premium to be received by the Fund for lending
its portfolio securities. In either event, the total yield on the Fund's
portfolio is increased by loans of its portfolio securities. The Fund will have
the right to regain record ownership of loaned securities to exercise beneficial
rights such as voting rights, subscription rights and rights to dividends,
interest or other distributions. Such loans are terminable at any time. The Fund
may pay reasonable finder's, administrative and custodial fees in connection
with such loans.
High Yield Securities. The Fund has established no rating criteria for
debt securities in which it may invest. Therefore, the Fund may invest in
convertible and, to a limited extent, non-convertible debt securities either (a)
which are rated BBB or better by Standard & Poor's Corporation ("S&P") or Baa or
better by Moody's Investors Service, Inc. ("Moody's") or which, in the Manager's
judgment, possess similar credit characteristics ("investment grade securities")
or (b) which are rated BB or lower by S&P or Ba or lower by Moody's or which, in
the Manager's judgment, possess similar credit characteristics ("high yield
securities", also commonly referred to as "junk bonds"). The Manager considers
the ratings assigned by S&P or Moody's as one of several factors in its
independent credit analysis of issuers.
7
<PAGE> 58
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 a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act means
the lesser of (i) 67% of the Fund's shares represented at a meeting at which
more than 50% of the outstanding shares of the Fund are represented or (ii) more
than 50% of the Fund's outstanding shares). The Fund may not:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or
management.
8
<PAGE> 59
4. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interest therein or issued by companies which
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Notwithstanding the 15% limitation herein, to the extent the laws of any
state in which the Fund's shares are registered or qualified for sale
9
<PAGE> 60
require a lower limitation, the Fund will observe such limitation. As of
the date hereof, therefore, the Fund will not invest more than 10% of its
total assets in securities which are subject to this investment restriction
(c). Securities purchased in accordance with Rule 144A under the Securities
Act (a "Rule 144A security") and determined to be liquid by the Fund's
Board of Directors are not subject to the limitations set forth in this
investment restriction (c). Notwithstanding the fact that the Board may
determine that a Rule 144A security is liquid and not subject to
limitations set forth in this investment restriction (c), the State of Ohio
does not recognize Rule 144A securities as securities that are free of
restrictions as to resale. To the extent required by Ohio law, the Fund
will not invest more than 50% of its total assets in securities of issuers
that are restricted as to disposition, including Rule 144A securities.
d. Invest in warrants if, at the time of acquisition, its investments
in warrants, valued at the lower of cost or market value, would exceed 5%
of the Fund's net assets; included within such limitation, but not to
exceed 2% of the Fund's net assets, are warrants which are not listed on
the New York Stock Exchange or American Stock Exchange or a major foreign
exchange. For purposes of this restriction, warrants acquired by the Fund
in units or attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the officers and general
partner of the Manager, the directors of such general partner or the
officers and directors of any subsidiary thereof each owning beneficially
more than one-half of one percent of the securities of such issuer own in
the aggregate more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental investment restriction (7) above,
borrow amounts in excess of 20% of its total assets, taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act involving
only usual and customary commissions or transactions permitted pursuant to an
exemptive order under the Investment Company Act. See "Portfolio Transactions
and Brokerage". Without such an exemptive order, the Fund is prohibited from
engaging in portfolio transactions with Merrill Lynch or its affiliates acting
as principal and from purchasing securities in public offerings that are not
registered under the Securities Act in which such firms or any of its affiliates
participate as an underwriter or dealer.
10
<PAGE> 61
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their ages 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
P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (62) -- President and Director(1)(2) -- President of the
Manager (which term as used herein includes its corporate predecessors) since
1977 and Chief Investment Officer thereof since 1976; President of Fund Asset
Management, L.P. ("FAM") (which term as used herein includes its corporate
predecessors) and Chief Investment Officer thereof since 1977; President and
Director of Princeton Services, Inc. ("Princeton Services") since 1993;
Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990;
Executive Vice President of Merrill Lynch since 1990 and Senior Vice President
thereof from 1985 to 1990; Director of Merrill Lynch Funds Distributor, Inc.
("MLFD" or the "Distributor").
HERBERT I. LONDON (55) -- 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; John M. Olin Professor of Humanities, New York University since 1993 and
Professor thereof since 1980; Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Trustee, Hudson Naval Institute since 1980;
Overseer, Center for Naval Analyses; Director, Damon Corporation since 1991.
ROBERT R. MARTIN (67) -- Director(2) -- 513 Grand Hill, St. Paul, Minnesota
55102. Director, WTC Industries, Inc. since 1995 and Chairman thereof from 1994
to 1995; 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 (65) -- 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 (42) -- Director(2) -- Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and Associate
Professor from 1983 to 1989; Trustee, The Common Fund, since 1989; Director,
Quantec Limited since 1991 and Teknekron Software Systems since 1994.
TERRY K. GLENN (54) -- Executive Vice President(1)(2) -- Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of the Distributor since
1986 and Director thereof since 1991.
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<PAGE> 62
N. JOHN HEWITT (60) -- Senior Vice President(1)(2) -- Senior Vice President
of the MLAM and FAM since 1980; Manager of FAM's Fixed Income Mutual Fund and
Insurance Portfolio Groups since 1980; Senior Vice President of Princeton
Services since 1993.
HARRY E. DEWDNEY (66) -- 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 (34) -- Vice President(1)(2) -- Vice President and Director
of Taxation of MLAM since 1990; Employee of Deloitte & Touche LLP from 1981 to
1990.
GERALD M. RICHARD (45) -- Treasurer(1)(2) -- Senior Vice President and
Treasurer of the Manager and FAM since 1984; Vice President of the Distributor
since 1981 and Treasurer thereof since 1984; Senior Vice President and Treasurer
of Princeton Services since 1993.
MARK B. GOLDFUS (48) -- Secretary(1)(2) -- Vice President of the Manager
since 1985.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a trustee, director or officer of certain other
investment companies for which the Manager or FAM acts as investment adviser
or manager.
At February 1, 1995, the officers and Directors of the Fund as a group (11
persons) owned an aggregate of less than 1% of the outstanding shares of common
stock of ML & Co., and owned an aggregate of less than 1% of the outstanding
shares of the Fund.
Pursuant to the terms of the management agreement with the Fund, the
Manager pays all compensation of officers and employees of the Fund as well as
the fees of all Directors who are affiliated persons of ML & Co. or its
subsidiaries. The Fund pays each Director not affiliated with ML & Co. or its
affiliates an annual fee of $5,000 plus $500 for each meeting of the Board
attended. The Fund also pays each member of the Audit and Nominating Committee,
which consists of the unaffiliated Directors, an annual fee of $1,000 plus $250
for each meeting attended. The Fund reimburses each unaffiliated Director for
his out-of-pocket expenses relating to attendance at Board and Committee
meetings. For the year ended October 31, 1994, fees and expenses paid to the
nonaffiliated Directors aggregated $49,496.
COMPENSATION OF DIRECTORS
The following table sets forth for the fiscal year ended October 31, 1994,
compensation paid by the Fund to the non-affiliated Directors and for the
calendar year ended December 31, 1994, the aggregate compensation paid by all
investment companies advised by MLAM and its affiliate, FAM ("MLAM/FAM Advised
Funds"), to the non-affiliated Directors.
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS MLAM/FAM ADVISED
NAME OF COMPENSATION ACCRUED AS PART FUNDS PAID TO
DIRECTOR FROM FUND OF FUND EXPENSE DIRECTORS(1)
- ------------------ ------------ ------------------- ----------------
<S> <C> <C> <C>
Herbert I. London $9,750 None $168,250
Robert R. Martin 9,750 None 168,250
Joseph L. May 9,750 None 168,250
Andre F. Perold 9,750 None 168,250
</TABLE>
- ---------------
(1) In addition to the Fund, the Directors serve on the boards of other MLAM/FAM
Advised Funds as follows: Mr. London (23 boards); Mr. Martin (23 boards);
Mr. May (23 boards); and Mr. Perold (23 boards).
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<PAGE> 63
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund -- Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients for which the Manager or its
affiliates act as an adviser. Because of different objectives or other factors,
a particular security may be bought for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities by
the Manager for the Fund or other funds for which it acts as investment adviser
or for its advisory clients arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds and clients in a manner deemed equitable to all. To the extent
that transactions on behalf of more than one client of the Manager or its
affiliates during the same period may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect
on price.
The Fund has entered into a management agreement with the Manager (the
"Management Agreement"). As discussed in the Prospectus, the Manager receives
for its services to the Fund monthly compensation at the annual rate of 0.65% of
the average daily net assets of the Fund. For the years ended October 31, 1992,
1993 and 1994, the fees paid by the Fund to the Manager aggregated $97,038,
$139,948 and $285,526, respectively.
The State of California imposes limitations on the expenses of the Fund. At
the date of this Statement of Additional Information, these annual 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 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, 1992, $69,907 was
reimbursed to the Fund pursuant to such operating expense limitations. For the
year ended October 31, 1993, the Fund was not reimbursed 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 ML & Co. or any of its
affiliates. The Fund pays all other expenses incurred in the operation of the
Fund, including, among other things, taxes, expenses for legal and auditing
services, costs of printing proxies, stock certificates, shareholder reports and
prospectuses and statements of additional information (except to the extent paid
by the Distributor), charges of the custodian, any sub-custodian and transfer
agent, expenses of redemption of shares, Commission fees, expenses of
registering the shares under Federal, state or foreign laws, fees and expenses
of nonaffiliated Directors, accounting and pricing costs (including the daily
calculation of net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or nonrecurring expenses, and other expenses
properly payable by the Fund. Accounting services are provided to the Fund by
the Manager and the Fund reimburses the Manager for its costs in
13
<PAGE> 64
connection with such services on a semi-annual basis. For the year ended October
31, 1994, the Fund paid the Manager $66,892 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 will be financed by the Fund pursuant to a Distribution Plan in
compliance with Rule 12b-1 under the Investment Company Act. See "Purchase of
Shares -- Distribution Plans".
The Manager is a limited partnership, the partners of which are ML & Co.
and Princeton Services, Inc.
Duration and Termination. Unless earlier terminated as described herein,
the Management Agreement will remain in effect from year to year if approved
annually (a) by the Board of Directors or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Directors who are not parties to
such contract or interested persons (as defined in the Investment Company Act)
of any such party. Such contracts are not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party thereto
or by the vote of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System: Class A and Class D shares are sold to investors choosing
the initial sales charge alternatives, and Class B and Class C shares are sold
to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents an identical
interest in the investment portfolio of the Fund and has the same rights
except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees are paid. Each
class has different exchange privileges. See "Shareholder Services -- Exchange
Privilege".
The Merrill Lynch Select Pricing(SM) System is used by more than 50 mutual
funds advised by the Manager or its affiliate, FAM. Funds advised by the Manager
or FAM are referred to herein as "MLAM-advised mutual funds".
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs. The Distribution Agreements are subject to the same renewal
requirements and termination provisions as the Management Agreement described
above.
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<PAGE> 65
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
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 gross
sales charges for the sale of Class A shares for the fiscal year ended October
31, 1994 were $24,608, of which the Distributor received $2,045 and Merrill
Lynch received $22,563. The gross sales charges for the sale of Class D shares
for the period October 21, 1994 (commencement of the public offering of Class D
shares) to October 31, 1994 were $4,122, of which the Distributor received $325
and Merrill Lynch received $3,797.
The term "purchase", as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts by an individual, his spouse and their children under the age
of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account 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.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or FAM
who purchased such closed-end fund shares prior to October 21, 1994 (the date
the Merrill Lynch Select Pricing System commenced operations) and wish to
reinvest the net proceeds of a sale of their closed-end fund shares of common
stock in Eligible Class A shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such shares
on or after October 21, 1994 and wish to reinvest the net proceeds from a sale
of their closed-end fund shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund and other MLAM-advised mutual
funds ("Eligible Class D shares"), if the following conditions are met. First,
the sale of closed-end fund shares must be made through Merrill Lynch and the
net proceeds therefrom must be immediately reinvested in Eligible Class A or
Class D shares. Second, the closed-end fund shares must either have been
acquired in the initial public offering or be shares representing dividends from
shares of common stock acquired in such offering. Third, the closed-end fund
shares must have been continuously maintained in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option. 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
15
<PAGE> 66
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.
REDUCED INITIAL SALES CHARGE
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing, or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or of
any other MLAM-advised mutual funds made within a 13-month period starting with
the first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides plan
participant recordkeeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares; however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and Class
D shares of the Fund and of other MLAM-advised mutual funds presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward the
completion of such Letter, but the reduced sales charge applicable to the amount
covered by such Letter will be applied only to new purchases. If the total
amount of shares does not equal the amount stated in the Letter of Intention
(minimum of $25,000), the investor will be notified and must pay, within 20 days
of the expiration of such Letter, the difference between the sales charge on the
Class A or Class D shares purchased at the reduced rate and the sales charge
applicable to the sales actually purchased through the Letter. Class A or Class
D shares equal to at least five percent of the intended amount will be held in
escrow during the 13-month period (while remaining registered in the name of the
purchaser) for this purpose. The first purchase under the Letter of Intention
must be at least five percent of the dollar amount of such Letter. If during the
term of such Letter, a purchase brings the total amount invested to an amount
equal to or in excess of the amount indicated in the Letter, the purchaser will
be entitled on that purchase and subsequent purchases to the reduced percentage
sales charge which would be applicable to a single purchase equal to the total
dollar value of the Class A shares then being purchased under such Letter, but
there will be no retroactive reduction of the sales charges on any previous
purchase. The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the Letter of
16
<PAGE> 67
Intention will be deducted from the total purchases made under such Letter. An
exchange from a MLAM-advised money market fund into the Fund that creates a
sales charge will count toward completing a new or existing Letter of Intention
from the Fund.
Merrill Lynch Blueprint(SM) Program. Class D shares of the Fund are
offered to participants in the Merrill Lynch Blueprint(SM) Program
("Blueprint"). In addition, participants in Blueprint who own Class A shares of
the Fund may purchase additional Class A shares of the Fund through Blueprint.
Blueprint is directed to small investors, group IRAs and participants in
certain affinity groups such as credit unions and trade associations. Investors
placing orders to purchase Class A or Class D shares of the Fund through
Blueprint will acquire the Class A shares at net asset value plus a sales
charge calculated in accordance with the Blueprint sales charge schedule (i.e.,
up to $300 at 4.25%, from $300.01 to $5,000 at 3.25% plus $3.00 and $5,000.01
or more at the standard sales charge rates disclosed in the Prospectus). In
addition, Class A or Class D 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 A or D shares through Blueprint.
Services, including the exchange privilege, available to Class A and D
investors through Blueprint, however, may differ from those available to other
investors in Class A or D shares.
Class A and Class D shares are offered at net asset value to Blueprint
participants through the Merrill Lynch Directed IRA Rollover Program ("IRA
Rollover Program") available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from Employer Sponsored Retirement and Savings Plans
(as defined below) whose Trustee and/or Plan Sponsor has entered into the
Merrill Lynch Directed IRA Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days 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.
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Employer Sponsored Retirement and Savings Plans. Class A and Class D
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 Internal Revenue Code of 1986, as amended (the "Code"),
deferred compensation plans within the meaning of Sections 403(b) and 457 of the
Code, other deferred compensation arrangements, Voluntary Employee Benefits
Association 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
accumulated $20 million or more in MLAM-advised mutual funds (in the case of
Class A shares) or $5 million or more in MLAM-advised mutual funds (in the case
of Class D shares). Class D shares may be offered at net asset value to new
Employer Sponsored Retirement or Savings Plans, provided the plan has $3 million
or more initially invested in MLAM-advised mutual funds. Assets of Employer
Sponsored Retirement or Savings Plans sponsored by the same sponsor or an
affiliated sponsor may be aggregated.
17
<PAGE> 68
Class A and Class D shares also are offered at net asset value to Employer
Sponsored Retirement or Savings Plans that have at least 1,000 employees
eligible to participate in the plan (in the case of Class A shares) or between
500 and 999 employees eligible to participate in the plan (in the case of Class
D shares). 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 or Class D shares at net asset
value has the option of (i) purchasing Class D shares at the initial sales
charge schedule disclosed in the Prospectus for purchases of up to $1,000,000
and at .75% for purchases of $1,000,000 or more, (ii) if the Employer Sponsored
Retirement or Savings Plan meets the specified requirements, purchasing Class B
shares with a waiver of the CDSC upon redemption, or (iii) if the Employer
Sponsored Retirement or Savings Plan does not qualify to purchase Class B shares
with a waiver upon redemption, purchasing Class B or Class C shares at their
respective CDSC schedule disclosed in the prospectus. Certain Employer Sponsored
Retirement or Savings Plans, which were permitted prior to October 21, 1994 to
purchase Class A shares at the initial sales charge schedule in the then current
prospectus for purchases up to $1,000,000 and at .75% for purchases of
$1,000,000 or more, may purchase Class A shares at the initial sales charge
schedule disclosed in the Prospectus for purchases of up to $1,000,000 and at
.75% for purchases of $1,000,000 or more. 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, members of
the Boards of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries", when used herein with respect to ML &
Co., includes FAM, the Manager and certain other entities directly or indirectly
wholly owned and controlled by ML & Co.) and their directors and employees, and
any trust, pension, profit-sharing or other benefit plan for such persons, may
purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis. Second, the investor also must establish that such redemption had been
made within 60 days prior to the investment in the Fund, and the proceeds from
the redemption had been maintained in the interim in cash or a money market
fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: First, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from the redemption of such
shares of other mutual funds and that such shares have been outstanding for a
period of no less than six months. Second, such purchase of Class D shares must
be made within 60 days after the redemption and the proceeds from the redemption
must be maintained in the interim in cash or a money market fund.
18
<PAGE> 69
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a personal holding company or a public or private investment company. The value
of the assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases to reduce possible adverse tax consequences to the Fund which
might result from an acquisition of assets having net unrealized appreciation
which is disproportionately higher at the time of acquisition than the realized
or unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities which (i) meet the
investment objective and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objective and
Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares -- Distribution Plan" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance fees and/or distribution fees paid to the Distributor. In
their consideration of each Distribution Plan, the Directors must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholders. Each
Distribution Plan further provides that so long as the Distribution Plan remains
in effect, the selection and nomination of Directors who are not "interested
persons" of the Fund, as defined in the Investment Company Act (the "Independent
Directors"), shall be committed to the discretion of the Independent Directors
then in office. In approving each Distribution Plan in accordance with Rule
12b-1, the Independent Directors concluded that there is a reasonable likelihood
that such Distribution Plan will benefit the Fund and its related class of
shareholders. The Distribution Plan can be terminated at any time, without
penalty, by the vote of a majority of the Independent Directors or by the vote
of the holders of a majority of the outstanding related class of voting
securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders, and all material amendments are required to be
approved by the vote of Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in such Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of each Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of such Distribution Plan or such report, the first two years in an easily
accessible place.
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<PAGE> 70
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. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
The following table sets forth comparative information as of October 31,
1994 with respect to the Class B shares and Class C shares of the Fund
indicating the maximum allowable payments that can be made under the NASD
maximum sales charge rule and the Distributor's voluntary maximum for the period
February 26, 1988 (commencement of the public offering of Class B shares) to
October 31, 1994 for the Class B shares and for the period October 21, 1994
(commencement of the public offering of Class C shares) to October 31, 1994 for
the Class C shares.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF OCTOBER 31, 1994
-------------------------------------------------------------------------------------------
ANNUAL
ALLOWABLE ALLOWABLE AMOUNTS DISTRIBUTION
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- ---------- ----------- ------- -------------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Class B Shares
Under NASD Rule as Adopted....... $ 78,188 $4,887 $ 1,619 $6,506 $2,045 $ 4,461 $ 398
Under Distributor's Voluntary
Waiver......................... $ 78,188 $4,887 $ 391 $5,278 $2,045 $ 3,233 $ 398
(NOT IN THOUSANDS)
Class C Shares
Under NASD Rule as Adopted....... $ 84,705 $5,294 $ 6 $5,300 $ 14 $ 5,286 $1,522
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B shares sold since February 26, 1988
(commencement of the public offering of Class B shares) and of all eligible
Class C shares sold since October 21, 1994 (commencement of the public
offering of Class C shares) other than shares acquired through dividend
reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0% as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments for Class B shares made prior to July 6, 1993
under a prior plan at the 0.75% rate, 0.50% of average daily net assets has
been treated as a distribution fee and 0.25% of average daily net assets has
been deemed to have been a service fee and not subject to the NASD maximum
sales charge rule. See "Purchase of Shares -- Distribution Plans" in the
Prospectus.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum or the NASD maximum.
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<PAGE> 71
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.
DEFERRED SALES CHARGES -- CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares", while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or on redemption of Class B
shares following the death or disability of a Class B shareholder. Redemptions
for which the waiver applies are: (a) any partial or complete redemption in
connection with a distribution following retirement under a tax-deferred
retirement plan or attaining age 59 1/2 in the case of an IRA or other
retirement plan, or part of a series of equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) or any
redemption resulting from the tax-free return of an excess contribution to an
IRA; or (b) any partial or complete redemption following the death or disability
(as defined in the Code) of a Class B shareholder (including one who owns the
Class B shares as joint tenant with his or her spouse), provided the redemption
is requested within one year of the death or initial determination of
disability. For the years ended October 31, 1992, 1993 and 1994, the Distributor
received contingent deferred sales charges of $12,562, $23,432 and $55,082,
respectively, all of which was paid to Merrill Lynch.
Merrill Lynch Blueprint(SM) Program. Class B shares are offered to
certain participants in Blueprint. Blueprint is directed to small investors and
participants in certain affinity groups such as trade associations, credit
unions and benefit plans. Class B shares of the Fund are offered through
Blueprint only to members of certain affinity groups. The CDSC is waived in
connection with purchase orders placed through Blueprint by members of such
affinity groups. Services, including the exchange privilege, available to Class
B investors through Blueprint, however, may differ from those available to
other Class B investors. Orders for purchases and redemptions of Class B shares
of the Fund may be grouped for execution purposes which, in some circumstances,
may involve the execution of such orders two business days following the day
such orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There is no minimum initial
or subsequent purchase requirement for investors who are part of a Blueprint
automatic investment plan. Additional information concerning these Blueprint
programs, including any annual fees or transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
21
<PAGE> 72
Retirement Plans. Any Retirement Plan which does not meet the
qualifications to purchase Class A or Class D shares at net asset value has the
option of purchasing Class A or Class D 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 CDSC upon
redemption. The CDSC is waived for any Eligible 401(k) Plan redeeming Class B
shares. "Eligible 401(k) Plan" is defined as a retirement plan qualified under
Section 401(k) of the Code with a salary reduction feature offering a menu of
investments to plan participants. The CDSC 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 Class
B shares of MLAM-advised mutual funds ("Eligible 401(a) Plan"). Other
tax-qualified retirement plans within the meaning of Section 401(a) and 403(b)
of the Code which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a menu of
investments) by independent administration firms contracted through Merrill
Lynch also may purchase Class B shares with a waiver of the CDSC. The CDSC 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 or Merrill Lynch
Trust Company custodied Individual Retirement Account and held in such account
at the time of redemption. The Class B CDSC also is waived for any Class B
shares which are purchased by a Merrill Lynch rollover IRA that was funded by a
rollover from a terminated 401(k) plan managed by the MLAM Private Portfolio
Group and held in such account at the time of redemption. 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
22
<PAGE> 73
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.
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, 1994, the Fund paid $62,415, $1,968 or 3.2% of which was paid to
Merrill Lynch for effecting 5.2% of the aggregate dollar amount of 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.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the United States national securities exchanges from
executing transactions for their affiliates and institutional accounts which
they manage unless the member (i) has obtained prior express authorization from
the account to effect such transactions, (ii) at least annually furnishes the
account with a statement of the aggregate compensation received by the member in
effecting such transactions, and (iii) complies with any rules the Commission
has prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch acting as a broker for the
Fund in any of its portfolio transactions executed on any such securities
exchange of which it is a member, appropriate consents have been obtained from
the Fund and annual statements as to aggregate compensation will be provided to
the Fund.
For the year ended October 31, 1992, Merrill Lynch effected no portfolio
transactions pursuant to such contract. For the year ended October 31, 1993,
Merrill Lynch engaged in no portfolio transactions pursuant to
23
<PAGE> 74
such contract. For the year ended October 31, 1994, 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 all classes of the Fund is determined
once daily Monday through Friday 15 minutes after the close of business on the
New York Stock Exchange (generally, 4:00 P.M. New York time), on each day during
which the New York Stock Exchange is open for trading. The New York Stock
Exchange is not open on New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. 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 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, Class C and Class D shares generally
will be lower than the per share net asset value of the Class A shares,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to the Class B and Class
C shares and the daily expense accruals of the account maintenance fees
applicable with respect to the Class D shares; moreover, the per share net asset
value of the Class B and Class C shares generally will be lower than the per
share net asset value of its Class D shares reflecting the daily expense
accruals of the distribution fees and higher transfer agency fees applicable
with respect to the Class B and Class C shares of the Fund. It is expected,
however, that the per share net asset value of the four classes will tend to
converge (although not necessarily meet) immediately after the payment of
dividends or distributions, which will differ by approximately the amount of the
expense accrual differentials between the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Directors as the
primary market. Securities traded in the over-the-counter market are valued at
the most recent 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.
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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 statements, at least quarterly, 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 will receive separate transaction confirmations for each
purchase or sale transaction other than the automatic investment purchase and
the reinvestment of ordinary income dividends and long-term capital gain
distributions. Shareholders considering transferring their Class A or Class D
shares from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the Class A or Class D shares are to
be transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A or Class D shares (paying any applicable CDSC) so
that the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder.
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.
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 PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer, or by mail directly to the Transfer Agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Fund's Automatic Investment Plan whereby the Fund is authorized
through pre-authorized checks or automated clearing house debits of $50 or more
to charge the regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such shareholder.
Alternatively, investors who maintain CMA(R) accounts may arrange to have
periodic
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<PAGE> 76
investments made in the Fund, in their CMA(R) accounts or in certain related
accounts in amounts of $100 or more ($1 for retirement accounts) through the
CMA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
ordinary income 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 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 or direct deposited on or about the payment date.
Shareholders may, at any time, notify the Transfer Agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or capital gains distributions reinvested in shares of the Fund or vice
versa and, commencing ten days after the receipt by the Transfer Agent of such
notice, those instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS -- CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make 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 or Class D shares of the Fund having a value, based on cost or the
current offering price, of $5,000 or more, and monthly withdrawals are available
for shareholders with Class A or Class D shares with such a value of $10,000 or
more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify either a dollar amount or a percentage of the value of his Class A or
Class D shares. Redemptions will be made at net asset value as determined 15
minutes after the close of business on the New York Stock Exchange (generally,
4:00 P.M., New York time) on the 24th day of each month or the 24th day of the
last month of each quarter, whichever is applicable. If the New York Stock
Exchange is not open for business on such date, the Class A or Class D shares
will be redeemed at the close of business on 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 A or Class D shares in the Investment Account are
reinvested automatically in the Class A or Class D shares. A shareholder's
Systematic Withdrawal Plan may be terminated at any time, without charge or
penalty, by the shareholder, the Fund, the Fund's transfer agent or the
Distributor. Withdrawal payments should not be considered as dividends, yield or
income. Each withdrawal is a taxable event. If periodic withdrawals continuously
exceed reinvested dividends, the shareholder's original investment may be
reduced correspondingly. Purchases of additional Class A or Class D shares
concurrent with withdrawals are ordinarily disadvantageous to the shareholder
because of sales charges and tax liabilities. The Fund will not knowingly accept
purchase orders for Class A or Class D shares of the Fund from investors who
maintain a Systematic Withdrawal Plan unless such purchase is equal to at least
one year's scheduled withdrawals or $1,200, whichever is greater. Periodic
investments may not be made into an Investment Account in which the shareholder
has elected to make systematic withdrawals.
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<PAGE> 77
A Class A or Class D shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $25. The
proceeds of systematic redemptions will be posted to the shareholder's account
five business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month,
bimonthly systematic redemptions will be made at net asset value on the first
Monday of every other month, and quarterly, semiannual or annual redemptions are
made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their Financial Consultant.
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and in certain of the other mutual funds sponsored by Merrill Lynch as well
as in other securities. Merrill Lynch charges an initial establishment fee and
an annual custodial fee for each account. Information with respect to these
plans is available upon request from Merrill Lynch. The minimum initial purchase
to establish any such plan is $100, and the minimum subsequent purchase is $1.
Capital gains and income received in each of the plans referred to above
are exempt from Federal taxation until distributed from the plans. Investors
considering participation in any such plan should review specific tax laws
relating thereto and should consult their attorneys or tax advisers with respect
to the establishment and maintenance of any such plan.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select Pricing System, Class A shareholders may exchange Class A shares of
the Fund for Class A shares of a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the second fund in his account in which
the exchange is made at the time of the exchange or is otherwise eligible to
purchase Class A shares of the second fund. If the Class A shareholder wants to
exchange Class A shares for shares of a second MLAM-advised mutual fund, but
does not hold Class A shares of the second fund in his account at the time of
the exchange and is not otherwise eligible to acquire Class A shares of the
second fund, the shareholder will receive Class D shares of the second fund as a
result of the exchange. Class D shares also may be exchanged for Class A shares
of a second MLAM-advised mutual fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the account
in which the exchange is made or is otherwise eligible to purchase Class A
shares of the second fund. Class B, Class C and Class D shares are exchangeable
with shares of the same class of other MLAM-advised mutual funds. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period of the newly acquired shares of the
other fund as more fully described below. Class A, Class B, Class C and Class D
shares also are exchangeable for shares of certain
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<PAGE> 78
MLAM-advised money market funds specifically designated below as available for
exchange by holders of Class A, Class B, Class C or Class D shares. Shares with
a net asset value of at least $100 are required to qualify for the exchange
privilege, and any shares utilized in an exchange must have been held by the
shareholder for 15 days. It is contemplated that the exchange privilege may be
applicable to other new mutual funds whose shares may be distributed by the
Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charges paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-loan basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and Class D shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was paid.
Based on this formula, Class A and Class D shares of the Fund generally will be
exchanged into the Class A or Class D shares of the other funds or into shares
of the Class A and Class D money market funds without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will continue
to be subject to the Fund's CDSC schedule if such schedule is higher than the
CDSC schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through use
of the exchange privilege will be subject to the Fund's CDSC schedule if such
schedule is higher than the CDSC schedule relating to the Class B or Class C
shares of the fund from which the exchange has been made. For purposes of
computing the sales load that may be payable on a disposition of the new Class B
or Class C shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period of the new Class B or Class C shares.
For example, an investor may exchange Class B or Class C shares of the Fund for
those of Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after
having held the Fund's Class B shares for two and a half years. The 2% CDSC that
generally would apply to redemption would not apply to the exchange. Three years
later the investor may decide to redeem the Class B shares of Special Value Fund
and receive cash. There will be no CDSC due on this redemption, since by
"tacking" the two and a half year holding period of the Fund's Class B shares to
the three year holding period for the Special Value Fund Class B shares, the
investor will be deemed to have held the new Class B shares for more than five
years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Manager or its affiliates, but the period of time
that Class B or Class C shares are held in a money market fund will not count
towards satisfaction of the holding period requirement for purposes of reducing
the CDSC or, with respect to Class B shares, towards satisfaction of the
conversion period. However, shares of a money
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<PAGE> 79
market fund which were acquired as a result of an exchange for Class B or Class
C shares of a fund may, in turn, be exchanged back into Class B or Class C
shares, respectively, of any fund offering such shares, in which event the
holding period for Class B or Class C shares of the fund will be aggregated with
previous holding periods for purposes of reducing the CDSC. Thus, for example,
an investor may exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund after having held the Fund Class B shares for two and a half
years and three years later decide to redeem the shares of Merrill Lynch
Institutional Fund ("Institutional Fund") for cash. At the time of this
redemption, the 2% CDSC that would have been due had the Class B shares of the
Fund been redeemed for cash rather than exchanged for shares of Institutional
Fund will be payable. If, instead of such redemption the shareholder exchanged
such shares for Class B shares of a fund which the shareholder continued to hold
for an additional two and a half years, any subsequent redemption will not incur
a CDSC.
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made are as follows:
Funds Issuing Class A, Class B, Class C and Class D Shares:
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC........ High current income consistent with a policy of
limiting the degree of fluctuation in net asset
value of fund shares resulting from movements
in interest rates through investment primarily
in a portfolio of adjustable rate securities.
MERRILL LYNCH AMERICAS
INCOME FUND, INC............ A high level of current income, consistent with
prudent investment risk, by investing primarily
in debt securities denominated in a currency of
a country located in the Western Hemisphere
(i.e., North and South America and the
surrounding waters).
MERRILL LYNCH ARIZONA LIMITED
MATURITY MUNICIPAL
BOND FUND................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal and
Arizona income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade Arizona
Municipal Bonds.
MERRILL LYNCH ARIZONA
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arizona income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH ARKANSAS
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income
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exempt from Federal and Arkansas income taxes
as is consistent with prudent investment
management.
MERRILL LYNCH ASSET GROWTH
FUND, INC................... High total investment return, consistent with
prudent risk, from investment in United States
and foreign equity, debt and money market
securities, the combination of which will be
varied both with respect to types of securities
and markets in response to changing market and
economic trends.
MERRILL LYNCH ASSET INCOME
FUND, INC................... A high level of current income through
investment primarily in United States fixed
income securities.
MERRILL LYNCH BALANCED FUND
FOR INVESTMENT AND
RETIREMENT.................. As high a level of total investment return as
is consistent with a relatively low level of
risk through investment in common stock and
other types of securities, including fixed
income securities and convertible securities.
MERRILL LYNCH BASIC VALUE
FUND, INC................... Capital appreciation and, secondarily, income
through investments in securities, primarily
equities, that are undervalued and therefore
represent basic investment value.
MERRILL LYNCH CALIFORNIA
INSURED MUNICIPAL
BOND FUND................... A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and California
income taxes as is consistent with prudent
investment management through investment in a
portfolio primarily of insured California
Municipal Bonds.
MERRILL LYNCH CALIFORNIA
LIMITED MATURITY MUNICIPAL
BOND FUND................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal and
California income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade California
Municipal Bonds.
MERRILL LYNCH CALIFORNIA
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income
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exempt from Federal and California income taxes
as is consistent with prudent investment
management.
MERRILL LYNCH CAPITAL
FUND, INC................... The highest total investment return consistent
with prudent risk through a fully managed
investment policy utilizing equity, debt and
convertible securities.
MERRILL LYNCH COLORADO
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Colorado income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH CONNECTICUT
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Connecticut
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH CORPORATE
BOND FUND, INC.............. Current income from three separate diversified
portfolios of fixed income securities.
MERRILL LYNCH DEVELOPING
CAPITAL MARKETS FUND, INC... Long-term appreciation through investment in
securities, principally equities, of issuers in
countries having smaller capital markets.
MERRILL LYNCH DRAGON
FUND, INC................... Capital appreciation primarily through
investment in equity and debt securities of
issuers domiciled in developing countries
located in Asia and the Pacific Basin.
MERRILL LYNCH EUROFUND........ Capital appreciation primarily through
investment in equity securities of corporations
domiciled in Europe.
MERRILL LYNCH FEDERAL
SECURITIES TRUST............ High current return through investments in U.S.
Government and Government agency securities,
including GNMA mortgage-backed certificates and
other mortgage-backed Government securities.
MERRILL LYNCH FLORIDA
LIMITED MATURITY MUNICIPAL
BOND FUND................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal
income taxes as is
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consistent with prudent investment management
while serving to offer shareholders the
opportunity to own securities exempt from
Florida intangible personal property taxes
through investment in a portfolio primarily of
intermediate-term investment grade Florida
Municipal Bonds.
MERRILL LYNCH FLORIDA
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as is
consistent with prudent investment management
while seeking to offer shareholders the
opportunity to own securities exempt from
Florida intangible personal property taxes.
MERRILL LYNCH FUND
FOR TOMORROW, INC. ......... Long-term growth through investment in a
portfolio of good quality securities, primarily
common stock, potentially positioned to benefit
from demographic and cultural changes as they
affect consumer markets.
MERRILL LYNCH FUNDAMENTAL
GROWTH FUND, INC. .......... Long-term growth through investment in a
diversified portfolio of equity securities
placing particular emphasis on companies that
have exhibited an above-average growth rate in
earnings.
MERRILL LYNCH FUNDAMENTAL
VALUE PORTFOLIO
(AVAILABLE ONLY FOR
EXCHANGES BY CERTAIN
INDIVIDUAL RETIREMENT
ACCOUNTS FOR WHICH MERRILL
LYNCH ACTS AS CUSTODIAN).... A portfolio of Merrill Lynch Retirement Asset
Builder Program, Inc., a series fund, whose
objective is to provide capital appreciation
and income by investing in securities, with at
least 65% of the portfolio's assets being
invested in equities.
MERRILL LYNCH GLOBAL
ALLOCATION FUND, INC. ...... High total investment return, consistent with
prudent risk, through a fully managed
investment policy utilizing United States and
foreign equity, debt and money market
securities, the combination of which will be
varied from time to time both with respect to
the types of securities and markets in response
to changing market and economic trends.
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<PAGE> 83
MERRILL LYNCH GLOBAL BOND FUND
FOR INVESTMENT AND
RETIREMENT.................. High total investment return from investment in
government and corporate bonds denominated in
various currencies and multinational currency
units.
MERRILL LYNCH GLOBAL
HOLDINGS, INC.
(RESIDENTS OF ARIZONA MUST
MEET INVESTOR SUITABILITY
STANDARDS).................. The highest total investment return consistent
with prudent risk through worldwide investment
in an internationally diversified portfolio of
securities.
MERRILL LYNCH GLOBAL
OPPORTUNITY PORTFOLIO
(AVAILABLE ONLY FOR
EXCHANGES BY CERTAIN
INDIVIDUAL RETIREMENT
ACCOUNTS FOR WHICH MERRILL
LYNCH ACTS AS CUSTODIAN).... A portfolio of Merrill Lynch Retirement Asset
Builder Program, Inc., a series fund, whose
objective is to provide a high total investment
return through an investment policy utilizing
United States and foreign equity, debt and
money market securities, the combination of
which will vary depending upon changing market
and economic trends.
MERRILL LYNCH GLOBAL
RESOURCES TRUST............. Long-term growth and protection of capital from
investment in securities of domestic and
foreign companies that possess substantial
natural resource assets.
MERRILL LYNCH GLOBAL
SMALLCAP FUND, INC. ........ Long-term growth of capital by investing
primarily in equity securities of issuers with
relatively small market capitalizations located
in various foreign countries and in the United
States.
MERRILL LYNCH GLOBAL
UTILITY FUND, INC. ......... Capital appreciation and current income through
investment of at least 65% of its total assets
in equity and debt securities issued by
domestic and foreign companies which are
primarily engaged in the ownership or operation
of facilities used to generate, transmit or
distribute electricity, telecommunications, gas
or water.
MERRILL LYNCH GROWTH FUND FOR
INVESTMENT AND RETIREMENT... Growth of capital and, secondarily, income from
investment in a diversified portfolio of equity
securities placing principal emphasis
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<PAGE> 84
on those securities which management of the
fund believes to be undervalued.
MERRILL LYNCH HEALTHCARE FUND,
INC.
(RESIDENTS OF WISCONSIN MUST
MEET INVESTOR SUITABILITY
STANDARDS).................. Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in healthcare.
MERRILL LYNCH INTERNATIONAL
EQUITY FUND................. Capital appreciation and, secondarily, income
by investing in a diversified portfolio of
equity securities of issuers located in
countries other than the United States.
MERRILL LYNCH LATIN AMERICA
FUND, INC................... Capital appreciation by investing primarily in
Latin American equity and debt securities.
MERRILL LYNCH MARYLAND
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Maryland income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH MASSACHUSETTS
LIMITED MATURITY MUNICIPAL
BOND FUND................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal and
Massachusetts income taxes as is consistent
with prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade
Massachusetts Municipal Bonds.
MERRILL LYNCH MASSACHUSETTS
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Massachusetts
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH MICHIGAN
LIMITED MATURITY MUNICIPAL
BOND FUND................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide a
high level of income exempt from Federal and
Michigan income taxes as is consistent with
prudent investment management through
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<PAGE> 85
investment in a portfolio primarily of
intermediate-term investment grade Michigan
Municipal Bonds.
MERRILL LYNCH MICHIGAN
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Michigan income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH MINNESOTA
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Minnesota
personal income taxes as is consistent with
prudent investment management.
MERRILL LYNCH MUNICIPAL
BOND FUND, INC.............. Tax-exempt income from three separate
diversified portfolios of municipal bonds.
MERRILL LYNCH MUNICIPAL
INTERMEDIATE TERM FUND...... Currently the only portfolio of Merrill Lynch
Municipal Series Trust, a series fund, whose
objective is to provide as high a level as
possible of income exempt from Federal income
taxes by investing in investment grade
obligations with a dollar weighted average
maturity of five to twelve years.
MERRILL LYNCH NEW JERSEY
LIMITED MATURITY MUNICIPAL
BOND FUND................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal and
New Jersey income taxes as is consistent with
prudent investment management through a
portfolio primarily of intermediate-term
investment grade New Jersey Municipal Bonds.
MERRILL LYNCH NEW JERSEY
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and New Jersey
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH NEW MEXICO
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and New Mexico
income taxes as is consistent with prudent
investment management.
35
<PAGE> 86
MERRILL LYNCH NEW YORK
LIMITED MATURITY MUNICIPAL
BOND FUND................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal, New
York State and New York City income taxes as is
consistent with prudent investment management
through investment in a portfolio primarily of
intermediate-term investment grade New York
Municipal Bonds.
MERRILL LYNCH NEW YORK
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal, New York State and
New York City income taxes as is consistent
with prudent investment management.
MERRILL LYNCH NORTH CAROLINA
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and North Carolina
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH OHIO MUNICIPAL
BOND FUND................... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Ohio income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH OREGON
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Oregon income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH PACIFIC
FUND, INC................... Capital appreciation by investing in equity
securities of corporations domiciled in Far
Eastern and Western Pacific countries,
including Japan, Australia, Hong Kong and
Singapore.
MERRILL LYNCH PENNSYLVANIA
LIMITED MATURITY MUNICIPAL
BOND FUND................... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal and
Pennsylvania income taxes as is consistent with
prudent investment management through
investment in a portfolio of intermediate-term
investment grade Pennsylvania Municipal Bonds.
36
<PAGE> 87
MERRILL LYNCH PENNSYLVANIA
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Pennsylvania
personal income taxes as is consistent with
prudent investment management.
MERRILL LYNCH PHOENIX
FUND, INC. ................. Long-term growth of capital by investing in
equity and fixed income securities, including
tax-exempt securities, of issuers in weak
financial condition or experiencing poor
operating results believed to be undervalued
relative to the current or prospective
condition of such issuer.
MERRILL LYNCH QUALITY
BOND PORTFOLIO
(AVAILABLE ONLY FOR
EXCHANGES BY CERTAIN
INDIVIDUAL RETIREMENT
ACCOUNTS FOR WHICH MERRILL
LYNCH ACTS AS CUSTODIAN).... A portfolio of Merrill Lynch Retirement Asset
Builder Program, Inc., a series fund, whose
objective is to provide a high level of current
income through investment in a diversified
portfolio of debt obligations, such as
corporate bonds and notes, convertible
securities, preferred stocks and governmental
obligations.
MERRILL LYNCH SHORT-TERM
GLOBAL INCOME FUND, INC. ... As high a level of current income as is
consistent with prudent investment management
from a global portfolio of high quality debt
securities denominated in various currencies
and multinational currency units and having
remaining maturities not exceeding three years.
MERRILL LYNCH SPECIAL
VALUE FUND, INC. ........... Long-term growth of capital from investments in
securities, primarily common stocks, of
relatively small companies believed to have
special investment value and emerging growth
companies regardless of size.
MERRILL LYNCH STRATEGIC
DIVIDEND FUND............... Long-term total return from investment in
dividend paying common stocks 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 derive or are expected to derive a
substantial portion of their sales from
products and services in technology.
37
<PAGE> 88
MERRILL LYNCH TEXAS
MUNICIPAL BOND FUND......... A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as is
consistent with prudent investment management
by investing primarily in a portfolio of
long-term, investment grade obligations issued
by the State of Texas, its political
subdivisions, agencies and instrumentalities.
MERRILL LYNCH U.S. GOVERNMENT
SECURITIES PORTFOLIO
(AVAILABLE ONLY FOR
EXCHANGES BY CERTAIN
INDIVIDUAL RETIREMENT
ACCOUNTS FOR WHICH MERRILL
LYNCH ACTS AS CUSTODIAN).... A portfolio of Merrill Lynch Retirement Asset
Builder Program, Inc., a series fund, whose
objective is to provide a high current return
through investments in U.S. Government and
government agency securities, including GNMA
mortgage-backed certificates and other
mortgage-backed government securities.
MERRILL LYNCH UTILITY INCOME
FUND, INC. ................. High current income through investment in
equity and debt securities issued by companies
which are primarily engaged in the ownership or
operation of facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
MERRILL LYNCH WORLD INCOME
FUND, INC. ................. High current income by investing in a global
portfolio of fixed income securities
denominated in various currencies, including
multinational currencies.
Class A Share
Money Market Funds:
MERRILL LYNCH READY
ASSETS TRUST................ Preservation of capital, liquidity and the
highest possible current income consistent with
the foregoing objectives from the short-term
money market securities in which the 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
objectives are current income, preservation of
capital and liquidity available from investing
in a diversified portfolio of short-term money
market securities.
38
<PAGE> 89
MERRILL LYNCH U.S.A.
GOVERNMENT RESERVES......... Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and
repurchase agreements relating to such
securities.
MERRILL LYNCH U.S. TREASURY
MONEY FUND.................. Preservation of capital, liquidity and current
income through investment exclusively in a
diversified portfolio of short-term marketable
securities which are direct obligations of the
U.S. Treasury.
Class B, Class C and Class D Share
Money Market Funds:
MERRILL LYNCH
GOVERNMENT FUND............. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in securities issued
or guaranteed by the U.S. Government, its
agencies and instrumentalities and in
repurchase agreements secured by such
obligations.
MERRILL LYNCH
INSTITUTIONAL FUND.......... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide maximum current income
consistent with liquidity and the maintenance
of a high quality portfolio of money market
securities.
MERRILL LYNCH INSTITUTIONAL
TAX-EXEMPT FUND............. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income exempt
from Federal income taxes, preservation of
capital and liquidity available from investing
in a diversified portfolio of short-term, high
quality municipal bonds.
MERRILL LYNCH TREASURY FUND... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct obligations
of the U.S. Treasury and up to 10% of its total
assets in repurchase agreements secured by such
obligations.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an investor
may exercise the exchange
39
<PAGE> 90
privilege. Certain funds may suspend the offering of their shares to the general
public at any time and thereafter may resume such offering from time to time.
The exchange privilege is available only to U.S. shareholders in states where
the exchange legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income, if any.
Dividends from such net investment income will be paid quarterly. All net
realized long- or short-term capital gains, if any, will be distributed to the
Fund's shareholders annually. From time to time, the Fund may declare a special
distribution at or about the end of the calendar year in order to comply with 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
each class of shares will be reduced as a result of any account maintenance,
distribution and transfer agency fees applicable with respect to such class of
shares. See "Determination of Net Asset Value".
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended. If it so qualifies, the Fund (but not its shareholders)
will not be subject to Federal income tax on the part of its net ordinary income
and net realized capital gains that it distributes to Class A, Class B, Class C
and Class D shareholders (together, the "shareholders"). The Fund intends to
distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income 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.
Any loss upon the sale or exchange of Fund shares held for six months or less,
however, will be treated as long-term capital loss to the extent of any capital
gain dividends received by the shareholder. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income 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
40
<PAGE> 91
the Code, if certain requirements are met. For this purpose, the Fund will
allocate dividends eligible for the dividends received deduction among the Class
A, Class B, Class C and Class D shareholders according to a method (which it
believes is consistent with the Securities and Exchange Commission exemptive
order permitting the issuance and sale of multiple classes of stock) that is
based on the gross income allocable to Class A, Class B, Class C and Class D
shareholders during the taxable year, or such other method as the Internal
Revenue Service may prescribe. If the Fund pays a dividend in January 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, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Shareholders
may be able to claim United States foreign tax credits with respect to such
taxes, subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. If more than 50% in value of
the Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, the Fund will be eligible, and intends, to file an
election with the Internal Revenue Service pursuant to which shareholders of the
Fund will be required to include their proportionate shares of such withholding
taxes in their United States income tax returns as gross income, treat such
proportionate shares as taxes paid by them, and deduct such proportionate shares
in computing their taxable incomes or, alternatively, use them as foreign 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 among the Class
A, Class B, Class C and Class D shareholders according to a method similar to
that described above for the allocation of dividends eligible for the dividends
received deduction.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's
41
<PAGE> 92
basis in the Class B shares converted, and the holding period of the acquired
Class D shares will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon the purchase of the new shares in the absence
of the exchange privilege. Instead, such sales charge will be treated as an
amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to 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.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield securities"), as previously described. Some of these
high yield securities may be purchased at a discount and may therefore cause the
Fund to accrue income before amounts due under the obligations are paid. In
addition, a portion of the interest payments on such high yield securities may
be treated as dividends for Federal income tax purposes and may be eligible for
the dividends received deduction allowed to domestic corporations under the
Code.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the end
of each taxable year, i.e., each such option or futures contract will be treated
as sold for its fair market value on the last day of the taxable year. Unless
such contract is a forward foreign exchange contract, or is a non-equity option
or a regulated futures contract for a non-U.S. currency for which the Fund
elects to have gain or loss treated as ordinary gain or loss under Code Section
988 (as described below), gain or loss from Section 1256 contracts will be 60%
long-term and 40% short-term capital gain or loss. 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.
42
<PAGE> 93
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options, futures and forward foreign
exchange contracts. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain closing transactions
in options, futures and forward foreign exchange contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Fund may be
restricted in effecting closing transactions within three months after entering
into an option or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stocks, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, futures, or forward
foreign exchange contracts will be valued for purposes of the RIC
diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders as
ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions, and 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, and resulting in a capital gain for any
shareholder who received a distribution greater than such shareholder's basis in
Fund shares (assuming the shares were held as a capital asset). These rules and
the mark-to-market rules described above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of currency
fluctuations with respect to its investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative 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.
43
<PAGE> 94
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, Class B, Class C and Class D
shares in accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted and
(2) the maximum applicable sales charges will not be included with respect to
annual or annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time.
44
<PAGE> 95
Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated. Since
the Fund did not begin to offer Class C or Class D shares publicly until October
21, 1994, such information is provided as to those classes for the period ended
October 31, 1994 only.
<TABLE>
<CAPTION>
CLASS A SHARES* CLASS B SHARES
------------------------------------------ ------------------------------------------
EXPRESSED AS A REDEEMABLE VALUE EXPRESSED AS A REDEEMABLE VALUE
PERCENTAGE BASED OF A HYPOTHETICAL PERCENTAGE BASED OF A HYPOTHETICAL
ON A HYPOTHETICAL $1,000 INVESTMENT AT ON A HYPOTHETICAL $1,000 INVESTMENT AT
PERIOD $1,000 INVESTMENT THE END OF THE PERIOD $1,000 INVESTMENT THE END OF THE PERIOD
- ---------------------------- ----------------- --------------------- ----------------- ---------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended
October 31, 1994.......... (4.67)% $ 953.30 (4.25)% $ 957.50
Five Years Ended
October 31, 1994.......... 6.06% $1,342.20 6.12% $1,346.00
Inception (February 26,
1988) to October 31,
1994...................... 5.67% $1,445.30
Inception (November 4, 1988)
to October 31, 1994....... 6.11% $1,426.50
</TABLE>
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended October 31,
1994...................... 0.61% $1,006.10 (0.37)% $ 996.30
1993...................... 17.64% $1,176.40 16.45% $1,164.50
1992...................... 10.00% $1,100.00 8.77% $1,087.70
1991...................... 18.09% $1,180.90 16.79% $1,167.90
1990...................... (7.86)% $ 921.40 (8.68)% $ 913.20
1989...................... 5.58% $1,055.80
Inception (February 26,
1988)
to October 31, 1988....... 1.70% $1,017.00
Inception (November 4, 1988)
to October 31, 1989....... 6.29% $1,062.90
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (February 26,
1988) to October 31,
1994...................... 44.53% $1,445.30
Inception (November 4, 1988)
to October 31, 1994....... 42.65% $1,426.50
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended
October 31, 1994.......... 2.44% 1.52%
30 days ended
December 31, 1994......... 3.59% 2.72%
</TABLE>
45
<PAGE> 96
<TABLE>
<CAPTION>
CLASS C SHARES** CLASS D SHARES**
------------------------------------------ ------------------------------------------
EXPRESSED AS A REDEEMABLE VALUE EXPRESSED AS A REDEEMABLE VALUE
PERCENTAGE BASED OF A HYPOTHETICAL PERCENTAGE BASED OF A HYPOTHETICAL
ON A HYPOTHETICAL $1,000 INVESTMENT AT ON A HYPOTHETICAL $1,000 INVESTMENT AT
PERIOD $1,000 INVESTMENT THE END OF THE PERIOD $1,000 INVESTMENT THE END OF THE PERIOD
- ---------------------------- ----------------- --------------------- ----------------- ---------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21, 1994)
to October 31, 1994....... (11.95)% $ 996.50 (82.27)% $ 953.70
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21, 1994)
to October 31, 1994....... 0.65% $1,006.50 0.65% $1,006.50
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21, 1994)
to October 31, 1994....... (0.35)% $ 996.50 (4.63)% $ 953.70
<CAPTION>
YIELD
<S> <C> <C> <C> <C>
30 days ended
December 31, 1994......... 2.65% 3.30%
</TABLE>
- ---------------
* Information as to Class A shares is presented for the period November 4, 1988
to October 31, 1994. Prior to November 4, 1988, no Class A shares were
publicly issued.
** Class C and Class D shares commenced operations on October 21, 1994.
In order to reflect the reduced sales charges in the case of Class A or
Class D shares or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares", respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may take into account the waiver
of the CDSC and therefore may reflect greater total return since, due to the
reduced sales charges or the waiver of sales charges, a lower amount of expenses
is deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on October 22, 1987. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock, each of which consists of 100,000,000 shares. Class A, Class B,
Class C and Class D Common Stock represent an interest in the same assets of the
Fund and are identical in all respects except that the Class B, Class C and
Class D shares bear certain expenses related to the account maintenance and/or
distribution of such shares and have exclusive voting rights with respect to
matters relating to such expenditures. The Fund has received an order from the
Commission permitting the issuance and sale of multiple 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.
46
<PAGE> 97
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held and will vote on the election of
Directors and any other matter submitted to a shareholder vote. The Fund does
not intend to hold meetings of shareholders in any year in which the Investment
Company Act does not require shareholders to act upon any of the following
matters: (i) election of Directors; (ii) approval of an investment advisory
agreement; (iii) approval of a distribution agreement; and (iv) ratification of
selection of independent accountants. Generally, under Maryland law, a meeting
of shareholders may be called for any purpose on the written request of the
holders of at least 25% of the outstanding shares of the Fund. Voting rights for
Directors are not cumulative. Shares issued are fully paid and non-assessable
and have no preemptive rights. Redemption and conversion rights are discussed
elsewhere herein and in the Prospectus. Each share of Class B, Class C and Class
D Common Stock is entitled to participate equally in dividends and distributions
declared by the Fund and in the net assets of the Fund upon liquidation or
dissolution after satisfaction of outstanding liabilities. Stock certificates
will be issued by the Transfer Agent only on specific request. Certificates for
fractional shares are not issued in any case.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares for $100,000. Such shares were acquired for investment and can only be
disposed by redemption. 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.
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 Fund's net assets and number of shares
outstanding on October 31, 1994, is calculated as set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C*** CLASS D***
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net Assets................................. $7,850,496 $53,121,238 $202,924 $178,523
========= ========== ======== ========
Number of Shares Outstanding............... 729,963 4,916,473 18,779 16,585
========= ========== ======== ========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)............................. $10.75 $10.80 $10.81 $10.76
Shares Charge (for Class A and Class D
shares: 5.25% of offering price (5.54% of
net asset value per share))*............. 0.60 ** ** 0.60
---- ---- ----- -----
Offering Price............................. $11.35 $10.80 $10.81 $11.36
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of
Shares -- Deferred Sales Charge Alternative -- Class B and Class C Shares"
in the Prospectus.
*** Class C and Class D shares commenced operations on October 21, 1994.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the Fund's shareholders. The
independent auditors are responsible for auditing the annual financial
statements of the Fund.
47
<PAGE> 98
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 East, Jacksonville,
Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the opening,
maintenance and servicing of shareholder accounts. See "Management of the
Fund -- Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements audited
by independent auditors, is sent to shareholders each year. After the end of
each year, shareholders will receive Federal income tax information regarding
dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act, to which reference is hereby made.
- ------------------------------------------------------
Under a separate agreement, Merrill Lynch & Co., Inc. has granted the Fund the
right to use the "Merrill Lynch" name and has reserved the right to withdraw its
consent to the use of such name by the Fund at any time or to grant the use of
such name to any other company, and the Fund has granted Merrill Lynch & Co.,
Inc., under certain conditions, the use of any other name it might assume in the
future, with respect to any corporation organized by Merrill Lynch & Co., Inc.
To the knowledge of the Fund, no person owned beneficially 5% or more of
the Fund's shares on February 1, 1995.
48
<PAGE> 99
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
49
<PAGE> 100
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 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
50
<PAGE> 101
governments or other entities, but only as one factor in the total rating
assessment. Moody's makes no representation and gives no opinion on the legal
validity or enforceability of any support arrangement. You are cautioned to
review with your counsel any questions regarding particular support
arrangements.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds,
a variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols, presented below, are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stocks occupy a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
Preferred stock rating symbols and their definitions are as follows:
aaa An issue which is rated "AAA" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa An issue which is rated "AA" is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the
foreseeable future.
a An issue which is rated "A" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "BAA" is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of
time.
ba An issue which is rated "BA" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue which is rated "B" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa An issue which is rated "CAA" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
ca An issue which is rated "CA" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.
c This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "AA" through "B" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its
51
<PAGE> 102
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP ("STANDARD & POOR'S") CORPORATE
DEBT RATINGS
A Standard & Poor's corporate or municipal rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard 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.
52
<PAGE> 103
B Debt rated B has a greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity
or willingness to pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BB or BB- rating.
CCC Debt rated CCC has a current identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions
to meet timely payments of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal.
The CCC rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied B or B- rating.
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed
but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is being
paid.
D Debt rated D is in payment default. The D rating category is also used
when interest payments or principal repayments are not made on the date
due even if the applicable grace period has not expired, unless Standard
& Poor's believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
PLUS (+) or MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing with the major
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal amount
of those bonds to the extent that the underlying deposit collateral is
insured by the Federal Savings & Loan Insurance Corp. or the Federal
Deposit Insurance Corp. and interest is adequately collateralized.
* Continuance of the rating is contingent upon Standard & Poor's receipt of
an executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.
NR Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
53
<PAGE> 104
Debt Obligations of Issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments may impose certain
ratings or other standards for obligations eligible for investment by savings
banks, trust companies, insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1".
A-3 Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless Standard
& Poor's believes that such payments will be made during such grace
period.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be higher than
the bond rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer.
54
<PAGE> 105
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment-capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable sinking
fund requirements in accordance with the terms of the obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay
the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA".
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead 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.
55
<PAGE> 106
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.
56
<PAGE> 107
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, 1994, the related statements of operations for the year then
ended and changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the five-year
period then ended. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1994, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch Global
Convertible Fund, Inc. as of October 31, 1994, the results of its operations,
the changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
December 8, 1994
57
<PAGE> 108
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
NORTH Shares Value Percent of
AMERICA Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United States Chemicals 5,000 Witco Corp. $ 145,300 $ 140,000 0.23%
Metals & Mining 10,000 ++WHX Corp. 179,350 150,000 0.24
Oil & Related 10,000 Exxon Corp. 615,700 628,750 1.02
Total Investments in United
States Common Stocks 940,350 918,750 1.49
Convertible Preferred Stocks
Canada Oil & Gas 10,000 Occidental Petroleum Corp.,
Producers Pfd., Series A 500,700 502,500 0.82
Total Investments in Canadian
Convertible Preferred Stocks 500,700 502,500 0.82
United States Automotive 3,000 Goodrich (B.F.) Company, $3.50
Parts Pfd., Series D 164,550 150,375 0.25
Chemicals 20,000 Ashland Oil Inc., $6.25 Pfd. 1,065,800 1,265,000 2.06
Data 20,000 UNISYS Corp., $3.75 Pfd.,
Processing Series A 1,233,875 692,500 1.13
Food/Beverage/ 30,000 ConAgra Inc., Pfd., Class E 998,025 993,750 1.62
Tobacco & Household
Forest Products/ 10,000 Federal Paper Board Co.,
Paper & Packaging $2.875 Pfd. 489,550 562,500 0.92
5,000 James River Corp. of Virginia,
$3.375 Pfd. A, Series K 223,000 198,750 0.32
---------- ---------- -----
712,550 761,250 1.24
Metals & Mining 10,000 USX Corp., $3.25 Pfd. 505,800 503,750 0.82
5,000 WHX Corp., Pfd. 256,650 270,625 0.44
20,000 WHX Corp., Pfd. B 1,000,150 990,000 1.61
---------- ---------- -----
1,762,600 1,764,375 2.87
Transportation 20,000 Delta Airlines, Inc., $3.50
Pfd. C 1,010,350 957,500 1.56
Total Investments in United
States Convertible Preferred
Stocks 6,947,750 6,584,750 10.73
Face
Amount Convertible Bonds
Canada Oil & Related US$ 2,000,000 Amoco Canada Petro Co., Ltd.,
7.375% due 9/01/2013 2,391,500 2,470,000 4.03
Total Investments in Canadian
Convertible Bonds 2,391,500 2,470,000 4.03
United States Building & 1,200,000 Masco Corp., 5.25% due
Construction 2/15/2012 1,027,750 987,000 1.61
Computer 500,000 Cray Research, Inc., 6.125%
Services due 2/01/2011 510,000 357,500 0.58
Electronics 1,600,000 Texas Instruments, Inc., 2.75%
due 9/29/2002 1,555,250 1,552,000 2.53
Food & 1,000,000 American Brands Inc., 5.75%
Beverage due 4/11/2005 1,167,500 1,137,500 1.85
Forest Products/ 1,200,000 Mead Corp., 6.75% due
Paper & Packaging 9/15/2012 1,199,250 1,224,000 2.00
Insurance 2,000,000 Chubb Capital Corp., 6% due
5/15/1998 2,018,750 2,015,000 3.28
Leisure 800,000 Time Warner Inc., 8.75% due
1/10/2015 802,000 791,000 1.29
Metals & Mining 1,600,000 Homestake Mining Co., 5.50%
due 6/23/2000 1,688,000 1,680,000 2.74
300,000 USX Corp., 7% due 6/15/2017 285,600 267,000 0.44
---------- ---------- -----
1,973,600 1,947,000 3.18
</TABLE>
58
<PAGE> 109
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
NORTH AMERICA Face Value Percent of
(concluded) Industries Amount Convertible Bonds Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United States Multi- US$ 1,000,000 Ogden Corp., 5.75% due
(concluded) Industry 10/20/2002 $ 935,500 $ 810,000 1.32%
Natural Gas 1,500,000 Consolidated Natural Gas Co.,
7.25% due 12/15/2015 1,626,250 1,511,250 2.46
Oil & Related 1,600,000 Pennzoil Co., 4.75% due
10/01/2003 1,614,625 1,420,000 2.31
Real Estate 500,000 Rockefeller Center Properties,
Inc., 8% due 12/31/2000 520,000 457,500 0.75
Retail Stores 2,000,000 Home Depot Inc., 4.50% due
2/15/1997 2,304,062 2,360,000 3.85
Textiles 250,000 Fieldcrest Cannon, Inc., 6%
due 3/15/2012 160,000 195,000 0.32
Total Investments in United
States Convertible Bonds 17,414,537 16,764,750 27.33
Total Investments in North
American Securities 28,194,837 27,240,750 44.40
PACIFIC Shares
BASIN Held Common Stocks
Japan Financial Services 10,000 Daiwa Securities Co., Ltd. 109,055 145,556 0.24
10,000 Nikko Securities Co., Ltd. 91,790 117,683 0.19
6,000 Nomura Securities Co., Ltd. 94,803 125,735 0.21
10,000 Yamaichi Securities Co., Ltd. 94,005 79,281 0.13
----------- ----------- -----
389,653 468,255 0.77
Machinery 20,000 Shimadzu Corp. 156,900 147,001 0.24
5,000 Sodick Co., Ltd. 94,250 47,280 0.08
----------- ----------- -----
251,150 194,281 0.32
Total Investments in Japanese
Common Stocks 640,803 662,536 1.09
Convertible Preferred Stocks
Hong Kong Food & 800,000 Dairy Farms International
Beverage Holdings Ltd., $6.50 Pfd. 876,000 796,000 1.30
Total Investments in Hong Kong
Convertible Preferred Stocks 876,000 796,000 1.30
Face
Amount Convertible Bonds
Australia Banking US$ 750,000 Lend Lease Finance Inter-
national Corp., Ltd., 4.75%
due 6/01/2003 848,437 787,500 1.28
Total Investments in Australian
Convertible Bonds 848,437 787,500 1.28
Japan Auto & Truck Yen 50,000,000 No. 2 Toyota Motor Corp.,
1.20% due 1/28/1998 572,731 572,933 0.93
Automotive 15,000,000 No. 2 Mazda Motors, Ltd.,
1.70% due 3/31/1998 131,050 144,782 0.24
Building & 25,000,000 No. 2 Nichiei Construction
Construction Co., Ltd., 1.50% due 4/30/1999 195,234 227,883 0.37
25,000,000 No. 5 Nichiei Construction
Co., Ltd., 1.70% due 10/31/2002 261,132 209,043 0.34
----------- ----------- -----
456,366 436,926 0.71
</TABLE>
59
<PAGE> 110
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
PACIFIC BASIN Face Value Percent of
(concluded) Industries Amount Convertible Bonds Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Japan Chemicals Yen 20,000,000 No. 6 Sekisui Plastic Co.,
Ltd., 2% due 9/29/2000 $ 217,190 $ 214,308 0.35%
Computer Services 5,000,000 No. 5 CSK Corp., 3.80% due
3/19/1999 38,344 52,080 0.09
5,000,000 No. 6 CSK Corp., 3.90% due
3/20/2001 38,344 51,616 0.08
----------- ----------- -----
76,688 103,696 0.17
Diversified 50,000,000 No. 3 Mitsui & Co., 1.50% due
Companies 3/31/2003 529,601 531,124 0.87
Electronics 50,000,000 No. 7 Fujitsu Ltd., 4.30%
due 9/29/1995 505,414 533,705 0.87
15,000,000 No. 2 Kyushu Matsushita
Electric Co., Inc., 1.50%
due 3/31/1999 158,941 159,337 0.26
75,000,000 No. 11 Sharp Corp., 1.50%
due 9/30/1998 803,237 901,982 1.47
----------- ----------- -----
1,467,592 1,595,024 2.60
Food & Beverage 50,000,000 No. 1 Sanyo Coca-Cola
Bottling, Inc., 0.90% due
6/30/2003 522,384 466,089 0.76
50,000,000 No. 3 Sapporo Breweries, Ltd.,
1.20% due 12/18/2009 525,379 495,509 0.81
----------- ----------- -----
1,047,763 961,598 1.57
Food & 15,000,000 No. 4 Asahi Breweries, Ltd.,
Household 2.10% due 10/21/1997 138,779 150,976 0.25
Products 35,000,000 No. 3 Itoham Foods, Inc.,
1.80% due 2/28/2003 336,922 290,854 0.47
45,000,000 No. 4 Kikkoman Corp., 1.60%
due 12/29/2000 468,167 435,739 0.71
30,000,000 No. 6 Meiji Milk Products, 2.10%
due 9/30/2002 303,887 281,821 0.46
60,000,000 No. 2 Skylark Co., Ltd., 1.60%
due 6/28/1996 562,294 612,574 1.00
----------- ----------- -----
1,810,049 1,771,964 2.89
Health & 15,000,000 No. 2 Dai-Ichi Kogyo Seiyaku
Personal Co., Ltd., 2% due 3/31/1997 162,367 148,808 0.24
Care 15,000,000 No. 3 EISAI Co., Ltd., 4.20%
due 3/31/1998 183,945 172,344 0.28
----------- ----------- -----
346,312 321,152 0.52
Leisure 50,000,000 No. 4 Canon Co., 1.20% due
12/20/2005 553,669 614,225 1.00
25,000,000 No. 3 Canon Co., 1.30% due
12/19/2008 293,750 307,113 0.50
30,000,000 No. 2 Tokyo Dome Co., Ltd.,
1.70% due 1/31/1997 303,458 297,306 0.48
----------- ----------- -----
1,150,877 1,218,644 1.98
Machinery 20,000,000 No. 2 Nippondenso Co., Ltd.,
1.20% due 12/26/1997 224,111 227,108 0.37
60,000,000 No. 5 Toppan Printing Co. Ltd.,
1.90% due 11/30/2001 642,844 604,522 0.99
----------- ----------- -----
866,955 831,630 1.36
Metals & Mining 25,000,000 No. 2 Godo Steel Co., Ltd.,
2.60% due 3/29/2002 256,657 258,594 0.42
Multi- 60,000,000 No. 5 Asahi Glass Co., Ltd.,
Industry 1.90% due 12/26/2008 624,629 681,325 1.11
40,000,000 No. 4 Sony Corp., 1.40% due
3/31/2005 278,956 364,612 0.59
----------- ----------- -----
903,585 1,045,937 1.70
Oil & Related 20,000,000 No. 4 Nippon Oil Co., Ltd.,
1.70% due 3/31/2003 147,642 165,996 0.27
Real Estate 15,000,000 No. 12 Mitsui Real Estate
Development Co., Ltd., 1.40%
due 9/30/2003 148,558 121,555 0.20
Transportation 30,000,000 No. 4 All Nippon Airways Co.,
Ltd., 1% due 3/31/2004 312,259 327,965 0.53
50,000,000 No. 6 Yamato Transport Co.,
Ltd., 1.70% due 9/30/2002 539,151 544,544 0.89
----------- ----------- -----
851,410 872,509 1.42
Total Investments in Japanese
Convertible Bonds 10,981,026 11,168,372 18.20
Total Investments in Pacific
Basin Securities 13,346,266 13,414,408 21.87
</TABLE>
60
<PAGE> 111
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
WESTERN Shares Value Percent of
EUROPE Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United Business 71,944 Saatchi & Saatchi Co., PLC $ 217,005 $ 192,604 0.31%
Kingdom Services
Total Investments in United
Kingdom Common Stocks 217,005 192,604 0.31
Face Amount Convertible Bonds
France Leisure Ffr 4,200,000 Euro Disney SCA, 6.75% due
10/01/2001 686,297 512,323 0.84
Total Investments in French
Convertible Bonds 686,297 512,323 0.84
Switzerland Banking US$ 700,000 CS Holdings, 4.875% due
11/19/2002 890,750 946,750 1.54
Total Investments in Swiss
Convertible Bonds 890,750 946,750 1.54
United Business Pound 500,000 Hanson Trust PLC, 9.50% due
Kingdom Services Sterling 1/31/2006 869,996 840,686 1.37
Food & Beverage 500,000 Allied-Lyons PLC, 6.75% due
7/07/2008 817,944 867,212 1.41
550,000 Northern Foods PLC, 6.75%
due 8/08/2008 867,775 758,658 1.24
----------- ----------- ------
1,685,719 1,625,870 2.65
Oil & Related 1,200,000 EE Finance, 8.75% due
6/27/2006 1,860,229 1,870,730 3.05
Transportation 300,000 P&O Steam Navigation Co.,
7.25% due 5/19/2003 477,653 503,187 0.82
Total Investments in United
Kingdom Convertible Bonds 4,893,597 4,840,473 7.89
Total Investments in Western
European Securities 6,687,649 6,492,150 10.58
Short-Term Securities
United States Commercial US$ 2,903,000 General Electric Capital
Paper* Corp., 4.72% due 11/01/1994 2,903,000 2,903,000 4.73
US Government US Treasury Bills:
& Agency 5,000,000 4.34% due 11/10/1994 4,994,575 4,994,575 8.14
Obligations* 6,000,000 4.63% due 12/01/1994 5,976,850 5,976,850 9.74
----------- ----------- ------
10,971,425 10,971,425 17.88
Total Investments in Short-
Term Securities 13,874,425 13,874,425 22.61
Total Investments $62,103,177 61,021,733 99.46
===========
Unrealized Depreciation on Forward Foreign Exchange Contracts** (128,199) (0.21)
Other Assets Less Liabilities 459,647 0.75
----------- ------
Net Assets $61,353,181 100.00%
=========== ======
<FN>
++Non-income producing security.
*Commercial Paper and certain US Government & Agency Obligations are traded on
a discount basis; the interest rates shown are the discount rates paid at the
time of purchase by the Fund.
**Forward foreign exchange contracts as of October 31, 1994 are as follows:
</TABLE>
Unrealized
Depreciation
Foreign Currency Sold Expiration Date (Note 1b)
Yen 200,000,000 November 1994 $ (33,961)
Yen 450,000,000 December 1994 (94,238)
Total Unrealized Depreciation--Net on Forward Foreign
Exchange Contracts (US$ Commitment--$6,605,804) $(128,199)
=========
See Notes to Financial Statements.
61
<PAGE> 112
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
As of October 31, 1994
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$62,103,177) (Note 1a) $ 61,021,733
Cash 72,698
Receivables:
Capital shares sold $ 599,188
Interest 515,017
Dividends 4,825 1,119,030
------------
Prepaid expenses and other assets (Note 1f) 66,689
------------
Total assets 62,280,150
------------
Liabilities: Unrealized depreciation on forward foreign exchange contracts
(Note 1b) 128,199
Payables:
Securities purchased 438,028
Capital shares redeemed 160,371
Distributor (Note 2) 43,557
Investment adviser (Note 2) 32,545 674,501
------------
Accrued expenses and other liabilities 124,269
------------
Total liabilities 926,969
------------
Net Assets: Net assets $ 61,353,181
------------
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares authorized $ 72,996
Consist of: Class B Common Stock, $0.10 par value, 100,000,000 shares authorized 491,647
Class C Common Stock, $0.10 par value, 100,000,000 shares authorized 1,878
Class D Common Stock, $0.10 par value, 100,000,000 shares authorized 1,659
Paid-in capital in excess of par 60,937,778
Undistributed investment income--net 220,749
Undistributed realized capital gains on investments and foreign
currency transactions--net 829,511
Unrealized depreciation on investments and foreign currency
transactions--net (1,203,037)
------------
Net assets $ 61,353,181
============
Net Asset Class A--Based on net assets of $7,850,496 and 729,963 shares
Value: outstanding $ 10.75
============
Class B--Based on net assets of $53,121,238 and 4,916,473 shares
outstanding $ 10.80
============
Class C--Based on net assets of $202,924 and 18,779 shares
outstanding $ 10.81
============
Class D--Based on net assets of $178,523 and 16,585 shares
outstanding $ 10.76
============
</TABLE>
See Notes to Financial Statements.
62
<PAGE> 113
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended October 31, 1994
<S> <C> <C> <C>
Investment Interest and discount earned (net of $14,641 foreign withholding tax) $ 1,527,979
Income Dividends (net of $605 foreign withholding tax) 507,422
(Notes 1d & 1e): ------------
Total income 2,035,401
------------
Expenses: Distribution fees--Class B (Note 2) $ 381,718
Investment advisory fees (Note 2) 285,526
Printing and shareholder reports 111,720
Professional fees 71,997
Accounting services (Note 2) 66,982
Transfer agent fees--Class B (Note 2) 62,017
Registration fees (Note 1f) 51,442
Directors' fees and expenses 49,496
Custodian fees 26,104
Transfer agent fees--Class A (Note 2) 7,966
Pricing fees 2,673
Other 3,685
------------
Total expenses 1,121,326
------------
Investment income--net 914,075
------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 1,000,267
(Loss) on Foreign currency transactions--net (193,908) 806,359
Investments & ------------
Foreign Change in unrealized appreciation/depreciation on:
Currency Investments--net (1,627,788)
Transactions--Net Foreign currency transactions--net (206,739) (1,834,527)
(Notes 1b, 1e & 3): ------------ ------------
Net realized and unrealized loss on investments and foreign
currency transactions (1,028,168)
------------
Net Decrease in Net Assets Resulting from Operations $ (114,093)
------------
</TABLE>
See Notes to Financial Statements.
63
<PAGE> 114
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year
Ended
October 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <C> <C> <C>
Operations: Investment income--net $ 914,075 $ 310,807
Realized gain on investments and foreign currency transactions--net 806,359 303,814
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net (1,834,527) 2,506,720
------------ ------------
Net increase (decrease) in net assets resulting from operations (114,093) 3,121,341
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (148,368) (59,079)
Shareholders Class B (616,538) (236,220)
(Note 1g): Realized gain on investments--net:
Class A (36,309) (37,814)
Class B (244,353) (223,267)
------------ ------------
Net decrease in net assets resulting from dividends and distri-
butions to shareholders (1,045,568) (556,380)
------------ ------------
Capital Share Net increase in net assets derived from capital share transactions 28,124,292 15,565,778
Transactions ============ ============
(Note 4):
Net Assets: Total increase in net assets 26,964,631 18,130,739
Beginning of year 34,388,550 16,257,811
------------ ------------
End of year* $ 61,353,181 $ 34,388,550
============ ============
<FN>
*Undistributed investment income--net $ 220,749 $ 71,580
============ ============
</TABLE>
See Notes to Financial Statements.
64
<PAGE> 115
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class A
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 11.08 $ 9.79 $ 9.39 $ 8.37 $ 9.95
Operating -------- --------- --------- --------- ---------
Performance: Investment income--net .33 .23 .21 .25 .38
Realized and unrealized gain (loss) on
investments and foreign currency trans-
actions--net (.27) 1.45 .68 1.22 (1.11)
-------- --------- --------- --------- ---------
Total from investment operations .06 1.68 .89 1.47 (.73)
-------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net (.30) (.23) (.25) (.37) (.42)
Realized gain on investments--net (.09) (.16) (.24) (.08) (.43)
-------- --------- --------- --------- ---------
Total dividends and distributions (.39) (.39) (.49) (.45) (.85)
-------- --------- --------- --------- ---------
Net asset value, end of year $ 10.75 $ 11.08 $ 9.79 $ 9.39 $ 8.37
======== ========= ========= ========= =========
Total Investment Based on net asset value per share 0.61% 17.64% 10.00% 18.09% (7.86%)
Return:** ======== ========= ========= ========= =========
Ratios to Average Expenses, net of reimbursement 1.66% 2.22% 2.47% 2.47% 2.39%
Net Assets: ======== ========= ========= ========= =========
Expenses 1.66% 2.22% 2.86% 2.87% 2.39%
======== ========= ========= ========= =========
Investment income--net 2.97% 2.36% 2.61% 3.16% 4.55%
======== ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $ 7,850 $ 4,557 $ 2,283 $ 448 $ 162
Data: ======== ========= ========= ========= =========
Portfolio turnover 38.04% 26.02% 4.91% 18.02% 22.76%
======== ========= ========= ========= =========
</TABLE>
<TABLE>
<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: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 11.13 $ 9.84 $ 9.44 $ 8.39 $ 9.95
Operating -------- --------- --------- --------- ---------
Performance: Investment income--net .21 .13 .12 .18 .29
Realized and unrealized gain (loss) on
investments and foreign currency trans-
actions--net (.25) 1.46 .67 1.20 (1.10)
-------- --------- --------- --------- ---------
Total from investment operations (.04) 1.59 .79 1.38 (.81)
-------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net (.20) (.14) (.15) (.25) (.32)
Realized gain on investments--net (.09) (.16) (.24) (.08) (.43)
-------- --------- --------- --------- ---------
Total dividends and distributions (.29) (.30) (.39) (.33) (.75)
-------- --------- --------- --------- ---------
Net asset value, end of year $ 10.80 $ 11.13 $ 9.84 $ 9.44 $ 8.39
======== ========= ========= ========= =========
</TABLE>
65
<PAGE> 116
FINANCIAL HIGHLIGHTS
<TABLE>
<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: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Total Investment Based on net asset value per share (0.37%) 16.45% 8.77% 16.79% (8.68%)
Return:** ======== ========= ========= ========= =========
Ratios to Average Expenses, excluding distribution fees and
Net Assets: net of reimbursement 1.69% 2.26% 2.49% 2.50% 2.41%
======== ========= ========= ========= =========
Expenses, net of reimbursement 2.69% 3.26% 3.49% 3.50% 3.41%
======== ========= ========= ========= =========
Expenses 2.69% 3.26% 3.96% 3.88% 3.41%
======== ========= ========= ========= =========
Investment income--net 1.95% 1.32% 1.53% 2.25% 3.51%
======== ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $ 53,121 $ 29,831 $ 13,975 $ 14,973 $ 18,296
Data: ======== ========= ========= ========= =========
Portfolio turnover 38.04% 26.02% 4.91% 18.02% 22.76%
======== ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. October 21, 1994++
to October 31, 1994++++
Increase (Decrease) in Net Asset Value: Class C Class D
<S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.74 $ 10.69
Operating ----------- -----------
Performance: Realized and unrealized gain on investments and
foreign currency transactions--net .07 .07
----------- -----------
Total from investment operations .07 .07
----------- -----------
Net asset value, end of period $ 10.81 $ 10.76
=========== ===========
Total Investment Based on net asset value per share 0.65%+++ 0.65%+++
Return:** =========== ===========
Ratios to Average Expenses, excluding distribution fees 4.64%* 4.88%*
Net Assets: =========== ===========
Expenses 5.64%* 5.13%*
=========== ===========
Investment income--net (1.74%)* (1.24%)*
=========== ===========
Supplemental Net assets, end of year (in thousands) $ 203 $ 179
Data: =========== ===========
Portfolio turnover 38.04% 38.04%
=========== ===========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
+++Aggregate total investment return.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
</TABLE>
See Notes to Financial Statements.
66
<PAGE> 117
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Global Convertible Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, open-end management
investment company. The Fund offers four classes of shares under the Merrill
Lynch Select Pricing SM System. Shares of Class A and Class D are sold with a
front-end sales charge. Shares of Class B and Class C may be subject to a
contingent deferred sales charge. All classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and conditions, except
that Class B, Class C and Class D Shares bear certain expenses related to the
account maintenance of such shares, and Class B and Class C Shares also bear
certain expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to its account
maintenance and distribution expenditures. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded on stock
exchanges are valued at the last sale price on the exchange on which such
securities are traded as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last available 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 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 value. 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 contract as a
hedge against either specific transactions or portfolio positions. Such
contracts are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such contracts.
Premium or discount is amortized over the life of the contracts.
The Fund may also purchase or sell listed or over-the-counter foreign currency
options, foreign currency futures and related options on foreign currency
futures as a short or long hedge against possible variations in foreign exchange
rates. Such transactions may be effected with respect to hedges on non-US dollar
denominated securities owned by the Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund.
(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).
67
<PAGE> 118
Written and purchased options are non-income producing investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend 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.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). Effective January 1, 1994, the investment
advisory business of MLAM was reorganized from a corporation to a limited
partnership. Both prior to and after the reorganization, ultimate control of
MLAM was vested with Merrill Lynch & Co., Inc. ("ML & Co."). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary
of ML & Co. The limited partners are ML & Co. and Merrill Lynch Investment
Management, Inc. ("MLIM"), which is also an indirect wholly-owned subsidiary of
ML & Co. The Fund has also entered into 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.
Pursuant to the distribution plans ("the Distribution Plans") adopted by the
Fund in accordance with Rule 12b-1 under the Investment Company Act of 1940, the
Fund pays the Distributor ongoing account maintenance and distribution fees. The
fees are accrued daily and paid monthly at annual rates based upon the average
daily net assets of the shares as follows:
<TABLE>
<CAPTION>
Account Distribution
Maintenance Fee Fee
<S> <C> <C>
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
</TABLE>
68
<PAGE> 119
NOTES TO FINANCIAL STATEMENTS (concluded)
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the year ended October 31, 1994, MLFD earned underwriting discounts and
MLPF&S earned dealer concessions on sales of the Fund's Class A and Class D
shares as follows:
<TABLE>
<CAPTION>
MLFD MLPF&S
<S> <C> <C>
Class A $2,045 $22,563
Class D $ 325 $ 3,797
</TABLE>
MLPF&S received contingent deferred sales charges of $55,082 relating to
transactions in Class B Shares and $1,968 in commissions on the execution of
portfolio security transactions for the Fund for the year ended October 31,
1994.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is
the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
MLAM, MLIM, MLPF&S, FDS, PSI, MLFD and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 1994 were $30,423,811 and $13,301,372, respectively.
Net realized and unrealized gains (losses) as of October 31, 1994 were as
follows:
<TABLE>
<CAPTION>
Realized Unrealized
Gains (Losses) Gains (Losses)
<S> <C> <C>
Long-term investments $1,000,940 $(1,081,444)
Short-term investments (673) --
Foreign currency transactions 30,406 6,606
Forward foreign exchange contracts (224,314) (128,199)
---------- -----------
Total $ 806,359 $(1,203,037)
========== ===========
</TABLE>
As of October 31, 1994, net unrealized depreciation for Federal income tax
purposes aggregated $1,081,444, of which $1,255,474 related to appreciated
securities and $2,336,918 related to depreciated securities. At October 31,
1994, the aggregate cost of investments for Federal income tax purposes was
$62,103,177.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions were
$28,124,292 and $15,565,778 for the years ended October 31, 1994 and October 31,
1993, respectively.
Transactions in capital shares for each class were as follows:
<TABLE>
<CAPTION>
Class A Shares for the Year Dollar
Ended October 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 552,279 $ 5,969,087
Shares issued to shareholders in
reinvestment of dividends and
distributions 13,838 147,006
---------- -----------
Total issued 566,117 6,116,093
Shares redeemed (247,561) (2,665,037)
---------- -----------
Net increase 318,556 $ 3,451,056
========== ===========
<CAPTION>
Class A Shares for the Year Dollar
Ended October 31, 1993 Shares Amount
<S> <C> <C>
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
========== ===========
</TABLE>
69
<PAGE> 120
<TABLE>
<CAPTION>
Class B Shares for the Year Dollar
Ended October 31, 1994 Shares Amount
<S> <S> <S>
Shares sold 3,053,210 $33,198,057
Shares issued to shareholders in
reinvestment of dividends and
distributions 62,480 619,865
---------- -----------
Total issued 3,115,690 33,817,922
Shares redeemed (878,683) (9,525,443)
---------- -----------
Net increase 2,237,007 $24,292,479
========== ===========
<CAPTION>
Class B Shares for the Year Dollar
Ended October 31, 1993 Shares Amount
<S> <C> <C>
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
</TABLE>
Transactions in capital shares for each class were as follows:
<TABLE>
<CAPTION>
Class B Shares for the Year Dollar
Ended October 31, 1993 Shares Amount
<S> <C> <C>
Shares redeemed (698,109) (7,463,275)
---------- -----------
Net increase 1,259,863 $13,575,359
========== ===========
<CAPTION>
Class C Shares for the Period
October 21, 1994++ to Dollar
October 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 18,780 $ 202,593
Shares redeemed (1) (11)
---------- -----------
Net increase 18,779 $ 202,582
========== ===========
<FN>
++Commencement of Operations.
<CAPTION>
Class D Shares for the Period
October 21, 1994++ to Dollar
October 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 16,586 $ 178,186
Shares redeemed (1) (11)
---------- -----------
Net increase 16,585 $ 178,175
========== ===========
<FN>
++Commencement of Operations.
</TABLE>
70
<PAGE> 121
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies..... 2
Management of the Fund................ 11
Directors and Officers.............. 11
Compensation of Directors........... 12
Management and Advisory
Arrangements..................... 13
Purchase of Shares.................... 14
Redemption of Shares.................. 21
Portfolio Transactions and
Brokerage........................... 22
Determination of Net Asset Value...... 24
Shareholder Services.................. 25
Dividends, Distributions and Taxes.... 39
Performance Data...................... 43
General Information................... 45
Description of Shares............... 45
Computation of Offering Price Per
Share............................ 46
Independent Auditors................ 46
Custodian........................... 47
Transfer Agent...................... 47
Legal Counsel....................... 47
Reports to Shareholders............. 47
Additional Information.............. 47
Appendix.............................. 48
Independent Auditors' Report.......... 56
Financial Statements.................. 57
</TABLE>
Code #10666-0295
[MERRILL LYNCH LOGO HERE]
MERRILL LYNCH
GLOBAL CONVERTIBLE
FUND, INC.
ART WORK
HERE
STATEMENT OF
ADDITIONAL
INFORMATION
February 24, 1995
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 122
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- --------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graphic paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<PAGE> 123
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for each of the periods in the seven-year period
ended October 31, 1994.
Contained in Part B:
Schedule of Investments as of October 31, 1994.
Statement of Assets and Liabilities as of October 31, 1994.
Statement of Operations for the year ended October 31, 1994.
Statements of Changes in Net Assets for the years ended October 31,
1994 and 1993.
Financial Highlights for each of the periods in the five-year period
ended October 31, 1994.
(B) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------- ----------------------------------------------------------------------------------
<S> <C> <C>
1 (a) -- Articles of Incorporation of the Registrant.
(b) -- Amendment to Articles of Incorporation, dated November 16, 1987.
(c) -- Amendment to Articles of Incorporation, dated October 19, 1994.
(d) -- Articles Supplementary to Articles of Incorporation, dated October 19, 1994.
2 -- By-Laws of Registrant.(e)
3 -- None.
4 -- Portions of the Articles of Incorporation and the By-Laws of the Registrant
defining the rights of holders of shares of the Registrant.(h)
5 (a) -- Management Agreement between Registrant and Merrill Lynch Asset Management,
Inc.(c)
(b) -- Supplement to Management Agreement between the Registrant and Merrill Lynch Asset
Management, L.P.(j)
6 (a)(1) -- Class A Shares Distribution Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc.(e)
(a)(2) -- Form of Revised Class A Shares Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.(j)
6 (b) -- Class B Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc.(e)
(c) -- Form of Class C Shares Distribution Agreement between the Registrant and Merrill
Lynch Funds Distributor, Inc.(j)
(d) -- Form of Class D Shares Distribution Agreement between the Registrant and Merrill
Lynch Funds Distributor, Inc.(j)
(e) -- Letter Agreement between the Fund and Merrill Lynch Funds Distributor, Inc. dated
September 15, 1993, in connection with the Merrill Lynch Mutual Fund Adviser
program.(i)
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 Service, 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 LLP, independent auditors for the Registrant.
</TABLE>
C-1
<PAGE> 124
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------- ----------------------------------------------------------------------------------
<S> <C> <C>
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 Merrill Lynch, Pierce,
Fenner & Smith Incorporated.(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.(i)
(c) -- Form of Class C Shares Distribution Plan and Class C Shares Distribution Plan
Sub-Agreement of the Registrant.(j)
(d) -- Form of Class D Shares Distribution Plan and Class D Shares Distribution Plan
Sub-Agreement of the Registrant.(j)
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)
(c) -- Schedule for computation of performance quotations for Class C and Class D shares
provided in the Registration Statement in response to Item 22.
17 (a) -- Financial Data Schedule for the Year Ended October 31, 1994 relating to Class A
shares.
(b) -- Financial Data Schedule for the Year Ended October 31, 1994 relating to Class B
shares.
(c) -- Financial Data Schedule for the Year Ended October 31, 1994 relating to Class C
shares.
(d) -- Financial Data Schedule for the Year Ended October 31, 1994 relating to Class D
shares.
</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 as amended by the
Amendment to Articles of Incorporation, dated October 19, 1994, filed as
Exhibit 1(b) 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.
C-2
<PAGE> 125
(i) Filed on February 24, 1994 as an Exhibit to Post-Effective Amendment No. 8
to the Registrant's Registration Statement under the Securities Act of 1933.
(j) Filed on October 13, 1994 as an Exhibit to Post-Effective Amendment No. 9 to
the Registrant's Registration Statement under the Securities Act of 1933.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE 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
TITLE OF CLASS AT JANUARY 31, 1995
- ------------------------------------------------------------------------ ------------------------
<S> <C>
Class A shares of Common Stock, par value $0.10 per share............... 25
Class B shares of Common Stock, par value $0.10 per share............... 84
Class C shares of Common Stock, par value $0.10 per share............... 11
Class D shares of Common Stock, par value $0.10 per share............... 7
</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, Class B, Class C and Class D
Distribution Agreements.
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, Class B, Class C and Class D Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933, 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
C-3
<PAGE> 126
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 Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc.,
Merrill Lynch Balanced Fund for Investment and Retirement, Merrill Lynch Capital
Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch 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, Inc., Merrill Lynch Global Resources Trust,
Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund,
Inc., Merrill Lynch Growth Fund for Investment and Retirement, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc.,
Merrill Lynch Institutional Intermediate Fund, Merrill Lynch International
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch
Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement
Series Trust, Merrill Lynch Senior Floating Rate Fund, Inc., Merrill Lynch
Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill
Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill
Lynch U.S. Treasury Money Fund, Merrill Lynch Utility Income Fund, Inc., and
Merrill Lynch Variable Series Funds, Inc. 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.,
Emerging Tigers Fund, 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 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.,
Senior Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus
MuniNew York Holdings, Inc. and Worldwide DollarVest Fund, Inc. The address of
each of these investment companies is P.O. Box 9011, Princeton, New Jersey
08543-9011, except that the address of Merrill Lynch Funds for Institutions
Series and Merrill Lynch Institutional Intermediate Fund is One Financial
Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of the
Manager, FAM, Merrill Lynch Funds Distributor, Inc. ("MLFD") and Princeton
Services, Inc. ("Princeton Services") is also P.O. 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
C-4
<PAGE> 127
10281. The address of Financial Data Services, Inc. is 4800 Deerlake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
January 1, 1992 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, Kirstein and Ms. Griffin are directors,
trustees or officers of one or more of such companies.
Officers and Partners of MLAM are set forth as follows:
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------- ------------------------- -----------------------------------
<S> <C> <C>
ML & Co........................ Limited Partner Financial Services Holding Company
Princeton Services............. General Partner General Partner of FAM
Arthur Zeikel.................. President President of FAM; President and
Director of Princeton Services;
Director of MLFD; Executive Vice
President of ML & Co.; Executive
Vice President of Merrill Lynch
Terry K. Glenn................. Executive Vice President Executive Vice President of FAM;
Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of Financial Data
Services, Inc. ("FDS"); President
of Princeton Administrators, L.P.
Bernard J. Durnin.............. Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services
Vincent R. Giordano............ Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services
Elizabeth Griffin.............. Senior Vice President Senior Vice President of FAM
Norman R. Harvey............... Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services
N. John Hewitt................. Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services
Philip L. Kirstein............. Senior Vice President, Senior Vice President, General
General Counsel and Counsel and Secretary of FAM;
Secretary Senior Vice President, General
Counsel, Director and Secretary
of Princeton Services; Director
of MLFD
Ronald M. Kloss................ Senior Vice President and Senior Vice President and
Controller Controller of FAM; Senior Vice
President and Controller of
Princeton Services
Stephen M. M. Miller........... Senior Vice President Executive Vice President of
Princeton Administrators, L.P.;
Senior Vice President of
Princeton Services
</TABLE>
C-5
<PAGE> 128
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------- ------------------------- -----------------------------------
<S> <C> <C>
Joseph T. Monagle, Jr.......... Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services
Gerald M. Richard.............. Senior Vice President and Senior Vice President and Treasurer
Treasurer of FAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of
MLFD
Ronald L. Welburn.............. Senior Vice President Senior Vice President of FAM;
Senior Vice President of Princeton
Services
Anthony Wiseman................ Senior Vice President Senior Vice President of Princeton
Services
</TABLE>
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., Emerging Tigers Fund, 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 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., Senior Strategic
Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork
Holdings, Inc. and Worldwide Dollar Vest Fund, Inc.
C-6
<PAGE> 129
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Crook,
Aldrich, 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
Kevin P. Boman............................. Vice President None
Michael J. Brady........................... Vice President None
William M. Breen........................... Vice President None
Sharon Creveling........................... Vice President and None
Assistant 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
Salvatore Venezia.......................... Vice President None
William Wasel.............................. Vice President None
Robert Harris.............................. Secretary None
</TABLE>
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the Rules
thereunder 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, the Registrant is
not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-7
<PAGE> 130
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
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 1995.
MERRILL LYNCH GLOBAL CONVERTIBLE
FUND, INC. (Registrant)
By: /s/ ARTHUR ZEIKEL
------------------------------------
(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.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ----------------------------------- ---------------------------------- ------------------
<S> <C> <C>
/s/ ARTHUR ZEIKEL President and Director (Principal February 23, 1995
- ----------------------------------- Executive Officer)
(Arthur Zeikel)
/s/ GERALD M. RICHARD Treasurer (Principal Financial and February 23, 1995
- ----------------------------------- Accounting Officer)
(Gerald M. Richard)
/s/ HERBERT I. LONDON Director
- -----------------------------------
(Herbert I. London)
/s/ ROBERT R. MARTIN Director
- -----------------------------------
(Robert R. Martin)
/s/ JOSEPH L. MAY Director
- -----------------------------------
(Joseph L. May)
/s/ ANDRE F. PEROLD Director
- -----------------------------------
(Andre F. Perold)
*By: /s/ ARTHUR ZEIKEL February 23, 1995
- -----------------------------------
(Arthur Zeikel, Attorney-in-Fact)
</TABLE>
C-8
<PAGE> 131
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- --------------
<S> <C> <C>
1 (a) -- Articles of Incorporation of the Registrant.
(b) -- Amendment to Articles of Incorporation, dated November 16, 1987.
(c) -- Amendment to the Articles of Incorporation, dated October 19, 1994.
(d) -- Articles Supplementary to Articles of Incorporation, dated October 19, 1994.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
16 (c) -- Schedule for computation of performance quotations for Class C and Class D
shares provided in the Registration Statement in response to Item 22.
17 (a) -- Financial Data Schedule for Class A shares for the fiscal year ended October 31,
1994.
(b) -- Financial Data Schedule for Class B shares for the fiscal year ended October 31,
1994.
(c) -- Financial Data Schedule for Class C shares for the fiscal year ended October 31,
1994.
(d) -- Financial Data Schedule for Class D shares for the fiscal year ended October 31,
1994.
</TABLE>
<PAGE> 1
EXHIBIT 1(a)
ARTICLES OF INCORPORATION
OF
MERRILL LYNCH CONVERTIBLE FUND, INC.
ARTICLE I
THE UNDERSIGNED, JULIA HAUPTMAN COHEN, whose post-office address is
One World Trade Center, New York, New York 10048, being at least eighteen years
of age, does hereby act as an incorporator, under and by virtue of the General
Laws of the State of Maryland authorizing the formation of corporations and
with the intention of forming a corporation.
ARTICLE II
NAME
The name of the corporation is MERRILL LYNCH CONVERTIBLE FUND, INC.
ARTICLE III
PURPOSES AND POWERS
The purpose or purposes for which the Corporation is formed and the
business or objects to be transacted, carried on and promoted by it are as
follows:
(1) To conduct and carry on the business of an investment company of
the management type.
<PAGE> 2
(2) To hold, invest and reinvest its assets in securities, and in
connection therewith to hold part or all of its assets in cash.
(3) To issue and sell shares of its own capital stock in such amounts
and on such terms and conditions, for such purposes and for such amount or kind
of consideration now or hereafter permitted by the General Laws of the State of
Maryland and by these Articles of Incorporation, as its Board of Directors may
determine; provided, however, that the value of the consideration per share to
be received by the Corporation upon the sale or other disposition of any shares
of its capital stock shall not be less than the net asset value per share of
such capital stock outstanding at the time of such event.
(4) To redeem, purchase or otherwise acquire, hold, dispose of,
resell, transfer, reissue or cancel (all without the vote or consent of the
stockholders of the Corporation) shares of its capital stock, in any manner and
to the extent now or hereafter permitted by the General Laws of the State of
Maryland and by these Articles of Incorporation.
(5) To do any and all such further acts or things and to exercise any
and all such further powers or rights as may be necessary, incidental,
relative, conducive, appropriate or desirable for the accomplishment, carrying
out or attainment of all or any of the foregoing purposes or objects.
<PAGE> 3
The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations by
the General Laws of the State of Maryland now or hereafter in force, and the
enumeration of the foregoing. shall not be deemed to exclude any powers,
rights or privileges so granted or conferred.
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
The post-office address of the principal office of the Corporation in
the State of Maryland is c/o The Corporation Trust Incorporated, 32 South
Street, Baltimore, Maryland 21202. The name of the resident agent of the
Corporation in this State is The Corporation Trust Incorporated, a corporation
of this state and the post-office address of the resident agent is 32 South
Street Baltimore, Maryland 21202.
ARTICLE V
CAPITAL STOCK
(1) The total number of shares of capital stock which the Corporation
shall have authority to issue is Two Hundred Million (200,000,000) shares, of
the par value of Ten Cents ($.10) per share and an aggregate par value of
Twenty Million Dollars ($20,000,000), divided into two classes of Common Stock,
each of
<PAGE> 4
which consists of One Hundred Million (100,000,000) shares which are hereby
designated as Class A and Class B Common Stock, as follows:
(a) The holders of each share of capital stock of the Corporation
shall be entitled to one vote for each full share, and a fractional vote for
each fractional share of stock, irrespective of the class then standing in his
name on the books of the Corporation. On any matter submitted to a vote of
stockholders, all shares of the Corporation then issued and outstanding and
entitled to vote shall be voted in the aggregate and not by class, except that
when the matter does not affect any interest of a particular class, then only
stockholders of the affected class shall be entitled to vote thereon.
(b) Each class of capital stock of the Corporation shall represent
interests in the Corporation and have identical voting, dividend, liquidation
and other rights, except that:
(i) Expenses related to the distribution of the shares of a class of
capital stock may be borne solely by such class and a class may have exclusive
voting rights with respect to matters relating to the expenses being borne
solely by such class; and
(ii) The bearing of expenses solely by a class capital stock shall be
appropriately reflected (in the manner determined by the Board of Directors) in
the net asset value, dividends and liquidation rights of the shares of such
class.
<PAGE> 5
(2) Any fractional share shall carry proportionately all the rights of
a whole share, excepting any right to receive a certificate evidencing such
fractional share, but including, without limitation, the right to vote and the
right to receive dividends.
(3) All persons who shall acquire stock in the Corporation shall
acquire the same subject to the provisions of these Articles of Incorporation
and the By-Laws of the Corporation.
ARTICLE VI
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE DIRECTORS
AND STOCKHOLDERS
(1) The number of directors of the Corporation shall be three (3),
which number may be increased pursuant to the By-Laws of the Corporation but
shall never be less than three (3). The names of the directors who shall act
until the first annual meeting or until their successors are duly elected and
qualified are:
Philip L. Kirstein
Mark B. Goldfus
Michael J. Hennewinkel
(2) The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of capital stock, whether
now or hereafter authorized, for such consideration as the Board of Directors
may deem advisable, subject to such limitations as may be set forth in these
Articles of Incorporation or in the By-Laws of the Corporation or in the
General Laws of the State of Maryland.
(3) No holder of stock of the Corporation shall, as such holder, have
any right to purchase or subscribe for any shares of the capital stock of the
Corporation or any other security of the corporation which it may issue or sell
(whether out of the number of shares authorized by these Articles of
Incorporation, or out of any shares of the capital stock of the Corporation
acquired by it after the issue thereof, or otherwise) other than such right, if
any, as the Board of Directors, in its discretion, may determine.
<PAGE> 6
(4) Each director and each officer of the Corporation shall be
indemnified by the Corporation to the full extent permitted by the General Laws
of the State of Maryland, subject to the requirements of the Investment Company
Act of 1940, as amended.
(5) The Board of Directors of the Corporation may make, alter or
repeal from time to time any of the By-Laws of the Corporation except any
particular By-Law which is specified as not subject to alteration or repeal by
the Board of Directors, subject to the requirements of the Investment Company
Act of 1940, as amended.
<PAGE> 7
ARTICLE VII
REDEMPTION
Each holder of shares of capital stock of the Corporation shall be
entitled to require the Corporation to redeem all or any part of the shares of
capital stock of the Corporation standing in the name of such holder on the
books of the Corporation, and all shares of capital stock issued by the
Corporation shall be subject to redemption by the Corporation, at the
redemption price of such shares as in effect from time to time as may be
determined by the Board of Directors of the Corporation in accordance with the
provisions hereof, subject to the right of the Board of Directors of the
Corporation to suspend the right of redemption of shares of capital stock of
the Corporation or postpone the date of payment of such redemption price in
accordance with provisions of applicable law. The redemption price of shares of
capital stock of the Corporation shall be the net asset value thereof as
determined by the Board of Directors of the Corporation from time to time in
accordance with the provisions of applicable law, less such redemption fee or
other charge, if any, as may be fixed by resolution of the Board of Directors
of the Corporation. Payment of the redemption price shall be made in cash by
the Corporation at such time and in such manner as may be determined from time
to time by the Board of Directors of the Corporation.
<PAGE> 8
ARTICLE VIII
DETERMINATION BINDING
Any determination made in good faith, so far as accounting matters are
involved, in accordance with accepted accounting practice by or pursuant to the
direction of the Board of Directors, as to the amount of assets, obligations or
liabilities of the Corporation, as to the amount of net income of the
Corporation from dividends and interest for any period or amounts at any time
legally available for the payment of dividends, as to the amount of any
reserves or charges set up and the propriety thereof, as to the time of or
purpose for creating reserves or as to the use, alteration or cancellation of
any reserves or charges (whether or not any obligation or liability for which
such reserves or charges shall have been created, shall have been paid or
discharged or shall be then or thereafter required to be paid or discharged),
as to the price of any security owned by the Corporation or as to any other
matters relating to the issuance, sale, redemption or other acquisition or
disposition of securities or shares of capital stock of the Corporation, and
any reasonable determination made in good faith by the Board of Directors as to
whether any transaction constitutes a purchase of securities on "margin," a
sale of securities "short," or an underwriting of the sale of, or a
participation in any underwriting or selling group in connection with the
public distribution of, any securities, shall be final and conclusive, and
shall be
<PAGE> 9
binding upon the Corporation and all holders of its capital stock, past,
present and future, and shares of the capital stock of the Corporation are
issued and sold on the condition and understanding, evidenced by the purchase
of shares of capital stock or acceptance of share certificates, that any and
all such determinations shall be binding as aforesaid. No provision of these
Articles of Incorporation shall be effective to (a) require a waiver of
compliance with any provision of the Securities Act of 1933, as amended, or the
Investment Company Act of 1940, as amended, or of any valid rule, regulation or
order of the Securities and Exchange Commission thereunder or (b) protect or
purport to protect any director or officer of the Corporation against any
liability to the Corporation or its security holders to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
ARTICLE IX
PERPETUAL EXISTENCE
The duration of the Corporation shall be perpetual.
ARTICLE X
AMENDMENT
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in these Articles of Incorporation, in any manner now
or hereafter prescribed by statute,
<PAGE> 10
including any amendment which alters the contract rights, as expressly set
forth in the charter, of any outstanding stock and substantially adversely
affects the stockholder's rights, and all rights conferred upon stockholders
herein are granted subject to this reservation.
<PAGE> 11
IN WITNESS WHEREOF, the undersigned incorporator of MERRILL LYNCH
CONVERTIBLE FUND, INC. hereby executes the foregoing Articles of Incorporation
and acknowledges the same to be his act and further acknowledges that, to the
best of his knowledge, the matters and facts set forth therein are true in all
material respects under the penalties of perjury.
Dated the 21st day of October, 1987.
/s/ Julia Hauptman Cohen
------------------------
Julia Hauptman Cohen
<PAGE> 1
EXHIBIT 1(b)
MERRILL LYNCH CONVERTIBLE FUND, INC.
ARTICLES OF AMENDMENT
MERRILL LYNCH CONVERTIBLE FUND, INC., a Maryland corporation having
its principal office c/o The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202 (hereinafter called the "Corporation"), hereby
certifies to the State Department of Assessments and Taxation of Maryland,
that:
FIRST: The charter of the Corporation is hereby amended by striking out
Article II of the Articles of Incorporation and inserting in lieu thereof the
following:
ARTICLE II
NAME
The name of the Corporation is MERRILL LYNCH GLOBAL CONVERTIBLE FUND,
INC.
SECOND: The amendment to the charter of the Corporation herein made
was duly approved by unanimous written consent of the board of directors on
November 16, 1987; and that at the time of the approval by the directors there
were no shares of stock of the Corporation entitled to vote on the matter
either outstanding or subscribed for.
<PAGE> 2
IN WITNESS WHEREOF, Merrill Lynch Convertible Fund, Inc. has caused
these articles to be signed in its name and on its behalf by its President and
attested by its Secretary on November 16, 1987.
MERRILL LYNCH CONVERTIBLE FUND, INC.
By
/s/ Philip L. Kirstein
- -----------------------------
Philip L. Kirstein, President
Attest:
/s/ Mark B. Goldfus
- -----------------------------
Mark B. Goldfus, Secretary
THE UNDERSIGNED, President of MERRILL LYNCH CONVERTIBLE FUND, INC., who
executed on behalf of said corporation the foregoing Articles of Amendment, of
which this certificate is made a part, hereby acknowledges, in the name and on
behalf of said corporation, the foregoing Articles of Amendment to be the
corporate act of said corporation and further certifies that, to the best of
his knowledge, information and belief, the matters and facts set forth therein
with respect to the approval thereof are true in all material respects, under
the penalties of perjury.
/s/ Philip L. Kirstein
----------------------
Philip L. Kirstein
<PAGE> 1
EXHIBIT 1(c)
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC., a Maryland corporation
having its principal Maryland office c/o The Corporation Trust Incorporated, 32
South Street, Baltimore, Maryland 21202 (hereinafter called the "Corporation"),
hereby certifies to the State Department of Assessments and Taxation of
Maryland that:
FIRST: The charter of the Corporation is hereby amended by adding the
following provision at the end of Article V:
(8) The Board of Directors may classify and reclassify any issued
shares of capital stock into one or more additional or other classes or series
as may be established from time to time by setting or changing in any one or
more respects the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of stock and pursuant to such
classification or reclassification to increase or decrease the number of
authorized shares of any existing class or series; provided, however, that any
such classification or reclassification shall not substantially adversely
affect the rights of holders of such issued shares. The Board's authority
pursuant to this paragraph shall include, but not be limited to, the power to
vary among all the holders of a particular class or series (a) the length of
time shares must be held prior to reclassification to shares of another class
or series (the "Holding Period(s)"), (b) the manner in which the time for such
Holding Period(s) is determined and (c) the class or series into which the
particular class or series is being reclassified; provided, however, that,
subject to the first sentence of this section, with respect to holders of the
Corporation's shares issued on or after the date of the Corporation's first
effective prospectus which sets forth Holding Period(s) (the "First Holding
Period Prospectus"), the Holding Period(s), the manner in which the time for
such Holding Period(s) is determined and the class or series into which the
particular class or series is being reclassified shall be disclosed in the
Corporation's prospectus or statement of additional information in effect at
the time such shares, which are the subject of the reclassification, were
issued; and provided, further, that, subject to the first sentence of this
section, with respect to holders of the Corporation's Class B shares issued
prior to the date of the
<PAGE> 2
Corporation's First Holding Period Prospectus, the Holding Period shall be ten
(10) years for retirement plan (as recognized by the Internal Revenue Code of
1986, as amended from time to time) holders of issued Class B shares purchased
without a contingent deferred sales charge (a "CDSC-Waived Retirement Plan")
and shall be the Holding Period set forth in the Corporation's First Holding
Period Prospectus, for all other holders of issued Class B shares; Class B
shares held by a CDSC-Waived Retirement Plan shall be reclassified to Class D
shares in the month following the month in which the first Class B share of any
mutual fund advised by Merrill Lynch Asset Management, L.P., Fund Asset
Management, L.P., or their affiliates or successors, held by such CDSC-Waived
Retirement Plan has been held for the ten (10) year Holding Period established
by the Corporation's Board of Directors for such CDSC-Waived Retirement Plan
Class B shareholder; and the Class B shares of every shareholder other than
CDSC-Waived Retirement Plans shall be reclassified to Class D shares in the
month following the month in which such shares have been held for the Holding
Period established by the Corporation's Board of Directors for shareholders
other than CDSC-Waived Retirement Plans in the Corporation's First Holding
Period Prospectus.
SECOND: The foregoing Articles of Amendment have been effected in the
manner and by the vote required by the Corporation's charter and the laws of
the State of Maryland. Pursuant to Section 2-604 of the Maryland Corporations
and Associations Code, the amendment was advised by the Board of Directors of
the Corporation and approved by the stockholders.
THIRD: Except as amended hereby, the Corporation's charter shall
remain in full force and effect.
FOURTH: The authorized capital stock of the Corporation has not been
increased by these Articles of Amendment.
FIFTH: These Articles of Amendment shall be effective at the very
beginning of the day on October 21, 1994.
The President acknowledges these Articles of Amendment to be the
corporate act of the Corporation and states that to the best of his knowledge,
information and belief, the matters set forth in these Articles of Amendment
with respect to the authorization and approval of the amendment of the
Corporation's charter are true in all material respects, and that this
statement is made under the penalties for perjury.
2
<PAGE> 3
IN WITNESS WHEREOF, MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. has
caused these Articles of Amendment to be signed in its name and on its behalf
by its President, a duly authorized officer of the Corporation, and attested by
its Secretary as of the 19th day of October, 1994.
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
/s/ Arthur Zeikel
-----------------
Arthur Zeikel
President
Attest:
/s/ Mark B. Goldfus
- --------------------------
Mark B. Goldfus, Secretary
3
<PAGE> 1
EXHIBIT 1(d)
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
ARTICLES SUPPLEMENTARY TO ARTICLES OF INCORPORATION
INCREASING THE AUTHORIZED CAPITAL STOCK OF THE
CORPORATION AND CREATING TWO ADDITIONAL CLASSES
OF COMMON STOCK
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC., a Maryland corporation
having its principal Maryland office c/o The Corporation Trust Incorporated, 32
South Street, Baltimore, Maryland 21202 (hereinafter called the "Corporation"),
hereby certifies to the State Department of Assessments and Taxation, that:
FIRST: The Corporation is registered as an open-end company under the
Investment Company Act of 1940, as amended, with authority to issue ONE HUNDRED
MILLION (100,000,000) shares of capital stock. The Corporation has two classes
of capital stock consisting of FIFTY MILLION (50,000,000) shares of Class A
Common Stock and FIFTY MILLION (50,000,000) shares of Class B Common Stock.
All shares of all classes and series of the Corporation's capital stock have a
par value of Ten Cents ($.10) per share and an aggregate par value of TEN
MILLION Dollars ($10,000,000).
SECOND: The Board of Directors of the Corporation, acting in
accordance with Section 2-105(c) of the Maryland Corporations and Associations
Code, hereby increases the total number of authorized shares of Class B Common
Stock of the Corporation by THREE HUNDRED MILLION (300,000,000) shares.
THIRD: After this increase in the number of authorized shares of
capital stock of the Corporation, the Corporation will have authority to issue
FOUR HUNDRED MILLION (400,000,000) shares of capital stock and the capital
stock will consist of FIFTY MILLION (50,000,000) shares of Class A Common Stock
and THREE HUNDRED FIFTY MILLION (350,000,000) shares of Class B Common Stock.
FOURTH: After this increase in the number of authorized shares of
capital stock of the Corporation, all shares of all classes and series of the
Corporation's capital stock will have a par value of Ten Cents ($.10) per share
and an aggregate par value of FORTY MILLION Dollars ($40,000,000).
FIFTH: Pursuant to authority expressly vested in the Board of
Directors of the Corporation by its charter, the Board of Directors has
reclassified ONE HUNDRED MILLION (100,000,000) authorized and unissued shares
of the Class B Common Stock of the Corporation as Class C Common Stock of par
value of Ten Cents
<PAGE> 2
($.10) per share and of the aggregate par value of TEN MILLION Dollars
($10,000,000).
SIXTH: The preferences, designations, conversion or other rights,
voting powers, restrictions, limitations as to dividends, qualifications or
terms or conditions of redemption of Class C Common Stock are as follows:
The Class C Common Stock of the Corporation shall represent the same
interest in the Corporation and have identical preferences, designations,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms or conditions of redemption as the Class B
Common Stock as of the date of these Articles Supplementary, except as
otherwise set forth in the Corporation's charter and further except that:
(i) Expenses related to the distribution of the Class C Common Stock
shall be borne solely by such class and such class shall have exclusive voting
rights with respect to matters relating to the expenses being borne solely by
such class;
(ii) Such distribution expenses borne solely by Class C Common Stock
shall be appropriately reflected (in the manner determined by the Board of
Directors) in the net asset value, dividends, distribution and liquidation
rights of the shares of such class; and
(iii) Class C Common Stock shall not be reclassified into Class D
shares.
SEVENTH: Pursuant to authority expressly vested in the Board of
Directors of the Corporation by its charter, the Board of Directors has
reclassified ONE HUNDRED MILLION (100,000,000) authorized and unissued shares
of the Class B Common Stock of the Corporation as Class D Common Stock of par
value of Ten Cents ($.10) per share and of the aggregate par value of TEN
MILLION Dollars ($10,000,000).
EIGHTH: The preferences, designations, conversion or other rights,
voting powers, restrictions, limitations as to dividends, qualifications or
terms or conditions of redemption of Class D Common Stock are as follows:
The Class D Common Stock of the Corporation shall represent the same
interest in the Corporation and have identical preferences, designations,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms or conditions of redemption as the Class B
Common Stock as of the date of these Articles Supplementary,
2
<PAGE> 3
except as otherwise set forth in the Corporation's charter and further except
that:
(i) Expenses related to the distribution of the Class D Common Stock
shall be borne solely by such class and such class shall have exclusive voting
rights with respect to matters relating to the expenses being borne solely by
such class; and
(ii) Such distribution expenses borne solely by Class D Common Stock
shall be appropriately reflected (in the manner determined by the Board of
Directors) in the net asset value, dividends, distribution and liquidation
rights of the shares of such class.
NINTH: Pursuant to authority expressly vested in the Board of
Directors of the Corporation by its charter, the Board of Directors has
reclassified FIFTY MILLION (50,000,000) authorized and unissued shares of the
Class B Common Stock of the Corporation as Class A Common Stock of par value of
FIVE MILLION Dollars ($5,000,000).
TENTH: The preferences, designations, conversion or other rights,
voting powers, restrictions, limitations as to dividends, qualifications or
terms or conditions of redemption of Class A Common Stock are as follows:
The Class A Common Stock of the Corporation shall represent the same
interest in the Corporation and have identical preferences, designations,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms or conditions of redemption as the Class B
Common Stock as of the date of these Articles Supplementary, except as
otherwise set forth in the Corporation's charter and further except that:
(i) Expenses related to the distribution of the Class A Common Stock
shall be borne solely by such class and such class shall have exclusive voting
rights with respect to matters relating to the expenses being borne solely by
such class;
(ii) Such distribution expenses borne solely by Class A Common Stock
shall be appropriately reflected (in the manner determined by the Board of
Directors) in the net asset value, dividends, distribution and liquidation
rights of the shares of such class; and
(iii) Class A Common Stock shall not be reclassified into Class D
shares.
3
<PAGE> 4
IN WITNESS WHEREOF, MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC. has
caused these Articles Supplementary to be signed in its name and on its behalf
by its President and attested by its Secretary on October 19, 1994.
MERRILL LYNCH GLOBAL CONVERTIBLE
FUND, INC.
By /s/ Arthur Zeikel
------------------
Arthur Zeikel
President
Attest:
/s/ Mark B. Goldfus
- --------------------------
Mark B. Goldfus, Secretary
THE UNDERSIGNED, President of MERRILL LYNCH GLOBAL CONVERTIBLE FUND,
INC., who executed on behalf of said Corporation the foregoing Articles
Supplementary, of which this certificate is made a part, hereby acknowledges,
in the name and on behalf of said Corporation, the foregoing Articles
Supplementary to be the corporate act of said Corporation and further certifies
that, to the best of his knowledge, information and belief, the matters and
facts set forth therein with respect to the authorization and approval thereof
are true in all material respects, and that this statement is made under the
penalties for perjury.
/s/ Arthur Zeikel
-----------------
Arthur Zeikel
President
4
<PAGE> 1
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.:
We consent to the use in Post-Effective Amendment No. 10 to Registration
Statement No. 33-18720 of our report dated December 8, 1994 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.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Princeton, New Jersey
February 22, 1995
<PAGE> 1
EXHIBIT 16(c)
GLOBAL CONVERTIABLE FUND - CLASS C
10/21/94 - 10/31/94
<TABLE>
<CAPTION>
Since Since
Inception Inception
Avg Annual Total
Return Return*
---------- ---------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Net Asset Value 10.74 10.74
--------- ---------
Equals Shares Purchased 93.11 93.11
Plus Shares Acquired through
Dividend Reinvestment 0.00 0.00
--------- ---------
Equals Shares Held at 12/31/94 93.11 93.11
Multiplied by Net Asset Value at 12/31/94 10.81 10.81
--------- ---------
Equals Ending Value before deduction for
contingent deferred sales charge 1,006.52 1,006.52
Less deferred sales charge (10.00) 0.00
--------- ---------
Equals Ending Redeemable Value at
$1000 Investment (ERV) at 12/31/94 $995.52 $1,006.52
--------- ---------
Divided by $1,000 (P) 0.9965 1.0065
Subtract 1 -0.0035 0.0065
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) -0.35%
=========
Expressed as a percentage equals the
Aggregate Total Return for the Period 0.65%
=========
ERV divided by P 0.9965
Raise to the power of 36.5000
Equals 0.8805
Subtract 1 -0.1195
Expressed as a percentage equals the
Average Annualized Total Return -11.95%
=========
</TABLE>
* Does not include sales change for the period.
<PAGE> 2
EXHIBIT 16(d)
GLOBAL CONVERTIABLE FUND - CLASS D
10/21/94 - 10/31/94
<TABLE>
<CAPTION>
Since Since
Inception Inception
Avg Annual Total
Return Return*
---------- ---------
<S> <C> <C>
Initial Investment $1,000.00 $1,000.00
Divided by Initial Maximum Offering Price 11.28
---------
Divided by Net Asset Value 10.69
---------
Equals Shares Purchased 88.63 93.55
Plus Shares Acquired through
Dividend Reinvestment 0.00 0.00
--------- ---------
Equals Shares Held at 10/31/94 88.63 93.55
Multiplied by Net Asset Value at 10/31/94 10.76 10.76
--------- ---------
Equals Ending Redeemable Value at
$1000 Investment (ERV) at 10/31/94 $953.70 $1,006.55
Divided by $1,000 (P) 0.9537 1.0065
Subtract 1 -0.0463 0.0065
Expressed as a percentage equals the
Aggregate Total Return for the Period (T) -4.63%
=========
Expressed as a percentage equals the
Aggregate Total Return for the Period 0.65%
=========
ERV divided by P 0.9537
Raise to the power of 36.5000
Equals 0.1773
Subtract 1 -0.8227
Expressed as a percentage equals the
Average Annualized Total Return -82.27%
=========
</TABLE>
* Does not include sales change for the period.
<PAGE> 1
[ARTICLE] 6
[CIK]0000825306
[NAME]MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] OCT-31-1994
[PERIOD-START] NOV-01-1993
[PERIOD-END] OCT-31-1994
[INVESTMENTS-AT-COST] 62103177
[INVESTMENTS-AT-VALUE] 61021733
[RECEIVABLES] 1119030
[ASSETS-OTHER] 139387
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 62280150
[PAYABLE-FOR-SECURITIES] 438028
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 488941
[TOTAL-LIABILITIES] 926969
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 61505958
[SHARES-COMMON-STOCK] 729963
[SHARES-COMMON-PRIOR] 411407
[ACCUMULATED-NII-CURRENT] 220749
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 829511
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (1203037)
[NET-ASSETS] 7850496
[DIVIDEND-INCOME] 507422
[INTEREST-INCOME] 1527979
[OTHER-INCOME] 0
[EXPENSES-NET] 1121326
[NET-INVESTMENT-INCOME] 914075
[REALIZED-GAINS-CURRENT] 806359
[APPREC-INCREASE-CURRENT] (1834527)
[NET-CHANGE-FROM-OPS] (114093)
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 148368
[DISTRIBUTIONS-OF-GAINS] 36309
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 552279
[NUMBER-OF-SHARES-REDEEMED] 247561
[SHARES-REINVESTED] 13838
[NET-CHANGE-IN-ASSETS] 26964631
[ACCUMULATED-NII-PRIOR] 71580
[ACCUMULATED-GAINS-PRIOR] 303814
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 285526
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 1121326
[AVERAGE-NET-ASSETS] 5722626
[PER-SHARE-NAV-BEGIN] 11.08
[PER-SHARE-NII] .33
[PER-SHARE-GAIN-APPREC] (.27)
[PER-SHARE-DIVIDEND] .30
[PER-SHARE-DISTRIBUTIONS] .09
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.75
[EXPENSE-RATIO] 1.66
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK]0000825306
[NAME]MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] OCT-31-1994
[PERIOD-START] NOV-01-1993
[PERIOD-END] OCT-31-1994
[INVESTMENTS-AT-COST] 62103177
[INVESTMENTS-AT-VALUE] 61021733
[RECEIVABLES] 1119030
[ASSETS-OTHER] 139387
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 62280150
[PAYABLE-FOR-SECURITIES] 438028
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 488941
[TOTAL-LIABILITIES] 926969
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 61505958
[SHARES-COMMON-STOCK] 4916473
[SHARES-COMMON-PRIOR] 2679466
[ACCUMULATED-NII-CURRENT] 220749
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 829511
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (1203037)
[NET-ASSETS] 53121238
[DIVIDEND-INCOME] 507422
[INTEREST-INCOME] 1527979
[OTHER-INCOME] 0
[EXPENSES-NET] 1121326
[NET-INVESTMENT-INCOME] 914075
[REALIZED-GAINS-CURRENT] 806359
[APPREC-INCREASE-CURRENT] (1834527)
[NET-CHANGE-FROM-OPS] (114093)
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 616538
[DISTRIBUTIONS-OF-GAINS] 244353
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 3053210
[NUMBER-OF-SHARES-REDEEMED] 878683
[SHARES-REINVESTED] 62480
[NET-CHANGE-IN-ASSETS] 26964631
[ACCUMULATED-NII-PRIOR] 71580
[ACCUMULATED-GAINS-PRIOR] 303814
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 285526
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 1121326
[AVERAGE-NET-ASSETS] 37961496
[PER-SHARE-NAV-BEGIN] 11.13
[PER-SHARE-NII] .21
[PER-SHARE-GAIN-APPREC] (.25)
[PER-SHARE-DIVIDEND] .20
[PER-SHARE-DISTRIBUTIONS] .09
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.80
[EXPENSE-RATIO] 2.69
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK]0000825306
[NAME]MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
<TABLE>
<S> <C>
[PERIOD-TYPE] OTHER
[FISCAL-YEAR-END] OCT-31-1994
[PERIOD-START] OCT-21-1994
[PERIOD-END] OCT-31-1994
[INVESTMENTS-AT-COST] 62103177
[INVESTMENTS-AT-VALUE] 61021733
[RECEIVABLES] 1119030
[ASSETS-OTHER] 139387
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 62280150
[PAYABLE-FOR-SECURITIES] 438028
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 488941
[TOTAL-LIABILITIES] 926969
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 61505958
[SHARES-COMMON-STOCK] 18779
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 220749
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 829511
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (1203037)
[NET-ASSETS] 202924
[DIVIDEND-INCOME] 507422
[INTEREST-INCOME] 1527979
[OTHER-INCOME] 0
[EXPENSES-NET] 1121326
[NET-INVESTMENT-INCOME] 914075
[REALIZED-GAINS-CURRENT] 806359
[APPREC-INCREASE-CURRENT] (1834527)
[NET-CHANGE-FROM-OPS] (114093)
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 18780
[NUMBER-OF-SHARES-REDEEMED] 1
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 26964631
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 285526
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 1121326
[AVERAGE-NET-ASSETS] 68752
[PER-SHARE-NAV-BEGIN] 10.74
[PER-SHARE-NII] 0
[PER-SHARE-GAIN-APPREC] .07
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.81
[EXPENSE-RATIO] 5.64
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK]0000825306
[NAME]MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.
<TABLE>
<S> <C>
[PERIOD-TYPE] OTHER
[FISCAL-YEAR-END] OCT-31-1994
[PERIOD-START] OCT-21-1994
[PERIOD-END] OCT-31-1994
[INVESTMENTS-AT-COST] 62103177
[INVESTMENTS-AT-VALUE] 61021733
[RECEIVABLES] 1119030
[ASSETS-OTHER] 139387
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 62280150
[PAYABLE-FOR-SECURITIES] 438028
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 488941
[TOTAL-LIABILITIES] 926969
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 61505958
[SHARES-COMMON-STOCK] 16585
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 220749
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 829511
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (1203037)
[NET-ASSETS] 178523
[DIVIDEND-INCOME] 507422
[INTEREST-INCOME] 1527979
[OTHER-INCOME] 0
[EXPENSES-NET] 1121326
[NET-INVESTMENT-INCOME] 914075
[REALIZED-GAINS-CURRENT] 806359
[APPREC-INCREASE-CURRENT] (1834527)
[NET-CHANGE-FROM-OPS] (114093)
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 16586
[NUMBER-OF-SHARES-REDEEMED] 1
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 26964631
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 285526
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 1121326
[AVERAGE-NET-ASSETS] 61849
[PER-SHARE-NAV-BEGIN] 10.69
[PER-SHARE-NII] 0
[PER-SHARE-GAIN-APPREC] .07
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.76
[EXPENSE-RATIO] 5.13
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
